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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
For the quarterly period ended March 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
For the transition period from to
Commission file number: 0-22141
Michigan
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 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
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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 6. | Exhibits | 11 | ||||
| SIGNATURES | 12 | |||||
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COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
| March 31, | December 31, | |||||||||
| 2001 | 2000 | |||||||||
| (Dollars in thousands) | ||||||||||
| (Unaudited) | ||||||||||
ASSETS | ||||||||||
| Current assets: | ||||||||||
| Cash and cash equivalents | $ | 120,222 | $ | 140,123 | ||||||
| Accounts receivable, net | 83,158 | 82,203 | ||||||||
| Revenue earned in excess of billings, net | 26,528 | 22,347 | ||||||||
| Deferred and refundable income taxes | 13,158 | 13,158 | ||||||||
| Prepaid expenses and other | 4,078 | 4,143 | ||||||||
| Total current assets | 247,144 | 261,974 | ||||||||
| Property and equipment, net | 33,930 | 34,169 | ||||||||
| Computer software, net | 3,150 | 3,409 | ||||||||
| Goodwill, net | 11,121 | 11,398 | ||||||||
| Other assets, net | 19,289 | 19,951 | ||||||||
| Total assets | $ | 314,634 | $ | 330,901 | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||
| Current liabilities: | ||||||||||
| Accounts payable | $ | 13,096 | $ | 13,715 | ||||||
| Accrued payroll and related costs | 24,950 | 27,581 | ||||||||
| Other accrued liabilities | 13,154 | 11,991 | ||||||||
| Deferred revenue | 124 | 1,787 | ||||||||
| Total current liabilities | 51,324 | 55,074 | ||||||||
| Deferred taxes | 2,969 | 2,969 | ||||||||
| Other liabilities | 145 | 92 | ||||||||
| Commitments and contingencies | ||||||||||
| Convertible redeemable preferred stock, no par value, 200,000 shares issued and outstanding as of March 31, 2001 and December 31, 2000, respectively | 156,715 | 155,660 | ||||||||
| Shareholders’ equity: | ||||||||||
| Preferred stock, no par value, 1,000,000 shares authorized, 200,000 issued as Convertible redeemable preferred stock | — | — | ||||||||
| Common stock, no par value, 200,000,000 shares authorized, 28,606,072 and 29,577,428 shares issued and outstanding as of March 31, 2001 and December 31, 2000, respectively | — | — | ||||||||
| Additional paid-in capital | 111,607 | 122,139 | ||||||||
| Retained earnings (deficit) | (453 | ) | 2,553 | |||||||
| Stock subscriptions receivable | (2,921 | ) | (3,176 | ) | ||||||
| Other comprehensive income (loss) | (4,752 | ) | (4,410 | ) | ||||||
| Total shareholders’ equity | 103,481 | 117,106 | ||||||||
| Total liabilities and shareholders’ equity | $ | 314,634 | $ | 330,901 | ||||||
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 | ||||||||||
| March 31, | ||||||||||
| 2001 | 2000 | |||||||||
| (In thousands, except | ||||||||||
| per share data) | ||||||||||
| (Unaudited) | ||||||||||
| Revenues | $ | 104,671 | $ | 101,721 | ||||||
| Cost of revenues: | ||||||||||
| Salaries, wages and employee benefits | 65,066 | 59,538 | ||||||||
| Contractual services | 7,683 | 5,321 | ||||||||
| Project travel and relocation | 3,715 | 4,686 | ||||||||
| Depreciation and amortization | 681 | 1,258 | ||||||||
| Total cost of revenues | 77,145 | 70,803 | ||||||||
| Gross profit | 27,526 | 30,918 | ||||||||
| Selling, general and administrative expenses | 29,068 | 23,325 | ||||||||
| Restructuring and other | 3,216 | — | ||||||||
| Income (loss) from continuing operations | (4,758 | ) | 7,593 | |||||||
| Other expense (income) | (1,644 | ) | (866 | ) | ||||||
| Income (loss) from continuing operations before provision (benefit) for income taxes | (3,114 | ) | 8,459 | |||||||
| Provision (benefit) for income taxes | (1,164 | ) | 2,924 | |||||||
| Net income (loss) from continuing operations | (1,950 | ) | 5,535 | |||||||
| Loss from discontinued operations, net of income taxes | — | (524 | ) | |||||||
| Net income (loss) | (1,950 | ) | 5,011 | |||||||
| Convertible redeemable preferred stock dividends | 1,053 | — | ||||||||
| Net income (loss) available for common shareholders | (3,003 | ) | 5,011 | |||||||
| Basic earnings (loss) per share — Weighted average shares outstanding | 29,233 | 37,781 | ||||||||
| Basic earnings (loss) per share from continuing operations | $ | (0.07 | ) | $ | 0.14 | |||||
