UNITED STATES

FORM 10-K

Commission File Number 0-22141

COMPLETE BUSINESS SOLUTIONS, INC.

Registrant’s telephone number, including area code: (248) 488-2088

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  [X]  No  [   ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [   ]

     The aggregate market value of common stock held by non-affiliates of the registrant as of March 8, 2000 was $699,382,328.

     The number of shares outstanding of the registrant’s common stock as of March 8, 2000 was 37,825,995.

Documents Incorporated by Reference

     Portions of the Proxy Statement of the Registrant for its 2000 Annual Meeting of Shareholders to the extent expressly so stated, are incorporated by reference into Part III of this Report.

COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES

FORM 10-K

For the Fiscal Year Ended December 31, 1999

INDEX

PART I

Item 1.  Business

Summary

      Complete Business Solutions, Inc. is a leading provider of information technology services offering clients flexible delivery capabilities through a focused partnership sourcing approach. We offer clients a broad range of IT services, from advising them on IT business strategy and strategic technology plans to developing and implementing appropriate IT applications solutions. We are a single source provider of a broad range of IT services, including: (1) emerging technologies; (2) IT consulting; (3) large systems applications development and maintenance; (4) reengineering legacy applications to client/server technology; (5) client/server applications development; (6) packaged software implementation, such as ERP; and (7) contract programming services. In 1999, we successfully transitioned our Y2K business to other service offerings including emerging technologies.

      We apply industry-specific IT consulting services to a wide range of leading technology platforms and perform these services in a variety of emerging computing environments. Our emerging technology service offerings include: (1) electronic commerce solutions; (2) data warehousing solutions; and (3) network services to support enterprise-wide applications such as sales force automation and Internet/intranet development. We have established a growing capability to deliver B to B and B to C solutions. We believe that our broad and expanding range of services minimizes our dependence on any single technology, enables us to serve as a single-source provider for our clients’ IT applications needs and provides us with the ability to cross-sell our services to existing clients.

      We offer flexible, cost-effective project delivery capabilities by providing our clients a choice among any combination of the following options: (1) onsite at the client facility; (2) offsite at one of our eight development facilities in the U.S. and Canada; or (3) offshore at one of our three development facilities in India and the Philippines. We have been developing our extensive offshore infrastructure since 1992 and believe that it is one of the largest and best in the industry. Our ability to deliver services globally is enhanced by our local branch management and recruiting infrastructure, consisting of a geographically dispersed network of 31 branch offices and 165 sales and account managers. Our local branch infrastructure allows us to demonstrate our commitment to each market and enhances our ability to attract locally based clients and consultants.

      Our flexible delivery capabilities enable our clients to determine their degree of project involvement and to control the costs and speed of project delivery, consistent with our team-focused partnership sourcing approach. Under this approach, we seek to establish long-term relationships with our clients by serving as a virtual extension of their organizations. Proven, innovative methodologies combined with highly competent IT professionals enable us to deliver flexible, team-oriented solutions to meet our clients’ expectations.

      Our goal is to become the preferred, single-source provider of IT services to an expanding base of clients by establishing teams that quickly and cost effectively provide strong industry-specific IT applications solutions. To achieve this goal, our strategy is to:

	•	Support each service offering with our program management team to create new opportunities and leverage existing relationships;
	•	Capitalize on the marketing and development efforts of vertically focused industry solutions groups;
	•	Expand the breadth and depth of our technical capabilities through a continued evaluation of emerging technologies and development of industry solutions;
	•	Expand our branch infrastructure, both domestically and internationally, and capitalize on our significant investment in offsite and offshore development centers;
	•	Create virtual partnerships with our clients to provide them with a broad range of IT solutions and create cross-selling opportunities; and
	•	Seek mergers and acquisitions that complement our core skills or expand our geographic reach and have the potential to increase our overall value.

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The CBSI Advantage

      The CBSI advantage enables our clients to use IT as a more effective business tool consistent with their evolving business needs. The key attributes of the CBSI advantage are that we:

	•	Offer clients a single-source provider of a broad range of IT services, from advising them on IT business strategy and strategic technology plans to developing and implementing appropriate IT applications solutions. This range includes emerging technology services such as data warehousing solutions, electronic commerce solutions and network services.
	•	Assure clients of the highest quality software services by achieving a Level 5 quality rating at our offshore development centers in India. CBSI is one of a very few companies worldwide to achieve this designation as set by the Software Engineering Institute’s Capability Maturity Model. Our proven software engineering and management processes are extremely efficient in managing project costs and delivery for customers.
	•	Provide flexible project delivery by offering our clients any combination of the following options: (1) onsite at the client facility; (2) offsite at one of our eight development facilities in the U.S. and Canada; or (3) offshore at one of our three development facilities in India and the Philippines. This flexibility enables our clients to determine their degree of project involvement and to control the costs and speed of project delivery.
	•	Offer a local presence by delivering our services to clients through a geographically dispersed network of 31 branch offices and 165 sales and account managers. Our local presence allows us to demonstrate our commitment to each local market and enhances our ability to attract locally based clients and consultants.
	•	Recruit and train our consultants globally through our established domestic and international network. Consultants receive up to two months of training in software engineering techniques and key technologies at one of our five U.S. training centers or one of our two overseas training centers in India. These centers are equipped with a variety of hardware, software and development tools.

CBSI Growth Strategy

      Our goal is to become the preferred single-source provider of IT services to an expanding base of clients by establishing teams that quickly and cost effectively provide industry-based IT applications solutions. To achieve this goal, our strategy is to:

	•	Support each service offering with a program management team to create new opportunities and develop existing accounts. We have 50 sales people in our branch offices developing new accounts and 115 account managers maintaining and expanding existing client relationships by cross selling our broad range of service offerings. These long-term relationships provide us with a significant advantage over our competitors in marketing additional services and solutions to our clients.
	•	Capitalize on vertically focused industry solutions groups. These groups develop solutions based on in-depth knowledge of particular industries and a detailed understanding of the client’s business. They sell and market a broad range of ERP and other solutions to existing clients and also obtain new clients within our targeted industries. Targeted industries include banking and financial services, health care, public sector, retail and distribution, and utilities and telecommunications.
	•	Expand the breadth and depth of our technical capabilities through training existing personnel, recruiting experienced talent and acquiring or merging with complementary businesses. Our continued evaluation of emerging technologies enables us to add new service offerings and minimizes our dependence on any single technology.
	•	Expand our branch infrastructure, both domestically and internationally, and capitalize on our significant investment in offsite and offshore development centers, as well as our systems,

