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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
For the transition period from to
Commission file number: 0-22141
COMPLETE BUSINESS SOLUTIONS, INC.
| Michigan | 38-2606945 | |
| (State or Other Jurisdiction of | (IRS Employer | |
| Incorporation or Organization) | Identification No.) |
32605 West Twelve Mile Road
Registrant’s telephone number, including area code:(248) 488-2088
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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| No Par Value | 31,400,972 | |
| (Class of Common Stock) | (Outstanding as of October 31, 2000) |
COMPLETE BUSINESS SOLUTIONS, INC.
INDEX
| Page No. | ||||||
| PART I. FINANCIAL INFORMATION | ||||||
| Item 1. | Financial Statements | 3 | ||||
| Condensed Consolidated Balance Sheets | 3 | |||||
| Condensed Consolidated Statements of Operations | 4 | |||||
| Condensed Consolidated Statements of Cash Flows | 5 | |||||
| Notes to Condensed Consolidated Financial Statements | 6 | |||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 8 | ||||
| PART II. OTHER INFORMATION | ||||||
| Item 4. | Submission of Matters to a Vote of Security Holders | 11 | ||||
| Item 6. | Exhibits and Reports on Form 8-K | 11 | ||||
| SIGNATURES | 12 | |||||
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COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
| September 30, | December 31, | |||||||||
| 2000 | 1999 | |||||||||
| (Dollars in thousands) | ||||||||||
| (Unaudited) | ||||||||||
ASSETS | ||||||||||
| Current assets: | ||||||||||
| Cash and cash equivalents | $ | 160,103 | $ | 91,236 | ||||||
| Accounts receivable, net | 87,120 | 85,506 | ||||||||
| Revenue earned in excess of billings, net | 27,714 | 18,152 | ||||||||
| Deferred and refundable income taxes | 5,253 | 5,253 | ||||||||
| Prepaid expenses and other | 7,045 | 4,612 | ||||||||
| Total current assets | 287,235 | 204,759 | ||||||||
| Property and equipment, net | 33,323 | 29,836 | ||||||||
| Computer software, net | 5,660 | 5,936 | ||||||||
| Goodwill, net | 25,815 | 25,209 | ||||||||
| Other assets | 19,516 | 11,648 | ||||||||
| Total assets | $ | 371,549 | $ | 277,388 | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||
| Current liabilities: | ||||||||||
| Accounts payable | $ | 9,073 | $ | 8,432 | ||||||
| Accrued payroll and related costs | 23,825 | 26,510 | ||||||||
| Deferred revenue | 1,439 | 982 | ||||||||
| Other accrued liabilities | 4,930 | 2,784 | ||||||||
| Total current liabilities | 39,267 | 38,708 | ||||||||
| Other liabilities | 2,201 | 2,263 | ||||||||
| Commitments and contingencies | ||||||||||
| Convertible redeemable preferred stock, no par value, 200,000 shares authorized, 200,000 and 0 shares issued and outstanding as of September 30, 2000 and December 31, 1999, respectively | 154,588 | — | ||||||||
| Shareholders’ equity: | ||||||||||
| Preferred stock, no par value, 1,000,000 shares authorized, none issued | — | — | ||||||||
| Common stock, no par value, 200,000,000 shares authorized, 32,080,746 and 37,494,446 shares issued and outstanding as of September 30, 2000 and December 31, 1999, respectively | — | — | ||||||||
| Additional paid-in capital | 146,962 | 182,816 | ||||||||
| Retained earnings | 35,193 | 60,709 | ||||||||
| Stock subscriptions receivable | (3,786 | ) | (5,599 | ) | ||||||
| Cumulative translation adjustment | (2,876 | ) | (1,509 | ) | ||||||
| Total shareholders’ equity | 175,493 | 236,417 | ||||||||
| Total liabilities and shareholders’ equity | $ | 371,549 | $ | 277,388 | ||||||
The accompanying notes are an integral part of these condensed consolidated balance sheets.
