<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-25372
COTELLIGENT GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3173918
(State of other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
101 California Street, Suite 2050
San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
(415) 439-6400
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicates 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
At November 14, 1996, there were 7,953,440 shares of common stock
outstanding.
<PAGE>
COTELLIGENT GROUP, INC.
INDEX
Part 1 - Financial Information
Item 1. Financial Statements
Cotelligent Group, Inc.
Balance Sheet at March 31, 1996 and September 30, 1996
Statement of Operations for the Three and Six Months
Ended September 30, 1995 and 1996 (Unaudited)
Statement of Cash Flows for the Six Months Ended
September 30, 1995 and 1996(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Part II - Other Information
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED BALANCE SHEET
(In Thousands Except Share Data)
<TABLE>
March 31, 1996 September 30, 1996
--------------------- ---------------------
<S> <C> <C>
(Unaudited)
Current Assets:
Cash and cash equivalents........................................ $ 14,548 $ 9,987
Accounts receivable, less allowance for doubtful accounts of $120 15,907 16,823
Notes from stockholders.......................................... 74 38
Notes receivable from related party.............................. 105 -
Deferred income taxes............................................ 286 337
Prepaid expenses and other current assets........................ 682 952
--------------------- ---------------------
Total current assets......................................... 31,602 28,137
--------------------- ---------------------
Property and equipment, net........................................... 1,465 2,469
Deferred income taxes................................................. 266 188
Other assets.......................................................... 157 126
===================== =====================
Total assets................................................. $ 33,490 $ 30,920
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt................................................... $ 3,980 $ 1,608
Accounts Payable.................................................. 654 1,617
Accrued compensation and related payroll liabilities.............. 4,140 4,377
Income taxes payable.............................................. 1,243 771
Deferred income taxes............................................. 846 821
Due to related party.............................................. 417 100
Other accrued liabilities......................................... 1,510 1,487
--------------------- --------------------
Total current liabilities..................................... 12,790 10,781
--------------------- --------------------
Long-term debt......................................................... 450 216
Deferred income taxes.................................................. 19 20
Other long-term liabilities............................................ 942 341
Stockholders' equity:
Common Stock, $0.01 par value;100,000,000 shares authorized;
7,917,440 and 7,953,440 shares outstanding, respectively....... 79 80
Preferred Stock, $0.01 par value; 500,000 shares authorized; none
issued and outstanding......................................... - -
Additional paid-in capital........................................ 18,202 18,006
Retained earnings ................................................ 1,008 1,476
--------------------- --------------------
Total stockholders' equity..................................... 19,289 19,562
===================== ====================
Total liabilities and stockholders' equity..................... $ 33,490 $ 30,920
===================== ====================
</TABLE>
The accompanying notes are an integral part of these consolideated financial
statements.
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands Except Share and Per Share Data)
(Unaudited)
<TABLE>
Three Months Pro Forma Three Pro Forma Six
Ended Six Months Ended Months Ended Months Ended
September 30, 1996 September 30, 1996 September 30, 1996 September 30, 1996
------------------ ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
Revenues......................................... $ 27,782 $ 53,195 $ 27,782 $ 53,195
Cost of services................................. 19,707 38,340 19,707 38,340
----------------- ------------------ ----------------- ------------------
Gross Margin............................... 8,075 14,855 8,075 14,855
Non-recurring transaction costs................. 543 788 - -
Selling, general and administrative expenses.... 6,153 11,477 6,187 11,386
----------------- ------------------ ----------------- ------------------
Operating income........................... 1,379 2,590 1,888 3,469
Other (income) expense:
Interest expense........................... 44 130 44 108
Interest income............................ (78) (216) (78) (208)
Other...................................... (28) (32) (28) (32)
----------------- ------------------ ----------------- ------------------
Total other.............................. (62) (118) (62) (132)
Income before provision for income taxes........ 1,441 2,708 1,950 3,601
Provision for income taxes...................... 575 1,855 741 1,368
----------------- ------------------ ---------------- ------------------
Net income...................................... $ 866 $ 853 $ 1,209 $ 2,233
================= ================== ================ ==================
Net income per share (Note 4)................... $ .11 $ .10 $ .15 $ .27
================= ================== ================ ==================
Pro forma net income (adjusted for