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		methodologies, training programs and marketing efforts. We believe that our existing development centers can be further leveraged to support a significantly larger number of consultants.
	•	Create virtual partnerships with our clients to provide them with IT solutions so that we become an extension of their organization. This partnership sourcing model uses a team approach that makes the client an integral team member. We consider the impact of each project on the entire application to build a broader solution over time. We quickly assemble capable teams and use the strategic insights of the client to produce flexible, supportable business and IT solutions.
	•	Seek mergers, acquisitions and investments in technology alliances or start-up companies that complement our core skills or expand our geographic reach and have the potential to increase our overall value, rather than merely increase our revenues. We believe that our branch management organization allows us to efficiently integrate acquisitions.

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CBSI Services

      We offer our clients a broad range of IT services, from advising clients on strategic technology plans to developing and implementing appropriate IT solutions. We provide services in the following categories:

* Part of our emerging technologies service offering.

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Industry Solutions

      We have designed and developed proprietary software to solve industry-specific problems for our clients. These include APECS/Discovery, Clarety and Business Solutions Framework.

      APECS enables K-12 school districts and higher education institutions to manage their business and student records. Our APECS Product has been reengineered to a client/ server platform and renamed Discovery. We market the Student Administration module of Discovery jointly with PeopleSoft’s finance and HR/ payroll applications.

      Clarety is a set of reusable software modules for the public employee retirement systems (PERS) industry. We are currently implementing Clarety software for California PERS, Mississippi PERS, Nevada PERS and the Ohio State Teachers Retirement System.

      The Business Solutions Framework consists of infrastructure software used as a foundation for our e-commerce solutions practice. This Business Solutions Framework allows us to build e-commerce solutions more efficiently for our clients and is written in JAVA.

Clients

      Approximately 70% of our clients are middle market companies with annual revenues between $500 million and $4 billion, and state governments. Using our partnership sourcing approach, we are quickly becoming an important supplier to these middle market clients. We have also started to serve emerging companies with revenues from $50 million to $500 million. These emerging companies require the expertise CBSI can provide and have limited alternative sources, either internal or external, to meet their IT needs.

      In 1999 we provided services to over 600 clients in the United States, Europe and Asia. Our strategy is to maximize our client retention rate and to secure additional engagements by providing quality services and by being responsive to client needs. For each of the past five years, existing clients from the previous fiscal year generated more than 80% of our revenues.

      Certain of our representative clients in various industries are listed in the following table:

Banking and Financial Services

Bank One Services Corporation

Health Care

Anthem Blue Cross Blue Shield of Connecticut

Manufacturing

DaimlerChrysler AG

State of California

Retail and Distribution

Fred Meyer, Inc.

Utilities and Telecommunications

Ameritech Corporation

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Sales and Marketing

      We generate the majority of new sales through our branch management structure. Our branches focus on all clients within a geographic area. The manager of each branch office is responsible for managing client relationships, ensuring the delivery team is performing as expected and identifying new business opportunities, and is compensated primarily on the financial performance of the branch. This structure fosters an entrepreneurial atmosphere within each branch and results in a significant number of client referrals and opportunities to cross-sell our services.

      In many cases, we use a consultant from one of our industry solutions groups, an expert in the IT needs of the specific industry, to enhance the initial planning and development phase of a project. They are also able to share common solutions for an industry with a specific client prospect. Our ability to provide industry-specific solutions enables our clients to take advantage of our vertically focused business and IT knowledge.

      Our partnership sourcing approach facilitates the sale of services to clients by making us an extension of their organization and making the client a member of our service delivery team. When clients view us as part of their team, they often decide to source their additional IT services needs through us with little sales effort on our part.

      Cross-selling our industry solutions and other services to existing clients has proven to be a successful way to expand our business and accounts for much of the extensive recurring revenue volume we have enjoyed over the years. Our acquisitions have expanded our range of industry solutions and services, enabling us to be even more successful in this activity.

      In addition to our sales group, we have a dedicated marketing department which is responsible for coordination of all corporate communications, including the scheduling of press conferences to promote our services and delivery methodologies. In addition, the marketing group provides information to industry analysts including the Gartner, Giga and Meta Groups and Forrester.

Human Resources

      Our success depends in large part on our ability to attract, develop, motivate and retain highly skilled IT professionals. Our strategy for achieving “career-based employment” includes career planning, thorough initial and ongoing training, allocation of assignments in accordance with employee skills and career objectives and a comprehensive benefits package including a Company-matched 401(k) plan, stock purchase plan, health, dental and vision insurance, preventive medical short-term disability insurance, a flexible spending account and tuition reimbursement. We also will continue to grant stock options as part of our recruitment and retention strategy. As part of our effort for minimizing turnover we emphasize:

	•	Human resource management;
	•	Competitive salaries;
	•	Comprehensive benefits;
	•	Employee stock options; and
	•	Deferred compensation

      Our branch offices use intensive programs to recruit consultants throughout the United States, screen them through a variety of interview and testing processes and select them for future assignments on our project teams. In addition, our recruiting activities seek to draw on an international pool of IT talent. We actively recruit in India, England, Australia, New Zealand, the Philippines, Mexico and Singapore. Recruiting methods include advertising in leading newspapers and trade magazines, using the Internet and participation in career fairs. In addition, we actively involve our employees in referring individuals and screening candidates for new positions.

      Our consultants typically have Bachelor’s or Master’s degrees in Computer Science or another technical discipline. As of December 31, 1999, we had 4,947 employees comprised of 4,322 IT professionals, 179 sales

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      We have five employee training centers located in the United States and two in India. These training centers employ full-time instructors and are equipped with hardware, software and development tools. New college graduates receive two months of full-time classroom instruction in program analysis and design. Along with technical training, we provide business skills to enhance team building, diversity awareness and key consulting skills such as presentations and communications training. We also provide training to prepare for specific future technical assignments followed by one month of self-study.

