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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-22141
COMPLETE BUSINESS SOLUTIONS, INC.
(Exact Name of Registrant as Specified in its Charter)
MICHIGAN
(State or Other Jurisdiction of
Incorporation or Organization)
38-2606945
(IRS Employer
Identification No.)
32605 WEST TWELVE MILE ROAD
SUITE 250
FARMINGTON HILLS, MICHIGAN 48334
(Address of Principal Executive Offices and Zip Code)
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
(Class of Common Stock)
37,568,995
(Outstanding as of August 5, 1999)
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COMPLETE BUSINESS SOLUTIONS, INC.
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 3
Condensed Consolidated Balance Sheets....................... 3
Condensed Consolidated Statements of Income................. 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................................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 9
Item 6. Exhibits and Reports on Form 8-K............................ 9
SIGNATURES............................................................. 10
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30,
1999 DECEMBER 31,
(UNAUDITED) 1998
----------- ------------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 86,392 $ 60,732
Accounts receivable, net.................................. 97,330 72,007
Revenue earned in excess of billings, net................. 13,766 11,597
Deferred and refundable income taxes...................... 11,921 8,459
Prepaid expenses and other................................ 6,068 3,311
-------- --------
Total current assets................................... 215,477 156,106
-------- --------
Property and equipment, net................................. 22,557 17,846
Goodwill, net............................................... 26,358 10,383
Other assets................................................ 8,829 6,710
-------- --------
Total assets........................................... $273,221 $191,045
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 6,278 $ 6,113
Accrued payroll and related costs......................... 32,813 26,479
Deferred revenue.......................................... 705 1,703
Other accrued liabilities................................. 6,708 12,954
-------- --------
Total current liabilities.............................. 46,504 47,249
-------- --------
Other liabilities........................................... 1,316 2,641
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value, 1,000,000 shares
authorized, none issued................................ -- --
Common stock, no par value, 200,000,000 shares authorized,
37,470,024 and 34,862,642 shares issued and outstanding
as of June 30, 1999 and December 31, 1998,
respectively........................................... -- --
Additional paid-in capital................................ 182,886 117,590
Retained earnings......................................... 48,408 30,912
Stock subscriptions receivable............................ (4,451) (6,079)
Cumulative translation adjustment......................... (1,442) (1,268)
-------- --------
Total shareholders' equity............................. 225,401 141,155
-------- --------
Total liabilities and shareholders' equity............. $273,221 $191,045
======== ========
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
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COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- --------------------
1999 1998 1999 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Revenues............................................. $119,618 $90,705 $231,645 $173,866
Cost of revenues:
Salaries, wages and employee benefits.............. 64,614 45,969 124,451 89,623
Contractual services............................... 7,888 9,323 15,611 16,634
Project travel and relocation...................... 4,593 3,653 9,363 7,579
Depreciation and amortization...................... 1,037 959 1,933 2,034
-------- ------- -------- --------
Total cost of revenues..................... 78,132 59,904 151,358 115,870
-------- ------- -------- --------
Gross profit............................... 41,486 30,801 80,287 57,996
Selling, general and administrative expenses......... 26,056 20,770 50,287 41,153
Merger costs and other............................... 5,367 8,110 5,367 19,070
-------- ------- -------- --------
Income (loss) from operations.............. 10,063 1,921 24,633 (2,227)
Interest expense (income)............................ (1,037) (730) (2,077) (1,289)
-------- ------- -------- --------
Income (loss) before provision for income
taxes.................................... 11,100 2,651 26,710 (938)
Provision for income taxes........................... 3,839 (212) 9,214 2,836
-------- ------- -------- --------
Net income (loss).......................... $ 7,261 $ 2,863 $ 17,496 $ (3,774)
======== ======= ======== ========
Basic earnings (loss) per share --
Weighted-average shares outstanding................ 37,473 34,287 36,918 33,991
======== ======= ======== ========
Basic earnings (loss) per share.................... $ 0.19 $ 0.08 $ 0.47 $ (0.11)
======== ======= ======== ========