income taxes - Note 5)..................... $ 961 $ 1,679
================= ==================
Pro forma net income per share
(adjusted for income taxes)................ $ .12 $ .21
================ ==================
Weighted average shares outstanding............ 8,202,212 8,159,463 8,202,212 8,159,463
================ ================== ================== =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
(CONTINUED)
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
In Thousands Except Share and Per Share Data)
(Unaudited)
<TABLE>
Three Months Pro Forma Three Pro Forma Six
Ended Six Months Ended Months Ended Months Ended
September 30, 1995 September 30, 1995 September 30, 1995 September 30, 1995
------------------ ------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Revenues......................................... $ 5,980 $ 11,769 $ 21,836 $ 42,405
Cost of services................................. 4,196 8,224 16,291 31,642
------------------ ------------------- ------------------ -------------------
Gross Margin............................... 1,784 3,545 5,545 10,763
Non-recurring transaction costs................. - - - -
Selling, general and administrative expenses.... 1,528 3,017 4,326 8,326
------------------ ------------------- ----------------- -------------------
Operating income........................... 256 528 1,219 2,437
Other (income) expense:
Interest expense........................... 43 71 130 231
Interest income............................ (1) (1) (15) (32)
Other...................................... (9) (15) (29) (52)
------------------ -------------------- ---------------- -------------------
Total other.............................. 33 55 86 147
------------------ -------------------- ---------------- -------------------
Income before provision for income taxes........ 223 473 1,133 2,290
Provision for income taxes...................... 2 47 453 901
================== ==================== ================ ===================
Net Income...................................... $ 221 $ 426 $ 680 $ 1,389
================== ==================== ================ ===================
Net income per share (Note 4)........................................................... $ 0.11 $ 0.23
================ ===================
Weighted average shares outstanding..................................................... 6,101,350 6,101,350
================ ===================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
Six Months Ended
----------------------------------------
September 30, 1995 September 30, 1996
------------------ -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 426 $ 853
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 38 330
(Gain) on disposal of property and equipment........... - (272)
Deferred income taxes, net............................. - 27
Changes in current assets and liabilities:
Accounts receivable................................ (328) (916)
Prepaid expenses and other current assets.......... (23) (270)
Accounts payable and accrued expenses.............. 892 1,306
Income taxes payable............................... 19 (866)
Increase (decrease) in other liabilities (4) (23)
Changes in other assets................................ (903) (8)
--------------------- --------------------
Net cash provided in operating activities.......... 117 161
--------------------- --------------------
Cash flows from investing activities:
Proceeds on sale of assets................................. - 280
Purchases of property and equipment........................ (248) (1,334)
Net repayments from (advances to) related parties.......... (10) 100
--------------------- --------------------
Net cash used in investing activities............. (258) (954)
--------------------- --------------------
Cash flows from financing activities:
Repurchase of common stock................................. 268 -
Proceeds on long-term debt................................. 215 -
Payments on long-term debt................................. (8) (168)
Net borrowings (repayments) on short-term debt............. (2) (2,837)
Payments on loans with related parties..................... - (244)
Net proceeds from issuance of common stock................. 47 46
Distribution to founding Companies former stockholders..... (73) (423)
Dividends.................................................. (26) (142)
--------------------- --------------------
Net cash provided by (used in) financing activities 421 (3,768)
--------------------- --------------------
Net increase (decrease) in cash and cash equivalents....... 280 (4,561)
Cash and cash equivalents at beginning of period........... 462 14,548
--------------------- --------------------
Cash and cash equivalents at end of period................ $ 742 $ 9,987
===================== ====================
Supplemental disclosures of cash flow information:
Interest paid............................................. $ 40 $ 110
Income taxes paid ........................................ $ 46 $ 2,117
</TABLE>
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Data)
Note 1 - Business Organization and Basis of Presentation
Cotelligent Group, Inc. ("Cotelligent" or the "Company") was formed to
acquire, own and operate professional service businesses specializing in
computer consulting and contract programming. On February 20, 1996, Cotelligent
acquired (the "Acquisitions") four companies (the "Founding Companies"):
Financial Data Systems, Inc.("FDSI"), BFR Co., Inc.("BFR"), Data Arts &
Sciences, Inc. (`DASI") and Chamberlain Associates, Inc. ("CAI"). All
outstanding shares of the Founding Companies' capital stock were converted into
shares of Cotelligent Common Stock concurrently with the consummation of an
initial public offering (the "Offering") of such Common Stock.