      Between projects and after business hours, all IT professionals receive ongoing training on a variety of technology platforms. Our education and training department helps employees make the transition from legacy and client/server skills to e-commerce skills by providing cross-platform training in new technologies. In addition to comprehensive technical training, we provide extensive training in quality processes and cross-cultural communications skills. In addition, we offer training courses to non-employees for a fee and may hire graduates of these training programs.

      We provide over 200 courses on our computer-based training system, which is available 24 hours a day, 7 days a week. In addition to technical skills in a variety of programming languages, we offer courses in business and administration skills.

Item 2.  Properties

      We lease approximately 70,000 square feet of office space in Farmington Hills, Michigan for our headquarters office. In addition to our headquarters, we lease office space throughout the world. Currently, our facilities are adequate for our needs, however, additional space may be required as our business expands. We believe we will be able to obtain suitable space as needed.

      We have principal offices in the following locations:

Item 3.  Legal Proceedings

      In April 1999, CBSI signed a Mutual Settlement and Release Agreement (the “Agreement”) with Network Six, Inc. (“NSI”) to settle all claims relating to the litigation between CBSI and NSI in the Superior Court for the State of Rhode Island and the Circuit Court for the State of Hawaii arising from a software development project for the State of Hawaii. The settlement did not have a material effect on CBSI’s financial condition, results of operations or cash flows.

Item 4.  Submission of Matters to a Vote of Security Holders

      No matters were submitted to a vote of CBSI’s security holders during the fourth quarter of the year ended December 31, 1999.

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PART II

Item 5.  Market for the Registrant’s Common Equity and Related Stockholder Matters

      Our common stock is traded on the Nasdaq National Market under the symbol CBSI. The following table sets forth, for the periods indicated, the range of high and low bid prices for our common stock as reported on the Nasdaq National Market.

      As of March 8, 2000, there were approximately 816 shareholders of record of CBSI’s common stock.

      Since our initial public offering in March 1997, we have not paid cash dividends on our common stock. We currently anticipate that all of our earnings will be retained for the continued development of our business and we do not anticipate paying any cash dividends in the foreseeable future.

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Item 6.  Selected Financial Data

      The selected financial data presented below for the five years ended December 31, 1999, are derived from CBSI’s Consolidated Financial Statements and related Notes thereto. The selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related Notes thereto included in Item 8 of this Form 10-K.

      On April 20, 1999, CBSI acquired E-Business Solutions.com, Inc. (“EBS”), formerly Impact Innovations Group, Inc. This acquisition was accounted for by the purchase method of accounting and accordingly, the operating results of EBS have been included in the consolidated financial statements since the date of acquisition.

      On January 27, 1998 and July 24, 1998, CBSI merged with c.w. Costello & Associates, inc. (“Costello”) and Claremont Technology Group, Inc. (“Claremont”), respectively. These mergers were accounted for by the pooling of interests method of accounting and accordingly, the consolidated balance sheets, statements of income, cash flows and shareholders’ equity and all financial information of CBSI included in this Form 10-K have been retroactively restated.

      CBSI and Costello had fiscal years ending December 31 and Claremont had a fiscal year ending June 30. The statement of income data presented below for the three years ended December 31, 1997, combine CBSI’s and Costello’s results for the years ended December 31, 1997, 1996 and 1995, with Claremont’s results for the years ended June 30, 1997, 1996 and 1995, respectively. The statement of income data for the year ended December 31, 1998, combine all three companies’ results for the year ended December 31, 1998. The balance sheet data as of December 31, 1997, 1996 and 1995 combine CBSI’s and Costello’s balance sheets as of December 31, 1997, 1996 and 1995, with Claremont’s balance sheet as of June 30, 1997, 1996 and 1995, respectively. The balance sheet data as of December 31, 1998, combine all three companies’ balance sheets as of that date.

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(b)	The pro forma adjustments for the incremental income tax benefit reflects the additional benefit for Federal and state income taxes at the effective income tax rate as if the applicable merged companies’ Subchapter S elections had been revoked prior to January 1, 1998, and the merged companies had been taxed as C corporations.

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Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

      The following section should be read in conjunction with our Consolidated Financial Statements and related Notes appearing in Item 8 of this Form 10-K. With the exception of statements regarding historical matters and statements concerning our current status, certain matters discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements that involve substantial risks and uncertainties. Such forward-looking statements may be identified by the words “anticipate,” “believe,” “estimate,” “expect” or “intend” and similar expressions. Our actual results, performance or achievements could differ materially from these forward-looking statements. Factors that could cause or contribute to such material differences include our failure to recruit and retain IT professionals, risks related to our merger, acquisition and strategic investment strategy, variability of our quarterly operating results, government regulation of immigration, potential cost overruns on fixed-price projects, increasing significance of non-U.S. operations, exposure to regulatory, political and economic conditions in India, competition in the IT services industry, short-term and termination provisions of contracts, failure to properly manage growth, possible write-off of computer software development costs, limited protection of intellectual property rights, and potential liability to clients, each of which are discussed herein under the caption “Factors that may Affect Future Results.”

Overview

      Complete Business Solutions, Inc. provides IT services worldwide, offering clients flexible global delivery capabilities. CBSI’s strategy is to establish long-term client relationships and to secure additional engagements with existing clients by providing quality services and by being responsive to client needs. For each of the past five years, over 80% of CBSI’s revenues were generated from existing clients from the previous fiscal year.

      CBSI offers its clients a broad range of IT services, from advising them on IT business strategy and strategic technology plans to developing and implementing appropriate IT applications solutions through its partnership sourcing approach.

      CBSI’s service offerings include: (1) emerging technologies; (2) IT consulting; (3) large systems applications development and maintenance; (4) reengineering legacy applications to client/server technology; (5) client/server applications development; (6) packaged software implementation; and (7) contract programming services. CBSI’s emerging technology service offerings include: (1) electronic commerce solutions including, B to B and B to C; (2) data warehousing solutions; and (3) network services to support enterprise-wide applications such as sales force automation and Internet/intranet development. In 1999, we successfully transitioned our Y2K business to other service offerings including emerging technologies.

      CBSI generally assumes responsibility for project management and may bill the client on either a time-and-materials or fixed-price basis, although such projects are generally billed on a time-and-materials basis. Contract programming services are typically provided as a member of a project team working under the direct supervision of the client, billed on a time-and-materials basis, and have lower gross profit margins than other service offerings. CBSI continues to shift its business away from contract programming services toward higher margin service offerings.