Diluted earnings (loss) per share --
Weighted-average shares outstanding................ 37,473 34,287 36,918 33,991
Diluted effect of stock options.................... 834 2,078 1,203 --
-------- ------- -------- --------
Diluted weighted average shares outstanding........ 38,307 36,365 38,121 33,991
======== ======= ======== ========
Diluted earnings (loss) per share.................. $ 0.19 $ 0.08 $ 0.46 $ (0.11)
======== ======= ======== ========
Pro Forma Information:
Net income (loss) as reported........................ $ 7,261 $ 2,863 $ 17,496 $ (3,774)
Pro forma incremental income tax benefit............. -- -- -- (1,417)
-------- ------- -------- --------
Pro forma net income (loss).......................... $ 7,261 $ 2,863 $ 17,496 $ (2,357)
======== ======= ======== ========
Earnings (loss) per share --
Pro forma basic earnings (loss) per share.......... $ 0.19 $ 0.08 $ 0.47 $ (0.07)
======== ======= ======== ========
Pro forma diluted earnings (loss) per share........ $ 0.19 $ 0.08 $ 0.46 $ (0.07)
======== ======= ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
-----------------------
1999 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Cash flows from operating activities:
Net income (loss)......................................... $ 17,496 $ (3,774)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 4,991 4,335
Provision for doubtful accounts........................ 650 612
Writedown of other assets and other.................... -- 15,649
Change in assets and liabilities, net --
Accounts receivable.................................... (19,979) (13,650)
Prepaid expenses and other assets...................... (2,558) (516)
Accounts payable, accrued payroll and related costs and
other liabilities..................................... (8,726) 8,298
Deferred revenue....................................... (2,348) 1,304
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Net cash provided by (used in) operating
activities...................................... (10,474) 12,258
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Cash flows from investing activities:
Investment in property, equipment and other............... (7,631) (5,369)
Investment in computer software........................... (2,581) (1,510)
Payment for purchase of assets, net of cash acquired...... (18,593) --
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Net cash used in investing activities............. (28,805) (6,879)
-------- --------
Cash flows from financing activities:
Net payments on revolving credit facility and long-term
debt................................................... -- (3,886)
Net proceeds from issuance of common stock................ 61,590 1,947
Net proceeds from repayment of stock subscriptions
receivable............................................. 3,364 --
S corporation distributions............................... -- (658)
-------- --------
Net cash provided by (used in) financing
activities...................................... 64,954 (2,597)
-------- --------
Effect of exchange rate changes on cash..................... (15) (47)
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Increase in cash and cash equivalents....................... 25,660 2,735
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Cash and cash equivalents at beginning of period............ 60,732 61,861
-------- --------
Cash and cash equivalents at end of period.................. $ 86,392 $ 64,596
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................... $ -- $ 111
Income taxes........................................... $ 15,151 $ 3,837
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
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 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 June 30, 1999, the results of its operations for the
three and six month periods ended June 30, 1999 and 1998, and cash flows for the
six month periods ended June 30, 1999 and 1998. These financial statements
should be read in conjunction with the consolidated financial statements and
footnotes thereto included in CBSI's 1998 Form 10-K.
The results of operations for the three month period ended June 30, 1999
are not necessarily indicative of the results to be expected in future quarters
or for the full fiscal year ending December 31, 1999.
2. COMMON STOCK OFFERING
In February 1999, CBSI completed a secondary offering of 5,400,000 shares
of its Common Stock at a price of $31.00 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 CBSI from the sale of newly issued shares in
this offering were approximately $60,000.
3. INCOME TAXES
In January 1998, CBSI merged with c.w. Costello & Associates, inc.
(Costello), an S corporation. As a result of the merger, the S corporation
status was terminated, thereby subjecting future income of Costello to federal
and state income taxes at the corporate level. Accordingly, the application of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS No. 109) resulted in the recognition of deferred tax assets and
liabilities, and a corresponding benefit to the provision for income taxes of
approximately $1,400 during the six month period ended June 30, 1998.