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COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
| Three Months Ended | Nine Months Ended | |||||||||||||||||
| September 30, | September 30, | |||||||||||||||||
| 2000 | 1999 | 2000 | 1999 | |||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||
| (Unaudited) | ||||||||||||||||||
| Revenues | $ | 105,641 | $ | 113,906 | $ | 313,193 | $ | 339,905 | ||||||||||
| Cost of revenues: | ||||||||||||||||||
| Salaries, wages and employee benefits | 67,466 | 63,826 | 192,014 | 185,711 | ||||||||||||||
| Contractual services | 6,030 | 6,421 | 18,773 | 20,156 | ||||||||||||||
| Project travel and relocation | 4,634 | 5,547 | 13,951 | 14,876 | ||||||||||||||
| Depreciation and amortization | 740 | 1,095 | 3,267 | 3,028 | ||||||||||||||
| Total cost of revenues | 78,870 | 76,889 | 228,005 | 223,771 | ||||||||||||||
| Gross profit | 26,771 | 37,017 | 85,188 | 116,134 | ||||||||||||||
| Selling, general and administrative expenses | 43,188 | 24,911 | 91,312 | 73,996 | ||||||||||||||
| Restructuring, merger and other costs | — | — | 5,498 | 5,367 | ||||||||||||||
| Income (loss) from operations | (16,417 | ) | 12,106 | (11,622 | ) | 36,771 | ||||||||||||
| Interest income | (2,036 | ) | (787 | ) | (4,166 | ) | (2,864 | ) | ||||||||||
| Income (loss) before provision for income taxes | (14,381 | ) | 12,893 | (7,456 | ) | 39,635 | ||||||||||||
| Provision (benefit) for income taxes | (5,036 | ) | 4,903 | (2,147 | ) | 14,130 | ||||||||||||
| Net income (loss) from continuing operations | (9,345 | ) | 7,990 | (5,309 | ) | 25,505 | ||||||||||||
| Gain (Loss) from discontinued operations, net of income taxes | (627 | ) | 254 | (1,692 | ) | 235 | ||||||||||||
| Gain on sale of discontinued operations, net of income taxes | 6,072 | — | 6,072 | — | ||||||||||||||
| Net income (loss) | (3,900 | ) | 8,244 | (929 | ) | 25,740 | ||||||||||||
| Beneficial conversion feature | — | — | 23,651 | — | ||||||||||||||
| Convertible redeemable preferred stock dividends | 936 | — | 1,470 | — | ||||||||||||||
| Net income (loss) available for common shareholders | $ | (4,836 | ) | $ | 8,244 | $ | (26,050 | ) | $ | 25,740 | ||||||||
| Basic earnings (loss) per share — | ||||||||||||||||||
| Weighted average shares outstanding | 33,949 | 37,593 | 35,244 | 37,157 | ||||||||||||||
| Basic earnings (loss) per share from continuing operations | $ | (0.27 | ) | $ | 0.21 | $ | (0.15 | ) | $ | 0.68 | ||||||||
| Basic earnings (loss) per share from discontinued operations | (0.02 | ) | 0.01 | (0.05 | ) | 0.01 | ||||||||||||
| Basic earnings per share from gain on sale | 0.18 | — | 0.17 | — | ||||||||||||||
| Basic loss per share from beneficial conversion feature and dividends | (0.03 | ) | — | (0.71 | ) | — | ||||||||||||
| Basic earnings (loss) per share | $ | (0.14 | ) | $ | 0.22 | $ | (0.74 | ) | $ | 0.69 | ||||||||
| Diluted earnings (loss) per share — | ||||||||||||||||||
| Weighted average shares outstanding | 33,949 | 37,593 | 35,244 | 37,157 | ||||||||||||||
| Dilutive effect of stock options | — | 576 | — | 994 | ||||||||||||||
| Diluted weighted average shares outstanding | 33,949 | 38,169 | 35,244 | 38,151 | ||||||||||||||
| Diluted earnings (loss) per share from continuing operations | $ | (0.27 | ) | $ | 0.21 | $ | (0.15 | ) | $ | 0.66 | ||||||||
| Diluted earnings (loss) per share from discontinued operations | (0.02 | ) | 0.01 | (0.05 | ) | 0.01 | ||||||||||||
| Diluted earnings per share from gain on sale | 0.18 | — | 0.17 | — | ||||||||||||||
| Diluted loss per share from beneficial conversion feature and dividends | (0.03 | ) | — | (0.71 | ) | — | ||||||||||||