      CBSI recognizes revenues on time-and-materials engagements as the services are performed. On fixed-price engagements, CBSI recognizes revenues under the percentage of completion method. For the year ended December 31, 1999 approximately 18% of total revenues were generated from fixed-price engagements.

      CBSI’s most significant cost is project personnel cost, which consists primarily of salaries, wages and benefits for its IT professionals. CBSI strives to maintain its gross profit margin by controlling project costs and offsetting increases in salaries and benefits with increases in billing rates. CBSI uses a human resource allocation team to ensure that IT professionals are quickly placed on assignments to minimize nonbillable time and are placed on assignments that use their technical skills and allow for maximum billing rates. CBSI has realized higher gross profit margins from its shift away from contract programming services and from its shift to offshore projects in India, where the personnel cost of IT professionals is lower as a percentage of

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      In an effort to sustain its growth and profitability, CBSI has made and continues to make substantial investments in its infrastructure, including: (1) software development centers in the United States, Canada, India, and the Philippines; (2) global recruiting and training centers in the United States and India; (3) system methodologies; (4) a geographically dispersed branch management structure; and (5) internal systems.

Results of Operations

      The following table sets forth, for the periods indicated, selected statement of income data as a percentage of revenues:

1999 Compared to 1998

      Revenues.  CBSI’s revenues increased 22.7% to $462.1 million for fiscal 1999 from $376.6 million in fiscal 1998. This growth is primarily attributable to increases in CBSI’s IT professional workforce, increases in average billing rates, and additional services provided to existing clients. The completion of Y2K projects and the Y2K-induced industry slowdown has and will continue to temporarily decrease our growth rate and margins as we transition our offshore services to high-margin services, including emerging technology services. CBSI’s IT professional workforce increased 7% for 1999 compared to 1998. For the year ended December 31, 1999, approximately 86% of CBSI’s revenues were generated from existing clients.

      Gross Profit.  Gross profit consists of revenues less cost of revenues. Cost of revenues consists primarily of salaries (including nonbillable and training time), benefits, travel and relocation for IT professionals. In addition, cost of revenues includes depreciation and amortization, direct facility costs and contractual services. Gross profit increased 17.2% to $149.4 million in fiscal 1999 from $127.5 million in fiscal 1998. This increase is primarily attributable to increases in CBSI’s IT professional workforce and average U.S. billing rates. Gross profit as a percentage of revenues decreased to 32.3% for fiscal 1999 from 33.9% in fiscal 1998. This decrease in gross profit margin as a percentage of revenues is primarily attributable to a decrease in offshore utilization resulting from the continuing transition from Year 2000 related services to emerging technology services, including e-business services.

      Selling, General and Administrative Expenses.  Selling, general and administrative expenses consist primarily of costs associated with CBSI’s direct selling and marketing efforts, human resource and recruiting departments, administration and indirect facility costs. Selling and administrative expenses increased 19.0% to $101.7 million in fiscal 1999 from $85.5 million in fiscal 1998. This increase resulted from the continued expansion of CBSI’s direct selling and marketing effort, further investments in infrastructure, and other general overhead cost increases necessary to support CBSI’s continued revenue growth. As a percentage of revenues, selling, general and administrative expenses decreased in fiscal 1999 to 22.0% from 22.7% in fiscal 1998 as CBSI continued to leverage its existing infrastructure.

      Other Expense (Income).  Other expense (income) represents interest earned on cash equivalents, net of interest expense on borrowings. Other expense (income) for fiscal 1999 was $3.7 million compared to $2.9

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1998 Compared to 1997

      Revenues.  CBSI’s revenues increased 44.1% to $376.6 million for fiscal 1998 from $261.3 million in fiscal 1997. This growth in revenues is primarily attributable to increases in CBSI’s IT professional workforce, increases in average billing rates, further expansion of CBSI’s international operations and additional services provided to existing clients. CBSI’s IT professional workforce increased 33% for 1998 compared to 1997. Revenues from international operations, principally offshore development centers, increased 147% to $45.8 million in fiscal 1998 from $18.6 million in fiscal 1997.

      Gross Profit.  Gross profit increased 54.5% to $127.5 million in fiscal 1998 from $82.5 million in fiscal 1997. This increase is primarily attributable to increases in CBSI’s IT professional workforce and average U.S. billing rates, as well as the continued expansion of CBSI’s offshore development centers. Gross profit as a percentage of revenues increased to 33.9% for fiscal 1998 from 31.6% in fiscal 1997. This increase in gross profit margin as a percentage of revenues is primarily attributable to CBSI’s continued strategic shift of its business toward higher service offerings and the increasing utilization and expansion of CBSI’s offshore development centers which operate at higher gross profit and operating margins. For fiscal 1998, 11% of revenues were generated from contract programming services as compared to 17% in fiscal 1997.

      Selling, General and Administrative Expenses.  Selling, general and administrative expenses increased 32.3% to $85.5 million in fiscal 1998 from $64.6 million in fiscal 1997. This increase resulted from the continued expansion of CBSI’s direct selling and marketing effort, further investments in infrastructure, and other general overhead cost increases necessary to support CBSI’s continued revenue growth. As a percentage of revenues, selling, general and administrative expenses decreased to 22.7% in fiscal 1998 from 24.8% in fiscal 1997 as CBSI continued to leverage its existing infrastructure.

      Other Expense (Income).  Other expense (income) for fiscal 1998 was $2.9 million compared to $.8 million in fiscal 1997. This change is primarily due to reduced interest expense, resulting from the repayment of CBSI’s outstanding debt in 1997, the repayment of Costello’s and Claremont’s debt in 1998 and interest earned from the investment of net proceeds from CBSI’s and Claremont’s public offerings of common stock in 1997.

Liquidity and Capital Resources

      CBSI generally funds its operations and working capital needs through internally generated funds, periodically supplemented by borrowings under CBSI’s revolving credit facilities with a commercial bank. CBSI’s cash provided by operating activities was $11.8 million, $14.4 million and $12.9 million for the years ended December 31, 1999, 1998 and 1997, respectively.