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 1999 and 1998.
4. ACQUISITION
On April 20, 1999, CBSI acquired all of the outstanding capital stock of
E-Business Solutions.com, Inc. ("Solutions"), formerly Impact Innovations Group,
Inc. For financial statement purposes the acquisition was accounted for as a
purchase and, accordingly, Solutions' results are included in the condensed
consolidated financial statements since the date of acquisition. The aggregate
purchase price was 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.
5. SETTLEMENT OF THIRD-PARTY COMPLAINT
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following management's discussion and analysis of financial condition
and results of operations 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 which involve substantial risks and uncertainties.
Forward-looking statements can be identified by the words "anticipate,"
"believe," "estimate," "expect," "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 and acquisition strategy, variability of our
operating results, governmental regulation of immigration, potential costs
overruns on fixed-price projects, increasing significance of non-U.S.
operations, increasing cost of IT professional workforce, decreasing demand for
Year 2000 services, exposure to regulatory, political and economic conditions in
India, competition in the IT services industry and other risks as more fully
discussed in our 1998 Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Revenues. CBSI's revenues increased approximately 32% to $119.6 million for
the three month period ended June 30, 1999 from $90.7 million for the same
period in 1998. Revenue increased approximately 33% to $231.6 million for the
six month period ended June 30, 1999 from $173.9 million for the same period in
1998. This growth in revenues is primarily attributable to increases in CBSI's
IT professional workforce, increases in average billing rates and additional
services provided to existing clients. CBSI's IT professional workforce
increased approximately 21% for the three month period ended June 30, 1999 from
the comparable three month period in 1998, and approximately 20% for the six
month period ended June 30, 1999 from the comparable six month period in 1998.
For the quarter ended June 30, 1999, approximately 83% of CBSI's revenues were
generated from existing clients from the comparable period in 1998.
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 approximately 35% to $41.5 million
for the three month period ended June 30, 1999 from $30.8 million for the same
period in 1998, and approximately 38% to $80.3 million for the six month period
ended June 30, 1999 from $58 million for the same period in 1998. These
increases are primarily attributable to increases in CBSI's IT professional
workforce and average U.S. billing rates. Gross profit as a percentage of
revenues increased to 34.7% for the three month period ended June 30, 1999 from
approximately 34.0% for the same period in 1998. For the six month period ended
June 30, 1999, gross profit margin increased to 34.7% from 33.4% for the same
period in 1998. This increase in gross profit margin as a percentage is
primarily attributable to CBSI's continued strategic shift of its business
toward higher margin service offerings. For the three month period ended June
30, 1999, approximately 6% of revenues were generated from contract programming
services, as compared with approximately 12% for the three month period ended
June 30, 1998.
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 increased
approximately 26% to $26.1 million for the three month period ended June 30,
1999 from $20.8 million for the same period in 1998 and approximately 22.2% to
$50.3 million for the six month period ended June 30, 1999 from $41.2 million
for the same period in 1998. This increase resulted from the continued expansion
of CBSI's direct selling and marketing effort, further enhancement of the
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 21.8% and 21.7% for the three and six
month periods ended June 30, 1999, respectively, from 22.9% and 23.7% for the
same periods in 1998 as CBSI continued to leverage its existing infrastructure.
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Interest Expense (Income). Interest expense (income) represents interest
earned on cash equivalents, net of interest expense on borrowings. Other income
for the three month period ended June 30, 1999 was $1.0 million, as compared to
$0.7 million for the three month period ended June 30, 1998. This change is
primarily due to reduced interest expense, resulting from the repayment of
Claremont Technology Group, Inc. debt in 1998 and, interest earned from the
investment of net proceeds from CBSI's February 1999 public offering of Common
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 commercial banks. CBSI's cash used in
operations was $10.5 million for the six month period ended June 30, 1999
compared to cash provided by operations of $12.3 million for the six month
period ended June, 1998. The decrease in cash provided by operations is
primarily due to payment of amounts accrued in fiscal 1998 and acquisition
costs, and an increase in the accounts receivable days sales outstanding during
the six month period ended June 30, 1999 as compared to the same period in 1998.