| Diluted earnings (loss) per share | $ | (0.14 | ) | $ | 0.22 | $ | (0.74 | ) | $ | 0.67 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| 2000 | 1999 | ||||||||||
| (Dollars in thousands) | |||||||||||
| (Unaudited) | |||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | (929 | ) | $ | 25,740 | ||||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities from continuing operations: | |||||||||||
| Loss from discontinued operations | 1,692 | (235 | ) | ||||||||
| Gain on sale of discontinued operations | (10,106 | ) | — | ||||||||
| Depreciation and amortization | 9,213 | 7,747 | |||||||||
| Write down of accounts receivable and provision for doubtful accounts | 15,852 | 1,016 | |||||||||
| Change in assets and liabilities — | |||||||||||
| Accounts receivable and revenue earned in excess, net | (23,078 | ) | (26,309 | ) | |||||||
| Prepaid expenses and other assets | (3,654 | ) | (3,489 | ) | |||||||
| Accounts payable, accrued payroll and related costs and other liabilities | (3,951 | ) | (13,769 | ) | |||||||
| Deferred revenue | 395 | (1,972 | ) | ||||||||
| Net cash used in operating activities of continuing operations | (14,566 | ) | (11,271 | ) | |||||||
| Cash flows from investing activities: | |||||||||||
| Investment in property, equipment and other | (8,454 | ) | (11,389 | ) | |||||||
| Investment in computer software | (3,112 | ) | (4,804 | ) | |||||||
| Investments in affiliates and other | (10,143 | ) | (2,000 | ) | |||||||
| Payment for purchase of assets, net of cash acquired | (1,320 | ) | (17,998 | ) | |||||||
| Net cash used in investing activities of continuing operations | (23,029 | ) | (36,191 | ) | |||||||
| Cash flows from financing activities: | |||||||||||
| Net proceeds from issuance of common stock | 1,151 | 61,185 | |||||||||
| Net proceeds from issuance of convertible redeemable preferred stock | 187,138 | — | |||||||||
| Repurchases of common stock | (85,236 | ) | (3,536 | ) | |||||||
| Net proceeds from exercise of stock options and other | 5,345 | 6,802 | |||||||||
| Net cash provided by financing activities of continuing operations | 108,398 | 64,451 | |||||||||
| Cash used in discontinued operations and effect of exchange rate changes on cash | (1,936 | ) | 221 | ||||||||
| Increase in cash and cash equivalents | 68,867 | 17,210 | |||||||||
| Cash and cash equivalents at beginning of period | 91,236 | 60,732 | |||||||||
| Cash and cash equivalents at end of period | $ | 160,103 | $ | 77,942 | |||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Cash paid during the period for: | |||||||||||
| Income taxes | $ | 4,423 | $ | 16,798 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
1. Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared by management, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position of Complete Business Solutions, Inc. and subsidiaries (CBSI) as of September 30, 2000, the results of its operations for the three and nine month periods ended September 30, 2000 and 1999, and cash flows for the nine month periods ended September 30, 2000 and 1999. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in CBSI’s 1999 Form 10-K.
The results of operations for the three and nine month periods ended, September 30, 2000 are not necessarily indicative of the results to be expected in future quarters or for the full fiscal year ending December 31, 2000.
2. Income Tax
CBSI has provided federal and state income taxes in the condensed consolidated statements of income based on the anticipated effective tax rate for fiscal years 2000 and 1999.