      The principal use of cash for investing activities during the three years ended December 31, 1999 was for the purchase of property and equipment, primarily as part of the development and enhancement of CBSI’s offshore software development centers, the investment in internally developed computer software, and business acquisitions.

      To facilitate future cash flow needs, CBSI has an arrangement with a commercial bank, where CBSI may borrow an amount not to exceed $21.0 million with interest at the bank’s prime interest rate, or the LIBOR rate plus 1  1/4%. Borrowings under this facility are short-term, payable on demand and are secured by trade accounts receivable and equipment of CBSI.

      Net cash provided by financing activities for the years ended December 31, 1999 and 1997 of $63.2 million and $71.4 million, respectively, was primarily due to CBSI and Claremont realizing net proceeds of $64.2 million and $88.5 million from issuances of their common stock in fiscal 1999 and 1997, respectively, principally in their initial public and follow-on offerings.

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      Significant uses of cash by financing activities were for the repurchase of CBSI Common Stock and the partial distributions of previously undistributed S corporation earnings following the terminations of the companies’ S corporation status. During the year ended December 31, 1999, CBSI repurchased 354,000 shares of its Common Stock, for cash, at a total of $5.2 million. Partial distributions of S corporation earnings were $1.1 million and $11.1 million for the years ended December 31, 1998 and 1997, respectively.

      The international operations of CBSI, principally the offshore development centers, accounted for 9.9%, 12.2%, and 7.1% of CBSI’s total revenues for the years ended December 31, 1999, 1998 and 1997, respectively. Most of CBSI’s revenues are billed in U.S. dollars. CBSI recognizes transaction gains and losses in the period of occurrence. Foreign currency fluctuations in 1999, 1998 and 1997 did not have a material impact on income from operations as currency fluctuations on revenue denominated in a foreign currency were offset by currency fluctuations on expenses denominated in a foreign currency. There were no material operating trends or effects on liquidity as a result of fluctuations in the functional currency. CBSI does not generally use any types of derivatives to hedge against foreign currency fluctuations, nor does it speculate in foreign currency.

      Inflation did not have a material impact on CBSI’s revenues or income from operations in fiscal years 1999, 1998 and 1997.

      On March 17, 2000, the Company entered into an agreement with a fund managed by Clayton, Dubilier & Rice, Inc. (CDR) whereby CDR will purchase, in two transactions, from the Company 200,000 shares of convertible Preferred Stock for $200,000 and will be issued warrants to purchase 5,300,000 shares of the Company’s Common Stock.

      The Preferred Stock is convertible at any time subsequent to issuance at a price of $23 per share, subject to certain adjustments, and may be redeemed, at CDR’s option, if not converted within ten years of the date of issuance. The warrants consist of seven-year warrants to purchase 3,500,000 shares at $25 per share and ten-year warrants to purchase 1,800,000 shares at $31 per share. All of the warrants become exercisable upon the earlier of the third anniversary of the date of issuance or the Company’s stock price exceeding a predetermined price for twenty consecutive trading days.

      The Company also entered into an agreement with CDR whereby CDR will provide the Company financial and management advisory services.

      CBSI has not experienced any material failures in its primary technology infrastructure related to the Year 2000 changeover. CBSI does not expect to incur any material additional expense to modify its primary technology infrastructure as a result of the Year 2000 changeover.

Factors That May Affect Future Results

Failure to Recruit, Train and Retain Skilled IT Professionals Could Increase Costs or Limit Growth

      We need to recruit and retain highly trained professionals in order to deliver our IT services to our clients. Our continued success depends upon our ability to attract, develop, motivate and retain highly skilled IT professionals and project managers with the technical skills and experience necessary to deliver our services to our clients. The qualified IT professionals we require are in high demand worldwide and are likely to remain a limited resource for the foreseeable future. We cannot be certain that we will be able to attract or retain the IT professionals that we seek.

Failure to Properly Manage Mergers, Acquisitions and Strategic Investments Could Adversely Affect Our Business

      We have expanded, and plan to continue to expand our operations through mergers with or acquisitions of additional businesses that complement our core skills and that have the potential to increase our overall value. We have also undertaken a strategy to identify and make investments in start-up companies that have the potential to be successful and to complement our current business. We may not be able to continue to identify and merge with or acquire businesses with which we are compatible. In addition, we may not be able to

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      Mergers and acquisitions involve a number of special risks, including:

      •  Diversion of management’s attention;

      •  Failure to retain key personnel of the acquired business;

      •  Assumption of unanticipated legal liabilities and other problems;

      •  Difficulties in integrating systems, operations and cultures;

      •  Amortization of acquired intangible assets; and

      •  Potential dilution of earnings per share.

      Our reputation is a valuable asset and performance problems and client dissatisfaction with a firm which we acquire or merge with could adversely affect our reputation. In addition, we cannot be certain that businesses we acquire or merge with will achieve anticipated revenues and earnings. Failure to successfully manage our merger and acquisition strategy could have a material adverse effect on our business.

Variability of Quarterly Operating Results

      Our revenues and operating results can vary from quarter to quarter depending on a number of factors, including:

      •  The timing and number of client projects commenced and completed during a quarter;

      •  The number of working days in a quarter;

      •  Employee hiring, attrition and utilization rates;

      •  Progress on fixed-price projects during a quarter;

      •  The consummation of mergers and acquisitions;

      •  The ability of clients to terminate engagements without penalty;

      •  The size and scope of assignments; and

      •  General economic conditions.

      Because a high percentage of our expenses are fixed, such as personnel and facilities costs, a variation in revenues may cause a significant variation in our quarterly operating results and could result in losses. Also, our costs periodically increase due to the hiring of new employees and the making of strategic investments in infrastructure in anticipation of future opportunities for revenue growth.

Impact of Government Regulation of Immigration Could Limit Growth

      We recruit IT professionals globally to create a workforce that can be deployed wherever required by our clients. As a result, we must comply with the immigration laws in the countries in which we operate, particularly the United States. As of December 31, 1999, approximately 25% of our worldwide workforce was working under H-1B temporary work permits in the United States. Government regulation limits the number of new H-1B permits that may be approved in a fiscal year. If the limit is reached in any year, we may not be able to recruit enough IT professionals to meet our personnel requirements. This could materially affect our business. Congress and administrative agencies with jurisdiction over immigration matters have periodically expressed concern over the level of legal and illegal immigration into the United States. These concerns have often resulted in proposals aimed at reducing the number of work permits that may be issued. Any change

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Our Fixed-Price Projects Expose us to Cost Overrun Risks

      We undertake certain projects on a fixed-price basis, as distinguished from billing on a time-and-materials basis. We realized approximately 18% of our revenues from fixed-price projects during the year ended December 31, 1999. Significant cost overruns can occur if we fail to:

      •  Adequately estimate the resources required to complete a project;

      •  Properly determine the scope of an engagement; or

      •  Complete our contractual obligation in a manner consistent with the project plan.