| Basic loss per share from discontinued operations | — | (0.01 | ) | |||||||
| Basic loss per share from preferred stock dividends | (0.04 | ) | — | |||||||
| Basic earnings (loss) per share | $ | (0.11 | ) | $ | 0.13 | |||||
| Diluted earnings (loss) per share — Weighted average shares outstanding | 29,233 | 37,781 | ||||||||
| Dilutive effect of stock options | — | 1,282 | ||||||||
| Diluted weighted average shares outstanding | 29,233 | 39,063 | ||||||||
| Diluted earnings (loss) per share from continuing operations | $ | (0.07 | ) | $ | 0.14 | |||||
| Diluted loss per share from discontinued operations | — | (0.01 | ) | |||||||
| Diluted loss per share from preferred stock dividends | (0.04 | ) | — | |||||||
| Diluted earnings (loss) per share | $ | (0.11 | ) | $ | 0.13 | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| 2001 | 2000 | ||||||||||
| (Dollars in thousands) | |||||||||||
| (Unaudited) | |||||||||||
| Cash flows from continuing operating activities: | |||||||||||
| Net income (loss) | $ | (1,950 | ) | $ | 5,011 | ||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities from continuing operations: | |||||||||||
| Depreciation and amortization | 3,024 | 2,991 | |||||||||
| Provision for doubtful accounts | 276 | 317 | |||||||||
| Loss from discontinued operations | — | 524 | |||||||||
| Change in assets and liabilities — | |||||||||||
| Accounts receivable | (5,412 | ) | (4,002 | ) | |||||||
| Prepaid expenses and other assets | 372 | (3,074 | ) | ||||||||
| Accounts payable, accrued payroll and related costs and other liabilities | (2,087 | ) | (6,125 | ) | |||||||
| Deferred revenue | (1,610 | ) | (6 | ) | |||||||
| Net cash used in operating activities of continuing operations | (7,387 | ) | (4,364 | ) | |||||||
| Cash flows from investing activities: | |||||||||||
| Investment in property, equipment and other | (2,249 | ) | (2,795 | ) | |||||||
| Investment in computer software | — | (638 | ) | ||||||||
| Investments in affiliates and other | — | (6,500 | ) | ||||||||
| Net cash used in investing activities of continuing operations | (2,249 | ) | (9,933 | ) | |||||||
| Cash flows from financing activities: | |||||||||||
| Net proceeds from issuance of common stock | 473 | 600 | |||||||||
| Net proceeds from exercise of stock options and other, net | 48 | 4,206 | |||||||||
| Repurchases of common stock | (10,786 | ) | — | ||||||||
| Net cash provided (used) by financing activities of continuing operations | (10,265 | ) | 4,806 | ||||||||
| Cash used in discontinued operations and effect of exchange rate changes on cash | — | (541 | ) | ||||||||
| Decrease in cash and cash equivalents | (19,901 | ) | (10,032 | ) | |||||||
| Cash and cash equivalents at beginning of period | 140,123 | 91,236 | |||||||||
| Cash and cash equivalents at end of period | $ | 120,222 | $ | 81,204 | |||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Cash paid during the period for: | |||||||||||
| Income taxes | $ | 62 | $ | 1,122 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
1. Organization and Basis of Presentation
Complete Business Solutions, Inc. was founded in 1985. Complete Business Solutions, Inc. and its subsidiaries (the Company) provide information technology (IT) services worldwide to large and mid-size organizations. The Company offers its clients a focused range of IT services specializing in Web-to-Enterprise Integration (WEIsm), industry-solutions and strategic outsourcing. The Company’s range of experience runs from advising clients on IT business strategy and strategic technology plans to developing and implementing appropriate IT applications solutions.
In February 2001, the Company began doing business under the name Covansys Corporation.
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 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 as of March 31, 2001, the results of its operations and cash flows for the three month periods ended March 31, 2001 and 2000. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s 2000 Form 10-K.
The results of operations for the three month period ended March 31, 2001 are not necessarily indicative of the results to be expected in future quarters or for the full fiscal year ending December 31, 2001.
2. Income Taxes
The Company has provided (benefited) federal and state income taxes in the condensed consolidated statements of operations based on the anticipated effective tax rate for fiscal years 2001 and 2000.