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. In May 2000, CBSI’s board of directors authorized the repurchase of up to an additional 5,000,000 shares of CBSI’s Common Stock. Through December 31, 1999, CBSI repurchased 354,000 shares of its Common Stock, for cash, at a total cost of $5,213. During the nine month period ended September 30, 2000, CBSI repurchased 5,141,000 shares of its Common Stock, for cash, at a total cost of $85,236.
In October 2000, CBSI’s board of directors authorized the repurchase of up to an additional 1,000,000 shares of CBSI’s Common Stock.
On November 13, 2000, CBSI’s board of directors authorized the repurchase of up to an additional 4,000,000 shares of CBSI’s Common Stock.
4. Convertible Redeemable Preferred Stock
On March 17, 2000, CBSI entered into an agreement with funds managed by Clayton, Dubilier & Rice, Inc. (CDR) whereby CDR would purchase, in two transactions, from CBSI 200,000 shares of Convertible Redeemable Preferred Stock for $200,000 and will be issued warrants to purchase 5,300,000 shares of CBSI’s Common Stock. The first transaction, which consisted of the purchase of 100,000 shares of Convertible Redeemable Preferred Stock for $100,000 and the issuance of seven year warrants to purchase 3,000,000 shares of CBSI’s Common Stock at $25 per share, closed on April 20, 2000. The second transaction, which consisted of the purchase of 100,000 shares of Convertible Redeemable Preferred Stock for $100,000, the issuance of seven year warrants to purchase 500,000 shares of CBSI’s Common Stock at $25 per share, and the issuance of ten year warrants to purchase 1,800,000 shares of CBSI’s Common Stock at $31 per share, closed on July 28, 2000.
The Convertible Redeemable Preferred Stock is convertible into CBSI Common Stock 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. All of the warrants become exercisable
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Upon closing of each transaction, the proceeds were allocated to Convertible Redeemable Preferred Stock and the warrants based on their relative fair values, with the Convertible Redeemable Preferred Stock classified outside of stockholders’ equity and the warrants as additional paid-in capital on the condensed consolidated balance sheet. The difference between the fair value allocated to the Convertible Redeemable Preferred Stock and the fair value of CBSI’s Common Stock, if any, is considered a beneficial conversion feature. The beneficial conversion feature, which does not affect net income (loss), was accounted for as a dividend on the Convertible Redeemable Preferred Stock in the period it is issued and as a reduction of income available to common shareholders in the computation of basic and fully diluted earnings per share, where applicable.
CBSI also entered into an agreement with CDR whereby CDR will provide CBSI financial and management advisory services.
5. Restructuring, Merger and Other Costs
During 2000, CBSI incurred approximately $5,498 in costs for severance and certain non-recurring employee costs related to CBSI’s organizational restructuring. The charge related to approximately 50 employees in CBSI’s European operations and U.S. Management. The majority of these costs have been paid by June 30, 2000 and no adjustments have been made to the liability. During 1999, CBSI incurred approximately $5,367 for certain non-capitalizable merger and other costs, including lease termination and severance, related to the acquisition of E-Business Solutions.com, Inc.
6. Discontinued Operations and Gain on Sale of Discontinued Operations
In June 2000, the CBSI’s board of directors adopted a plan to sell the operations of its contract programming services subsidiary, Synova, Inc. (Synova). Accordingly, the condensed consolidated financial statements of CBSI have been reclassified to reflect Synova as a discontinued operation. The net operating results of Synova have been reported, net of applicable income taxes, as “Loss from discontinued operations” in the accompanying condensed consolidated statements of operations for all periods presented. The net cash flows of Synova have been included in “Cash used in discontinued operations and effect of exchange rate changes on cash” in the accompanying condensed consolidated statement of cash flows.