The principal use of cash for investing activities during the six month
period ended June 30, 1999 was for the purchase of assets in connection with
CBSI's acquisition of Impact Innovations Group and for the purchase of property
and equipment primarily as part of the development and enhancement of CBSI's
offshore software development centers.
Historically, borrowings and repayments under CBSI's revolving credit
facilities represented the most significant components of cash provided or used
by financing activities. Under an arrangement with a commercial bank, CBSI may
borrow an amount not to exceed $21 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 six month
period ended June 30, 1999 of $65 million was primarily due to CBSI realizing
net proceeds of approximately $60 million from the issuance of common stock in
February 1999 during this follow-on offering.
The offshore development centers' operations of CBSI accounted for
approximately 10% of CBSI's total revenues during the six month period ended
June 30, 1999. 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 six month period ended June 30, 1999 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 six month period ended June 30, 1999.
CBSI has evaluated its primary information technology infrastructure for
Year 2000 compliance. CBSI does not expect that the cost to modify its primary
information technology infrastructure to be Year 2000 compliant will be material
to its financial condition or results of operations. CBSI does not anticipate
any material disruption in its operations as a result of any failure to be in
compliance. CBSI does not currently have any information concerning the Year
2000 compliance status of its suppliers and customers. In the event that any of
CBSI's significant suppliers, including providers of electricity, gas, water,
communication and telephone services, or customers do not successfully and
timely achieve Year 2000 compliance, CBSI's business or operations may be
adversely affected.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 28, 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
On May 4, 1999 the annual meeting of shareholders was held. The meeting was
held for the following purposes:
1. to elect four (4) directors; and
2. to ratify the appointment of Arthur Andersen LLP as the independent
auditors for the 1999 fiscal year.
The shareholders re-elected Mr. William Brooks as director. The vote was
33,188,216 approved, 153,331 withheld.
The shareholders re-elected Mr. Ronald Machtley as director. The vote was
33,207,261 approved, 134,286 withheld.
The shareholders re-elected Mr. John Stanley as director. The vote was
33,192,379 approved, 149,168 withheld.
The shareholders re-elected Mr. Jerry Stone as director. The vote was
33,191,524 approved, 150,023 withheld.
The above listed directors join Mr. Rajendra Vattikuti, Mr. Timothy Manney,
Mr. Douglas Land, Mr. Charles Costello and Mr. Frank Stella as directors of
CBSI.
The shareholders approved the appointment of Arthur Andersen LLP as the
independent auditors of CBSI for the year ending December 31, 1999. The
vote was 33,293,298 approved, 35,265 against, and 12,984 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
NUMBER EXHIBIT
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(11) Computation of Earnings per share
(27) Financial Data Schedule
(b) Reports on Form 8-K
On April 20, 1999, CBSI filed a Form 8-K with the Securities and Exchange
Commission announcing that it had signed a definitive Stock Purchase Agreement
with Medaphis Corporation, Impact Innovations Holdings, Inc. and E-Business
Solutions.com, Inc. for all of the outstanding capital stock of E-Business
Solutions.com, Inc.
On July 7, 1999, CBSI filed a Form 8-K/A amending and restating Item 7 of
its report on Form 8-K dated April 20, 1999.
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SIGNATURES
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/ RAJENDRA B. VATTIKUTI
------------------------------------
Rajendra B. Vattikuti
President and Chief Executive
Officer
/s/ TIMOTHY S. MANNEY
------------------------------------
Timothy S. Manney
Executive Vice President of Finance
and
Administration, Treasurer and
Director
(Principal Financial and
Accounting Officer)
Dated: August 13, 1999
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EXHIBIT INDEX
NUMBER EXHIBIT
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(11) Computation of Earnings per share
(27) Financial Data Schedule