3. Common Stock Repurchase Program
The Company’s board of directors has authorized the repurchase of up to 12,000,000 shares of the Company’s Common Stock.
Through December 31, 2000, the Company repurchased 8,017,600 shares of its Common Stock, for cash, at a total cost of $117,033. During the quarter ended March 31, 2001, the Company repurchased 1,035,600 shares of its Common Stock at a total cost of $10,786.
4. Convertible Redeemable Preferred Stock
On March 17, 2000, the Company entered into an agreement with a fund managed by Clayton, Dubilier & Rice, Inc. (CDR) whereby CDR purchased, in two transactions, from the Company 200,000 shares of convertible redeemable preferred stock (Preferred Stock) for $200,000 and was 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.
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Upon closing of the transactions, the proceeds were allocated to the convertible Preferred Stock and the warrants based on their relative fair values, with the convertible Preferred Stock classified outside of stockholders’ equity and the warrants as additional paid-in capital on the consolidated balance sheet. The difference between the fair value allocated to the convertible redeemable Preferred Stock and the fair value of the Company’s Common Stock was considered a beneficial conversion feature. The beneficial conversion feature, which does not affect net income was accounted for as a dividend on the convertible Preferred Stock in the period it was issued and as a reduction of income available to common shareholders in the computation of basic and fully diluted earnings per share.
The Preferred Stock is redeemable at the option of the holder seven years from issuance. Due to the redeemable nature of the Preferred Stock, the difference between the proceeds allocated to the Preferred Stock and the amount of the redemption ($200,000) is being accreted to Preferred Stock over the redemption period as a dividend on Preferred Stock. The Preferred Stock ranks senior to common stock in the event of liquidation, has voting rights equal to the number of common shares into which it is convertible and is entitled to the same dividend as common stock if a dividend is declared.
The Company also entered into an agreement with CDR whereby CDR will provide the Company financial and management advisory services.
5. Discontinued Operations
In June 2000, the Company’s board of directors adopted a plan to sell the operations of its contract programming services subsidiary, Synova. Accordingly, the accompanying condensed consolidated financial statements for the quarter ended March 31, 2000 have been reclassified to reflect Synova as a discontinued operation. The net operating results of Synova have been reported, net of income taxes, as “loss from discontinued operations” in the accompanying condensed consolidated statements of operations. The net cash flows of Synova have been included in “cash used in discontinued operations and effect of exchange rate changes in cash” in the accompanying condensed consolidated statements of cash flows.
Summarized financial information for the discontinued operations of Synova are as follows:
| Three Months | ||||
| Ended | ||||
| March 31, 2000 | ||||
| Revenues | $ | 10,525 | ||
| Loss from operations | 524 | |||
On September 28, 2000, the Company sold Synova to a related party in exchange for 750,000 shares of the Company’s Common Stock, determined to be the fair market value.
6. Restructuring and Other Costs
During the three month period ended March 31, 2001, the Company incurred approximately $1,516 in costs for severance and certain non-recurring employee costs related to the Company’s organizational restructuring. The charge related to approximately 150 employees in the Company’s U.S. operations and management. The majority of these costs have been paid by March 31, 2001. In addition, the Company incurred approximately $1,700 in legal and advisory fees related to discontinued acquisition discussions. These costs have been included in other accrued liabilities in the accompanying condensed consolidated balance sheet at March 31, 2001.
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The following section should read in conjunction with our Consolidated Financial Statements and related Notes appearing 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, 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, economic conditions unique to clients in specific industries, possible write-off of computer software costs, limited protection of intellectual property rights, and potential liability to clients, each of which are discussed in our 2000 Form 10-K.
Overview
We provide IT services worldwide, offering clients flexible global delivery capabilities. Our 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 our revenues were generated from existing clients from the previous fiscal year.
We offer our clients a focused range of IT services specializing in Web-to-Enterprise Integration (WEIsm), industry-solutions and strategic outsourcing. Our range of experience runs from advising clients on IT business strategic plans to developing and implementing appropriate IT applications solutions.
We generally assume 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. We recognize revenues on time-and-materials engagements as the services are performed. On fixed-price engagements, we recognize revenues under the percentage of completion method.
Our most significant cost is project personnel cost, which consists primarily of salaries, wages and benefits for our IT professionals. We strive to maintain our gross profit margin by controlling project costs and offsetting increases in salaries and benefits with increases in billing rates. We use 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.