Summarized financial information for the discontinued operations of Synova are as follows:
| Three Months | Nine Months | |||||||||||||||
| Ended | Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2000 | 1999 | 2000 | 1999 | |||||||||||||
| Revenues | $ | 16,158 | $ | 5,301 | $ | 39,204 | $ | 10,947 | ||||||||
| Income (loss) before provision for income taxes | (994 | ) | 404 | (2,685 | ) | 373 | ||||||||||
On September 28, 2000, CBSI sold Synova to an affiliated entity in exchange for 750,000 shares of CBSI’s Common Stock held by the affiliated entity. As a result of this exchange, CBSI has recorded a gain on the sale of discontinued operations of $6,072, net of income taxes, in the accompanying condensed consolidated statements of operations.
7. Writedown of Accounts Receivable and Other
During the three month period ended September 30, 2000, CBSI recorded a $15,000 charge primarily to write-down certain accounts receivables for dot.com companies which had become uncollectible, and to recognize lower valuations of investments in certain dot.com companies. This charge has been included in “selling, general and administrative expenses” in the accompanying condensed consolidated statements of operations.
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The following section should be read in conjunction with CBSI’s condensed consolidated financial statements and notes thereto included in this Form 10-Q. 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, governmental 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 and other risks as more fully discussed in our 1999 Form 10-K.
Results of Continuing Operations
Revenues. CBSI’s revenues from continuing operations decreased approximately 7.3% to $105.6 million for the three month period ended September 30, 2000 from $113.9 million for the same period in 1999. Revenue from continuing operations decreased approximately 7.9% to $313.2 for the nine month period ended September 30, 2000 from $339.9 million for the same period in 1999. This decline in revenues is primarily due to longer customer sales cycles brought on by the IT industry slowdown. For the fourth quarter of fiscal 2000, management expects to see only modest revenue growth and, combined with margin pressure and increased investment in repositioning initiatives, management expects short-term earnings to remain depressed.
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 decreased approximately 27.7% to $26.8 million for the three month period ended September 30, 2000 from $37.0 million for the same period in 1999, and approximately 26.6% to $85.2 million for the nine month period ended September 30, 2000 from $116.1 million for the same period in 1999. Gross profit as a percentage of revenues decreased to approximately 25.3% for the three month period ended September 30, 2000 from 32.5% for the same period in 1999. For the nine month period ended September 30, 2000, gross profit margin as a percentage of revenue decreased to approximately 27.2% from 34.2% for the same period in 1999. This decrease is due to CBSI’s continuing investment in training and development of its IT professionals in connection with its e-business expansion strategy and decreased utilization rates.
Selling, General and Administrative. Selling, general and administrative expenses consist primarily of costs associated with CBSI’s direct selling and marketing efforts, human resources and recruiting departments, administration and indirect facility costs. Selling, general and administrative expenses increased approximately 73.4% to $43.2 million for the three month period ended September 30, 2000 from $24.9 million for the same period in 1999 and approximately 23.4% to $91.3 million for the nine month period ended September 30, 2000 from $74.0 million for the same period in 1999. As a percentage of revenues, selling, general and administrative expenses increased to 40.9% for the three month period ended September 30, 2000 from 21.9% for the same period in 1999 and to 29.2% for the nine month period ended September 30, 2000 from 21.8% for the same period in 1999. This increase is primarily due to CBSI’s decision to record a $15,000 charge primarily to write-down certain accounts receivable from dot-com companies which had become uncollectible and to recognize lower valuations of investments in certain dot-com companies. In addition, CBSI continues to make increasing infrastructure investments as it pursues a transformation and repositioning strategy.
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Interest Expense (Income). Interest expense (income) represents interest earned on cash equivalents net of interest expense on borrowings. Interest income for the three month period ended September 30, 2000 was $2.0 million compared to $.8 million for the same period in 1999. The increase is due primarily to the investment of funds received in connection with the issuance of Convertible Redeemable Preferred Stock.
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 used in continuing operations was $14.6 million for the nine month period ended September 30, 2000 compared to $11.3 million for the same period in 1999. The increase in cash used in operations is primarily due to reduced gross profit margins, increased infrastructure investments, an increase in the accounts receivable days sales outstanding and an increase in revenue earned in excess.