The aggregate consideration paid by Cotelligent in these transaction
was $3,492 in cash, 3,206,875 shares of Common Stock of the Company and the
assumption of approximately $3,000 in debt, for an aggregate value of $35,304.
The aggregate consideration for each of the Founding Companies was as follows:
BFR:$11,958, consisting of $1,450 paid in cash and 1,167,587 of Common Stock;
CAI; $3,999 consisting of $300 paid in cash, 388,761 shares of Common Stock and
$200 in short-term and related-party debt; DASI: $5,606 consisting of $400 paid
in cash, 443,044 shares of Common Stock and $1,219 in short-term and
related-party debt; and FDSI: $13,740 consisting of $1,342 paid in cash,
1,207,483 shares of Common Stock and $1,531 in short-term, long-term and related
party debt. As a result of the substantial continuing interest in the Company of
the former stockholders of BFR, CAI DASI, FDSI and Cotelligent, the Acquisitions
were accounted for on a historical cost basis.
On June 28, 1996 Cotelligent acquired ESP Software Services, Inc.
("ESP") and INNOVA Solutions, Inc.("ISI") and on September 30, 1996 acquired
JasTech, Inc. and JasTech of Florida, Inc. ("JTI") (collectively the "Pooled
Companies") in business combinations accounted for under the pooling-of-
interests method.
The accompanying consolidated financial statements include Cotelligent
Group, Inc., restated to give effect of the mergers of the Pooled Companies,
through the date of acquisition of the Founding Companies on February 20, 1996,
after which the financial statements also reflect the results of the Founding
Companies.
The pro forma statements of operations includes the results of the
Founding Companies and the Pooled Companies as if they had been combined since
April 1, 1995. Pro forma data also reflects adjustments for: (i) compensation
differentials to former owners of the acquired entities; (ii) termination of
contributions to retirement plans; (iii) incremental selling, general and
administrative costs associated with Cotelligent corporate activities ; (iv) the
exclusion of non-recurring transaction costs related to the acquisition of the
Acquired Companies; and (v) income taxes as if the entities were combined and
subject to the effective federal and state statutory rates throughout the
periods presented.
Note 2 - Summary of Significant Accounting Policies
The accompanying interim financial statements do not include all
disclosures included in the financial statements for the fiscal years ended
March 31, 1994, 1995 and 1996 as included in Cotelligent's Form 10-K for the
year ended March 31, 1996, and therefore should be read in conjunction with the
financial statements included in the Form 10-K.
In the opinion of management, the interim financial statements filed as
part of this Form 10-Q reflect all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the financial position
and the results of operations and of cash flows for the interim periods
presented.
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(In Thousands Except Share and Per Share Data)
(Unaudited)
Note 3 - Changes in Stockholders' Equity
<TABLE>
Total
Additional Paid Retained Stockholders'
Common Stock -In Capital Earnings Equity
------------------------ ----------------- ------------- -----------------
Shares Amount
------------- ----------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1996................... 7,917,440 $ 79 $ 18,202 $ 1,008 $ 19,289
Dividends................................... - - - (385) (385)
Distribution to former ESP stockholder...... - - (423) - (423)
Issuance of Common Stock.................... 36,000 1 45 - 46
Tax benefit on stock options................ - - 182 - 182
Net Income.................................. - - - 853 853
------------- ---------- ----------------- ------------- -----------------
Balance at September 30, 1996............... 7,953,440 $ 80 $ 18,006 $ 1,476 $ 19,562
============= ========== ================= ============= =================
</TABLE>
Note 4 - Earnings Per Share
Historical earnings per share for the quarter and six months ended
September 30, 1995 has not been presented because it is not considered
meaningful as a result of the merger of the Founding Companies and
simultaneous initial public offering of the Company's stock, all which occurred
on February 20, 1996 (See Note 1). Earnings per share has been presented on
a historical basis for the second quarter fiscal 1997 and on a pro forma basis
for all periods presented.
Note 5 - Unaudited Pro Forma Income Tax Information
Prior to the acquisition of the Pooled Companies, ISI, ESP and JasTech
of Florida, Inc. were S corporations and accordingly, the financial statements
of ISI, ESP and JasTech of Florida, Inc. did not reflect a provision for income
taxes, as income taxes were the responsibility of the individual stockholders.
Effective with their respective acquisitions ISI, ESP and JasTech of Florida,
Inc. terminated their S corporation status. The following unaudited pro forma
income tax information is presented in accordance with Statement of Financial
Accounting Standards No. 109 as if the companies had been a C corporation
subject to federal and state income taxes thoughout the periods presented.