      The potential for cost overruns may be heightened if we act as a subcontractor on a fixed-price project, because we have a limited ability to control project variables and to negotiate directly with the ultimate client. We cannot be certain that any of our existing or future fixed-price projects will be profitable.

Increasing Significance and Risks of Non-U.S. Operations

      Our international consulting and offshore software development operations accounted for approximately 10% of our total revenues for the year ended December 31, 1999. Our international operations and international business activities are subject to the following risks:

	•	Unexpected changes in regulatory environments;
	•	Foreign currency fluctuations;
	•	Tariffs and other trade barriers;
	•	Difficulty in managing international operations;
	•	Potential foreign tax consequences, including repatriation of earnings;
	•	Burden of complying with a wide variety of foreign laws and regulations;
	•	Unexpected changes in the local and regional political climate and the possible reaction to those changes by the international community, including economic sanctions;
	•	Risk of increased duties, taxes and governmental royalties; and
	•	Changes in laws and policies governing operations of foreign-based companies.

      Our international operations greatly depend upon business and technology transfer laws and related restrictions and upon continued development of technology infrastructure. We cannot be certain that our international operations will continue to be profitable or support our growth strategy.

Exposure to Regulatory, Political and General Economic Conditions in India

      A significant element of our business strategy is to expand our offshore software development centers in India and the Philippines. As of December 31, 1999, approximately 24% of our workforce was located in India. We benefit directly from certain incentives provided by the Indian government to encourage foreign investment, including tax holidays (temporary exemptions from taxation on operating income) and liberalized import and export duties. If the Indian government changes any of these incentives, it could negatively impact the profitability of our Indian operations.

      Although wage costs in India are significantly lower than in the United States and elsewhere for comparably skilled IT professionals, wages in India are increasing at a faster rate than in the United States. In the past, India has experienced significant inflation and shortages of foreign exchange, and has been subject to civil unrest and acts of terrorism. Changes in interest rates, inflation rates, tax rates and policies, or other

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We Operate in Highly Competitive Markets

      The IT services industry is highly competitive, undergoing consolidation and is served by many national, regional and local firms, all of which are either existing or potential competitors. Our primary competitors include:

      •  Large accounting firms;

      •  Implementation firms;

      •  Software applications firms;

      •  Service groups of computer equipment companies;

      •  General management consulting firms; and

      •  Programming companies and temporary staffing firms.

      Many of these competitors have substantially greater resources and greater name recognition than we do. In addition, there are relatively few barriers to entry into our markets. We have faced, and we expect to continue to face, additional competition from new entrants into our markets. In addition, clients may increase their use of internal IT resources to satisfy their applications solutions needs instead of engaging us. Each of these competitive factors may limit our ability to increase prices commensurate with increases in labor costs which could result in reduced margins. We cannot be certain that we will be able to compete successfully with existing or new competitors.

Our Contracts are Short-Term and Contain Termination Provisions

      A typical contract with our clients has a term of one-to-three years. A client may choose not to renew its contract when it terminates. Under our contracts, clients may unilaterally reduce the use of our services with little or no notice and without penalty. If we are unable to retain our existing clients, our business could be adversely affected. An unanticipated termination of a major project could result in a loss of revenues and could require us to pay a number of unassigned IT professionals until new engagements can be obtained. In the alternative, we could also be forced to terminate unassigned IT professionals.

Failure to Properly Manage Growth Could Adversely Affect Our Business

      As a result of our internal growth and acquisition strategy, we have experienced a rapid increase in the number of branch locations, the number of employees and revenues. This rapid growth has placed significant demands on our managerial, administrative and operational resources. Effective management of our growth will require us to continue to improve our operational, financial and other management processes and systems and to quickly and efficiently integrate businesses we merge with or acquire. We cannot be sure that we will continue to grow or that we will be able to manage our growth.

Possible Write-Off of Computer Software Development Costs Could Adversely Affect Our Business

      Prior to its merger with CBSI, Claremont wrote off approximately $8.3 million of capitalized software development costs related to their Premost and Clarety software modules. We have remaining net capitalized software development costs relating to the Clarety module of $3.5 million as of December 31, 1999. If, in subsequent periods, remaining capitalized software development costs exceed the potential revenue that can be derived from the software, we would be required under generally accepted accounting principles to immediately write-down the asset to its realizable value. The amount of the write-down in any particular period may be as much as the total amount of capitalized software development costs carried on our balance sheet and could have an adverse effect on our results of operations and financial condition.

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Limited Protection of Intellectual Property Rights

      Our success depends in part upon certain methodologies we utilize in providing IT services to our clients. We have not registered copyrights to such methodologies, which may impair our ability to protect these methodologies. We rely upon a combination of nondisclosure and other contractual arrangements and trade secret, copyright and trademark laws to protect our proprietary rights and the proprietary rights of third parties from whom we license intellectual property.

      We enter into confidentiality agreements with our employees and limit the distribution of proprietary information. However, we cannot be sure that these steps will be adequate to deter misappropriation of proprietary information or that we will be able to detect unauthorized use of and take appropriate steps to enforce our intellectual property rights.

      The laws of certain foreign countries in which our products are, or may be, developed or sold may not protect our products or intellectual property rights to the same extent as do the laws of the U.S. This lack of protection may impair our ability to adequately protect our intellectual property.

      Although we do not believe that our products infringe on the rights of third parties, third parties may nevertheless make infringement claims against us in the future. Such claims may result in costly litigation or require us to obtain a license for such intellectual property rights.