The principal use of cash for investing activities of continuing operations during the nine month period ended September 30, 2000 was for the purchase of property and equipment primarily as part of the development and enhancement of CBSI’s e-centers and offshore software development centers, the investment in internally developed computer software, and other strategic investments.
To facilitate future cash flow needs, CBSI has an arrangement with a commercial bank where CBSI may borrow an amount not to exceed $30 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 of continuing operations for the nine month period ended September 30, 2000 of $108.4 million was primarily due to CBSI realizing net proceeds of approximately $187.1 million in connection with the issuance of 200,000 shares of Convertible Redeemable Preferred Stock, offset by the $85.2 million cost of repurchasing CBSI Common Stock. Net cash provided by financing activities of continuing operations for the nine month period ended September 30, 1999 of $64.5 million was primarily due to CBSI realizing net proceeds of approximately $60.3 million from the issuance of Common Stock in February 1999 during a follow-on Common Stock offering.
The offshore development centers’ operations of CBSI accounted for approximately 8% of CBSI’s total revenues during the three month period ended September 30, 2000. 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 during the nine month period ended September 30, 2000 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 during the nine month period ended September 30, 2000.
Other
Convertible Redeemable Preferred Stock. On March 17, 2000, CBSI entered into an agreement with funds managed by Clayton, Dubilier & Rice, Inc. (CDR) whereby CDR would purchase, in two transactions, from CBSI 200,000 shares of Convertible Redeemable Preferred Stock for $200 million and will be issued warrants to purchase 5,300,000 shares of CBSI’s Common Stock. The first transaction, which consisted of the purchase of 100,000 shares of Convertible Redeemable Preferred Stock for $100 million and the issuance of seven year warrants to purchase 3,000,000 shares of CBSI’s Common Stock at $25 per share, closed on April 20, 2000. The second transaction, which consisted of the purchase of 100,000 shares of Convertible Redeemable Preferred Stock for $100 million, the issuance of seven year warrants to purchase 500,000 shares of CBSI’s common stock at $25 per share, and the issuance of ten year warrants to purchase 1,800,000 shares of CBSI’s common stock at $31 per share, closed on July 28, 2000.
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The Convertible Redeemable Preferred Stock is convertible into CBSI Common Stock 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. All of the warrants become exercisable upon the earlier of the third anniversary of the date of issuance or CBSI’s stock price exceeding a predetermined price for twenty consecutive trading days.
Upon closing of each transaction, the proceeds were allocated to the Convertible Redeemable Preferred Stock and the warrants based on their relative fair values, with the Convertible Redeemable Preferred Stock classified outside of stockholders’ equity and the warrants as additional paid-in capital on the condensed consolidated balance sheet. The difference between the fair value allocated to the Convertible Redeemable Preferred Stock and the fair value of CBSI’s Common Stock is considered a beneficial conversion feature. The beneficial conversion feature, which does not affect net income (loss), was accounted for as a dividend on the Convertible Redeemable Preferred Stock in the period it is issued and as a reduction of income available to common shareholders in the computation of basic and fully diluted earnings per share, where applicable.
CBSI also entered into an agreement with CDR whereby CDR will provide CBSI financial and management advisory services.
Restructuring, Merger and Other Costs. During 2000, CBSI incurred approximately $5.5 million in costs for severance and certain non-recurring employee costs related to CBSI’s organizational restructuring. The charge related to approximately 50 employees in CBSI’s European operations and U.S. Management. The majority of these costs have been paid by September 30, 2000 and no adjustments have been made to the liability. During 1999, CBSI incurred approximately $5.4 million for certain non-capitalizable merger and other costs, including lease termination and severance, related to the acquisition of E-Business Solutions.com, Inc.