<TABLE>
Quarter Ended Quarter Ended
September 30, September 30,
1995 1996
------------- ------------
<S> <C> <C>
Income before provision for income taxes....................... $ 473 $ 2,708
Provision for income taxes..................................... 120 1,029
------------- -------------
Pro forma net income.......................................... $ 353 $ 1,679
------------- -------------
</TABLE>
<PAGE>
ITEM 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
Cotelligent was formed in February 1993 to acquire, own and operate
professional service businesses specializing in computer consulting and contract
programming. On February 20, 1996, Cotelligent acquired (the "Acquisitions")
four companies (the "Founding Companies"): Financial Data Systems, Inc.("FDSI"),
BFR Co., Inc.("BFR"), Data Arts & Sciences, Inc. ("DASI") and Chamberlain
Associates, Inc. ("CAI"). The Founding Companies have operated since 1975
(DASI), 1980 (CAI), 1982 (FDSI) and 1985 (BFR).
On June 28, 1996 Cotelligent acquired two Companies which have operated
since 1987 (ESP) and 1991 (ISI). On September 30, 1996 Cotelligent acquired
JasTech (JTI) which has operated since 1984.
As a professional services organization, the Company responds to
service demands from its clients. Accordingly, the Company has limited control
over the timing and circumstances under which its services are provided.
Therefore, the Company can experience volatility in its operating results from
quarter to quarter. The operating results for any quarter are not necessarily
indicative of the results for any future period.
Pro forma data also reflects adjustments for: (i) compensation
differentials to former owners of the acquired entities; (ii) termination of
contributions to retirement plans; (iii) incremental selling, general and
administrative costs associated with Cotelligent corporate activities; (iv) the
exclusion of non-recurring transaction costs related to the acquisition of the
Pooled Companies; and (v) income taxes as if the entities were combined and
subject to the effective federal and state statutory rates throughout the
periods presented.
<PAGE>
PRO FORMA RESULTS OF OPERATIONS
Three Months Ended September 30, 1996 Compared to
Three Months Ended September 30, 1995
Revenues
Revenues increased $6.0 million, or 27.2%, to $27.8 million in the
three months ended September 30, 1996 ("second quarter of 1997") from $21.8
million in the three months ended September 30, 1995 ("second quarter of 1996").
The increase was primarily attributable to a 21.0% increase in total client
service hours provided to 468,000 hours in the second quarter of 1997 from
387,000 hours in the second quarter of 1996, and a 5.0% increase in the average
hourly billing rate to $58.83 in the second quarter of 1997 from $56.02 in the
second quarter of 1996. The increase in hourly billing rate reflects increased
demand for employees and consultants with higher skill levels and a more
favorable economic climate. The increases discussed above were in addition to an
increase in placement fee revenues generated to $254,000 in the second quarter
of 1997 from $159,000 in the second quarter of 1996.
Gross Margin
The pro forma gross margin increased $2.6 million, or 45.60 %, to $8.1
million in the second quarter of 1997 from $5.5 million in the second quarter of
1996, primarily as a result of an increase in hours of service provided to
clients. Gross margin as a percentage of revenues increased to 29.1% in the
second quarter of 1997 from 25.4% in the second quarter of 1996, principally due
to an increase in project management engagements.
Selling, General and Administrative Expenses
Selling, general and administrative expenses on a pro forma basis
increased $1.9 million or 43.0%, to $6.2 million in the second quarter of 1997
from $4.3 million in the second quarter of 1996. The increase in absolute
dollars was primarily due to increased compensation to existing staff and staff
added to support current and anticipated future growth, increased occupancy
expenses and related operating costs associated with the Company's growth.
Selling, general and administrative expenses as a percentage of revenues were
22.3% for the second quarter of 1997 as compared to 19.8% for the second quarter
of 1996.
Interest Expense, Net
Interest expense, net of interest income on a pro forma basis was
$115,000 in the second quarter of 1996. Interest income, net of interest expense
of $34,000 in the second quarter of 1997, resulted from interest income on cash
provided from the Offering and consolidation of banking facilities of the
Founding Companies effective June 1, 1996.
Provision for Income Taxes
Provision for income taxes on a pro forma basis were $741,000 an
effective tax rate of 39.0% of pro forma income before provision for income
taxes for the second quarter of 1997, compared to $453,000, an effective tax
rate of 40.0% of pro forma income before provision for income taxes for the
second quarter of 1996. The reduced rate reflects an expansion of operations
in states which do not have state income taxes.
<PAGE>
HISTORICAL COMBINED RESULTS OF OPERATIONS
Three Months Ended September 30, 1996 Compared to
Three Months Ended September 30, 1995
Revenues
Revenues increased $21.8 million, or 364.6%, to $27.8 million in the
second quarter of 1997 from $6.0 million in the second quarter of 1996. The
increase was primarily attributable to the inclusion of $13.0 million of
revenues of the Founding Companies in the second quarter of 1997 coupled with a
28.6% increase in total client service hours provided by the Pooled Companies to
162,000 hours in the second quarter of 1997 from 126,000 hours in the second
quarter of 1996, and an 11.0% increase in the average hourly billing rate of the
Pooled Companies to $52.18 in the second quarter of 1997 from $47.00 in the
second quarter of 1996. The increase in hourly billing rate reflects increased
demand for employees and consultants with higher skill levels and a more
favorable economic climate. The increases discussed above were in addition to an
increase in placement fee revenues of the Pooled Companies.
Gross Margin
Gross margin increased $6.3 million, or 352.6%, to $8.1 million in the
second quarter of 1997 from $1.8 million in the second quarter of 1996,
primarily due to the inclusion of the $5.0 million in gross margin of the
Founding Companies in the second quarter of 1997 together with an increase in
hours of service provided to clients. Gross margin as a percentage of revenues
decreased to 29.1% in the second quarter of 1997 from 29.8% in the second
quarter of 1996, primarily due to lower margins inherent in the client contracts
of the Founding Companies.
Non - Recurring Transaction Costs
Non-recurring transaction costs include expenditures associated with
the acquisition of the Pooled Companies and are expended as a result of
accounting for the acquisitions as poolings-of-interests.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $4.6 million, or
302.7%, to $6.1 million in the second quarter of 1997 from $1.5 million in the
second quarter of 1996. The increase in absolute dollars was primarily due to
the inclusion of the $3.5 million in selling, general and administrative
expenses of the Founding Companies in the second quarter of 1997 together with
increased compensation to existing staff and staff added to support anticipated
growth. Selling, general and administrative expenses decreased as a percentage
of revenues from 25.6% in the second quarter of 1996 to 22.1% in the second
quarter of 1997, primarily due to the spreading of corporate overhead over a
larger revenue base.
Interest Expense, Net
Interest expense, net of interest income, was $42,000 in the second
quarter of 1996. Interest income, net of interest expense of $34,000 in the
second quarter of 1997, resulted from interest income on cash provided from the
Offering and consolidation of banking facilities of the Founding Companies
effective June 1, 1996.
Provision for Income Taxes
The Company's provision for income taxes increased to $575,000 in the
second quarter of 1997, which reflects an adjustment to bring the
year-to-dateprovision on pre-tax income to 39%. The Company expects that its
effective statutory tax rate for the year ending March 31, 1997 will approximate
39%.
<PAGE>
PRO FORMA RESULTS OF OPERATIONS
Six Months Ended September 30, 1996 Compared to
Six Months Ended September 30, 1995
Revenues.
Revenues increased $10.8 million, or 25.4%, to $53.2 million in the six
months ended September 30, 1996 ("first half of 1997") from $42.4 million in the
six months ended September 30, 1995 ("first half of 1996"). The increase was
primarily attributable to a 17.5% increase in total client service hours
provided to 905,000 hours in the first half of 1997 from 770,000 hours in the
first half of 1996, and a 6.3% increase in the average hourly billing rate to
$58.25 in the first half of 1997 from $54.78 in the first half of 1996. The
increase in hourly billing rate reflects increased demand for employees and
consultants with higher skill levels and a more favorable economic climate. The
increases discussed above were in addition to an increase in placement fee
revenues generated to $434,000 in the first half of 1997 from $237,000 in the
first half of 1996.
Gross Margin
The pro forma gross margin increased $4.1 million, or 38.0%, to $14.9
million in the first half of 1997 from $10.8 million in the first half of 1996,
primarily as a result of an increase in hours of service provided to clients.
Gross margin as a percentage of revenues increased to 27.9% in the first half of
1997 from 25.4% in the first half of 1996, principally due to an increase in
project management engagements, which generally have higher gross margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses on a pro forma basis increased
$3.1 million, or 36.8%, to $11.4 million in the first half of 1997 from $8.3
million in the first half of 1996. The increase in absolute dollars was
primarily due to increased compensation to existing staff and staff added to
support current and anticipated future growth, increased occupancy expenses and
related operating costs associated with the Company's growth. Selling, general
and administrative expenses as a percentage of revenues were 21.4% for the first
half of 1997 as compared to 19.6% for the first half of 1996.
Interest Expense, Net
.
Interest expense, net of interest income on a pro forma basis was $199,000
in the first half of 1996. Interest income, net of interest expense of $100,000
in the first half of 1997, resulted from interest income on cash provided from
the Offering and consolidation of banking facilities of the Founding Companies.
Provision for Income Taxes
Provision for income taxes on a pro forma basis were $1.4 million an
effective tax rate of 38.0% of pro forma income before provision for income
taxes for the first half of 1997, compared to $901,000 an effective tax rate of
40.0% of pro forma income before provision for income taxes for the first half
of 1996. The reduced rate reflects an expansion of operations in states which do
not have state income taxes.
HISTORICAL COMBINED RESULTS OF OPERATIONS
Six Months Ended September 30, 1996 Compared to
Six Months Ended September 30, 1995
Revenues.
Revenues increased $41.4 million, or 352.0%, to $53.2 million in the first
half of 1997 from $11.8 million in the first half of 1996. The increase was
primarily attributable to the inclusion of $36.8 million in revenues of the
Founding Companies in the first half of 1997 coupled with a 19.2% increase in
total client service hours provided by the Pooled Companies to 310,000 hours in
the first half of 1997 from 260,000 hours in the first half of 1996, and a 16.5%
increase in the average hourly billing rate of the Pooled Companies to $52.31 in
the first half of 1997 from $44.89 in the first half of 1996. The increase in
hourly billing rate reflects increased demand for employees and consultants with
higher skill levels and a more favorable economic climate.
<PAGE>
Gross Margin.
Gross margin increased $11.3 million, or 319.0%, to $14.9 million in the
first half of 1997 from $3.5 million in the first half of 1996, primarily due to
the inclusion of the $9.5 million in gross margin of the Founding Companies in
the first half of 1997 together with an increase in hours of service provided to
clients by the Pooled Companies. Gross margin as a percentage of revenues
decreased to 27.9% in the first half of 1997 from 30.1% in the first half of
1996, primarily due to lower gross margins inherent in the engagements of the
Founding Companies.
Non-Recurring Transaction Costs
Non-recurring transaction costs include expenditures associated with the
acquisition of the Pooled Companies as a result of accounting for the
acquisitions as poolings-of-interests.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $8.5 million, or
280.4%, to $11.5 million in the first half of 1997 from $3.0 million in the
first half of 1996. The increase in absolute dollars was primarily due to the
inclusion of the $6.5 million in selling, general and administrative expenses
for the Founding Companies in the first half of 1997 together with increased
compensation to existing staff and staff added to support anticipated growth.
Selling, general and administrative expenses decreased as a percentage of
revenues from 25.6% in the first half of 1996 to 21.6% in the first half of
1997, primarily due to the spreading of corporate overhead over a larger revenue
base.
Interest Expense, Net
Interest expense, net of interest income, was $70,000 in the first half of
1996. Interest income, net of interest expense of $86,000 in the first half of
1997, resulted from interest income on cash provided from the Offering and
consolidation of the banking facilities of the Founding Companies.
Provision for Income Taxes
The Company's provision for income taxes increased to $1.9 million in the
first half of 1997, which includes an $799,000 provision related to the
termination of the S corporation status of the Pooled Companies together with a
39% provision on pre-tax income. The Company expects that its effective
statutory tax rate for the year ending March 31, 1997 will approximate 38%.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth principally through cash flows from
operations, periodic borrowings under its credit facilities, and cash
generated from the February 20, 1996 sale of stock to the public.
The Company's primary source of liquidity is the collection of its
accounts receivable. Accounts receivable have grown as the Company's operations
have grown. Receivables decreased to 62 days of revenue at September 30, 1996
from 65 days of revenue at March 31, 1996. The Company's ability to reduce
significantly the aging of its outstanding receivables is limited because of a
continuing general trend by clients to slow their payment of invoices as a means
of managing cash. Should the Company not be able to bill and collect for its
services on a timely basis, the Company could utilize existing cash on hand or
draw upon available credit facilities to finance its operations.
Cash flow provided by operating activities was $161,000 for the six
months ended September 30, 1996. During this period the Company has utilized
this cash plus a portion of existing cash balance to acquire fixed assets ($1.3)
million and to reduce short term debt ($2.8) million. The average balance of
such borrowings outstanding was approximately $2.8 million and approximately
$1.3 million during the first six months of 1997 and 1996, respectively.
At September 30, 1996, the Company had $10.0 million in cash and cash
equivalents as compared to $14.5 million at March 31, 1996. At September 30,
1996, the Company had short-term notes payable under its bank revolving credit
facilities and current installments of long-term obligations outstanding in the
amount of $1.6 million. Long-term obligations, consisting of capital lease
obligations and equipment loans, totaled $341,000 at September 30, 1996 compared
to $942,000 at March 31, 1996.
Cotelligent and each of the Founding Companies had separate banking
relationships through May 31, 1996. Effective June 1, 1996, these separate
banking relationships were consolidated into a single banking relationship with
a major bank. The single relationship will provide for a more effective means of
managing operating capital. The new relationship provides a credit facility (the
"Facility") in the amount of $20.0 million for the Company, secured by accounts
receivable and other assets of the Company. ESP and ISI terminated their
separate banking relationship in September 1996 and are now included in the
consolidated credit facility. JTI will begin using the Company's banking
relationship in the near term. Borrowings on the Facility bear interest at
the bank's prime rate. The Company intends to borrow from time-to-time
to meet normal operating needs, finance its receivables or to effect
acquisitions in connection with its acquisition strategy.
As of April 1, 1995, BFR terminated its S corporation status. As a
result, federal and state income taxes of approximately $463,000 are expected to
be paid ratably over the next two years. ESP and ISI terminated their respective
S corporation elections on June 28, 1996. The termination of these elections
will result in federal and state income taxes of approximately $800,000 being
paid ratably over the next four years.
The Company believes the net proceeds from the sale of Common Stock in
the Offering, together with existing sources of liquidity and funds generated
from operations, will provide adequate cash to fund its anticipated cash needs
at least through the next six months.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is, from time to time, a party to litigation arising in
the normal course of its business. The Company is not presently
subject to any material litigation.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
(A.) The Company held its annual meeting of stockholders on
September 10, 1996.
(B.) The following persons were elected to serve as directors for
a three-year term expiring at the Annual Meeting in 1999:
Edward E. Faber
Daniel M. Beals
Linda M. Cassell
Harvey L. Poppel
The following persons are directors whose terms of office
continue after the meeting and expire at the annual meeting
in 1997:
Anthony M. Frank
James R. Lavelle
Bjorn E. Nordemo
The following persons are directors whose terms of office
continue after the meeting and expire at the annual meeting
in 1998:
Michael L. Evans
Jeffery J. Bernardis
John E. Chamberlain
B. Tom Green
(C.) The following is a brief description of each matter voted
upon at the annual meeting:
1. Elections of four directors to serve for a three-year
term expiring at the annual meeting 1999.
For Against Abstain
Edward E. Faber 5,995,868 0 350
Daniel M. Beals 5,995,868 0 350
Linda M. Cassell 5,995,868 0 350
Harvey L. Poppel 5,995,868 0 350
<PAGE>
PART II - OTHER INFORMATION
(Continued)
2. Approve the appointment of Price Waterhouse LLP as the
Company's independent certified public accountants.
FOR 5,988,008
AGAINST 5,100
ABSTAIN 3,000
3. Approve the Employee Stock Purchase Plan of the Company
FOR 5,973,211
AGAINST 14,897
ABSTAIN 8,000
(D.) N/A
Item 5. Other Information.
None.
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibits.
(b) Reports on Form 8-K.
Thefollowing reports on Form 8-K have been filed during the
quarter ended September 30, 1996:
Cotelligent Group, Inc. acquisition of Innova Solutions, Inc.
nd ESP Software Services, Inc. - July 12, 1996.
<PAGE>
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.
COTELLIGENT GROUP, INC
Date: November 14, 1996 By : /s/ Duane W. Bell
Duane W. Bell
Senior Vice President
and Chief Financial
Officer
<PAGE>
EXHIBIT INDEX
NUMBER EXHIBIT PAGE
None
<PAGE>