Potential Liability to Clients

      Many of our engagements involve projects that are critical to the operation of our client’s businesses and provide benefits that may be difficult to quantify. We attempt to contractually limit our liability for damages arising from errors, mistakes, omissions or negligent acts in rendering our services. We cannot be sure that our attempts to limit liability will be successful. If we fail to meet a client’s expectations in the execution of our services, it could result in an adverse change to our client’s operations. This could give rise to claims against us or damage our reputation, which could adversely affect our business.

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Item 8.  Financial Statement and Supplementary Data

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Complete Business Solutions, Inc.:

      We have audited the accompanying consolidated balance sheets of Complete Business Solutions, Inc. (a Michigan corporation) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the 1997 financial statements of Claremont Technology Group, Inc. and c.w. Costello & Associates, inc., companies that Complete Business Solutions, Inc. merged with during 1998, in transactions accounted for as poolings of interests, as discussed in Note 1. Such statements are included in the related consolidated financial statements of Complete Business Solutions, Inc. and reflect total revenues and net income of 53% and 24%, respectively in 1997, of the related consolidated totals. These statements were audited by other auditors whose reports have been furnished to us and our opinion, insofar as it relates to amounts included for Claremont Technology Group, Inc. and c.w. Costello & Associates, inc., is based solely upon the reports of the other auditors.

      We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion.

      In our opinion, based on our audits and the reports of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Complete Business Solutions, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States.

ARTHUR ANDERSEN LLP

Detroit, Michigan,

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REPORT OF INDEPENDENT AUDITORS

The Board of Directors of

      We have audited the consolidated statements of operations, shareholders’ equity, and cash flows of Claremont Technology Group, Inc. and subsidiaries for the year ended June 30, 1997 not presented separately herein. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based upon our audit.

      We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of Claremont Technology Group, Inc. and subsidiaries operations and their cash flows for the year ended June 30, 1997 in conformity with generally accepted accounting principles.

KPMG LLP

Portland, Oregon

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REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors and Shareholders

      We have audited the statements of operations, shareholders’ equity and of cash flows of c.w. Costello & Associates, inc. for the year ended December 31, 1997 not presented separately herein. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

      We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of c.w. Costello & Associates, inc. (an “S” Corporation) for the year ended December 31, 1997, in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

Hartford, Connecticut

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COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES

The accompanying notes are an integral part of these consolidated balance sheets.

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COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES

The accompanying notes are an integral part of these consolidated financial statements.

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COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES

The accompanying notes are an integral part of these consolidated financial statements.

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COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES

The accompanying notes are an integral part of these consolidated financial statements.

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COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES

(Dollars in thousands, except per share data)

1.  Organization and Summary of Significant Accounting Policies

     Operations

      Complete Business Solutions, Inc. (CBSI) was founded in 1985. CBSI and its subsidiaries (the Company) provide information technology (IT) services worldwide to large and mid-size organizations. The Company offers its clients a broad range of IT services, from advising clients on IT business strategy and strategic technology plans to developing and implementing appropriate IT solutions.

     Principles of Consolidation and Organization

      The consolidated financial statements include the accounts of CBSI and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in the accompanying consolidated financial statements.

      In April 1999, the Company closed a Stock Purchase Agreement for the purchase of all of the outstanding common stock of E-Business Solutions.com, Inc. (“EBS”), formerly Impact Innovations Group, Inc. from Medaphis Corporation. The acquisition of EBS was accounted for by the purchase method of accounting, and accordingly, the operating results of EBS have been included in the consolidated statements of income, shareholders’ equity and cash flows since the date of the acquisition.

      In July 1998, the Company closed an Agreement and Plan of Merger with Claremont Technology Group, Inc. (Claremont), a publicly held Oregon corporation. The merger with Claremont was accounted for by the pooling of interests method of accounting, and accordingly, the accompanying consolidated balance sheets and statements of income, shareholders’ equity and cash flows have been retroactively restated. Claremont had a fiscal year end of June 30. The consolidated statements of income, shareholders’ equity and cash flows for the year ended December 31, 1997 combine, CBSI’s results for the year ended December 31, 1997 with Claremont’s results for the year ended June 30, 1997. The consolidated statements of income, shareholders’ equity and cash flows for the year ended December 31, 1998 combine CBSI’s and Claremont’s results for the year ended December 31, 1998. All footnote information stated as of and for the year ended December 31, 1997 combines CBSI’s information as of and for the year ended December 31, 1997 with Claremont’s information as of and for the year ended June 30, 1997. Footnote information stated as of and for the year ended December 31, 1998 combines CBSI’s and Claremont’s information as of and for the year ended December 31, 1998. As a result of these pooling of interests period combinations, an adjustment has been included in the consolidated statements of shareholders’ equity to adjust all components of shareholders’ equity to their respective balances as of December 31, 1998.

      In January 1998, the Company closed an Agreement and Plan of Merger with c.w. Costello & Associates, inc. (Costello), a privately held Delaware corporation. The merger with Costello was accounted for by the pooling of interests method of accounting, and accordingly, the accompanying consolidated balance sheets and statements of income, shareholders’ equity and cash flows have been retroactively restated.

     Foreign Currency

      For significant foreign operations, the local currencies have been designated as the functional currencies. The financial statements of these subsidiaries are translated into U.S. dollars using exchange rates in effect at year end for assets and liabilities and at the average exchange rate during the year for revenues and expenses. The resulting foreign currency translation adjustment (other comprehensive income (loss)) is reflected as a separate component of shareholders’ equity as of December 31, 1999 and 1998.

      Transaction gains and losses, which were not significant in the years presented, are reflected in the consolidated statements of income.

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     Cash and Cash Equivalents

      Cash and cash equivalents include investments in highly liquid money market funds and commercial paper.

     Financial Instruments

      The fair values and carrying amounts of certain of the Company’s financial instruments, primarily accounts receivable and payable, and accrued liabilities are approximately equivalent.

     Goodwill

      Goodwill represents the excess of cost over the net tangible and identifiable intangible assets related to businesses acquired and the acquisition of shares of a subsidiary. Goodwill is carried at cost, less accumulated amortization, and is amortized on a straight-line basis over periods ranging from 20 to 30 years. The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of goodwill may warrant revision or that the remaining balance may not be recoverable. When factors indicate that goodwill should be evaluated for possible impairment, the Company uses an estimate of the related business’s undiscounted cash flow over the remaining life of the goodwill in measuring whether the goodwill is recoverable.