In an effort to sustain our growth and profitability, we have made and continue to make substantial investments in our infrastructure, including: (1) software development centers in the United States and India; (2) global recruiting and training centers in the United States and India; (3) system methodologies; (4) sales and marketing teams; (5) a geographically dispersed branch management structure; and (6) internal systems.
Results of Operations
Revenues. Our revenues increased 3% to $104.7 million for the three month period ended March 31, 2001 from $101.7 million for the same period in 2000. This increase in revenue is primarily due to increases in our IT professional workforce and increases in our average billing rate, offset by reduced revenues resulting from divisions that were sold or abandoned during the 4th quarter of 2000. For the three month period ended March 31, 2001, over 80% of our revenues were generated from existing customers.
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 11% to $27.5 million for the three month period ended March 31, 2001
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Selling, General and Administrative. Selling, general and administrative expenses consists primarily of costs associated with our direct selling and marketing efforts, human resources and recruiting departments, administration and indirect facility costs. Selling, general and administrative increased approximately 24.6% to $29.1 million for the three month period ended March 31, 2001 from $23.3 million for the same period in 2000. As a percentage of revenues, selling, general and administrative expenses increased to 27.8% for the three month period ended March 31, 2001 from 22.9% for the same period in 2000. This increase resulted from the expansion of our selling and marketing organization, increased public relations and advertising costs associated with our new branding initiative, expansion of our vertically focused industry solution groups, and further enhancement of our infrastructure.
Other Expense (Income). Other expense (income) represents interest earned on cash and cash equivalents. Other income for the three month period ended March 31, 2001 was $1.6 million, as compared to $.9 million for the three month period ended March 31, 2000. This increase is primarily due to the interest earned from the investment of funds received in connection with the issuance of Convertible Redeemable Preferred Stock to Clayton, Dubilier & Rice, Inc. in mid 2000.
Restructuring and Other Costs
During the three month period ended March 31, 2001, we incurred approximately $1.5 million in costs for severance and certain non-recurring employee costs related to our organizational restructuring. The charge related to approximately 150 employees in our U.S. operations and management. The majority of these costs have been paid by March 31, 2001. In addition, we incurred approximately $1.7 million in legal and advisory fees related to discontinued acquisition discussions. These costs have been included in other accrued liabilities in the accompanying condensed consolidated balance sheet at March 31, 2001.
Liquidity and Capital Resources
We generally fund our operations and working capital needs through internally generated funds, periodically supplemented by borrowings under our revolving credit facilities with a commercial bank. Our cash used in operations was $7.4 million for the three month period ended March 31, 2001 compared to cash used in operations of $4.3 million for the three month period ended March 31, 2000. This increase in cash used in operations is primarily due to the reduction in net income from continuing operations.
The principal use of cash for investing activities during the three month period ended March 31, 2001 was for the purchase of property and equipment.
To facilitate future cash flow needs, we have an arrangement with a commercial bank where we may borrow an amount not to exceed $30.0 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 our trade accounts receivable and equipment.
Net cash used by financing activities of $10.3 million for the three month period ended March 31, 2001 was due to our repurchase of 1,035,600 shares of our Common Stock, offset slightly by proceeds from stock option exercises and sales.
Our offshore development centers’ operations accounted for approximately 9% of our total revenues during the three month period ended March 31, 2001. Most of our revenues are billed in U.S. dollars. We recognize transaction gains and losses in the period of occurrence. Foreign currency fluctuations during the three month period ended March 31, 2001 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. We do not generally use any types of derivatives to hedge against foreign currency fluctuations, nor does it speculate in foreign currency.
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Inflation did not have a material impact on our revenues or income from operations during the three month period ended March 31, 2001.
We have provided a guarantee of up to $13.5 million for indebtedness, as well as certain operating leases, of an affiliated entity. As of March 31, 2001 the affiliated entity had outstanding indebtedness of approximately $13.0 million. We believe we have the financial resources to perform under this guarantee, if required.
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(a) Exhibits
| Number | Exhibit | |||
| (10.1) | Employment contract between the Company and Timothy M. Wolfe | |||
| (11) | Computation of Earnings per share | |||
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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, Chief Executive Officer | |
| and Director | |
| /s/ TIMOTHY S. MANNEY | |
| Timothy S. Manney | |
| Executive Vice President, | |
| Chief Financial Officer and | |
| Treasurer | |
| (Principal Financial and | |
| Accounting Officer) |
Dated: May 15, 2001
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| Exhibit No. | Description | |||
| 10.1 | Employment contract between the Company and Timothy M. Wolfe | |||
| 11 | Computation of Earnings per Share | |||