Discontinued Operations. In June 2000, the CBSI’s board of directors adopted a plan to sell the operations of its contract programming services subsidiary, Synova, Inc. (Synova). Accordingly, the condensed consolidated financial statements of CBSI have been reclassified to reflect Synova as a discontinued operation. The net operating results of Synova have been reported, net of applicable income taxes, as “Loss from discontinued operations” in the accompanying condensed consolidated statements of operations for all periods presented. The net cash flows of Synova have been included in “Cash used in discontinued operations and effect of exchange rate changes on cash” in the accompanying condensed consolidated statement of cash flows. On September 28, 2000, CBSI sold Synova to an affiliated entity in exchange for 750,000 shares of CBSI’s Common Stock held by the affiliated entity. CBSI has recorded a gain on the sale of discontinued operations of $6.1 million, net of income taxes, in the accompanying condensed consolidated statements of operations.
Recently Issued Financial Accounting Standards
Staff Accounting Bulletin No. 101, “Revenue Recognition” was issued in December 1999, and later amended in June 2000. CBSI will be required to adopt the new Staff Accounting Bulletin by the fourth quarter of the year ended December 31, 2000. This bulletin clarifies the SEC’s views on revenue recognition. CBSI is in the process of assessing the impact of the bulletin and will adopt this bulletin in the fourth quarter of fiscal year 2000.
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On July 11, 2000, the annual meeting of shareholders was held. The meeting was held for the following purposes:
| 1. | to consider and vote upon the second step of a transaction between Clayton, Dubilier & Rice, Inc. (“CDR”) and CBSI; | |
| 2. | to amend the Company’s 1996 Stock Option Plan; | |
| 3. | to elect four directors to the Board of Directors; and | |
| 4. | to ratify the appointment of Arthur Andersen LLP as independent auditors for fiscal year 2000. |
The shareholders approved the second step of the CDR transaction. The vote was 23,959,723 for, 702,919 against, 15,308 abstain and 7,276,170 non- vote.
The shareholders approved to amend the 1996 Stock Option Plan to increase the number of shares of common stock that may be issued by 6,000,000 shares to 13,247,454 shares. The vote was 14,727,311 for, 9,870,309 against, 80,330 abstain and 7,276,170 non- vote.
The shareholders re-elected Mr. Rajendra Vattikuti as director. The vote was 29,130,368 for and 2,823,752 abstain.
The shareholders re-elected Mr. Kevin Conway as director. The vote was 31,397,068 for and 557,052 abstain.
The shareholders re-elected Mr. Ned Lautenbach as director. The vote was 31,404,113 for and 550,007 abstain.
The shareholders re-elected Mr. David Wasserman as director. The vote was 31,396,173 for and 557,947 abstain.
Mr. Ronald Machtley, Mr. Douglas Land and Mr. Frank Stella continue as directors with terms expiring 2001.
Mr. William Brooks and Mr. John Stanley continue as directors with terms expiring 2002.
The shareholders approved the appointment of Arthur Andersen LLP as the independent auditors of CBSI for the year ending December 31, 2000. The vote was 31,886,567 for, 57,652 against and 9,901 abstain.
(a) Exhibits
| Number | Exhibit | |||
| (11) | Computation of Earnings per share | |||
| (27) | Financial Data Schedule | |||
(b) Reports on Form 8-K
On October 10, 2000, CBSI filed a Form 8-K with the Securities and Exchange Commission regarding a share exchange with The Rajendra B. Vattikuti Trust for the exchange of all of the stock of Synova, Inc., a wholly-owned subsidiary of CBSI. The share exchange was consummated on September 28, 2000.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| COMPLETE BUSINESS SOLUTIONS, INC. |
| By: | /s/ MICHAEL W. BEALMEAR |
| Michael W. Bealmear | |
| President and Chief Executive Officer | |
| /s/ TIMOTHY S. MANNEY | |
| Timothy S. Manney | |
| Executive Vice President of Strategic Planning, | |
| Corporate Development and Administration | |
| (Principal Financial and | |
| Accounting Officer) |
Dated: November 14, 2000
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Exhibit Index
| Exhibit No. | Description | |||
| 11 | Computation of Earnings per share | |||
| 27 | Financial Data Schedule | |||
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