     Property and Equipment

      Property and equipment are stated at cost. Depreciation is provided primarily using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the expected life of the asset or term of the lease, whichever is shorter.

      The American Institute of Certified Public Accountants has issued Statement of Position (SOP) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”, which requires entities to capitalize and amortize certain costs and currently expense certain other costs incurred for software developed or obtained for internal use. Internally developed computer software is recorded at cost and includes purchased, internally developed and externally developed software to be used in CBSI’s operations.

     Revenue Recognition

      The Company recognizes professional service fee revenue on time-and-materials contracts as the services are performed.

      Revenues on fixed-priced contracts are recognized using the percentage of completion method. The percentage of completion is determined by relating the actual cost of work performed to date to the estimated total cost for each contract. If the estimate indicates a loss on a particular contract, a provision is made for the entire estimated loss without reference to the percentage of completion. Retainages, which are not material for any of the years presented, are included in accounts receivable in the accompanying consolidated balance sheets. Revenue earned in excess of billings is comprised of revenue recognized on certain contracts in excess of contractual billings on such contracts. Billings in excess of revenue earned are classified as deferred revenue.

     Computer Software

      The Company performs research to develop software for various business applications. The costs of such research are charged to expense when incurred. When the technological feasibility of the product is established, subsequent costs are capitalized. Capitalized software costs are amortized on a product-by-product basis. Amortization is recorded on the straight-line method over the estimated economic life of the product, generally three years to five years, commencing when such product is available. The establishment of technological feasibility and the ongoing assessment of the recoverability of these costs requires considerable

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judgment by management with respect to certain external factors, including, but not limited to, anticipated future gross product revenue, estimated economic product lives and changes in software and hardware technology. These assumptions are reevaluated and adjusted as necessary at the end of each accounting period. On an ongoing basis, management reviews the valuation and amortization of capitalized development costs. As part of this review, the Company considers the value of future cash flows attributable to the capitalized development costs in evaluating potential impairment of the asset. The amortization of software development costs was $1,076, $1,583 and $860 for the years ended December 31, 1999, 1998 and 1997, respectively.

      In Claremont’s third and fourth quarters of fiscal 1998, management determined that certain of the Company’s computer software products were no longer realizable and recorded a charge of approximately $8,300.

      Accumulated amortization on computer software amounted to $6,103 and $5,027 as of December 31, 1999 and 1998, respectively.

      Amounts capitalized were $2,387, $1,510 and $6,901 for the years ended December 31, 1999, 1998 and 1997, respectively.

      Amounts charged to expense for research and development of computer software were not material in the periods presented.

     Use of Estimates in the Preparation of Financial Statements

      The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

     Income Taxes

      Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

     Reclassifications

      Certain reclassifications have been made to the 1998 and 1997 consolidated financial statements to conform with the 1999 presentation.

2.  Common Stock Offerings

      In February 1999, CBSI completed an offering of 5,400,000 shares of its Common Stock at a price of $31 per share. This offering consisted of 2,135,000 shares of newly issued Common Stock and 3,265,000 shares sold by selling shareholders. After underwriting discounts, commissions and other issuance costs, net proceeds to the Company from the sale of the newly issued shares in this offering were approximately $60,000.

      In August 1997, CBSI completed a secondary offering of 5,200,000 shares of its Common Stock at a price of $14 1/8 per share. This offering consisted of 2,900,000 shares of newly issued Common Stock and 2,300,000 shares sold by selling shareholders. After underwriting discounts, commissions and other issuance costs, net proceeds to the Company from this offering were approximately $38,000.

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      In March 1997, CBSI completed its initial public offering of 5,000,000 shares of its Common Stock at a price of $6 per share. This offering consisted of 4,600,000 shares of newly issued Common Stock and 400,000 shares sold by a selling shareholder. After underwriting discounts, commissions and other issuance costs, net proceeds to the Company from this offering were approximately $23,600.

      In July 1996, Claremont completed its initial public offering of 2,171,417 shares of its common stock at a price of $19 3/8 per share. This offering consisted of 1,357,136 shares of newly issued common stock and 814,281 shares sold by selling shareholders. After underwriting discounts, commissions and other issuance costs, net proceeds to Claremont from this offering were approximately $26,900.

3.  Common Stock Repurchase Program

      In August 1999, CBSI’s board of directors authorized the repurchase of up to 2,000,000 shares of CBSI’s Common Stock over a twenty-four month period. During the year ended December 31, 1999, CBSI repurchased 354,000 shares of its Common Stock, for cash, at a total cost of $5,213.

4.  Mergers and Acquisitions

      On April 20, 1999, the Company acquired all of the outstanding capital stock of EBS for approximately $15,000. The aggregate purchase price, which was funded through available working capital, has been allocated to the assets based upon their respective fair values. The excess of purchase price over assets acquired is being amortized over 30 years.

      For the year ended December 31, 1998, assuming the acquisition of EBS occurred at the beginning of the period, proforma revenues, income from continuing operations and diluted earnings per share from operations would have been $420,976, $2,347 and $.06 respectively. These results include certain adjustments, primarily to eliminate the businesses of EBS that were not acquired, amortization of goodwill and income taxes, and are not necessarily indicative of what the results would have been had the transaction actually occurred at the beginning of the period. The proforma impact of the acquisition on results of operations was not significant for the year ended December 31, 1999.

      On July 24, 1998, the Company closed a merger agreement with Claremont. This merger agreement provided for all of the outstanding Claremont common stock to be exchanged for approximately 7,235,000 shares of CBSI’s common stock. See Note 11.

      Unaudited summarized results of operations and other changes in shareholders’ equity of the previously separate entities for the six month period ended June 30, 1998 are as follows:

      The activity for Claremont for the period from July 1, 1997 to December 31, 1997, has not been reflected in the consolidated statements of income for CBSI as a result of the periods combined. (See Note 1).

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Unaudited summarized results of operations for the six month period ended December 31, 1997 for Claremont are as follows:

      On January 27, 1998, the Company closed a merger agreement with Costello. This merger agreement provided for all of the outstanding Costello common stock to be exchanged for approximately 3,363,000 shares of CBSI’s common stock. See Note 11.

      Audited summarized results of operations and other changes in shareholders’ equity of the previously separate entities for the year ended December 31, 1997 are as follows: