<PAGE>
As filed with the Securities and Exchange Commission on November 14, 1996
Registration No. 33-
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- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
COTELLIGENT GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 7379 94-3173918
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation
or organization)
101 California Street, Suite 2050
San Francisco, California 94111
(415) 439-6400
(Address, including zip code and telephone
number, including area code, of registrant's principal
executive offices)
James R. Lavelle
Chief Executive Officer
Chairman of the Board
Cotelligent Group, Inc.
101 California Street, Suite 2050
San Francisco, California 94111
(415) 439-6400
(Name and address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Daniel E. Jackson, Esq. David W. Pollak, Esq.
Cotelligent Group, Inc. Morgan, Lewis & Bockius LLP
101 California Street, Suite 2050 101 Park Avenue
San Francisco, California 94111 New York, New York 10178
(415) 439-6400 (212) 309-6000
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Approximate date of commencement of proposed sale to
the public: As soon as practicable after the Registration
Statement becomes effective.
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If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. X
------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box.
CALCULATION OF REGISTRATION FEE
===============================================================================
Proposed Proposed
Maximum Maximum
Title of each Amount Offering Aggregate Amount of
class of Securities to be Price Per Offering Registration
to be Registered Registered Share Price Fee
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Common stock, $.01 par
value per share...... 3,500,000 $17.25 $60,375,000 $18,296.00
===============================================================================
<PAGE>
November 14,1996
[LOGO] 3,500,000 Shares
COTELLIGENT GROUP, INC.
Common Stock
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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This Prospectus covers 3,500,000 shares of common stock, $.01 par value
(the "Common Stock"), which may be offered and issued by Cotelligent Group, Inc.
(the "Company") from time to time in connection with the merger with or
acquisition by the Company of other businesses or assets. It is expected that
the terms of acquisitions involving the issuance of securities covered by this
Prospectus will be determined by direct negotiations with the owners or
controlling persons of the businesses or assets to be merged with or acquired by
the Company, and that the shares of Common Stock issued will be valued at prices
reasonably related to market prices current either at the time of a merger or
acquisition are agreed upon or at or about the time of delivery of shares. No
underwriting discounts or commissions will be paid, although finder's fees may
be paid from time to time with respect to specific mergers or acquisitions. Any
person receiving any such fees may be deemed to be an Underwriter within the
meaning of the Securities Act of 1933, as amended (the "Securities Act").
The Company currently has 7,953,440 shares of its Common Stock listed
on the NASDAQ National Market of which 4,462,635 are registered and available
for unrestricted trading in the public markets unless owned by affiliates of the
Company. Application will be made to list the shares of Common Stock offered
hereby on the NASDAQ National Market. On November 11, 1996, the closing price of
the Common Stock on the NASDAQ National Market was $17.50 per share as published
in The Wall Street Journal on November 12, 1996.
All expenses of this offering will be paid by the Company. The Company
is a Delaware corporation and all references herein to the Company refer to the
Company and its subsidiaries. The executive offices of the Company are located
at 101 California Street, Suite 2050, San Francisco, California 94111 and its
telephone number is (415) 439-6400.
The date of this Prospectus is , 1996.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and the pro forma
combined financial statements, including the notes thereto, appearing elsewhere
in this Prospectus. All references to years, unless otherwise noted, refer to
the Company's fiscal year, which ends on March 31 of each year.
The Company
Cotelligent Group, Inc. ("Cotelligent" or the "Company") is an
independent software professional services firm devoted primarily to providing
computer consulting and contract programming services. The Company operates
offices in 13 metropolitan areas including Boston, Cleveland Dallas,
Minneapolis, New York, San Francisco/Silicon Valley and Seattle.
The Company provides its clients with the services of technical
personnel who are skilled in implementing systems using a wide range of software
development and support services. These services include mainframe and mid-range
software development, personal computer and client/server applications
development support, telecommunications and help-desk support.
The growth of information technology and the increasing importance of
generating timely business information has transformed the way businesses
operate, creating significant information services infrastructures, large
budgets and personnel pools to support, update and enhance the technology.
Industry sources estimate that United States spending for software
implementation services in 1994 was approximately $17.7 billion and is projected
to grow at a compound annual rate of 12% through 1999.
At the same time as businesses are investing more in technology,
external economic factors are forcing large organizations to focus operational
expenditures on core competencies. Faced with these two countervailing
trends--technology investment and operational cost pressures--companies are
increasingly turning to skilled and experienced outside organizations to help
them appropriately staff and manage certain software development and
applications projects. Outsourcing these activities provides businesses access
to specialized skills on an "as-needed" basis and reduces costs, while allowing
management to focus on core business issues.
Recognizing the advantages applications development outsourcing affords
businesses in the United States, a large number of specialized computer
consulting firms has developed over the last 20 years. According to INPUT, an
international research firm, approximately 3,500 businesses with annual revenues
in excess of $1.0 million provide such services and expertise in the United
States.
In more recent years, however, the growth of local and regional
computer consulting firms has been hindered by a number of factors. Such factors
include difficulty in locating qualified personnel, limited access to capital
and the lack of national presence to serve clients that are consolidating their
vendor lists. In response to these market pressures, the Company has acquired
computer consulting services businesses in diverse geographic regions, which the
Company believes will create a unified entity with the national presence,
capital, human resources and name recognition required to serve larger
organizations while maintaining the local focus and management structures under
which these firms have developed.
The Company provides and markets its services with the objective of
becoming and remaining the provider of choice when businesses seek the Company's
services. The Company intends to meet this objective by virtue of its (i)
ability to locate and place people with strong performance capabilities and
experience, (ii) national service capabilities and (iii) ability to provide
effective management of account relationships.
Serving clients across a broad spectrum of commercial industries
throughout the United States, the Company has provided significant services to
companies in the financial services, technology and telecommunications
industries, including such companies as AT&T, AT&T Wireless (formerly McCaw
Cellular Communications), Bellcore, Cargill, Frito-Lay, McKesson, Microsoft,
Monsanto, Pacific Bell and U S West. The Company believes that its large and
diverse client base presents excellent opportunities for further marketing of
its services.
3
<PAGE>
<TABLE>
SUMMARY FINANCIAL DATA
Cotelligent Group, Inc. (1)
(In Thousands, Except Share and Per Share Amounts)
Year Ended March 31, Six Months Ended September 30,
--------------------------------------------------------- -------------------------------------------
<CAPTION>
Pro Pro Pro
Forma Forma Forma
1992 1993 1994 1995 1996 1996(2) 1995 1996 1995(2) 1996(2)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-------- -------- --------- ---------- -------- --------- ---------- ------------ -------- -----------
Statement of Operations Data:
Revenues...................$ 9,169 $12,374 $15,914 $17,480 $33,105 $88,850 $ 11,769 $ 53,195 $ 42,405 $ 53,195
Cost of services........... 7,030 9,050 10,249 12,163 23,620 65,683 8,224 38,340 31,642 38,340
-------- -------- --------- ---------- -------- --------- ---------- ------------ --------- -----------
Gross margin............. 2,139 3,324 5,665 5,317 9,485 23,167 3,545 14,855 10,763 14,855
Selling, general and
administrative expenses.... 2,409 2,990 5,021 5,799 8,106 17,555 3,017 11,477 8,326 11,386
Non-recurring transaction
costs...................... 0 0 0 0 0 0 0 788 0 0
-------- -------- --------- -------- -------- --------- ---------- ---------- --------- ---------
Operating income (loss). (270) 334 644 (482) 1,379 5,612 528 2,590 2,437 3,469
Other expense (income), net. 60 50 59 64 88 271 55 (118) 147 (132)
-------- -------- --------- -------- -------- --------- ---------- ------------ --------- -----------
Income (loss) before
provision for income
taxes...................... (330) 284 585 (546) 1,291 5,341 473 2,708 2,290 3,601
Provision (benefit) for
income taxes............... (42) 26 167 (77) 199 2,136 47 1,855 901 1,368
-------- -------- --------- ---------- -------- --------- ---------- ------------ --------- ---------
Net income (loss) $ (288) $ 258 $ 423 $ (469) $1,092 $ 3,205 $ 426 $ 853 1,389 2,233
======== ======== ========= ========== ======== ========= ========== ============ ========= ===========
Net income per share (5)... $ .10
Pro forma net income per
share(3)................... $ .50 $ .23 $ .27
========= ========= ===========
Unaudited Pro Forma
Data(4):
Income (loss) before
provision (benefit)
for income taxes.........$ (330) $ 284 $ 585 $ (546) $1,290 $ 473 $ 2,708
Provision (benefit) for
income taxes............. (3) 121 275 (132) 507 120 1,029
-------- -------- --------- ---------- -------- ---------- ----------
Net income (loss)........$ (327) $ 163 $ 310 $ (414) $ 783 $ 353 $ 1,679
======== ======== ========= ========== ======== ========== ==========
March 31,
-------------------------------------------------------------------------- --------------------
1992 1993 1994 1995 1996 September 30, 1996
------------- ------------ ------------ ------------- ------------- --------------------
Balance Sheet Data:
Working capital.......... $ 52 $ (23) $ 743 $ 473 $ 18,812 $ 17,750
Total assets............. 1,660 2,046 2,902 3,320 33,490 30,920
Long-term debt, less
current portion.......... 103 124 56 143 450 216
Stockholders' equity..... 173 306 820 101 19,289 19,956
<FN>
(1) On June 28, 1996, Cotelligent acquired ESP Software Services, Inc.
("ESP") and INNOVA Solutions, Inc. ("ISI") and on September 30, 1996,
Cotelligent acquired JasTech, Inc. and JasTech of Florida, Inc. (collectively
"JTI") (the "Pooled Companies") in business combinations accounted for under the
pooling-of-interests method. Accordingly, the historical financial statements of
Cotelligent have been restated in accordance with generally accepted accounting
principles to present the financial data as if Cotelligent and the Pooled
Companies had always been members of the same operating group.
(2) Pro Forma data presented gives effect to the acquisitions of the
Founding Companies as if they were made on April 1, 1995. Additionally, pro
forma data reflect adjustments for the acquisitions of the Pooled Companies and
the Founding Companies including: (i) compensation differentials to former
owners and employees of the Founding Companies and the Pooled Companies; (ii)
termination of contributions to retirement plans; (iii) incremental selling,
general and administrative costs associated with Cotelligent corporate
activities; (iv) removal of non-recurring transaction costs associated with 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. See Notes to the Pro Forma Financial Statements.
(3) Pro Forma weighted average shares outstanding used to determine pro
forma net income were 6,377,799 for March 31, 1996 6,101,350 for September 30,
1995 and 8,159,463 for September 30, 1996. For calculation of these weighted
average shares, see Note 1 of the Notes to Pro Forma Financial Statements.
(4) ESP was an S corporation through the date of merger with Cotelligent at
June 28, 1996 and, accordingly, was not subject to federal or state income
taxes. ISI was a C corporation through December 31, 1994, then elected to be
taxed as an S corporation until the merger with Cotelligent. JasTech of Florida,
Inc. was an S corporation from January 1, 1996 through the date of merger with
Cotelligent on September 30, 1996 and accordingly was not subject to federal or
state income tax. The unaudited pro forma information is presented for the
purpose of reflecting a provision for income taxes as if the Pooled Companies
had been subject to income taxes for all periods presented, calculated in
accordance with FAS 109, based on tax laws that were in effect during the
respective periods.
(5) Weighted average shares outstanding used to determine net income per
share for the six months ended September 30, 1996 were 8,159,463.
</FN>
</TABLE>
4
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
risk factors should be considered carefully in evaluating the Company and its
business before purchasing the shares of Common Stock offered hereby.
Absence of Combined Operating History. Cotelligent was founded in
February 1993 and generated no revenue prior to the consummation of its initial
public offering of its Common Stock (the "Offering") on February 20, 1996.
Cotelligent acquired (the "Acquisitions"), simultaneously with the closing of
the Offering, four software professional services businesses (the "Founding
Companies"). Prior to the consummation of the Offering, the Founding Companies
operated as separate independent entities. Prior to their acquisition in June
1996, ESP Software Services, Inc. ("ESP") and INNOVA Solutions, Inc. ("ISI")
operated as separate independent entities. Prior to their acquisition in
September 1996, JasTech, Inc. and JasTech of Florida, Inc. (collectively "JTI")
operated as separate independent entities. (ESP, ISI and JTI are hereafter
referred to as the "Pooled Companies".)There can be no assurance that the
Company will be able to integrate these businesses on an economic or operational
basis. The Company's management group has been assembled only recently, and
there can be no assurance that the management group will be able to oversee the
combined entity and effectively implement the Company's strategy. The combined
historical financial results of the acquired entities cover periods when the
acquired entities and Cotelligent were not under common control or management
and as such may not be indicative of the Company's future financial or operating
results. An inability of the Company to integrate the Founding Companies and the
Pooled Companies would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management" and "Certain
Transactions."
In addition, the Company's senior management team is limited, and the
Company expects to be required to hire new personnel if it is to pursue its
business strategy successfully. The Company will also need to hire additional
management personnel at regional levels and implement adequate Company-wide
systems and controls at each operating subsidiary. If the Company is unable to
hire, train and integrate new senior or regional management personnel
effectively, if such personnel are unable to achieve anticipated performance
levels or if the Company is unable to implement effective controls, the
Company's business, financial condition and results of operations could be
adversely affected.
Risks Related to Implementation of the Company's Business Strategy. The
Company is a newly formed entity which has a limited history of combined
operations. The Company's ability to manage future growth, if any, and integrate
any potential acquisitions will depend significantly upon the Company's ability
to integrate the Founding Companies and any acquired businesses and develop
Company-wide systems and operating procedures. In addition, the Company's
acquisition program will depend upon the Company's ability to successfully
identify, acquire, integrate and profitably manage target companies and
businesses. The Company's growth will therefore be dependent on a number of
factors, including the hiring and training of qualified regional management
personnel; the development and recruitment of a base of qualified technical
personnel within a geographic market; the integration of new personnel into the
Company's network of operating subsidiaries; and the Company's ability to
initiate, develop and maintain client relationships. An inability to manage
future growth, if any, or successfully integrate any acquisitions, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors--Risks Related to the Company's
Acquisition Strategy" and "Business."
Substantial Competition. The computer consulting and contract
programming industry is highly competitive, fragmented and subject to rapid
change. There are numerous other companies engaged in the Company's business,
many of which have greater technical, financial or marketing resources than the
Company. The market includes participants in a variety of market segments,
including the professional service groups of computer equipment companies and
facilities management and management information outsourcing companies. Certain
of these companies operate in several of the Company's markets, and others may
choose to enter the Company's markets in the future. In addition, the Company
intends to enter new markets and offer new services by acquiring existing
companies and expects that one or more of its competitors will have a presence
in each of such new markets and are or will be providing such new services. The
majority of the Company's competition at the Founding Company level is made up
of smaller regional firms with a strong presence in their respective local
markets. Further, many of the larger companies which have traditionally made up
a substantial portion of the Company's target market have recently been
consolidating their vendor lists to a smaller number of preferred service
providers. To the extent the Company is unable to meet the necessary
requirements of such larger companies and become a preferred service provider,
its ability to attract and retain such clients will be adversely affected. As a
result of these factors, the Company may lose clients or have difficulty in
acquiring new clients. An inability to compete successfully in its marketplace
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Competition."
5
<PAGE>
In addition, the Company competes with many of its competitors for
qualified technical personnel and viable acquisition candidates. There can be no
assurance that the Company will be successful in attracting, hiring and
retaining such personnel or in implementing its acquisition program. See "Risk
Factors--Dependence on Availability of Qualified Technical Personnel," "--Risks
Related to the Company's Acquisition Strategy" and "Business--Competition."
Dependence on Availability of Qualified Technical Personnel. The
Company is dependent upon its ability to attract, hire and retain personnel who
possess the technical skills and experience necessary to meet the service
requirements of its clients. The Company must continually evaluate and upgrade
its database of available qualified technical personnel to keep pace with
rapidly evolving technologies and changing client needs. In addition, because
most of the personnel provided by the Company to its clients are not committed
to provide their services exclusively to the Company or a particular subsidiary,
the Company must compete with other companies in a variety of industry segments
seeking to engage the services of such personnel. Competition for individuals
with proven technical skills is intense. The Company competes for such
individuals with other providers of technical services, systems integrators,
providers of outsourcing services, computer systems consultants, clients and
temporary personnel agencies. In the past, the Company has experienced
difficulties identifying and retaining qualified personnel and has therefore
been unable in certain instances to fill requests for services from clients.
There can be no assurance that qualified technical personnel will be available
to the Company in sufficient numbers. An inability to locate, retain and
successfully place qualified personnel to fill client requests could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Technical Personnel and Recruitment."
Management of Professional Staff. The Company's staff includes a number
of highly qualified professionals who have a broad range of career
opportunities. The Company believes that its ability to retain such individuals
and attract additional qualified individuals depends significantly on the
freedom such persons are given to pursue their individual objectives within the
Company and on a compensation system that motivates and rewards individual
achievements. To the extent that such an environment were to result in lack of
coordination of projects or in competition among professionals or working
groups, or were the Company to lose such personnel or be unable to identify,
hire and retain additional personnel, the quality of the Company's services
could suffer. In such event, the Company's business, financial condition and
results of operations could be materially adversely affected. See
"Business--Technical Personnel and Recruitment."
Client Concentration. A relatively small number of clients has recently
accounted for a significant portion of the Company's revenues. In 1996, one
client accounted for approximately 5.6% of the Company's revenues, four clients
accounted for approximately 19% of the Company's revenues and 25 clients
accounted for approximately 50.3% of the Company's revenues. There can be no
assurance that these clients will continue to engage the Company for additional
projects or do so at the same revenue levels. The Company provides services on
an assignment-by-assignment basis, and a client generally can terminate an
assignment at any time without penalty. There can be no assurance that existing
clients will continue to use the Company's services at historical levels, if at
all. Loss of a major client could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Marketing and Clients."
Possible Volatility of Stock Price; Absence of Backlog. The Company's
revenues, gross margin and operating margin for any particular quarter are
generally affected by staffing mix and billing rates, resource requirements,
marketing activities and the timing and size of engagements. Results for any
quarter are not necessarily indicative of the results that the Company may
achieve for any subsequent fiscal quarter or for a full fiscal year and may
cause the market price of the Common Stock to fluctuate, perhaps substantially.
In addition, in recent years the stock market in general, and the shares of
technology companies in particular, have experienced extreme price fluctuations,
often for reasons unrelated to the performance of a particular company's
business. These broad market and industry fluctuations may adversely affect the
market price of the Company's Common Stock. In addition, the Company's revenues
are primarily derived from services provided in response to client requests or
events that occur without notice, and the Company's engagements, generally
billed on a "time and expenses" or arranged fee basis, are terminable at any
time by clients, generally without penalty. As a result, the Company's backlog
at any particular time may not be indicative of its quarterly or annual revenues
and is not a reliable indicator of revenues for any future period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Risks Related to the Company's Acquisition Strategy. The Company
intends to expand its operations through the acquisition of additional computer
consulting and contract programming businesses. There can be no assurance that
the Company will be able to identify, acquire or profitably manage additional
businesses or successfully integrate acquired businesses, if any, into the
Company without substantial costs, delays or other operational or financial
problems. Further, acquisitions may involve a number of special risks, including
adverse effects on the Company's operating results,
6
<PAGE>
diversion of management's
attention, failure to retain key acquired personnel, risks associated with
unanticipated events or circumstances or legal liabilities and amortization of
acquired intangible assets, some or all of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Client satisfaction or performance problems at a single acquired firm could have
a material adverse impact on the reputation of the Company as a whole. In
addition, there can be no assurance that acquired businesses, if any, will
achieve anticipated revenues and earnings. The inability of the Company to
implement and manage its acquisition strategy successfully may have an adverse
effect on the future prospects of the Company. See "Business--Business Strategy"
and "--Acquisition Strategy."
Risks Related to Acquisition Financing. The Company currently intends
to finance future acquisitions by using shares of its Common Stock, including
the Common Stock offered by this Prospectus, for all or a portion of the
consideration to be paid. If the Common Stock does not maintain a sufficient
value, or potential acquisition candidates are unwilling to accept Common Stock
as part or all of the consideration for the sale of their businesses, the
Company may be required to use more of its cash resources, if available, to
initiate and maintain its acquisition program. If the Company does not have
sufficient cash resources, its growth could be limited unless it is able to
obtain additional capital through additional debt or equity financing. There can
be no assurance that the Company will be able to obtain such financing if and
when it is needed or that, if available, it will be available on terms the
Company deems acceptable. As a result, the Company might be unable to
successfully implement its acquisition strategy. The inability of the Company to
implement and manage its acquisition strategy successfully may have an adverse
effect on the future prospects of the Company.
The Company will also need additional funds to implement its
acquisition and internal growth strategies. The Company has a line of credit
facility for use for working capital and other general corporate purposes, which
may include acquisitions. There can be no assurance, however, that the line of
credit will be sufficient for the Company's needs. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources," "Business--Business Strategy" and "--Acquisition Strategy."
Liabilities for Client and Employee Actions. Service providers such as
the Company are in the business of employing people and placing them in the
workplace of other businesses. An attendant risk of such activity includes
possible claims of discrimination and harassment, employment of illegal aliens
and other similar claims. A failure to avoid these risks may result in negative
publicity for the Company and the payment by the Company of money damages or
fines. Although the Company historically has not had any significant problems in
this area, there can be no assurance that the Company will not experience such
problems in the future.
The Company is also exposed to liability with respect to actions taken
by its employees while on assignment, such as damages caused by employee errors,
misuse of client-proprietary information or theft of client property. Due to the
nature of the Company's assignments and the potential liability with respect
thereto, there can be no assurance that any insurance maintained by the Company
will be adequate to cover any such liability. To the extent that such insurance
is not sufficient in amount or scope to cover a loss, the Company's business,
financial condition and results of operations could be materially adversely
affected.
Reliance on Key Personnel. The Company's operations are dependent on
the continued efforts of its executive officers and on senior management of it's
subsidiaries. Furthermore, the Company will likely be dependent on the senior
management of businesses, if any, that may be acquired in the future. If any of
these people become unable to continue in their present roles, or if the Company
is unable to attract and retain other skilled employees, the Company's business
or prospects could be adversely affected. While the Company has entered into
employment agreements with certain of these individuals, there can be no
assurance that any individual will continue in his or her present capacity with
the Company for a specified period. The Company does not intend to obtain key
man life insurance covering any of its executive officers or other members of
senior management. See "Management."
Potential Effect of Shares Eligible for Future Sale on Price of Common
Stock. The market price of the Common Stock of the Company could be adversely
affected by the sale of substantial amounts of Common Stock of the Company in
the public market.
The Company issued 2,725,500 shares of Common Stock in the Offering,
all of which may be sold in the public market. In addition, simultaneously with
the closing of the Offering, the stockholders of the Founding Companies
received, in the aggregate, 2,906,875 shares of Common Stock (not including
300,000 shares of Common Stock sold by one stockholder (the "Selling
Stockholder") in the Offering) as a portion of the consideration for their
businesses. The Company issued an additional 1,056,309 shares of Common Stock to
the stockholders of ESP and ISI in June 1996 as the sole consideration for their
businesses. The Company issued an additional 644,826 shares of Common Stock to
the
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<PAGE>
stockholder of JTI in September 1996 as the sole consideration for the
business. None of these aforementioned shares are being offered by this
Prospectus and, except for the 1,701,135 shares issued to the stockholders of
the Pooled Companies, have not been registered under the Securities Act and,
accordingly, may not be resold except in transactions registered under the
Securities Act or pursuant to an exemption therefrom. The stockholders of the
Founding Companies who received the shares have certain piggyback registration
rights with respect to such shares. The piggyback registration rights granted to
the stockholders of the Founding Companies in connection with consummation of
the Acquisitions do not give such stockholders the right to include any of their
shares in this Prospectus or in any other shelf registration to register shares
to be used solely in connection with acquisitions. See "Shares Eligible for
Future Sale."
James R. Lavelle, the Chairman and Chief Executive Officer of the
Company who owns 238,732 shares of Common Stock, and stockholders of the
Founding Companies who own, in the aggregate, 2,653,537 shares of Common Stock,
have each agreed not to sell, transfer or otherwise dispose of any shares of
Common Stock owned by them until February 13, 1998 (other than certain limited
transfers to immediate family members who agree to be bound by such
restriction).
Authority to Issue "Blank-Check" Preferred Stock. The Board of
Directors of the Company is empowered to issue up to 500,000 shares of preferred
stock, and to determine the price, rights, preferences and privileges of such
shares, without any further stockholder action. The existence of this
"blank-check" preferred stock could render more difficult or discourage an
attempt to obtain control of the Company by means of a tender offer, merger,
proxy contest or otherwise. In addition, this "blank-check" preferred stock, and
any issuance thereof, may have an adverse effect on the market price of the
Company's Common Stock. See "Description of Capital Stock."
Anti-Takeover Effects of Certain Charter Provisions. In addition to
authorizing the Board of Directors to issue "blank-check" preferred stock, the
Company's Certificate of Incorporation provides for a "staggered" Board of
Directors, which may also have the effect of inhibiting a change of control of
the Company and may have an adverse effect on the market price of the Company's
Common Stock. See "Risk Factors--Authority to Issue "Blank-Check" Preferred
Stock," "Management--Directors and Executive Officers" and "Description of
Capital Stock."
8
<PAGE>
THE COMPANY
The Company was formed to acquire, own and operate software
professional service businesses specializing in computer consulting and contract
programming. The Company acquired, upon consummation of the Offering, four
businesses, on June 28, 1996 acquired two other businesses and on September 30,
1996 acquired another business.
For a description of these transactions, see "Certain Transactions."
The Company was incorporated in February 1993 under the laws of the
State of California as TSX, a California corporation. In November 1995, the
Company changed its jurisdiction of incorporation to Delaware and its name to
Cotelligent Group, Inc. Unless the context otherwise requires, references in
this Prospectus to the "Company" and to "Cotelligent" refer to TSX, a California
corporation, and Cotelligent Group, Inc., a Delaware corporation.
The Company's executive offices are located at 101 California Street,
Suite 2050, San Francisco, California 94111 and its telephone number is (415)
439-6400.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded on the NASDAQ National Market
since February 14, 1996. On November 11, 1996, the last sale price of the Common
Stock was $17.50 per share, as published in The Wall Street Journal on November
12, 1996. At November 8, 1996, there were 75 stockholders of record of the
Company's Common Stock. The following table sets forth the range of high and low
sale close prices for the Common Stock for the period from February 14, 1996,
the date of the Company's initial public offering, through November 11, 1996,
by quarter.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
February 14, 1996 through March 31, 1996..................... $11.75 $ 8.25
April 1, 1996 through June 30, 1996.......................... $20.50 $12.00
July 1, 1996 through September 30, 1996...................... $17.50 $12.25
October 1, 1996 through November 11, 1996.................... $18.00 $16.00
====== ======
</TABLE>
DIVIDEND POLICY
The Company intends to retain all of its earnings, if any, to finance
the expansion of its business and for general corporate purposes and does not
anticipate paying any dividends on its Common Stock for the foreseeable future.
In addition, the Company's line of credit facility includes restrictions on the
ability of the Company to pay dividends without the consent of the lender.
9
<PAGE>
SELECTED FINANCIAL DATA
The Company was founded in February 1993 to acquire, own and operate
software professional service businesses specializing in computer consulting and
contract programming. On February 20, 1996 Cotelligent acquired BFR Co., Inc.
("BFR"), Chamberlain Associates, Inc. ("CAI"), Data Arts & Sciences, Inc.
("DASI") and Financial Data Systems, Inc. ("FDSI") (the "Founding Companies")
simultaneously with the completion of the Offering. These Founding Companies and
Cotelligent, for the periods prior to these acquisitions (February 20, 1996),
are herein referred to as the "Combined Predecessor Companies". As a result of
the substantial continuing interests in the Company of the former stockholders
of the Combined Predecessor Companies, the historical financial data as of the
date of the Acquisitions were combined on a historical cost basis.
On June 28, 1996, Cotelligent acquired ESP and ISI and on September 30,
1996 Cotelligent acquired JTI (collectively the "Pooled Companies") in business
combinations accounted for under the pooling-of-interests method. Accordingly,
the historical financial statements of Cotelligent have been restated in
accordance with generally accepted accounting principles to present the
financial data as if Cotelligent and the Pooled Companies had always been
members of the same operating group.
The selected financial data with respect to Cotelligent Group, Inc.'s
consolidated statements of operations for the years ended March 31, 1994, 1995
and 1996, and with respect to the consolidated balance sheets as of March 31,
1995 and 1996 have been derived from Cotelligent Group, Inc.'s financial
statements that have been audited by Price Waterhouse LLP and that appear
elsewhere in this registration statement. The selected financial data with
respect to Cotelligent Group, Inc.'s consolidated statements of operations for
the years ended March 31, 1993 and 1992 and the six months ended September 30,
1995 and 1996 and with respect to Cotelligent Group, Inc.'s consolidated balance
sheets as of March 31, 1992, 1993, 1994 and September 30, 1996 have been derived
from unaudited financial statements which, in the opinion of management, reflect
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of such data.
The pro forma financial data presented gives effect to the acquisitions
of the Founding Companies as if they were made on April 1, 1995. Additionally,
pro forma data reflects adjustments for the acquisitions of the Pooled Companies
and the Founding Companies including compensation differentials to employees and
former owners of the Founding Companies and the Pooled Companies, the planned
termination of contributions to retirement plans, incremental selling, general
and administrative costs of the corporate activities of Cotelligent, one-time,
non-recurring acquisition costs related to the Pooled Companies and adjustments
to reflect income taxes as if the entities were combined and subject to the
effective federal and state statutory rates for the combined entity throughout
the periods presented.
The selected financial data with respect to the Combined
Predecessor Companies' combined statements of operations for the years ended
March 31, 1993, 1994 and 1995 and the period April 1, 1995 through February 19,
1996, have been derived from the Combined predecessor company financial
statements and have been audited by Price Waterhouse LLP. The selected combined
financial data with respect to the Combined Predecessor Companies' combined
statements of operations for the year ended March 31, 1992, have been derived
from unaudited financial statements which, in the opinion of management, reflect
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of such data.
The selected financial data for the individual Founding Companies and
Cotelligent for the years ended March 31, 1993, 1994 and 1995 and for the period
April 1, 1995 through February 19, 1996 have been derived from financial
statements of each of these companies and have been audited by Price Waterhouse
LLP. The selected financial data for the individual Founding Companies and
Cotelligent for the year ended March 31, 1992 have been derived from unaudited
financial statements of these companies which, in the opinion of management,
reflect all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of such data.
The selected financial data provided should be read in conjunction with
the Cotelligent Group, Inc. Pro Forma Financial Statements, the Cotelligent
Group, Inc. financial statements, the Combined Predecessor Companies financial
statements, the individual financial statements of JTI, ESP, ISI, FDSI, BFR,
DASI and CAI, the related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" presented elsewhere
in this prospectus.
10
<PAGE>
<TABLE>
SELECTED FINANCIAL DATA
Cotelligent Group, Inc. (1)
(In Thousands, Except Share and Per Share Amounts)
Year Ended March 31, Six Months Ended September 30,
<CAPTION>
--------------------------------------------------------- -------------------------------------------
Pro Pro Pro
Forma Forma Forma
1992 1993 1994 1995 1996 1996(2) 1995 1996 1995(2) 1996(2)
-------- -------- --------- ---------- -------- --------- ---------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues...................$ 9,169 $12,374 $15,914 $17,480 $33,105 $88,850 $ 11,769 $ 53,195 $ 42,405 $ 53,195
Cost of services........... 7,030 9,050 10,249 12,163 23,620 65,683 8,224 38,340 31,642 38,340
-------- -------- --------- ---------- -------- --------- ---------- ------------ --------- -----------
Gross margin............. 2,139 3,324 5,665 5,317 9,485 23,167 3,545 14,855 10,763 14,855
Selling, general and
administrative expenses.. 2,409 2,990 5,021 5,799 8,106 17,555 3,017 11,477 8,326 11,386
Non-recurring transaction
costs.................... 0 0 0 0 0 0 0 788 0 0
-------- -------- --------- -------- -------- --------- ---------- ---------- --------- ---------
Operating income (loss). (270) 334 644 (482) 1,379 5,612 528 2,590 2,437 3,469
Other expense (income), net. 60 50 59 64 88 271 55 (118) 147 (132)
-------- -------- --------- -------- -------- --------- ---------- ------------ --------- -----------
Income (loss) before
provision for income taxes. (330) 284 585 (546) 1,291 5,341 473 2,708 2,290 3,601
Provision (benefit) for
income taxes............. (42) 26 167 (77) 199 2,136 47 1,855 901 1,368
-------- -------- --------- ---------- -------- --------- ---------- ------------ --------- ---------
Net income (loss)..........$ (288) $ 258 $ 423 $ (469) $1,092 $ 3,205 $ 426 $ 853 1,389 2,233
======== ======== ========= ========== ======== ========= ========== ============ ========= ===========
Net income per share (5)... $ .10
============
Pro forma net income per
share(3)................... $ .50 $ .23 $ .27
========= ========= ===========
Unaudited Pro Forma Data(4):
Income (loss) before
provision (benefit)
for income taxes...... $ (330) $ 284 $ 585 $ (546) $1,290 $ 473 $ 2,708
Provision (benefit) for
income taxes.......... (3) 121 275 (132) 507 120 1,029
-------- -------- --------- ---------- -------- ---------- ----------
Net income (loss)........$ (327) $ 163 $ 310 $ (414) $ 783 $ 353 $ 1,679
======== ======== ========= ========== ======== ========== ==========
March 31,
-------------------------------------------------------------------------- --------------------
1992 1993 1994 1995 1996 September 30, 1996
------------- ------------ ------------ ------------- ------------- --------------------
Balance Sheet Data:
Working capital.......... $ 52 $ (23) $ 743 $ 473 $ 18,812 $ 17,750
Total assets............. 1,660 2,046 2,902 3,320 33,490 30,920
Long-term debt, less
current portion........ 103 124 56 143 450 216
Stockholders' equity..... 173 306 820 101 19,289 19,956
<FN>
(1) On June 28, 1996, Cotelligent acquired ESP Software Services, Inc.
("ESP") and INNOVA Solutions, Inc. ("ISI") and on September 30, 1996,
Cotelligent acquired JasTech, Inc. and JasTech of Florida, Inc. (collectively
"JTI") (the "Pooled Companies") in business combinations accounted for under the
pooling-of-interests method. Accordingly, the historical financial statements of
Cotelligent have been restated in accordance with generally accepted accounting
principles to present the financial data as if Cotelligent and the Pooled
Companies had always been members of the same operating group.
(2)Pro Forma data presented gives effect to the acquisitions of the
Founding Companies as if they were made on April 1, 1995. Additionally, pro
forma data reflect adjustments for the acquisitions of the Pooled Companies and
the Founding Companies including: (i) compensation differentials to former
owners and employees of the Founding Companies and the Pooled Companies; (ii)
termination of contributions to retirement plans; (iii) incremental selling,
general and administrative costs associated with Cotelligent corporate
activities; (iv) removal of non-recurring transaction costs associated with 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. See Notes to the Pro Forma Financial Statements.
(3) Pro Forma weighted average shares outstanding used to determine pro
forma net income were 6,377,799 for March 31, 1996 6,101,350 for September 30,
1995 and 8,159,463 for September 30, 1996. For calculation of these weighted
average shares, see Note 1 of the Notes to Pro Forma Financial Statements.
(4) ESP was an S corporation through the date of merger with Cotelligent at
June 28, 1996 and, accordingly, was not subject to federal or state income
taxes. ISI was a C corporation through December 31, 1994, then elected to be
taxed as an S corporation until the merger with Cotelligent. JasTech of Florida,
Inc. was an S corporation from January 1, 1996 through the date of merger with
Cotelligent on September 30, 1996 and accordingly was not subject to federal or
state income tax. The unaudited pro forma information is presented for the
purpose of reflecting a provision for income taxes as if the Pooled Companies
had been subject to income taxes for all periods presented, calculated in
accordance with FAS 109, based on tax laws that were in effect during the
respective periods.
(5) Weighted average shares outstanding used to determine net income per
share for the six months ended September 30, 1996 were 8,159,463.
</FN>
</TABLE>
11
<PAGE>
<TABLE>
SELECTED FINANCIAL DATA
Combined Predecessor Companies
(In Thousands)
The following table presents selected information for the Combined
Predecessor Companies and for each of the Founding Companies and Cotelligent for
the four most recent fiscal years and for the period April 1, 1995 through
February 19, 1996. Combined Predecessor Companies financial data includes the
Founding Companies and Cotelligent Group, Inc. prior to the subsequent
combinations with the Pooled Companies.
<CAPTION>
April 1, 1995-
Year Ended March 31, February 19,
----------------------------------------------
1992 1993 1994 1995 1996
--------- ------------ ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Combined Predecessor Companies:
Revenues.................................$ 23,974 $ 31,138 $ 39,434 $ 50,029 $ 55,746
Gross margin............................. 5,944 8,048 9,494 11,540 13,384
Selling, general and administrative
expenses............................... 5,721 7,035 8,055 10,743 10,788
Income from continuing operations........ 97 693 934 225 250
Net income............................... 97 436 649 41 250
FDSI:
Revenues.................................$ 6,119 $ 8,206 $ 11,191 $ 15,808 $ 16,468
Gross margin............................. 1,659 2,362 2,955 3,542 4,315
Selling, general and administrative
expenses............................... 1,543 1,927 2,419 3,120 3,166
Income from continuing operations........ 55 278 314 223 658
Net income............................... 55 22 29 39 658
BFR:
Revenues.................................$ 7,958 $ 10,138 $ 14,440 $ 15,221 $ 15,623
Gross margin............................. 2,065 3,069 3,626 3,981 4,129
Selling, general and administrative
expenses............................... 2,047 2,764 2,833 4,173 3,589
Net income (loss)........................ 17 364 681 (179) (702)
DASI:
Revenues.................................$ 7,170 $ 9,396 $ 10,065 $ 12,437 $ 14,456
Gross margin............................. 1,549 1,884 2,094 2,696 3,201
Selling, general and administrative
expenses............................... 1,427 1,694 1,862 2,195 2,344
Net income............................... 47 71 80 235 442
CAI:
Revenues.................................$ 2,727 $ 3,398 $ 3,738 $ 6,563 $ 9,200
Gross margin............................. 671 733 818 1,322 1,740
Selling, general and administrative
expenses............................... 704 728 774 1,054 1,274
Net income (loss)........................ (22) 17 26 147 275
Cotelligent:
Revenues.................................$ - $ - $ - $ - $ -
Gross margin............................. - - - - -
Selling, general and administrative
expenses............................... - 38 167 201 415
Net (loss)............................... - (38) (167) (201) (423)
</TABLE>
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Cotelligent was formed in February 1993 to acquire, own and operate
software professional service businesses specializing in computer consulting and
contract programming. Cotelligent acquired, simultaneously with the closing of
the Offering, four established businesses (the "Founding Companies") which
provide a wide variety of computer consulting services in various metropolitan
areas of the country. In June 1996, Cotelligent acquired ESP Software Services,
Inc. ("ESP") and INNOVA Solutions, Inc. ("ISI"). In September 1996, Cotelligent
acquired JasTech, Inc. and JasTech of Florida, Inc. (collectively "JTI"). (ESP,
ISI and JTI are hereafter referred to as the "Pooled Companies".) Cotelligent
and the Founding Companies have been under common control only since February
20, 1996 and Cotelligent, the Founding Companies ESP and ISI have been under
common control only since June 28, 1996. Cotelligent, the Founding Companies and
the Pooled Companies have been under common control only since September 30,
1996. Therefore, the data presented below may not be comparable to or indicative
of the post-combination results to be achieved by the Company.
The Company derives substantially all of its revenues from professional
service activities. The majority of these activities are provided under "time
and expense" billing arrangements, and revenues are recorded as work is
performed. Revenues are directly related to the total number of hours billed to
clients and the associated hourly billing rates. Hourly billing rates are
established for each service professional and such rates are a function of the
professional's skills, experience and the type of work performed. The Company's
principal costs are professional compensation directly related to the
performance of services and related expenses. Gross margins (revenues after
professional compensation and related expenses) are primarily a function of
hours billed to clients per professional employee or consultant, hourly billing
rates of those employees or consultants and employee or consultant compensation
relative to those billing rates. Gross margins can be adversely impacted if
service activities cannot be billed, if the Company is not effective in managing
its service activities, if fixed-fee engagements (which historically have not
constituted a significant portion of total revenues) are not properly priced or
high levels of unutilized time (work activities not chargeable to clients or
unrelated to client services) of full-time service professional employees.
Operating income (gross margin less selling, general and administrative
expenses) can be adversely impacted by administrative staff compensation and
expenses related to growing and expanding the Company's business, which may be
incurred before revenues are generated from such investment.
From time to time, the Company has opened new operating or branch
offices, and it may open new offices in the future. Historically, a new office
requires approximately 12 months to reach break-even profitability. During such
period, a new office may lose on average $50,000 per month. There can be no
assurance that any new office will ever become profitable.
The Company's historical tax rates have been lower than statutory rates
due to the S corporation elections ESP and ISI had in effect through June 27,
1996, and the S corporation election JasTech of Florida, Inc. had in effect from
January 1, 1996 through September 29, 1996. The Company expects its effective
statutory tax rate as of April 1, 1996 to be approximately 38%.
For financial reporting purposes, Cotelligent and the Founding
Companies are deemed to have been formed on February 20, 1996. Since the
acquisitions of ESP, ISI and JTI were treated as pooling-of-interests, the
consolidated financial statements include Cotelligent Group, Inc., ESP, ISI and
JTI up to the date of the closing of the Offering, after which the financial
statements reflect the results of Cotelligent Group, Inc. and all wholly-owned
subsidiaries. As a result of the substantial continuing interests in the Company
of the former stockholders of BFR, CAI, DASI, FSDI and Cotelligent (the
"Combined Predecessor Companies"), the historical financial information of the
Combined Predecessor Companies have been combined on an historical cost basis
for all periods presented. Accordingly, no goodwill has been recorded in
combining these businesses. In the future, the Company may be required to record
goodwill to account for the amount of the purchase price of acquired businesses
which exceeds the tangible book value of businesses which it may acquire.
The pro forma statement of operations includes the results of
Cotelligent, the Founding Companies and the Acquired Companies as if they had
been combined since April 1, 1995. Pro forma data also reflect adjustments for
Cotelligent, the Founding Companies and the Pooled Companies including: (i)
compensation differentials to former owners and employees of the Founding
Companies and the Pooled Companies; (ii) termination of contributions to
retirement plans; (iii) incremental selling, general and administrative costs
associated with Cotelligent corporate activities;
13
<PAGE>
(iv) removal of non-recurring
transaction costs associated with 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 discussed.
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
period to period. The operating results for any period are not necessarily
indicative of the results for any future period.
Results of Operations
The following table sets forth the percentage of net revenues
represented by items in the Company's statement of operations for the periods
presented.
<TABLE>
<CAPTION>
Year Ended March 31, Six Months Ended September 30,
----------------------------------- ---------------------------------------
Pro Pro Pro
Forma Forma Forma
1994 1995 1996 1996 1995 1996 1995 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0 %
Cost of services...................... 64.4 69.6 71.4 73.9 69.9 72.1 74.6 72.1
-------- -------- -------- -------- -------- -------- ------------------
Gross margin..................... 35.6 30.4 28.6 26.1 30.1 27.9 25.4 27.9
Selling, general and administrative
expenses............................ 31.6 33.2 24.4 19.8 25.6 23.0 19.8 21.4
-------- -------- -------- -------- -------- -------- ------------------
Operating income (loss).......... 4.0 (2.8) 4.2 6.3 4.5 4.9 5.6 6.5
Other expense (income), net........... .3 .3 .3 .3 .5 (.2) .3 (.2)
-------- -------- -------- -------- -------- -------- ------------------
Income (loss) before provision for
income taxes........................ 3.7 (3.1) 3.9 6.0 4.0 5.1 5.2 6.7
Provision (benefit) for income taxes. 1.0 (.4) .6 2.4 .4 3.5 2.1 2.5
-------- -------- -------- -------- -------- -------- ------------------
Income (loss) from continuing
operations.......................... 2.7% (2.7)% 3.3% 3.6% 3.6% 1.6 % 3.1% 4.2 %
</TABLE>
Pro Forma Combined 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 $3.0 million, or 35.5%,
to $11.4 million in the first half of 1997 from $8.4 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 19.8% for the first half of 1996.
Interest Expense, Net. Interest expense, net of interest income on a
pro forma basis was $176,000 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
$886,000 an
14
<PAGE>
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.
Pro Forma 1996 Compared to Historical 1996
Revenues. Revenues were $88.8 million for 1996 on a pro forma basis
compared to $33.1 million on a historical basis reflecting the revenues of all
the Company's subsidiaries for the entire year. The pro forma revenues reflect
total client service hours provided of 1,570,000 at an average hourly rate of
$56.20. Pro forma revenues also include approximately $591,000 of permanent
placement revenues.
Gross Margin. The pro forma gross margin was 26.1% of pro forma
revenues, compared to historical gross margin of 28.6% of historical revenues in
1996. The pro forma gross margin percentage reflects the impact of the Founding
Companies which have inherently lower gross margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses on a pro forma basis were $17.6 million, or 19.8% of pro
forma revenues, compared to historical selling, general and administrative
expenses of $8.1 million, or 24.4% of historical revenues in 1996. The pro forma
selling, general and administrative expenses include the impact of the
Acquisitions, reflect a reduction in executive compensation from historical
levels due to the renegotiation of executive compensation arrangements with
former owners and employees of the Founding Companies and the Pooled Companies,
and elimination of retirement fund contributions since the Company plans to make
no such contributions in the future. This reduction was partially offset by
estimated additional expenses related to Cotelligent's corporate operating
activities.
Interest expense, Net. Net interest expense on a pro forma basis was
$348,000 or .4% of pro forma revenues, compared to historical net interest
expense of $129,000, or .4% of historical revenues in 1996. The higher pro forma
net interest expense reflects the acquisition of the Founding Companies offset
in part by the elimination of interest expense associated with the borrowings of
BFR's Employee Stock Ownership and Money Purchase Plan.
Provision for Income Taxes. The provision for income taxes on a pro
forma basis was $2.1 million, or an effective tax rate of 40.0% of pro forma
income before provision for income taxes, compared to historical provision for
income taxes of $199,000, or an effective rate of 15.3% of income before
provision for income taxes in 1996. The provision for income taxes on a pro
forma basis reflects the impact of subjecting all companies to the effective
federal and state statutory rates throughout the period. The 15.3% historical
effective rate is a result of S elections in place at some of the Pooled
Companies during the period.
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.
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
15
<PAGE>
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%.
1996 Compared to 1995
Revenues. Revenues increased $15.6 million, or 89.4%, to $33.1 million
in 1996 from $17.5 million in 1995 primarily as a result of the revenues of the
Founding Companies which were acquired on February 20, 1996 as well as a 37.6 %
increase in total client service hours provided by the Pooled Companies to
523,000 hours in 1996 from 380,000 hours by a 2.4% increase in the average
hourly billing rate to $47.11 in 1996 from $46.00 in 1995. The increase in
revenues also reflects an increase in permanent placement fee revenues of
$169,000.
Gross Margin. Gross margin increased $4.2 million, or 78.4 %, to $9.5
million in 1996 from $5.3 million in 1995, primarily as a result of an increase
in hours of service provided to clients and the acquisition of the Founding
Companies on February 20, 1996. Gross margin as a percentage of revenues
decreased from 30.4 % in 1995 to 28.6 % in 1996 reflecting investments in
clients and activities pertaining to the development of new service offerings by
the Pooled Companies and the lower margins generally inherent in the engagements
of the Founding Companies.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.3 million, or 39.8 %, to $8.1 million in
1996 from $5.8 million in 1995. The increase in absolute dollars was primarily
due to the acquisition of the Founding Companies on February 20, 1996, increased
compensation to existing staff and staff added to support anticipated growth,
increased occupancy expenses, related operating costs associated with the
Company's growth and activities undertaken subsequent to the Offering. The
increase in selling and general and administrative expenses is also a result of
the inclusion of a $588,000 special one-time compensation commitment to a former
shareholder of one of the Pooled Companies in 1995. Selling, general and
administrative expenses decreased as a percentage of revenues from 33.2% in 1995
to 24.4 % in 1996, reflecting greater operating efficiencies, a larger revenue
base and the special compensation expense incurred in 1995 as discussed in the
preceding sentence. The Company cannot be certain that such efficiencies can be
sustained in the near term as it undertakes to integrate its subsidiaries,
expand geographically and acquire other companies.
Interest Expense, Net. Interest expense, net of interest income,
increased $79,000 to $155,000 from $76,000 in 1995, reflecting increased
borrowings under the Company's various bank revolving credit facilities and the
acquisition of the Founding Companies on February 20, 1996. The bank revolving
credit facilities borrowings were required to support the expansion of the
Company's infrastructure.
Provision for Income Taxes. The Company's provision for income taxes
increased $275,000 to $198,000, an effective rate of 15.3 %, in 1996, from a
benefit of $77,000 in 1995. The increase in the provision for income taxes is
due to an increase in income before taxes to $1.3 million in 1996 from a loss of
$546,000 in 1995. The effective tax rate is lower than the statutory tax rates
due to S corporation elections of some of the Pooled Companies that were in
place to their respective dates of acquisitions.
16
<PAGE>
1995 Compared to 1994
Revenues. Revenues increased $1.6 million , or 9.8 %, to $17.5 million
in 1995 from $15.9 million in 1994. The increase was attributable to a 11.1 %
increase in total client service hours provided to 380,000 in 1995 from 342,000
hours in 1994 and a 9.7% decrease in the average hourly billing rate to $46.00
in 1995 from $46.45 in 1994. The decrease in hourly billing rate reflects
investments made in clients by one of the Pooled Companies to gain market share
and the loss of a significant engagement by that Pooled Company resulting in
lower utilization of personnel at that company partially offset by increased
utilization of personnel and increased demand for employees and consultants with
higher skill levels at the other Pooled Companies.
Gross Margin. Gross margin decreased $348,000, or 6.1 %, to $5.3
million in 1995 from $5.7 million in 1994, primarily as a result of investments
in clients made by two of the Pooled Companies to gain market share and the loss
of a significant engagement by one of the Pooled Companies partially offset by
increases in margin generated by the third Pooled Company. Gross margin as a
percentage of revenues decreased from 35.6 % in 1994 to 30.4 % in 1995,
principally due to the client investments and the loss of the significant client
engagement described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $778,000, or 15.5%, to $5.8 million in 1995
from $5.0 million in 1994 primarily due to a special one-time compensation
commitment of $588,000 to a former shareholder of one of the Pooled Companies in
1995.
Interest Expense, Net. Interest expense, net of interest income,
increased $6,000 to $76,000 in 1995 from $70,000 in 1994 as a result of
increased borrowings under the Company's various bank revolving credit
facilities. Such borrowings were used to support operating activities.
Provision for Income Taxes. The Company's provision for income taxes
decreased $239,000 to a benefit of $77,000, an effective rate of 14.1 %, in 1995
from $162,000, an effective rate of 27.7 %, in 1994. The benefit was less than
the statutory rate amount because of an S corporation election in effect at one
of the companies and no separate company tax benefit was obtained from
Cotelligent's separate company operating loss.
Quarterly Operating Results 1996 and 1995
The Company's results of operations may fluctuate significantly from
quarter to quarter. Revenues are generated from services provided in response to
client requests or events that occur without notice, and the Company's
engagements, generally billed on a time-and-expense basis, are terminable at any
time by clients. Revenues and operating margins for any particular quarter are
generally affected by staffing mix, resource requirements and timing and size of
engagements, and the results for any particular quarter are not necessarily
indicative of results for any other period. Quarterly results of operations for
the last two years and the second quarter of 1997 are summarized below.
<TABLE>
<CAPTION>
(In Thousands)
- - -------------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1995 Year Ended March 31, 1996 Fiscal 1997
----------------------------------------- ----------------------------------------- -------------------
First Second Third Fourth First Second Third Fourth First Second
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........... $ 3,857 $ 3,997 $ 4,383 $ 5,243 $ 5,789 $ 5,980 $ 6,167 $ 15,169 $ 25,413 $ 27,782
Gross
Margin............ 1,225 1,201 1,294 1,597 1,761 1,784 1,877 4,063 6,780 8,074
Operating
Income (loss)..... 168 (70) (89) (491) 272 256 280 571 1,211 1,379
-------- --------- --------- --------- -------- -------- -------- -------- --------- --------
Net Income......... $ 154 $ (63) $ (100) $ (460) $ 205 $ 221 $ 255 $ 411 $ (13) $ 866
-------- --------- --------- --------- -------- -------- -------- -------- --------- --------
Net Income
per Share........ $ .00 $ .11
--------- --------
- - -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Liquidity and Capital Resources
The Company has financed its growth principally through cash flows from
operations, periodic borrowings under its credit facilities, related party
borrowings and sales of shares of common stock.
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 use the proceeds from the Offering
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. The Company has used cash generated from
operating activities and the Offering to reduce short-term borrowings and
purchase property and equipment. 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. The principal uses
of cash were for acquisitions of fixed assets ($1.3) million and repayments of
short-term debt ($2.8) million.
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 $941,000 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 provides 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 relationships and began participating in the Cotelligent
banking relationship in September 1996. 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.
18
<PAGE>
BUSINESS
Overview
Cotelligent Group, Inc. is an independent software professional
services firm devoted primarily to providing computer consulting and contract
programming services. The Company acquired, simultaneously with the closing of
the Offering, four established businesses and in June 1996 acquired two other
established businesses. The Company operates offices in 13 metropolitan areas
including Boston, Cleveland, Dallas, Minneapolis, New York, San
Francisco/Silicon Valley and Seattle.
The Company provides its clients with the services of technical
personnel who are skilled in implementing systems using a wide range of software
development and support services. These services include mainframe and mid-range
software development, personal computer and client/server applications
development support, telecommunications and help-desk support.
Serving clients across a broad spectrum of commercial industries
throughout the United States, the Company has provided significant services to
companies in the financial services, technology and telecommunications
industries, including such companies as AT&T, AT&T Wireless (formerly McCaw
Cellular Communications), Bellcore, Cargill, Frito-Lay, McKesson Microsoft,
Monsanto, Pacific Bell and U S West. The Company believes that its large and
diverse client base presents excellent opportunities for further marketing of
its services. See "Business--Business Strategy."
The Company has 13 operating offices located in13 states across the
United States and, at September 30, 1996, had a staff of approximately1300,
including approximately 1100 technical software professionals. In 1996, Company
employees provided approximately 1,570,000 hours of technical services for over
200 clients. The Company has provided services to approximately 100 clients
listed on the Fortune 1000. The Company's engagements are supported, developed
and managed by specialized teams from each of the Company's offices.
The Information Technology Services Market
The Company competes in the information technology services market,
which can be divided into three categories: (i) pre-implementation services;
(ii) implementation services; and (iii) post-implementation services. The
Company's principal activities, computer consulting and contract programming,
fall within the implementation segment of the market. The following diagram
illustrates divisions within the marketplace.
[Chart]
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Pre-Implementation Services
Services in this category include strategic planning and consulting,
requirements definition studies, systems planning and design for information
technology. These services are provided by a handful of national and
international professional services firms and normally command premium billing
rates. The professional staff of these firms are generally full-time employees.
Implementation Services
These services, which represent the Company's business focus, include
project management, software applications development, systems and network
implementation, systems integration and higher-level contract programming
services. This segment of the information technology services market is highly
fragmented and serviced by several thousand local and regional firms, as well as
a few national firms. Historically, the barriers to entry in this market have
been low. However, as technology has become more sophisticated, the barriers to
entry have grown. Firms in this market segment utilize full-time employees,
hourly employees and independent consultants in providing their services.
Post-Implementation Services
Services in this category include facilities management, systems
maintenance, help-desk assistance and education and training. This market is
also highly fragmented and has historically had, and continues to have, low
barriers to entry. Firms in this market segment utilize full-time employees,
hourly employees and independent consultants in executing their assignments.
According to industry sources, worldwide spending for the
implementation segment of the software professional services market in 1994
exceeded $38.0 billion and is projected to grow at a compound annual rate of 12%
through 1999. United States spending in this market segment in 1994 was
approximately $17.7 billion and is also projected to grow at a compound annual
rate of 12% through 1999. The principal buyers of implementation services are
large businesses with recurring information technology needs.
The Company's focus market is highly fragmented and without a dominant
service provider. Service providers in the information technology services
industry vary by market segment and geographic area and include several of the
"Big Six" accounting firms, the professional service groups of computer
equipment companies, large-scale system integrators, outsourcers and smaller
regional and niche firms.
The Information Technology Services Environment
The growth of information technology and the increasing importance of
generating timely business information has transformed the way businesses
operate. In the 1960s and 1970s, businesses' dependence on mainframe and
mini-computers resulted in the creation of large information services
departments supporting specialized applications and centralized computing
environments. Given the proprietary nature of the systems and their attendant
customized applications, these organizations were forced to build significant
infrastructure to support and enhance information services capabilities,
resulting in large expenditures of capital resources and the need for a highly
trained, dedicated staff.
In the mid-to-late 1980s, computing environments began to shift from
centralized mainframes and custom applications to decentralized, scaleable
architectures centered on low cost personal computers, client/server
architectures, local and wide area networks, shared databases and generally
available applications software packages. Such trends permitted individuals
greater access to business data and an enhanced ability to analyze and interact
with information. Though highly beneficial to end-users, the client/server
migration has proved problematic to information services managers due to
increased operational challenges, including the integration of multiple
computing platforms, networking protocols, databases and operating systems, as
well as the customization of off-the-shelf applications to conform to existing
business rules and reporting standards. Despite this shift away from the
centralized mainframe model, businesses are often required to maintain and
support certain legacy mainframe systems for a variety of business functions.
At the same time, external economic factors have forced large
organizations to focus on core competencies, trim workforces in the information
technology services area and rely more upon third parties for a variety of
services. As a
20
<PAGE>
result, information technology services managers are charged with
developing and supporting increasingly complex information technology systems
and applications of significant strategic value while working under budgetary
pressures within their own organizations.
Faced with the challenges of adequately serving the needs of their
customers and employees, companies are increasingly turning to skilled and
experienced outside organizations to help them appropriately staff and manage
their information technology projects. Outsourcing such projects provides the
following benefits:
- Provides Access to Specialized Skills on an As-Needed Basis.
"As-needed access" avoids both the need to maintain a larger permanent
staff and implementation delays involved with retraining staff as
technologies and applications change.
- Reduces Costs. Outsourcing converts fixed labor costs into variable
costs by better matching staffing levels to actual needs. Moreover,
outsourcing reduces the costs of recruiting, hiring and terminating
permanent employees.
- Allows Management to Focus on Core Business Issues. Outsourcing
enables management to focus on strategic business issues rather than
on maintaining or implementing changes in the information technology
infrastructure.
Recognizing the advantages applications development outsourcing affords
businesses in the United States, a large number of specialized computer
consulting firms has developed over the last 20 years. According to INPUT, an
international research firm, approximately 3,500 businesses with annual revenues
in excess of $1.0 million provide such services and expertise in the United
States.
The Cotelligent Strategy
In more recent years, however, the growth of local and regional
computer consulting firms has been hindered by a number of factors, including
difficulty in locating qualified personnel, limited access to capital and the
lack of a national presence. These limitations have made it more difficult for
such firms to provide services to large organizations, many of which have been
decreasing the number of vendors from which they purchase services. The Company
believes that by acquiring computer consulting services businesses in diverse
geographic regions, it will create a unified entity which has the national
presence, capital, human resources and name recognition required to serve larger
organizations while retaining the local focus and management structures under
which these firms have developed.
Business Strategy
The Company's objective is to be a leading nationwide provider of
computer consulting and contract programming services. Key elements for
achieving this objective include the following:
Maintain and Enhance Relationships with Existing Clients. The Company
is committed to consistently provide high quality services. The Company believes
that the quality of its services has enabled it to establish and maintain
long-term relationships with many of its clients. During 1994, 1995 and 1996,
approximately 85.7%, 85.0% and 90.8%, respectively, of the Company's revenues
were derived from clients to whom services or solutions had been provided in the
preceding year. In addition, the Company believes that the access and goodwill
derived from these client relationships provide it with significant advantages
in marketing additional services and solutions to such clients, both regionally
and nationally.
Operate with Decentralized Management Structure. The Company operates
with a decentralized management structure to provide superior client service and
a motivating environment for its professional staff. The Company believes that
many competitors have homogenized their operating office and professional
service operations, thereby reducing the quality of services, focus and
creativity provided to clients. Therefore, the Company permits its acquired
businesses to manage the professional services and technical aspects of their
respective businesses in a manner consistent with their historical practices and
as dictated by local market conditions. Finance, marketing, planning and
administrative support is managed or provided on a centralized basis. The
Company believes that this approach enables its acquired businesses to
21
<PAGE>
maintain
their high level of client service and contact, while allowing them to draw upon
the collective resources of the Company as a whole.
Share Information and Expertise. Each acquired company possesses unique
expertise in certain technologies or vertical markets. The Company fosters an
environment, structure and communications infrastructure to enable its
subsidiaries to continually share knowledge, expertise, resources and
information. The Company believes such activities allow its subsidiaries to
integrate new ideas and systems into their respective operations, thereby
enhancing opportunities for growth.
Focus on Large Clients; Expand Geographically. The Company has
historically focused its client marketing efforts on large companies with
substantial recurring needs for supplemental applications or software
development services. Over the last five years, the Company has qualified as an
approved vendor for more than 100 companies in the Fortune 1000. The combined
resources and geographic dispersion of its subsidiaries enables the Company to
continue to focus marketing efforts on clients requiring national service
capabilities.
Since 1989, in order to respond to specific client needs, the Company
has opened four new offices. The Company intends to open additional offices in
selected markets, especially as national account relationships expand.
Management of these new offices will be drawn from staff of existing offices or
newly hired personnel, supported in either case by the Company's executive
management team. See "Business--Marketing and Clients."
Pursue Strategic Alliances. The Company seeks to form strategic
alliances with companies where opportunities exist to jointly market the
services and capabilities of both organizations. For example, FDSI and Microsoft
jointly provided an office automation solution to Mount Hood Community College
("MHCC") in Portland, Oregon. With FDSI as project manager, MHCC standardized
and implemented Microsoft's state-of-the-art technology for MHCC's desktop
configuration. In addition to each party receiving direct benefits from this
project, Microsoft created with MHCC a new training curriculum and MHCC has
increased its enrollment and has become the only "Certified Microsoft Academic
Training Center" in the State of Oregon. FDSI receives Microsoft product
training from MHCC for its technical staff. The project was the first in a
series of tasks to re-engineer the technical infrastructure of MHCC.
Acquisition Strategy
Recognizing the highly fragmented nature of its industry, the need for
capital and a wider geographic scope, as well as the evolving purchasing and
outsourcing patterns of its present and potential clients, the Company believes
that there are many independent firms that are attractive acquisition
candidates. As part of its strategic plan, the Company has commenced its
acquisition program utilizing a primary entry and tuck-in strategy for expansion
into each of its targeted metropolitan areas. A primary acquisition is an
acquisition which creates a significant presence for the Company in the
geographic market in which the acquisition candidate is located. A tuck-in
acquisition is one in which the candidate is located in a market where the
Company already has a presence. A tuck-in acquisition is also generally smaller
in size than a primary acquisition. The Company intends, where possible, to make
a primary acquisition in a targeted area by acquiring an established, high
quality local company. In most instances, the Company expects to retain the
management, sales personnel and name of the acquired company while seeking to
improve the acquired company's profitability by implementing the Company's
business strategies, rather than converting the local operation to a
standardized national business model. The Company also intends to make tuck-in
acquisitions where feasible. The Company expects to increase its revenues and
margins by eliminating a substantial portion of the costs associated with the
revenues derived from acquired companies.
The Company believes that the continued autonomy offered to acquisition
candidates as a result of the Company's decentralized management philosophy, the
access to the increased capital offered by association with a larger, publicly
traded company and the ability to affiliate with a more geographically diverse
company, will make the Company an attractive acquirer of additional businesses.
As consideration for future acquisitions, the Company intends to use
various combinations of Common Stock, cash and notes, including the shares of
Common Stock being offered hereby.
22
<PAGE>
Recent Acquisitions
The Company acquired on September 30, 1996 and October 7, 1996
respectively, the two businesses described below. For a description of these
transactions, see "Certain Transactions."
JasTech, Inc. and JasTech of Florida, Inc. ("JTI") - JasTech, Inc.'s office
is in Cleveland and JasTech of Florida, Inc.'s. office is in Fort Lauderdale.
JasTech, Inc. has been in operation since 1984 and JasTech of Florida, Inc. has
been in operation since 1994. Judith Jaskiel, the sole shareholder of both
companies, has been in the computer industry for 20 years and continues to serve
as the President of JTI.
The aggregate consideration paid by Cotelligent to acquire JTI was
approximately $8.7 million, consisting solely of 644,826 shares of Common Stock
of the Company. See "Certain Transactions."
Data Processing Professionals, Inc. ("DPPI") - DPPI's office is in St.
Louis and has been in operation since 1984. DPPI was acquired on October 7, 1996
and its business is being combined with the Company's existing St. Louis
operations.
The aggregate consideration paid by Cotelligent to acquire DPPI was $1.5
million in cash. See "Certain Transactions."
Services
The Company offers services to clients in the pre-implementation and
implementation services segments of the information technology services
environment.
Contract Programming and Technical Staffing
The Company's primary business is to provide highly skilled and trained
technical professionals to augment the internal information technology and
telecommunications staff and end-user groups of major corporations. These
services accounted for approximately 73% of the Company's revenues in 1996. The
Company contracts with its clients to provide ad hoc staffing support for
positions requiring highly specialized computer skills, including applications
programming and development, client/server development, systems software
architecture and design, systems engineering, data and telecommunications
analysis, systems integration and Internet/World Wide Web expertise. The Company
helps its clients complete their development projects by providing both
short-term and long-term staffing from among the Company's technical
professionals, supplemented by its database of over 60,000 qualified
professionals nationwide.
Computer Consulting
In addition to its primary business of providing technical personnel to
augment the needs of its clients, the Company also provides certain computing
consulting and systems/application design services. With the increasing
complexity of computer applications, many of the Company's clients find that
they are not able to manage their development projects without added assistance.
Among the services the Company provides in this segment are project management,
systems and business process re-engineering, relational database design and
implementation, hardware and software selection, creation of migration plans,
development of customized software applications and systems integration. The
Company has the resources and experience to plan and manage a project from
conception through completion, as well as the ability to enter a project
midstream, assess its status, develop a plan and successfully complete the
project.
Additionally, the Company also develops and implements open computer
systems using client/server architectures and integrating servers, mini- and
mainframe systems, workstations, terminals and communication gateways into
complete, flexible networks. The Company specializes in integrating local area
network environments into single heterogeneous networks and unifying enterprise
networks into wide area network environments. In addition, the Company offers
client support programs for facilities management, permanent placement and
education and training.
23
<PAGE>
Technical Personnel and Recruitment
Building and enhancing a database of skilled technical personnel is
integral to the Company's success. The Company uses traditional recruiting
methods, such as a presence at local and regional technical colleges, newspaper
and technical periodical classified advertising and participation in national
and regional job fair networks. It also employs less traditional methods,
including the use of the Internet through skill-specific user groups, World Wide
Web page advertisements, on-line and skills networks, resume referral services,
out-placement agencies and the Company's skills/resume retrieval networks. The
Company maintains a staff of 41 full-time recruiters in its operating offices.
Each applicant is interviewed by the Company's recruiting personnel.
Technical applicants are also required to complete a questionnaire regarding
skill levels, past professional experience, education, availability and are also
asked to provide technical references. Once qualified, the candidate's profile,
relevant skills, and experience are scanned into a database which can be
searched based on a number of different criteria, including specific skills and
qualifications. The Company regularly updates its databases to reflect changes
in employee skills, experience or availability. To place employees in client
organizations more efficiently, the Company is in the process of linking its
subsidiaries' separate databases in a manner that will allow each subsidiary to
access and search another's database.
Through its operating subsidiaries, the Company maintains databases
with over 40,000 technical personnel who have a wide range of skills, including
the following.
Application Development Project Management Systems Administration
Business Analysis Software Engineering Systems Integration
Computer Programming Software Quality Assurance Systems Programming
Database Administration Software Testing Telecommunication Analysis
Data Analysis
As of September 30, 1996, the Company had a staff of approximately
1,300 employees, including approximately 1,100 technical software professionals.
Although the Company has been successful in attracting and retaining
qualified technical personnel in the past, competition for such personnel is
intense. Demand for qualified professionals conversant with new technologies
outstrips supply as additional skills are required to keep pace with evolving
technologies. There can be no assurance that, in the future, the Company will be
successful in attracting and retaining qualified technical personnel.
Marketing and Clients
The Company focuses its marketing efforts on large businesses with
substantial recurring needs for applications or software development support.
The development needs of such businesses can provide opportunities for major
projects that extend for multiple years or generate additional assignments. The
Company also intends to begin to focus its marketing efforts on rapidly growing
mid-sized companies. With the implementation of client/server technology, the
Company believes that there is an increasing need among mid-sized companies for
technical assistance and applications support.
The Company markets its services through account managers located in
each operating office. Approximately 44 people are engaged in marketing full
time. To market its services more effectively and consistently, the Company
implements an account team strategy. Assigning a team to key accounts creates
the opportunity to service a client's needs more quickly and efficiently and
provides more marketing opportunities because the client and Company personnel
know specifically who is responsible for the service activities and are
generally more aware of a client's technology staffing needs, methodologies and
budgets. Account managers work as members of a team, thereby permitting them to
focus on identifying and understanding a client's needs while other members of
the team focus on finding qualified technical personnel to meet the needs of the
client. Performance bonuses and commissions constitute a significant portion of
the total compensation of account managers and are based upon the profitability
of the business generated.
The Company is expanding its marketing efforts by coordinating its
subsidiaries' responses to requests for proposals from current clients. The
Company is pursuing new client accounts primarily in those geographic areas
presently serviced by its subsidiaries. The Company believes that its size will
create opportunities to more effectively compete in vendor list selection, large
contract programming assignments and project engagements.
24
<PAGE>
The Company has historically derived a significant percentage of its
total revenue from a relatively small number of clients. In 1995, the Company's
four largest clients accounted for 30.6% of the Company's revenue. In 1996, the
Company generated approximately 50% of its revenue from its top 13 clients. In
accordance with industry practice, the Company's contracts are generally
terminable at will by clients without penalty. The Company does not believe that
backlog is material to its business. The loss of a significant client could have
a material adverse effect on the Company's business, financial condition and
results of operations.
Competition
The commercial information technology services market is highly
competitive, fragmented and served by numerous firms, many of which serve only
their respective local markets. The market includes participants in a variety of
market segments, including systems consulting and integration firms,
professional service divisions of application software firms, the professional
service groups of computer equipment companies, facilities management and
management information systems outsourcing companies, certain "Big Six"
accounting firms and general management consulting firms. The Company's
competitors, which may vary depending on geographic region and the nature of the
service(s) being provided, may have significantly greater financial, technical
and marketing resources and generate greater revenues than the Company. The
majority of the Company's competition at the Founding Company level is made up
of smaller regional firms with a strong presence in their respective local
markets. The Company believes that as it grows and expands geographically, it
may compete with additional national, regional and local service providers.
The Company believes that the principal competitive factors in the
information technology services industry include quality of service,
responsiveness to client needs, speed of application software development,
price, project management capability, technical expertise, size and reputation.
Pricing has its greatest importance as a competitive factor in the area of
professional service staffing. The Company believes its ability to compete also
depends in part on a number of competitive factors outside its control,
including the ability of its competitors to hire, retain and motivate skilled
technical and management personnel, the ownership by competitors of software
used by potential clients, the price at which others offer comparable services
and the extent of its competitors' responsiveness to client needs.
Intense competition also exists for viable acquisition candidates. The
Company believes that its decentralized management philosophy and operating
strategies will make it an attractive acquirer of other computer consulting and
contract programming companies. However, no assurance can be given that the
Company's acquisition program will be successful or that the Company will be
able to compete effectively in its chosen market segments. See "Risk
Factors--Substantial Competition."
Facilities
The Company's principal executive offices and the headquarters of its
six subsidiaries are located in seven facilities with an aggregate of
approximately 49,000 square feet and are leased at aggregate current monthly
rents of approximately $71,000 for terms not expiring before the year 2001. The
Company's remaining six offices aggregate approximately 20,500 square feet and
are leased at aggregate current monthly annual rents of approximately $30,700
for various terms, with no lease commitment extending past the year 2001. The
Company believes that its properties are adequate for its needs. Furthermore,
the Company believes that suitable additional or replacement space will be
available when required on terms the Company believes will be favorable.
Litigation
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.
25
<PAGE>
<TABLE>
MANAGEMENT
Directors and Executive Officers
The Company's directors and executive officers and their ages as of November 13,
1996 are as follows.
<CAPTION>
Name Age Position
<S> <C> <C>
James R. Lavelle(2)................................ 45 Chairman of the Board and Chief Executive Officer
Edward E. Faber(1)(3).............................. 63 Vice Chairman of the Board
Michael L. Evans(2)................................ 44 President and Chief Operating Officer; Director
Daniel E. Jackson.................................. 36 Senior Vice President, Corporate Development,
General Counsel and Secretary
Curtis J. Parker................................... 42 Vice President and Chief Accounting Officer
Daniel M. Beals(1)(3).............................. 45 Director
Jeffrey J. Bernardis(2)............................ 40 Director
Linda M. Cassell (2)............................... 48 Director
John E. Chamberlain................................ 55 Director
Anthony M. Frank(1)(2)(3).......................... 65 Director
B. Tom Green(1)(2)(3).............................. 54 Director
Harvey L. Poppel(1)(3)............................. 58 Director
John C. Travers.................................... 53 Director
<FN>
(1) Member of the Audit Committee
(2) Member of the Executive Committee
(3) Member of the Compensation Committee
</FN>
</TABLE>
James R. Lavelle is the founder, Chairman of the Board and Chief
Executive Officer of the Company. Mr. Lavelle has served as Chief Executive
Officer since he founded the Company in 1993. From inception of the Company
until August 1995, Mr. Lavelle was also Chairman of the Board of the Company, a
position which he reassumed in April 1996. From 1985 to 1993, he was a business
consultant specializing in strategic marketing and organization development.
From 1983 to 1985, Mr. Lavelle was Senior Manager and Director of Management
Consulting Services for the San Francisco office of KMG Main Hurdman, an
international accounting firm. Prior to that, he was Manager, Management
Consulting Services in the San Francisco office of Price Waterhouse LLP, an
international accounting firm. Mr. Lavelle has a bachelors degree from
University of California at Santa Barbara and a Master of Business
Administration degree from University of Santa Clara.
Edward E. Faber is Vice Chairman of the Board of Directors of the Company.
Mr. Faber joined the Company as a director in March 1993 and served as Chairman
from August 1995 to April 1996. From 1990 through 1992, he was Vice Chairman,
President and Chief Executive Officer of Supercuts, Inc., a company specializing
in hairstyling. Mr. Faber was founding President and Chief Executive Officer of
Computerland Corporation, a company specializing in the sale of computer
equipment and accessories, from 1976 through 1983. He retired from that company
in 1983 and returned in 1985 as Chairman of the Board and Chief Executive
Officer, serving in that capacity until 1987 when he again retired. Mr. Faber is
a director of Supercuts, Inc. and Integrated Circuit Engineering, Inc. Mr. Faber
has a bachelor of science degree from Cornell University and served as an
officer in the United States Marine Corps.
Michael L. Evans is President and Chief Operating Officer and a director of
the Company. Mr. Evans has been President and Chief Operating Officer of the
Company since April 1996. Mr. Evans served as Senior Vice President and Chief
Operating Officer from September 1995 to April 1996 and has been a director of
the Company since October 1993. In 1982, Mr. Evans co-founded FDSI and served as
its Vice President of Consulting until 1987 and served as its President from
1987 to September 1996. Mr. Evans has a bachelor of science degree from
Washington State University.
26
<PAGE>
Daniel E. Jackson is Senior Vice President, Corporate Development,
General Counsel and Secretary of the Company. Mr. Jackson has served as Senior
Vice President, Corporate Development and General Counsel since September 1995
and has served as Secretary since September 1996. From 1994 to 1995, Mr. Jackson
served as Vice President and General Counsel of an affiliate of Notre Venture
Capital, Ltd., a partnership specializing in industryconsolidation transactions.
Prior thereto, he was Corporate Counsel and Secretary of Sanifill, Inc. an
environmental services company from its founding in 1990 through 1994. From
1986 until 1990, Mr. Jackson was an associate at Morgan, Lewis & Bockius LLP in
New York where he practiced law in the areas of securities and mergers and
acquisitions. Mr. Jackson is a graduate of The Ohio State University with a
bachelor of science degree in business administration and the University of
Pennsylvania Law School with a Juris Doctor degree.
Curtis J. Parker is Vice President and Chief Accounting Officer of the
Company. Mr. Parker has served as Vice President and Chief Accounting Officer
since November 14, 1996. From January 1996 he served as a consultant to the
Company and was appointed Corporate Controller March 18, 1996. From 1988
through 1995 Mr. Parker was employeed by Burns Philp Food Inc., a manufacturer
of food products, where he rose to the position of Vice President - Finance for
the Industrial Products Division. Mr. Parker has a Bachelor of Commerce degree
from the University of British Columbia and is a Certified Public Accountant.
Daniel M. Beals is a director of the Company. He joined the Company in that
capacity in October 1995. Mr. Beals served as President of Financial Data
Systems, Inc. ("FDSI") from its inception to 1987 and, from 1990 until February
1996, was the Corporate Secretary and Treasurer of FDSI. Since February 1996,
Mr. Beals has been a private investor. In addition, from August 1990 to December
1993, Mr. Beals was Vice President of Operations of FDSI. From January 1994 to
August 1994, he was Vice President of Operations of CyberSafe Corporation, a
software development company spun off from FDSI in 1994. Mr. Beals received an
associate degree in business data processing from Columbus State Community
College in 1970.
Jeffrey J. Bernardis is a director of the Company. He joined the Company in
that capacity in August 1995. Since January 1995, Mr. Bernardis has served as
President of BFR Co., Inc. ("BFR"). Prior thereto, Mr. Bernardis had served
since 1985 as Vice President of Technical Services for BFR. Mr. Bernardis
received a bachelor of science degree in computer science from The Pennsylvania
State University.
Linda M. Cassell is a director of the Company. She joined the Company in
that capacity in October 1995. Ms. Cassell joined Chamberlain Associates, Inc.
("CAI") as a director in 1989, and in 1991, she was appointed, and remains, its
Vice President, Secretary and Treasurer. From 1982 until 1991, Ms. Cassell was a
systems programmer and technical analyst at Pacific Bell. Ms. Cassell received a
bachelors degree in psychology from Occidental College. Ms. Cassell is married
to John E. Chamberlain.
John E. Chamberlain is a director of the Company. He joined the Company in
that capacity in July 1994. Mr. Chamberlain has served as President of CAI since
its inception, which firm Mr. Chamberlain founded in 1980. Mr. Chamberlain is a
founder and past member of the Executive Committee of the National Association
of Computer Consultant Businesses ("NACCB") and is a founder and past President
of the NACCB's Northern California Chapter. He is a graduate of New Jersey
Institute of Technology with bachelors and masters degrees in mechanical
engineering. Mr. Chamberlain is married to Linda M. Cassell.
Anthony M. Frank is a director of the Company. He joined the Company in
that capacity in March 1993. Since 1992, Mr. Frank has been an independent
financial consultant and venture capitalist. From March 1988 to March 1992, Mr.
Frank served as the Postmaster General of the United States. From 1971 until
1988, he served as Chairman and Chief Executive Officer of First Nationwide
Bank. Mr. Frank is a graduate of Dartmouth College and is an overseer of the
Tuck School of Business. He is also a director of several companies, including
The Charles Schwab Corporation, Living Centers of America, Inc., Irvine
Apartment Communities, Crescent Real Estate Equities Ltd. and Temple Inland
Corporation.
B. Tom Green is a director of the Company. He joined the Company in
that capacity in March 1993. Since 1988, Mr. Green has been President of Sovus
Partners, a firm that creates and operates American-Russian businesses in
Russia. From 1982 to 1988, he worked with the United States government and the
governments of the Soviet Union and the People's Republic of China. Prior to
1982, Mr. Green's positions included General Manager of Transamerica's Southern
California Title Insurance division and President of General Mills' first
restaurant division. Mr. Green is a graduate of Stanford University with a
bachelors degree in civil engineering and received his Master of Business
Administration degree from the Stanford Graduate School of Business.
27
<PAGE>
Harvey L. Poppel is a director of the Company. He joined the Company in
that capacity in October 1995. Since 1985, Mr. Poppel has been Managing Director
of Broadview Associates, L.P., a firm specializing in mergers and acquisitions
in the information technology field. Prior to joining Broadview Associates,
L.P., Mr. Poppel spent 18 years at Booz, Allen & Hamilton, during which time he
held a number of positions, including Senior Vice President and Managing Officer
of the Information Industry Practice and as a member of its board of directors.
Mr. Poppel is a certified Management Consultant and received a bachelors degree
and a Master of Science degree from Rensselaer Polytechnic Institute.
John C. Travers is a director of the Company. He joined the Company in that
capacity in October 1996. Since 1991, Mr. Travers has served as President of
Data Arts and Sciences, Inc, which firm Mr. Travers founded in 1975. Mr. Travers
is a graduate of Boston College with a Bachelor of Science in Mathematics.
The number of directors on the Board of Directors is currently fixed at
eleven. Pursuant to the Company's Certificate of Incorporation and By-laws, the
Board of Directors is divided into three classes serving staggered three-year
terms. Class I, whose terms expire at the annual meeting to be held in calendar
1996, is comprised of Messrs. Beals, Faber and Poppel and Ms. Cassell; Class II,
whose terms expire at the annual meeting to be held in calendar 1997, is
comprised of Messrs. Frank, Lavelle and Travers; and Class III, whose terms
expire at the annual meeting to be held in calendar 1998, is comprised of
Messrs. Bernardis, Chamberlain, Evans and Green. At each annual meeting of
stockholders, directors will be elected for a full term of three years to
succeed those directors whose terms are expiring. All officers serve at the
discretion of the Board of Directors.
See "Description of Capital Stock--Common Stock."
Duane W. Bell served as Senior Vice President and Chief Financial Officer
from July 1995 through November 15, 1996. On November 15, 1996, Daniel E.
Jackson will assume the position of Chief Financial Officer of the Company. The
Company has retained an executive search firm to faciliate he process of finding
a suitable person to assume the position of Chief Financial Officer.
Director Compensation
Each director who is not an employee of the Company receives an annual
retainer fee of $12,000. Effective January 12, 1996, each non-employee director
of the Company was granted an initial option under the Company's 1995 Long-Term
Incentive Plan to acquire 10,000 shares of Common Stock at an exercise price of
$10.00 per share. In addition, each non-employee director will receive an
automatic annual option grant under the 1995 Long-Term Incentive Plan to acquire
5,000 shares of Common Stock on the date of each of the Company's annual
meetings held after March 31, 1997. All of such options have or will have an
exercise price equal to the fair market value of the Common Stock on the date of
grant, are or will be exerciseable immediately except as limited by the rules
and regulations of the Securities Act of 1933, as amended and the Securities
Exchange Act of 1934, as amended, and will expire ten years from the date of
grant. Directors are also reimbursed for out-of-pocket expenses incurred in
attending meetings of the Board of Directors or committees thereof, or for other
expenses incurred in their capacity as directors.
Mr. Faber received $14,500 during the year ended March 31, 1996 for
consulting and director services rendered prior to February 14, 1996. The fees
were paid in accordance with an agreement entered into upon formation of the
Company.
28
<PAGE>
Executive Compensation
Summary Compensation Table
The following table sets forth certain information regarding the
compensation earned by or awarded to the Chief Executive Officer and remaining
executive officers of the Company for each of the fiscal years ended March 31,
1996, 1995 and 1994.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation Long Term Compensation Awards
--------------------------------------------------------------------------------
Restricted
Bonus Stock Options/ All Other
Name and Principal Position Year Salary($) ($) Other($) Award(s)(#) SARs(#) Compensation($)
- - ------------------------------------- -------- ------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
James R. Lavelle, Chairman and
Chief Executive Officer............ 1996 $ 127,500 $0 $0 0 0 $ 750 (1)
1995 $ 122,133 $0 $0 0 0 0
1994 $ 45,794 $0 $0 0 0 0
Michael L. Evans, President and
Chief Operating Officer of the
Company; President of FDSI and
Director........................... 1996 $ 16,666 (2) $0 $0 0 0 $ 1,500 (1)
Duane W. Bell, Senior Vice
President, Chief Financial Officer
(4)................................ 1996 $ 97,500 (2) $0 $0 0 92,676 $ 750 (1)
Daniel E. Jackson, Senior Vice
President, Corporate Development,
General Counsel and Secretary...... 1996 $ 88,333 (2) $0 $ 37,100 (3) 0 92,676 $ 750 (1)
<FN>
(1) Represents payments made as an automobile allowance.
(2) Partial year.
(3) Reimbursement for temporary living and commuting costs.
(4) Mr. Bell has resigned from his position with the Company effective as of
November 15, 1996.
</FN>
</TABLE>
Employment Agreements; Covenants-Not-To-Compete
Messrs. Lavelle, Evans, and Jackson entered into employment agreements
commencing on the date of the closing of the Offering. Pursuant to such
agreements, each of such persons is to receive an annual base salary and will be
eligible for additional bonus compensation. Each employment agreement is for a
term of three years and unless terminated or not renewed by the employee shall
continue thereafter on a year-to-year basis on the same terms and conditions.
See "Management--Executive Compensation."
Each of the employment agreements provides that, in the event of a
termination of employment by the Company or a Founding Company, as the case may
be, without cause, such employee shall be entitled to receive from the Company
or such Founding Company, as the case may be, such employee's then current
salary for the remaining term of the agreement or for one year, whichever amount
is greater, without regard to whether the employee obtains subsequent
employment. In the event of a change in control of the Company, if the employee
is not given at least five days notice of such change in control, the employee
may elect to terminate his employment and shall be entitled to receive a minimum
of three years' current base salary as compensation. In the event the employee
is given at least five days notice of such change in control, the employee may
elect to terminate his employment agreement and receive a minimum of two years'
current salary as compensation.
Each employment agreement contains a covenant not to compete with the
Company for a period equivalent to the longer of two years immediately following
the termination of his employment or, in the case of a termination without
cause, for a period of one year following the termination of his employment. If
any court of competent jurisdiction determines that the scope, time or
territorial restrictions contained in the covenant are unreasonable, the
covenant not to compete shall be reduced to the maximum period permitted by such
court. The compensation to which such employee is entitled shall nonetheless be
paid to the employee.
29
<PAGE>
Long-Term Incentive Plan
No stock options were granted to, or exercised by or held by any
executive officers prior to September 1995. In September 1995, the Board of
Directors and the Company's stockholders approved the Company's 1995 Long-Term
Incentive Plan (the "Plan"). The purpose of the Plan is to provide directors,
officers, key employees and consultants with additional incentives by increasing
their ownership interests in the Company. Awards under the Plan may include (i)
stock options (both incentive stock options ("ISOs") and non-qualified stock
options ("NQSOs")), (ii) stock appreciation rights ("SARs"), (iii) restricted
and deferred stock, (iv) dividend equivalents, and (v) other awards not
otherwise provided for, the value of which are based in whole or in part upon
the value of the Common Stock.
The Compensation Committee of the Board of Directors administers the
Plan and generally selects the individuals who will receive an Award and the
terms and conditions of such Award. However, pursuant to the terms of the Plan
and without any action on the part of the Compensation Committee, directors who
are not otherwise employed by the Company or its subsidiaries automatically
receive annual option grants in an amount and subject to such terms as specified
in the Plan. See "Management--Director Compensation."
The maximum number of shares of Common Stock that may be subject to
awards granted in any calendar year under the Plan is equal to 15% of the
aggregate number of shares of the Company's Common Stock outstanding as of the
date of the award (932,445 immediately following the consummation of the
Offering), less, in each case, the number of shares subject to outstanding
awards under the Plan.
The Plan will remain in effect until terminated by the Board of
Directors. The Plan may be amended by the Board of Directors without the consent
of the stockholders of the Company, except that any amendment, although
effective when made, will be subject to stockholder approval if required by any
Federal or state law or regulation or by the rules of any stock exchange or
automated quotation system on which the Common Stock may then be listed or
quoted.
The Company did not grant any options to purchase Common Stock of the
Company in the fiscal year ended March 31, 1995. Effective as of September 8,
1995, the Company granted to each of Messrs. Bell and Jackson an option to
purchase 92,676 shares of Common Stock at an exercise price of $2.70 per share.
Such options vest as follows: 18,536 on February 21, 1996; thereafter, an
additional 18,535 shares vest on the annual anniversary of such initial vesting
date until all 92,676 shares have vested. Such options are exerciseable for a
period of seven years after the effective date of grant.
Effective January 12, 1996, each non-employee director of the Company was
granted an option to acquire 10,000 shares of Common Stock at an exercise price
of $10.00 per share. Such options are exerciseable for a period of ten years
from the effective date of grant. See "Management--Director Compensation."
Effective February 14, 1996, certain employees of the Founding Companies
were granted options to acquire an aggregate of 196,000 shares of Common Stock
at an exercise price equal to the initial offering price to public determined in
connection with the Offering ($9.00 per share).
Subsequent to February 14, 1996, certain other employees were granted
options to acquire an aggregate of 154,800 shares of Common Stock at exercise
prices ranging from $9.00 to $18.38 per share, including an aggregate of 75,000
options and 25,000 options granted as of June 28, 1996 to certain employees of
ESP and ISI, respectively. Such options vest over a four-year period commencing
on the one year anniversary of the date of grant and are exerciseable for a
period of seven years from the effective date of grant.
30
<PAGE>
Stock Option Grants Table
The following table shows, as to the executive officers named in the
Summary Compensation Table, information concerning the grant of stock options
pursuant to the Company's 1995 Long-Term Incentive Plan during the fiscal year
ended March 31, 1996.
<TABLE>
OPTIONS GRANTED IN FISCAL 1996
<CAPTION>
Individual Grants(1)
--------------------------------------------------------
Number of Percentage of Total Exercise or Potential Realizable Value At
Securities Options Granted to Base Price Per Assumed Annual Rates of Stock
Underlying Employees in Fiscal Share Price Appreciation For Option
Name Options Granted 1996 ($/Share)(2) Term (3)
- - -------------------------------------------------------------------- -----------------------------------------------
5% 10%
--------------- ---------------
<S> <C> <C> <C> <C> <C>
Duane W. Bell (4) 92, 676 21.6% $2.70 $101,867 $237,393
Daniel E. Jackson 92, 676 21.6% $2.70 $101,867 $237,393
<FN>
(1) All options granted in fiscal 1996 expire on September 7, 2002.
(2) The exercise price per share for all options granted is equal to the market
price of the underlying Common Stock as of the date of grant.
(3) The potential realizable value has been determined using market price on the
date the options were granted, compounded annually over seven years, net of
exercise price. These values have been determined based upon assumed rates
of appreciation and are not intended to forecast the future value or trading
prices of the Company's Common Stock.
(4) Mr. Bell has resigned from his position with the Comapny effective as of
November 15, 1996.
</FN>
</TABLE>
Stock Option Exercises and Year End Values Table
The following table shows, as to the executive officers named in the
Summary Compensation Table, information with respect to the unexercised options
to purchase Common Stock granted under the 1995 Long-Term Incentive Plan and
held as of March 31, 1996. None of the executive officers named in the Summary
Compensation Table exercised options during the year ended March 31, 1996.
<TABLE>
VALUE OF OPTIONS AT MARCH 31, 1996
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options Held at In-the-Money Options
March 31, 1996 at March 31, 1996 (1)
---------------------------------------------------------------------------
Name Exerciseable Unexerciseable Exerciseable Unexerciseable
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Duane W. Bell (2) 18,536 74,140 $167,758 $670,967
Daniel E. Jackson 18,536 74,140 $167,758 $670,967
<FN>
(1) Options are "in-the-money" if the closing market price of the Company's
Common Stock exceeds the exercise price of the options. The value of the
unexercised options represents the difference between the exercise price of such
options and the closing market price of the Company's Common Stock on March 31,
1996.
(2) Mr. Bell has resigned from his position with the Company efffective as of
November 15, 1996.
</FN>
</TABLE>
31
<PAGE>
CERTAIN TRANSACTIONS
Organization of the Company
Simultaneously with the closing of the Offering, Cotelligent acquired
by merger all of the issued and outstanding stock of the four Founding
Companies, at which time each Founding Company became a wholly owned subsidiary
of the Company. The aggregate consideration paid by Cotelligent in these
transactions was $3,491,951 in cash, 3,206,875 shares of Common Stock of the
Company and the assumption of approximately $3.0 million in debt, for an
aggregate value of approximately $35,303,905.
The consideration paid for the Founding Companies was determined by
negotiations among Cotelligent and representatives of the Founding Companies.
The factors considered by the parties in determining the consideration paid
included, among others, the historical operating results, the levels of
indebtedness and the future prospects of the Founding Companies.
The aggregate consideration paid by Cotelligent for each of the
Founding Companies is as follows: BFR: $11,958,283, consisting of $1,450,000 in
cash and 1,167,587 shares of Common Stock; CAI: $3,998,849, consisting of
$300,000 in cash, 388,761 shares of Common Stock and assumption of $200,000 in
short-term and related-party debt; DASI: $5,606,396, consisting of $400,000 in
cash, 443,044 shares of Common Stock and assumption of $1,219,000 in short-term
and related-party debt; and FDSI: $13,740,377, consisting of $1,341,951 in cash,
1,207,483 shares of Common Stock and assumption of $1,531,079 in short-term,
long-term and related-party debt.
Pursuant to the reorganization agreements entered into in connection
with the Acquisitions, the stockholders of the Founding Companies have agreed
not to compete with the Company for five years from February 20, 1996.
Prior to the consummation of the Offering, each of the Founding
Companies incurred indebtedness which was personally guaranteed by their
stockholders. At December 31, 1995, the aggregate amount of indebtedness of
these Founding Companies that was subject to personal guarantees was
approximately $2.8 million. Effective June 1, 1996, the Company consolidated all
its separate banking relationships into a single banking relationship with a
major bank. At the time of consolidation, the Company paid any and all amounts
outstanding on such personally guaranteed indebtedness and caused the former
stockholders of the Founding Companies to be relieved of their respective
personal guarantees.
In connection with the Acquisitions, and as consideration for their
interests in the Founding Companies, certain officers, directors and holders of
5% or more of the outstanding shares of the Company (giving effect to the
Acquisition but without giving effect to the Offering) received cash and shares
of Common Stock of the Company as follows: Michael L. Evans: 346,293 shares and
$330,000; Daniel M. Beals: 331,949 shares and $350,000; Peter M. Fooks: 275,903
shares and $300,000; John E. Chamberlain: 259,174 and $200,000; Charles F.
Fowler: 240,643 and $350,000; Bjorn E. Nordemo: 226,522 shares and $150,000;
Jeffrey J. Bernardis: 219,703 shares and $100,000; Bernard J. Ruddock: 219,703
and $100,000; John C. Travers: 216,522 and $250,000; and Linda M. Cassell:
129,587 shares and $100,000. All of such cash and shares of Common Stock are
included in the amount of aggregate consideration paid by Cotelligent for the
Founding Companies as set forth in the first paragraph of this section.
Linda M. Cassell, a member of the Board of Directors of the Company and
a Vice President of CAI, acquired 260 shares of stock (or one-third of the
outstanding capital stock of CAI) for $145,340 in August 1994. Such 260 shares
of stock of CAI represent the only consideration being paid by Ms. Cassell for
the cash and shares of Common Stock of the Company she will receive upon
consummation of the Acquisitions, as set forth in the immediately preceding
paragraph.
In April 1995, BFR and its shareholders established an Employee Stock
Ownership (ESOP) and Money Purchase Plan (the "BFR Plan") which covers
substantially all of BFR's salaried employees. At its inception, the BFR Plan
incurred a $2,250,000 liability to a bank with respect to the ESOP portion of
the BFR Plan, which loan, together with a $900,000 cash contribution from BFR,
enabled the BFR Plan to purchase 300,000 shares of BFR's Class A common stock
for $3,150,000 from BFR's stockholders. This ESOP debt was guaranteed by BFR and
the ESOP shares were to be allocated to participants over seven years as
contributions were made to the BFR Plan.
BFR terminated the money purchase provisions of the BFR Plan effective
November 18, 1995. On December 7, 1995, the BFR Plan was converted into the BFR
Co., Inc. Profit Sharing Plan Trust, which was the Selling Stockholder in the
Offering. In connection with such conversion, the loan from the bank to the BFR
Plan was restructured into a direct
32
<PAGE>
loan to BFR. On December 7, 1995, BFR
executed and delivered to NatWest Bank N.A. (the "Bank") a promissory note (the
"BFR Note") in the original principal amount of $2,035,714. Concurrently with
the execution and delivery of the BFR Note, on December 7, 1995, the BFR Plan
executed and delivered to BFR a promissory note (the "Plan Note") in the
original principal amount of $2,035,714. Pursuant to a letter of direction from
the trustee of the BFR Plan to the representative of the Underwriters of the
Offering, the Underwriters, upon consummation of the Offering, out of the
amounts payable to the BFR Plan, as Selling Stockholder, paid all remaining
amounts outstanding under the BFR Note. Upon such repayment to the Bank, the BFR
Note was canceled and the pledges and guaranties executed by the principal
stockholders of BFR in favor of the Bank released, and the Plan Note, from the
BFR Plan to BFR, was deemed satisfied and canceled by BFR.
BFR leases office space for its headquarters facilities in Somerset,
New Jersey from BFR Properties, a partnership owned by Jeffrey J. Bernardis,
Charles F. Fowler, Gloria C. O'Donnell and Bernard J. Ruddock, the principal
stockholders of BFR prior to the consummation of the Acquisitions. The annual
cost of such rental is approximately $170,000, and the lease runs through March
31, 2000. BFR also leases office equipment and furniture for this office space
from BFR Properties. The aggregate annual rental for such furniture and office
equipment is approximately $51,000, and the lease runs through December 31,
1999.
DASI leases office space for its headquarters facility in Natick,
Massachusetts from Strathmore Realty Trust, the trustees of which are John C.
Travers and Bjorn E. Nordemo, the principals of DASI prior to the consummation
of the Acquisitions. The annual cost of such rental is approximately $104,400,
and the lease runs through October 31, 2000. In addition, Messrs. Travers and
Nordemo each loaned DASI (i) $50,000 pursuant to a note dated October 25, 1991,
(ii) $100,000 pursuant to a note dated October 25, 1991 and (iii) $70,000
pursuant to a note dated December 25, 1992. Each of these notes bore interest at
a rate of 10% per annum, payable monthly. The entire $440,000 in aggregate
principal amount of these notes was paid with net proceeds of the Offering.
John E. Chamberlain loaned $100,000 to CAI on January 1, 1995 at an
annual interest rate of prime plus two percent. This note was payable in full on
December 31, 1995. The outstanding balance of the note as of December 31, 1995
was $50,000. The maturity date of the note was subsequently extended to December
31, 1996, and the remaining principal amount and all accrued but unpaid interest
was paid in full with net proceeds of the Offering.
In June 1994, Daniel M. Beals, Michael L. Evans and Peter M. Fooks, the
principal stockholders of FDSI, loaned $63,500, $64,000 and $64,000,
respectively, to FDSI. These loans each provided for interest at a rate of 9.25%
per annum, with interest payable monthly. In October 1995, FDSI repaid these
loans in full, including all accumulated but unpaid interest. In addition, as of
December 31, 1995, CyberSAFE Corporation, formerly a subsidiary of FDSI and
currently substantially owned by Messrs. Beals, Evans and Fooks, owed FDSI an
aggregate of $133,525 in the form of accounts payable and notes payable.
Daniel M. Beals and Michael L. Evans each own in excess of 10% of the
equity interests in VoiceNet, Inc. ("VoiceNet"), a voicemail service bureau from
which FDSI obtained voicemail services. In 1995, consideration paid by FDSI to
VoiceNet accounted for approximately 13% of VoiceNet's revenues, or $17,500.
FDSI paid for services at VoiceNet's advertised rates.
On June 28, 1996, Cotelligent acquired all of the outstanding stock of
ESP Software Systems, Inc. in exchange for 534,919 shares of Cotelligent Common
Stock. The number of shares issued in the exchange was determined with reference
to the average closing price of a share of Cotelligent Common Stock for the five
trading days immediately preceding the five trading days immediately prior to
the closing. Robert R. Hildreth, the former majority stockholder of ESP Software
Systems, Inc., received 401,189 shares of Cotelligent Group, Inc. Common Stock
in exchange for all of his shares of ESP Software Systems, Inc. Common Stock.
Mr. Hildreth received no other consideration in the transaction.
On June 28, 1996, Cotelligent acquired all of the outstanding stock of
INNOVA Solutions, Inc. in exchange for 521,390 shares of Cotelligent Common
Stock. The number of shares issued in the exchange was determined with reference
to the average closing price of a share of Cotelligent Common Stock for the five
trading days immediately preceding the five trading days immediately prior to
the closing. Susan E. Trice, the former sole stockholder of INNOVA Solutions,
Inc., received 521,390 shares of Cotelligent Group, Inc. Common Stock in
exchange for all of her shares of INNOVA Solutions, Inc. Common Stock. Ms. Trice
received no other consideration in the transaction.
On September 30, 1996, Cotelligent acquired all of the outstanding
stock of JasTech, Inc. and JasTech of Florida, Inc. in exchange for 644,826
shares of Cotelligent Common Stock. Both companies were simultaneously merged
33
<PAGE>
into a new company, JasTech, Inc., which is the sole surviving corporation. The
number of shares issued in the exchange was determined with reference to the
average closing price of a share of Cotelligent Common Stock for the ten trading
days immediately preceding the five trading day immediately prior to the
closing. Judith Jaskiel, the former sole stockholder of JasTech, Inc and JasTech
of Florida, Inc., received 644,826 shares of Cotelligent Group Inc. Common Stock
in exchange for all of her shares of JasTech, Inc. and JasTech of Florida, Inc.
Common Stock. Ms. Jaskiel received no other consideration in the transaction.
From May 1996 through early July 1996, the Company advanced to Daniel
E. Jackson $250,000 to facilitate relocation of his residence to Northern
California. On July 15, 1996, $100,000 of the advance was repaid and the
remaining balance was converted to a demand note in the amount of $150,000. The
note is non-interest bearing and the principal balance is due July 15, 2001 or
upon termination of employment should Mr. Jackson leave the Company prior to the
due date.
Company Policy
In the future, transactions with affiliates of the Company are
anticipated to be minimal and will be approved by a majority of the Board of
Directors, including a majority of the disinterested members of the Board of
Directors, and will be made on terms no less favorable to the Company than could
be obtained from unaffiliated third parties.
34
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of October 11, 1996 information
regarding the beneficial ownership of the Common Stock of the Company by (i)
each person known to beneficially own more than 5% of the outstanding shares of
Common Stock, (ii) each of the Company's directors, (iii) each named executive
officer and each officer named in the Summary Compensation Table and (iv) all
executive officers and directors as a group. All persons listed have an address
c/o the Company's principal executive offices and have sole voting and
investment power with respect to their shares unless otherwise indicated.
<TABLE>
<CAPTION>
Shares Beneficially Owned
----------------------------------
Name Number Percent
- - --------------------------------------------------------------------------- --------------
<S> <C> <C>
Judith Jaskiel......................................... 644,826 8.1%
Susan E. Trice......................................... 456,390 5.7
Robert Hildreth........................................ 401,189 5.0
Michael L. Evans....................................... 348,147 4.4
Daniel M. Beals (1) ................................... 341,949 4.3
John E. Chamberlain (2) ............................... 271,529 3.4
James R. Lavelle....................................... 238,732 3.0
Jeffrey J. Bernardis................................... 222,020 2.8
John C. Travers........................................ 216,522 2.7
Linda M. Cassell (3) .................................. 135,767 1.7
B. Tom Green (1) ...................................... 87,847 1.1
Edward E. Faber (1) ................................... 39,656 *
Anthony M. Frank (1) .................................. 39,656 *
Harvey L. Poppel (1) .................................. 24,828 *
Daniel E. Jackson (4) ................................. 24,097 *
Duane W. Bell (4)...................................... 20,761 *
All executive officers and directors as a group (13
persons) (5) ......................................... 2,011,511 25.1
<FN>
* less than 1.0%
(1) Includes 10,000 shares issuable upon exercise of options exerciseable within 60 days from October 11, 1996.
(2) Does not include 135,767 shares owned by Linda M. Cassell, Mr. Chamberlain's wife. Mr. Chamberlain disclaims beneficial
ownership of any shares owned by Ms. Cassell.
(3) Does not include 271,529 shares owned by John E. Chamberlain, Ms. Cassell's husband. Ms. Cassell disclaims beneficial
ownership of any shares owned by Mr. Chamberlain.
(4) Includes 536 shares issuable upon exercise of options exerciseable within 60 days from October 11, 1996.
(5) Includes 51,072 shares issuable upon exercise of options exerciseable within 60 days from October 11, 1996.
</FN>
</TABLE>
35
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
The Company's authorized capital stock consists of 100,000,000 shares of
Common Stock, par value $0.01 per share, and 500,000 shares of preferred stock,
par value $0.01 per share (the "Preferred Stock"). As of November 11, 1996, the
Company had outstanding 7,953,440 shares of Common Stock and no shares of
Preferred Stock. As of November 8, 1996, there were 75 record holders of Common
Stock.
Common Stock
The holders of Common Stock are entitled to one vote for each share on
all matters voted upon by stockholders, including the election of directors.
Subject to the rights of any then-outstanding shares of Preferred
Stock, the holders of the Common Stock are entitled to such dividends as may be
declared in the discretion of the Board of Directors out of funds legally
available therefor. See "Dividend Policy." Holders of Common Stock are entitled
to share ratably in the net assets of the Company upon liquidation after payment
or provision for all liabilities and any preferential liquidation rights of any
Preferred Stock then outstanding. The holders of Common Stock have no preemptive
rights to purchase shares of stock of the Company. Shares of Common Stock are
not subject to any redemption provisions and are not convertible into any other
securities of the Company. All outstanding shares of Common Stock are, and the
shares of Common Stock to be issued pursuant to this Prospectus will be, upon
payment therefor, fully paid and non-assessable.
The Common Stock trades on the NASDAQ National Market System under the
symbol "COTL."
Preferred Stock
Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of the Company's Certificate of Incorporation and limitations prescribed by law,
the Board of Directors is expressly authorized to adopt resolutions to issue the
shares, to fix the number of shares and to change the number of shares
constituting any series, and to provide for or change the voting powers,
designations, preferences and relative, participating, optional or other special
rights, qualifications, limitations or restrictions thereof, including dividend
rights (including whether dividends are cumulative), dividend rates, terms of
redemption (including sinking fund provisions), redemption prices, conversion
rights and liquidation preferences of the shares constituting any class or
series of the Preferred Stock, in each case without any further action or vote
by the stockholders. The Company has no current plans to issue any shares of
Preferred Stock of any class or series.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of the Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock issued by the Company may
rank prior to the Common Stock as to dividend rights, liquidation preference or
both, may have full or limited voting rights and may be convertible into shares
of Common Stock. Accordingly, the issuance of shares of Preferred Stock may
discourage bids for the Common Stock or may otherwise adversely affect the
market price of the Common Stock.
Statutory Business Combination Provision
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of a broad range
of business combinations with a person or an affiliate, or associate of such
person, who is an "interested stockholder" for a period of three years from the
date that such person became an interested stockholder unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
business combination, is approved by the Board of Directors of the corporation
before the person becomes an interested stockholder; (ii) the interested
stockholder acquired 85% or more of the outstanding voting stock of the
corporation in the same transaction that makes such person an interested
stockholder
36
<PAGE>
(excluding shares owned by persons who are both officers and
directors of the corporation, and shares held by certain employee stock
ownership plans); or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's board of
directors and by the holders of at least 66 2/3% of the corporation's
outstanding voting stock at an annual or special meeting, excluding shares owned
by the interested stockholder. Under Section 203, an "interested stockholder" is
defined as any person who is (i) the owner of 15% or more of the outstanding
voting stock of the corporation or (ii) an affiliate or associate of the
corporation and who was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether such person is an
interested stockholder.
Limitation on Directors' Liabilities
Pursuant to the Company's Certificate of Incorporation and under
Delaware law, directors of the Company are not liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty, except for
liability in connection with a breach of duty of loyalty, for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, for dividend payments or stock repurchases illegal under Delaware law or
any transaction in which a director has derived an improper personal benefit.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock is The First
National Bank of Boston.
37
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The Company has outstanding 7,953,440 shares of Common Stock. The
2,725,500 shares sold in the Offering are freely tradable without restriction
unless purchased by affiliates of the Company. The 1,701,135 shares issued in
the acquisitions of the Pooled Companies and 36,000 shares issued in connection
with stock options exercises are freely tradable without restriction unless
owned by affiliates of the Company. None of the remaining 3,490,805 outstanding
shares of Common Stock (collectively, the "Restricted Shares") have been
registered under the Securities Act, which means that they may be resold
publicly only upon registration under the Securities Act or in compliance with
an exemption from the registration requirements of the Securities Act, including
the exemption provided by Rule 144 thereunder.
In general, under Rule 144 as currently in effect, if two years have
elapsed since the later of the date of the acquisition of restricted shares of
Common Stock from the Company or any affiliate of the Company, the acquirer or
subsequent holder thereof may sell, within any three-month period commencing 90
days after the date of this Prospectus, a number of shares that does not exceed
the greater of 1% of the then outstanding shares of the Common Stock, or the
average weekly trading volume of the Common Stock on the NASDAQ National Market
during the four calendar weeks preceding the date on which notice of the
proposed sale is sent to the Securities and Exchange Commission. Sales under
Rule 144 are also subject to certain manner of sale provisions, notice
requirements and the availability of current public information about the
Company. A person who is not deemed to have been an affiliate of the Company at
any time for 90 days preceding a sale and who has beneficially owned his shares
for at least three years would be entitled to sell such shares under Rule 144
without regard to the volume limitations, manner of sale provisions or notice
requirements.
The stockholders of the Founding Companies, who owned, in the
aggregate, upon consummation of the Acquisitions, 2,653,537 shares of Common
Stock, and James R. Lavelle, the Chairman and Chief Executive Officer of the
Company, who owns 238,732 shares of Common Stock, have agreed with the Company
that they will not sell such shares for a period of two years after February 20,
1996. However, such stockholders, except for Mr. Lavelle, have the right, in the
event the Company proposes to register under the Securities Act any shares of
Common Stock for its own account or for the account of others, subject to
certain exceptions, to require the Company to include their shares in the
registration, subject to the right of any managing underwriter of any such
offering to exclude some or all of the shares for marketing reasons.
The 3,500,000 shares being offered by this Prospectus will generally be
freely tradable after their issuance, unless the sale thereof is contractually
restricted.
Sales of substantial amounts of the Common Stock in the public market
could adversely affect prevailing market prices and the ability of the Company
to raise equity capital in the future.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered by
this Prospectus will be passed upon for the Company by Morgan, Lewis & Bockius
LLP, New York, New York.
EXPERTS
The consolidated financial statements of Cotelligent Group, Inc. as of
March 31, 1996 and 1995 and for each of the three years in the period ended
March 31, 1996, the financial statements of JasTech, Inc. as of December 31,
1995 and 1994 and for each of the two years in the period ended December 31,
1995, the financial statements of ESP Software Services, Inc. as of December,
1995 and 1994 for each of the two years in the period ended December 31, 1995,
the financial statements of INNOVA Solutions, Inc. as of December 31, 1995 and
1994 for each of the two years in the period ended December 31, 1995 and the
combined financial statements of the Combined Predecessor Companies, the
consolidated financial statements of Financial Data Services, Inc., the
financial statements of BFR Co., Inc., the combined financial statements of Data
Arts & Sciences, Inc. and the financial statements of Chamberlain Associates,
Inc. as of March 31, 1995 and 1994 and for each of the two years in the period
ended March 31, 1995 and for the period April 1, 1995 through February 19, 1996
included in this Prospectus have been so included in reliance on the reports of
Price Waterhouse LLP, independent accountants, given on authority of said firm
as experts in auditing and accounting.
38
<PAGE>
ADDITIONAL INFORMATION
The Company is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza Building,
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and its regional
offices located at 7 World Trade Center, 13th Floor, New York, New York 10048
and Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such materials can be obtained from the
Commission at Judiciary Plaza, 450 Fifth Street, N.W. Washington, D.C. 20549, at
prescribed rates.
The Company has filed with the Commission, Washington, D.C., a
Registration Statement under the Securities Act with respect to the Common Stock
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and such Common Stock, reference
is made to such Registration Statement and exhibits. A copy of the Registration
Statement on file with the Commission may be obtained from the Commission's
principal office in Washington, D.C., upon payment of the fees prescribed by the
Commission.
The Company's Common Stock is listed on the NASDAQ National Market.
Reports, proxy statements and other information concerning the Company can also
be inspected at the offices of the NASDAQ National Market, 1735 K Street,
Washington, D.C. 20006.
39
<PAGE>
<TABLE>
COTELLIGENT GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<CAPTION>
Page
------------
COTELLIGENT GROUP, INC.
<S> <C>
Pro Forma Consolidated Statement of Operations for the Year Ended March 31, 1996............................. F- 5
Pro Forma Consolidated Statement of Operations for the Six Months Ended September 30, 1995................... F- 6
Pro Forma Consolidated Statement of Operations for the Six Months Ended September 30, 1996................... F- 7
Notes to Pro Forma Consolidated Statements of Operations..................................................... F- 8
COTELLIGENT GROUP, INC.
Report of Price Waterhouse LLP, Independent Accountants...................................................... F- 9
Consolidated Balance Sheet as of March 31, 1995, 1996 and September 30,1996 (Unaudited)...................... F- 10
Consolidated Statement of Operations for the Years Ended March 31, 1994, 1995, 1996, and for the
Six Months Ended September 30, 1995 and 1996 (Unaudited).................................................. F- 11
Consolidated Statement of Stockholders' Equity for the Years Ended March 31, 1994, 1995, 1996 and for the
Six Months Ended September 30, 1996 (Unaudited)........................................................... F- 12
Consolidated Statement of Cash Flows for the Years Ended March 31, 1994, 1995, 1996 and for the Six Months
Ended September 30, 1995 and 1996 (Unaudited)............................................................. F- 13
Notes to Consolidated Financial Statements................................................................... F- 15
JASTECH, INC.
Report of Price Waterhouse LLP, Independent Accountants..................................................... F- 29
Combined Balance Sheet at December 31, 1994 and 1995 and June 30, 1996 (Unaudited).......................... F- 30
Combined Statement of Operations for the Years Ended December 31, 1994 and 1995 and for the Six Months Ended
June 30, 1995 and 1996 (Unaudited)....................................................................... F- 31
Combined Statement of Stockholder's Equity (Deficit) for the Years Ended December 31, 1994 and 1995 and for
the Six Months Ended June 30, 1996 (Unaudited).......................................................... F- 32
Combined Statement of Cash Flows for the Years Ended December 31, 1995 and 1994 and for the Six Months Ended
June 30, 1996 and 1995 (Unaudited)....................................................................... F- 33
Notes to Combined Financial Statements....................................................................... F- 34
ESP SOFTWARE SERVICES, INC.
Report of Price Waterhouse LLP, Independent Accountants..................................................... F- 39
Balance Sheet at December 31, 1995 and 1994 and March 31, 1996 (Unaudited).................................. F- 40
Statement of Operations for the Years Ended December 31, 1995 and 1994 and for the Three Months Ended March
31, 1996 and 1995 (Unaudited)............................................................................ F- 41
Statement of Stockholder's Equity (Deficit) for the Years Ended December 31, 1994 and 1995 and for the Three
Months Ended March 31, 1996 (Unaudited)................................................................. F- 42
Statement of Cash Flows for the Years Ended December 31, 1995 and 1994 and for the Three Months Ended March
31, 1996 and 1995 (Unaudited)............................................................................ F- 43
Notes to Financial Statements................................................................................ F- 44
F-1
<PAGE>
COTELLIGENT GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
Page
------------
INNOVA SOLUTIONS, INC.
Report of Price Waterhouse LLP, Independent Accountants...................................................... F- 49
Balance Sheet at December 31, 1995 and 1994 and at March 31, 1996 (Unaudited)................................ F- 50
Statement of Operations for the Years Ended December 31, 1994 and 1995 and for the Three Months Ended March
31, 1996 and 1995 (Unaudited)............................................................................ F- 51
Statement of Stockholder's Equity for the Years Ended December 31, 1995 and 1994 and for the Three Months
Ended March 31, 1996 (Unaudited) ....................................................................... F- 52
Statement of Cash Flows for the Years Ended December 31, 1995 and 1994 and for the Three Months Ended March
31, 1996 and 1995 (Unaudited) ........................................................................... F- 53
Notes to Financial Statements................................................................................ F- 54
COMBINED PREDECESSOR COMPANIES
Report of Price Waterhouse LLP, Independent Accountants.................................................... F- 58
Combined Balance Sheet as of March 31, 1994 and 1995 ...................................................... F- 59
Combined Statement of Operations for the Years Ended March 31, 1994 and 1995, and for the
Period April 1, 1995 Through February 19, 1996.......................................................... F- 60
Combined Statement of Stockholders' Equity for the Years Ended March 31, 1994 and 1995 and for the
Period April 1, 1995 Through February 19, 1996.......................................................... F- 61
Combined Statement of Cash Flows for the Years Ended March 31, 1994 and 1995 and for the
Period April 1, 1995 Through February 19, 1996.......................................................... F- 62
Combined Notes to Financial Statements..................................................................... F- 64
FINANCIAL DATA SYSTEMS, INC.
Report of Price Waterhouse LLP, Independent Accountants.................................................... F- 75
Consolidated Balance Sheet as of March 31, 1994 and 1995 .................................................. F- 76
Consolidated Statement of Operations for the Years Ended March 31, 1994 and 1995, and for the
Period April 1, 1995 Through February 19, 1996.......................................................... F- 77
Consolidated Statement of Stockholders' Equity for the Years Ended March 31, 1994 and 1995 and for the
Period April 1, 1995 Through February 19, 1996.......................................................... F- 78
Consolidated Statement of Cash Flows for the Years Ended March 31, 1994 and 1995 and for the
Period April 1, 1995 Through February 19, 1996.......................................................... F- 79
Notes to Consolidated Financial Statements................................................................. F- 80
F-2
<PAGE>
COTELLIGENT GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
Page
-----------
BFR CO., INC.
Report of Price Waterhouse LLP, Independent Accountants.................................................... F- 89
Balance Sheet as of March 31, 1994 and 1995 ............................................................... F- 90
Statement of Operations for the Years Ended March 31, 1994 and 1995, and for the
Period April 1, 1995 Through February 19, 1996.......................................................... F- 91
Statement of Stockholders' Equity for the Years Ended March 31, 1994 and 1995 and for the
Period April 1, 1995 Through February 19, 1996.......................................................... F- 92
Statement of Cash Flows for the Years Ended March 31, 1994 and 1995 and for the
Period April 1, 1995 Through February 19, 1996.......................................................... F- 93
Notes to Financial Statements.............................................................................. F- 94
DATA ARTS & SCIENCES, INC.
Report of Price Waterhouse LLP, Independent Accountants.................................................... F-101
Combined Balance Sheet as of March 31, 1994 and 1995 ...................................................... F-102
Combined Statement of Operations for the Years Ended March 31, 1994 and 1995, and for the
Period April 1, 1995 Through February 19, 1996.......................................................... F-103
Combined Statement of Stockholders' Equity for the Years Ended March 31, 1994 and 1995 and for the
Period April 1, 1995 Through February 19, 1996.......................................................... F-104
Combined Statement of Cash Flows for the Years Ended March 31, 1994 and 1995 and for the
Period April 1, 1995 Through February 19, 1996 ......................................................... F-105
Notes to Combined Financial Statements..................................................................... F-106
CHAMBERLAIN ASSOCIATES, INC.
Report of Price Waterhouse LLP, Independent Accountants.................................................... F-113
Balance Sheet as of March 31, 1994 and 1995 ............................................................... F-114
Statement of Operations for the Years Ended March 31, 1994 and 1995, and for the
Period April 1, 1995 Through February 19, 1996.......................................................... F-115
Statement of Stockholders' Equity for the Years Ended March 31, 1994 and 1995 and for the
Period April 1, 1995 Through February 19, 1996.......................................................... F-116
Statement of Cash Flows for the Years Ended March 31, 1994 and 1995 and for the
Period April 1, 1995 Through February 19, 1996 ......................................................... F-117
Notes to Financial Statements.............................................................................. F-118
</TABLE>
F-3
<PAGE>
COTELLIGENT GROUP, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Cotelligent Group, Inc. ("Cotelligent" or the "Company") was formed to
acquire, own and operate software professional service businesses specializing
in computer consulting and contract programming. On February 20, 1996,
Cotelligent merged with four companies: Financial Data Systems, Inc. ("FDSI"),
BFR Co., Inc. ("BFR"), Data Arts & Sciences, Inc. ("DASI") and Chamberlain
Associates, Inc. ("CAI"), collectively the Founding Companies. All outstanding
shares of the Founding Companies' capital stock was converted into shares of
Cotelligent's Common Stock concurrently with the consummation of an initial
public offering (the "Offering") of Cotelligent Common Stock.
Additionally , on June 28, 1996 Cotelligent acquired ESP Software Services,
Inc. ("ESP") and INNOVA Solutions Inc. ("ISI") and on September 30, 1996
Cotelligent acquired JasTech, Inc. and JasTech of Florida, Inc ("JTI")
(collectively the "Pooled Companies") in business combinations accounted for
under the pooling-of-interests method. Accordingly, the historical financial
statements of Cotelligent have been restated in accordance with generally
accepted accounting principles to present the financial data as if Cotelligent
and the Pooled Companies had always been members of the same operating group.
The pro forma consolidated statements of operations give effect to the
acquisitions of the Founding Companies as if they were made on April 1, 1995.
Additionally, the pro forma consolidated statements reflect adjustments for the
acquisitions of the Pooled Companies and the Founding Companies including
compensation differentials to employees and former owners of the Founding
Companies and the Pooled Companies, the planned termination of contributions to
retirement plans, incremental selling, general and administrative costs of the
corporate activities of Cotelligent, one-time, non-recurring acquisition costs
related to the Pooled Companies and adjustments to reflect income taxes as if
the entities were combined and subject to the effective federal and state
statutory rates for the combined entity throughout the periods presented.
Pro forma adjustments are based upon historical information, preliminary
estimates and certain assumptions management deems appropriate. The pro forma
consolidated statement of operations presented herein are not necessarily
indicative of the results Cotelligent would have obtained had such events
occurred at the beginning of the period, as assumed, or of the future results of
Cotelligent. The pro forma consolidated statement of operations statements
should be read in conjunction with the other financial statements and notes
thereto appearing elsewhere in the registration statement.
F-4
<PAGE>
<TABLE>
COTELLIGENT GROUP, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1996
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
<CAPTION>
Founding
Companies
Cotelligent April 1, 1995 - Pro Forma
Group, Inc. Feb 19, 1996 Adjustments Pro Forma
---------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenues..................................... $ 33,105 $ 55,745 $ - $ 88,850
Cost of services............................. 23,620 42,361 (298) (a) 65,683
---------------- ----------------- --------------- --------------
Gross Margin.............................. 9,485 13,384 298 23,167
Selling, general and administrative expenses.. 8,106 10,374 (925) (c) 17,555
---------------- ----------------- --------------- --------------
Operating income............................. 1,379 3,010 1,223 5,612
Other expense (income):
Interest expense (income), net............ 129 421 (202) (d) 348
Other (income)............................. (41) (36) - (77)
---------------- ----------------- --------------- --------------
Total other expense (income)........ 88 385 (202) 271
---------------- ----------------- --------------- --------------
Income before income taxes................... 1,291 2,625 1,425 5,341
Provision (benefit) for income taxes......... 199 1,952 (15) (e) 2,136
---------------- ----------------- --------------- --------------
Net income................................... $ 1,092 $ 673 $ 1,440 $ 3,205
================ ================= =============== ==============
Earnings per share........................... $ .50
==============
Weighted average shares outstanding.......... 6,377,799 (f)
==============
</TABLE>
F-5
<PAGE>
<TABLE>
COTELLIGENT GROUP, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
<CAPTION>
Founding
Companies
April 1-
Cotelligent September 30, Pro Forma
Group, Inc. 1995 Adjustments Pro Forma
---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues $ 11,769 $ 30,636 $ - $ 42,405
Cost of services............................. 8,224 23,610 (192) (a) 31,642
------------------ --------------- ---------------- -------------
Gross margin................................. 3,545 7,026 192 10,763
Selling, general and administrative expense.. 3,017 5,404 (95) (c) 8,326
------------------ --------------- ---------------- -------------
Operating income............................. 528 1,622 287 2,437
Other expense (income):
Interest expense (income), net............ 70 246 (117) (d) 199
Other (income)............................ (15) (37) - (52)
------------------ --------------- ---------------- -------------
Total other expense (income)......... 55 209 (117) 147
------------------ --------------- ---------------- -------------
Income before income taxes................... 473 1,413 404 2,290
Provision (benefit) for income taxes......... 47 1,509 (655) (e) 901
------------------ --------------- ---------------- -------------
Net income (loss)............................ $ 426 $ (96) $ 1,059 $ 1,329
================== =============== ================ =============
Earnings per share........................... $ .23
=============
Weighted average shares outstanding.......... 6,101,350 (f)
=============
</TABLE>
F-6
<PAGE>
<TABLE>
COTELLIGENT GROUP, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
<CAPTION>
Cotelligent Pro Forma
Group, Inc. Adjustments Pro Forma
-------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues............................................ $ 53,195 $ - $ 53,195
Cost of services ................................... 38,340 - 38,340
-------------- ---------------- ----------------
Gross margin.................................. 14,855 14,855
Non-recurring transaction costs..................... 788 (788) (b) -
Selling, general and administrative expenses........ 11,477 (91) (c) 11,386
-------------- ---------------- ----------------
Operating income ................................... 2,590 879 3,469
Other expense (income):
Interest expense (income), net................... (86) (14) (d) (100)
Other (income).................................. (32) - (32)
-------------- ---------------- ----------------
Total other (income).......................... (118) (14) (132)
-------------- ---------------- ----------------
Income before income taxes.......................... 2,708 893 3,601
Provision (benefit) for income taxes................ 1,855 (487) (e) 1,368
-------------- ---------------- ----------------
Net income (loss)................................... $ 853 $ 1,380 $ 2,233
============== ================ ================
Earnings per share.................................. $ .27
================
Weighted average shares outstanding................. 8,159,463 (f)
================
</TABLE>
F-7
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands)
(Unaudited)
Note 1 - Unaudited Pro Forma Adjustments
Pro forma data reflects adjustments for the following.
a) Reduction in compensation to former owners and employees as a result of
the renegotiation of executive compensation arrangements and the termination of
contributions to employee benefit plans made in conjunction with the acquisition
of the Founding Companies;
b) The exclusion of non recurring transaction costs related to the
acquisitions of ESP, ISI and JTI;
c) Reduction in compensation to former owners and employees of the Founding
Companies and the Pooled Companies as a result of the renegotiation of executive
compensation arrangements ($1,353 for the year ended March 31, 1996, $486 for
the six months ended September 30, 1995 and $91 for the six months ended
September 30, 1996), termination of contributions to employee benefit plans ($76
for the year ended March 31, 1996, and $34 for the six months ended September
30, 1995), reduction in professional services in support of an examination by
the taxing authority ($199 for the year ended March 31, 1996, $75 for
the six months ended September 31, 1995), offset by increased expenses for
corporate operating activities ($703 for the year ended March 31, 1996, and $500
for the six months ended September 30, 1995);
d) Reduction in interest expense as a result of termination of an employee
stock ownership plan ($147 for the year ended March 31, 1996, and $87 for the
six months ended September 30, 1995) and the payoff of debt to a former
stockholder of ESP ($55 for the year ended March 31, 1996, $30 for the six
months ended September 30, 1995 and $14 for the six months ended September 30,
1996);
e) Income taxes as if the entities were combined and subject to the
effective federal and state statutory rates throughout the periods presented
(40% for the year ended March 31, 1996 and the six months ended September 30,
1995, and 38% for the six months ended September 30, 1996);
f) Pro forma weighted average shares outstanding used to determine pro
forma earnings per share were calculated based on the following: (i) shares
issued by Cotelligent prior to the Offering, shares issued to the stockholders
of the Founding Companies in connection with the Acquisitions and shares sold in
the Offering to pay the cash portion of the consideration of the Founding
Companies were considered outstanding for the entire period, (ii) additional
shares sold to the public in the Offering, (iii) shares issued to acquire the
Pooled Companies and (iv) dilution attributable to options to purchase common
stock in applying the treasury method.
F-8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Cotelligent Group, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Cotelligent
Group, Inc. and its subsidiaries at March 31, 1995 and 1996 and the results of
their operations and cash flows for each of the three years in the period ended
March 31, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Minneapolis, Minnesota
April 20, 1996, except as to the pooling of interests with ESP Software
Services, Inc. and INNOVA Solutions, Inc. which are as of June 28, 1996 and the
pooling of interests with JasTech, Inc. which is as of September 30, 1996
F-9
<PAGE>
<TABLE>
COTELLIGENT GROUP, INC.
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share Amounts)
<CAPTION>
(Unaudited)
March 31, March 31, September 30,
1995 1996 1996
-------------- -------------- ---------------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents......................................... $ 230 $ 14,548 $ 9,987
Accounts receivable, less allowance for doubtful accounts of $-0-
at March 31, 1995 and $120 at March 31 and September 30, 1996... 2,668 15,907 16,823
Notes from stockholders........................................... 36 74 38
Notes receivable from related party............................... - 105 -
Deferred income taxes............................................. - 286 337
Prepaid expenses and other current assets......................... 66 682 952
-------------- -------------- ------------------
Total current assets........................................... 3,000 31,602 28,137
-------------- -------------- ------------------
Property and equipment, net........................................... 147 1,465 2,469
Deferred income taxes................................................. 165 266 188
Other assets.......................................................... 8 157 126
-------------- -------------- -----------------
Total assets................................................... $ 3,320 $ 33,490 $ 30,920
============== ============== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt................................................... $ 818 $ 3,980 $ 1,608
Accounts payable.................................................. 117 654 1,617
Accrued compensation and related payroll liabilities.............. 929 4,140 4,377
Due to related party.............................................. 473 417 100
Income taxes payable.............................................. 56 1,243 771
Deferred income taxes............................................. - 846 821
Other accrued liabilities......................................... 134 1,510 1,487
-------------- -------------- --------------
Total current liabilities...................................... 2,527 12,790 10,781
-------------- -------------- --------------
Long-term debt........................................................ 143 450 216
Deferred income taxes................................................. 0 19 20
Other long-term liabilities........................................... 549 942 341
Stockholders' equity:
Common stock, $0.01 par value; 100,000,000 share authorized;
2,275,797, 7,917,440 and 7,953,440 shares outstanding, respect
respectively.................................................... 19 79 80
Additional paid-in capital...................................... 226 18,202 18,006
Retained earnings (deficit)..................................... (144) 1,008 1,476
-------------- -------------- --------------
Total stockholders' equity.................................... $ 101 $ 19,289 $ 19,562
-------------- -------------- --------------
Total liabilities and stockholders' equity.................... $ 3,320 $ 33,490 $ 30,920
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-10
<PAGE>
<TABLE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands, Except Share and Per Share Amounts)
<CAPTION>
(Unaudited)
For the Six Months Ended
For the Year Ended March 31, September 30,
-------------------------------------------- ---------------------------
1994 1995 1996 1995 1996
------------- ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenues................................. $ 15,914 $ 17,480 $ 33,105 $ 11,769 $ 53,195
Cost of services....................... 10,249 12,163 23,620 8,224 38,340
------------- ------------ ----------- ------------ -------------
Gross margin................... 5,665 5,317 9,485 3,545 14,855
Non-recurring transaction costs........ - 788
Selling, general and administrative
expenses............................ 5,021 5,799 8,106 3,017 11,477
------------- ------------ ----------- ------------ -------------
Operating income (loss)................ 644 (482) 1,379 528 2,590
Other (income )expense:
Interest expense.................... 72 87 203 71 130
Interest income..................... (2) (11) (74) (1) (216)
Other............................... (11) (12) (41) (15) (32)
------------- ------------ ----------- ------------ -------------
Total other (income) expense...... 59 64 88 55 (118)
------------- ------------ ----------- ------------ -------------
Income (loss) before income taxes...... 585 (546) 1,291 473 2,708
Provision (benefit) for income taxes... 162 (77) 199 47 1,855
------------- ------------ ----------- ------------ -------------
Net income (loss) ..................... $ 423 $ (469) $ 1,092 $ 426 $ 853
============= ============ =========== ============ =============
Earnings per share.................... $ .10
=============
Weighted average shares outstanding.. 8,159,463
=============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-11
<PAGE>
<TABLE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands, Except Share Amounts)
<CAPTION>
Additional Retained Total
Common Stock Paid-In Earnings Stockholders'
---------------------------
Shares Amount Capital (Deficit) Equity
------------- ---------- -------------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1993................... 2,021,792 $ 18 $ (75) $ 363 $ 306
Dividends Paid........................... - - - (1) (1)
Issuance of common stock................. 97,124 - 92 - 92
Net income............................... - - - 423 423
------------- ---------- -------------- ----------- ------------------
Balance at March 31, 1994................... 2,118,916 18 17 785 820
Dividends................................ - - - (254) (254)
Stock redemption......................... - - - (206) (206)
Issuance of common stock................. 156,881 1 209 - 210
Net (loss)............................... - - - (469) (469)
------------- ---------- -------------- ----------- ------------------
Balance at March 31, 1995................... 2,275,797 19 226 (144) 101
Redistribution of capital for stock
dividend............................... - 4 (4) - 0
Issuance of common stock prior to
Offering............................... 120,478 1 381 - 382
Redemption of common stock prior to
Offering.............................. (74,140) (1) (119) - (120)
Dividends................................ - - - (280) (280)
Reclassification of Founding Companies
Equity.............................. - - 4,307 - 4,307
Issuance of common stock................. 5,595,305 56 16,903 - 16,959
Distribution to founding stockholders.... - - (3,492) - (3,492)
Adjustments to conform year-ends of
Pooled Companies....................... - - - 340 340
Net income.............................. - - - 1,092 1,092
------------- ---------- -------------- ----------- ------------------
Balance at March 31, 1996................... 7,917,440 79 18,202 1,008 19,289
Dividends - - - (385) (385)
Distribution to former ESP stockholder
stockholder............................ - - (423) - (423)
Issuance of common stock................. 36,000 1 45 - 46
Tax benefit on stock options
exercised.............................. - - 182 - 182
Net income.............................. - - - 853 853
------------- ---------- -------------- ----------- ------------------
Balance at September 30, 1996 (Unaudited)... 7,953,440 $ 80 $ 18,006 $ 1,476 $ 19,562
============= ========== ============== =========== ==================
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-12
<PAGE>
<TABLE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<CAPTION>
(Unaudited)
For the Six Months
For the Year Ended March 31, Ended September 30,
------------------------------------------ -----------------------------
1994 1995 1996 1995 1996
----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................ $ 423 $ (469) $ 1,092 $ 426 $ 853
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization......... 64 71 153 38 330
Loss (gain) on disposal of property &
equipment........................... 2 42 - - (272)
Net deferred income taxes............. 127 - (539) - 27
Changes in assets and liabilities
(Increase) decrease in accounts
receivable........................ (600) (447) (2,708) (328) (916)
(Increase) decrease in prepaid
expenses and other current assets. 16 (32) (251) (23) (270)
Increase (decrease) in accounts
payable and accrued liabilities... 57 514 344 892 1,306
Increase (decrease) in income taxes
payable........................... 79 (29) 307 19 (866)
Increase (decrease) in other
liabilities....................... - 550 - (4) (23)
Changes in other assets............... 18 4 19 (903) (8)
----------- ----------- ----------- ------------- ------------
Net cash provided by (used in)
operating activities............ 186 204 (1,583) 117 161
Cash flows from investing activities:
Proceeds on sale of assets............... - 8 - - 280
Purchase of property & equipment......... (62) (64) (572) (248) (1,334)
Advances to stockholders................. - - (60) - -
Net repayments from (advances to)
related parties........................ - (25) (3) (10) 100
Cash and cash equivalents of Founding
Companies at date of acquisition..... - - 525 - -
----------- ----------- ----------- ------------- ------------
Net cash provided by (used in)
investing activities............ (62) (81) (110) (258) (954)
----------- ----------- ----------- ------------- ------------
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-13
<PAGE>
<TABLE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(In Thousands)
<CAPTION>
(Unaudited)
For the Six Months
For the Year Ended March 31, Ended September 30,
-------------------------------------- ----------------------------
1994 1995 1996 1995 1996
----------- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Repurchase of common stock....................... - (206) (120) 268 -
Dividends to stockholders prior to acquisition... - (254) (190) - -
Proceeds from long-term debt..................... - 168 64 215 -
Principal payments of long-term debt............. - (47) (19) (8) (168)
Payments on capital lease obligations............ - - (49) (2) -
Net borrowings (repayments) on short-term debt... (11) (138) 762 - (2,837)
Borrowings from related parties................. 51 10 848 - -
Payments on loans with related parties........... - - (700) - (244)
Proceeds from issuance of common stock .......... 92 209 18,378 47 46
Distribution to Companies former stockholders.... - - (3,492) (73) (423)
Dividends........................................ - - - (26) (142)
Net change in cash due to conforming fiscal
year-end of pooled companies................... - - 529 - -
----------- --------- ---------- ---------- ------------
Net cash provided by (used in) financing
activities........................... 132 (258) 16,011 421 (3,768)
----------- --------- ---------- ---------- ------------
Net increase (decrease) in cash and cash equivalents
256 (135) 14,318 280 (4,561)
Cash and cash equivalents beginning of period....... 109 365 230 462 14,548
=========== ========= ========== ========== ============
Cash and cash equivalents end of period............. $ 365 $ 230 $14,548 $ 742 $ 9,987
=========== ========= ========== ========== ============
Supplemental disclosures of cash flow information:
Interest paid................................... $ 55 $ 91 $ 237 $ 40 $ 110
Income taxes paid............................... $ 34 $ 14 $ 338 $ 46 $ 2,117
Schedule of non-cash investing & financing transactions:
Capital lease obligations incurred.............. $ - $ 10 $ 158 $ - $ -
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
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 transactions 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 shares 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 interests in the
Company of the former stockholders of BFR, CAI, DASI, FDSI and Cotelligent, the
Acquisitions were accounted for on a historical cost basis.
Additionally, as further discussed in Note 3, 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 to the mergers of the Pooled Companies,
through the date of the acquistion of the Founding Companies on February 20,
1996, after which the financial statements also reflect the results of these
Founding Companies.
Prior to the Acquisitions, the Company was a nonoperating entity and
incurred principally selling, general and administrative expenses. For the
period April 1, 1995 through February 19, 1996, the Company incurred $414 of
selling, general and administrative expenses and had a net loss before provision
for income taxes of $424.
Note 2-Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
F-15
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
Property and Equipment
Property and equipment are stated at cost. Depreciation, including
amortization of capitalized leases, is provided over the estimated useful lives
of the respective assets (generally ranging from five to ten years) on a
straight-line or an accelerated basis. Leasehold improvements are amortized over
the shorter of the lease term or the estimated useful life of the respective
assets.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
Receivables arising from services provided to clients are not collateralized and
accordingly, the Company performs ongoing credit evaluations of its clients to
reduce the risk of loss.
Revenue Recognition
Revenue is recognized as services are performed.
Fair Value of Financial Instruments
For cash and cash equivalents, the carrying amount approximates fair value
because of the short-term maturity of those instruments. The fair value of debt
is considered to approximate carrying value as the rates approximate those
currently available.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). The asset and liability approach used in SFAS 109 requires the recognition
of deferred tax assets and liabilities for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities.
Prior to the merger on June 28, 1996, ESP elected to be taxed as an S
corporation for federal and state income tax purposes. Accordingly, any tax
liabilities were the responsibility of the ESP stockholder. Additionally, ISI
was a C corporation until January 1, 1995, at which time it also elected to be
taxed for federal and state income tax purposes as an S corporation, and
accordingly, any tax liabilities were the responsibility of the ISI shareholder.
Effective June 28, 1996, ESP's and ISI's S corporation elections terminated
as a result of the mergers with Cotelligent. In connection with this conversion,
approximately $800 was recorded as income tax expense which represents the net
deferred tax liabilities of ESP and ISI. This amount will be paid on a pro rata
basis over a four-year period. See Note 7 for unaudited pro forma income tax
information and further discussion.
Effective January 1, 1996, JasTech of Florida, Inc. elected to be taxed as
an S corporation for federal and state income tax purposes. Accordingly, any tax
liabilities subsequent to this date and prior to the merger with Cotelligent,
are the responsibility of the stockholder of JasTech of Florida, Inc.
Effective September 30, 1996, JasTech of Florida, Inc.'s S corporation
status terminated as a result of the merger with Cotelligent.
F-16
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
Earnings Per Share
Historical earnings per share for the three years ended March 31, 1996 and
the six months ended September 30, 1995 have not been presented because it is
not considered to be meaningful as a result of the Acquisitions and the Offering
as discussed in Note 1.
Note 3-Business Combinations Accounted for Under the Pooling-of-Interests Method
Effective June 28, 1996, Cotelligent acquired all of the outstanding common
stock of ESP Software Services, Inc. ("ESP") and INNOVA Solutions, Inc. ("ISI")
in exchange for 534,919 shares of common stock with a market value of $9,000 and
521,390 shares of common stock with a market value of $9,000, respectively.
Additionally, on September 30, 1996 Cotelligent acquired all of the outstanding
common stock of JasTech, Inc. and JasTech of Florida, Inc. (collectively "JTI")
in exchange for 644,826 shares of common stock with a market value of $8,710.
ESP, ISI and JTI are herein referred to as the "Pooled Companies." The business
combinations were accounted for as poolings-of-interests and accordingly, the
Company's financial statements give retroactive effect to the acquisitions of
the Pooled Companies for all periods presented.
The results of these Pooled Companies were previously reported on December
31 year ends. The accounts of these Pooled Companies for the years ended
December 31, 1993, 1994 and 1995 have been combined with the accounts of
Cotelligent for the years ended March 31, 1994, 1995 and 1996, respectively.
Commencing on April 1, 1996, the year ends of these Companies were changed to
March 31, resulting in an increase to retained earnings of $340 during fiscal
year ending March 31, 1996. Following is a summary of the results related to the
adjustments to retained earnings:
<TABLE>
<CAPTION>
ESP ISI JTI TOTAL
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Revenues $ 2,757 $ 2,034 $ 2,598 $ 7,389
Costs and expenses 2,824 1,724 2,501 7,049
========== ========= ========= ==========
$ (67) $ 310 $ 97 $ 340
========== ========= ========= ==========
</TABLE>
F-17
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Amounts)
The separate results of Cotelligent and the Pooled Companies prior to the
acquisitions are as follows:
<TABLE>
<CAPTION>
(Unaudited)
For the Six
For the Year Ended March 31, Months Ended
--------------------------------------------------------------
1994 1995 1996 September 30, 1995
---------------- ---------------- ----------------- -----------------------
<S> <C> <C> <C> <C>
Cotelligent:
Revenues ............ $ - $ - $ 8,265 $ -
Net income (loss).... (167) (201) 88 (158)
ESP:
Revenues............. 4,936 6,950 10,274 4,905
Net income (loss).... 282 (219) 205 119
ISI:
Revenues............. 4,304 2,860 5,867 2,641
Net income (loss).... 284 (79) 668 380
JasTech:
Revenues............. 6,674 7,670 8,698 4,223
Net income........... 24 30 131 85
Combined:
Revenues............. 15,914 17,480 33,104 11,769
Net income (loss).... 423 (469) 1,092 426
</TABLE>
Note 4-Allowance for Doubtful Accounts
<TABLE>
<CAPTION>
Allowance for doubtful accounts activity is as follows.
<S> <C>
Balance, March 31, 1994 and 1995 ......................................................................... $ -
Balance of Founding Companies allowance for doubtful accounts at acquisition.............................. 40
Charges to costs and expenses............................................................................. 101
Write-offs................................................................................................ (21)
=============
Balance at March 31, 1996................................................................................. $ 120
=============
</TABLE>
F-18
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Amounts)
Note 5-Property and Equipment
<TABLE>
Property and equipment is comprised of the following.
<CAPTION>
March 31,
-----------------------------
1995 1996
-------------- --------------
<S> <C> <C>
Automobiles............................................................................... $ - $ 50
Computer and office equipment............................................................. 243 2,027
Furniture and fixtures.................................................................... 94 600
Leasehold improvements.................................................................... - 326
-------------- --------------
337 3,003
Less: Accumulated depreciation............................................................ 190 1,538
============== ==============
$ 147 $ 1,465
============== ==============
</TABLE>
Depreciation and amortization expense for the years ended March 31, 1994, 1995
and 1996 was $64, $71 and $153, respectively.
F-19
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Amounts)
Note 6-Credit Facilities
<TABLE>
Credit facilities consist of the following at March 31, 1996.
Short-Term Debt
<CAPTION>
March 31,
-------------------------------
1995 1996
--------------- ---------------
<S> <C> <C>
Note payable for consulting services performed, which bears interest at the rate of 10%
from June 1995, paid on completion of the Offering................................. $ 52 $ -
Bank line of credit, with maximum borrowings of $1,250 secured by FDSI's account
receivable, property and equipment, and personally guaranteed by several
Cotelligent stockholders who are also officers of FDSI, due May 28, 1998. Interest
at the prime rate plus 1.50% per annum (9.75% at March 31, 1996)................... - 1,097
Bank line of credit, for borrowings up to the lesser of $1,300 or 70% of the DASI's
eligible accounts receivable, secured by all assets of DASI, as well as the
personal guarantees of two Cotelligent stockholders who are also officers of
DASI, due May 31, 1996. Interest at 1.25% above the bank's base lending rate
(9.5% at March 31, 1996) .......................................................... - 809
Bank line of credit, for borrowings of up to $1,500 secured by all of BFR's assets, due
May 31, 1996. Interest at bank's prime rate of 8.25% at March 31, 1996............. - 300
Bank line of credit, for borrowing up to $250, secured by accounts receivable and
property and equipment and personally guaranteed by stockholder who is an officer
of ISI. Interest at prime plus 2.0% (10.25% at March 31, 1996).................... - 195
Bank line of credit, for borrowings up to $1,000 in combination with an affiliate
organization, personally guaranteed by ESP stockholder who is an officer of
ESP, secured by accounts receivable and general tangible assets of combined
companies. Interest at bank's base rate plus 1.25% (9.5% at March 31, 1996)....... - 824
Bank line of credit, with two separate banks for borrowing up to $900 and $300 secured
by accounts receivable and fixed assets of JasTech. Interest at prime rate plus
0.50% and 1.25% (8.75% and 9.50% at March 31, 1996)................................ 590 408
Related party loans, due on demand, interest rates from 8.0 % to 12.5 %............ 159 84
Capital lease obligations.......................................................... 3 142
Current portion of long-term debt.................................................. 14 121
--------------- ---------------
Total short-term debt................................................................... $ 818 $ 3,980
=============== ===============
</TABLE>
The lines of credit were executed pursuant to agreements that contain
various covenants that include, among other things, restrictions on additional
debt and distributions, and maintenance of certain financial ratios and net
worth requirements. The Subsidiaries were in compliance with all covenants at
March 31, 1996.
F-20
<PAGE>
<TABLE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Amounts)
<CAPTION>
Long-Term Debt
March 31,
------------------------------
1995 1996
-------------- --------------
<S> <C> <C>
Note payable to bank, monthly payments of $6, including interest at the bank's prime
rate plus 2.25% (10.50% at March 31,1996) per annum; maturing March 30, 1998 and
secured by FDSI's assets and the personal guarantee of several Cotelligent
stockholders who are also officers of FDSI.......................................... $ - $ 131
Notepayable to bank, monthly payments of $2, including interest at the bank's
prime rate plus 2.25% (10.50% at March 31, 1996) per annum; maturing May 29,
1998 and secured by FDSI's assets and the personal guarantees of several
Cotelligent
stockholders who are also officers of FDSI.......................................... - 56
Note payable to related party, quarterly installments of $7 plus interest at 2% over
bank index rate, due December 2001.................................................. 150 136
Capital lease obligations............................................................... 10 390
-------------- --------------
160 713
Less: Current maturities................................................................ 17 263
-------------- --------------
Total long-term debt.................................................................... $ 143 $ 450
============== ==============
</TABLE>
<TABLE>
Total maturities of long-term debt are as follows.
<CAPTION>
Year Ending
March 31,
1996
-----------------
<C> <C>
1997............................................................................... $ 263
1998............................................................................... 262
1999............................................................................... 77
2000............................................................................... 47
2001............................................................................... 32
Thereafter......................................................................... 32
-----------------
Total......................................................................... $ 713
=================
</TABLE>
Note 7-Income Taxes
Cotelligent will file a consolidated federal income tax return for
periods subsequent to the Acquisitions described in Note 2.
<TABLE>
The provision (benefit) for income taxes is as follows.
<CAPTION>
Year Ended March 31,
------------------------------------------------
1994 1995 1996
--------------- -------------- ---------------
<S> <C> <C> <C>
Current:
Federal........................................................... $ 21 $ 64 $ 742
State............................................................. 2 2 134
--------------- -------------- ---------------
23 66 876
--------------- -------------- ---------------
Deferred:
Federal........................................................... 82 (211) (531)
State............................................................. (10) (12) (107)
--------------- -------------- ---------------
72 (223) (638)
Valuation Allowance.................................................. 67 80 (40)
--------------- -------------- ---------------
Total provision (benefit) for income taxes........................... $ 162 $ (77) $ 198
=============== ============== ===============
</TABLE>
F-21
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Amounts)
<TABLE>
Deferred tax assets (liabilities) are comprised of the following.
<CAPTION>
March 31,
-------------------------------------
1995 1996
----------------- ------------------
<S> <C> <C>
Allowance for doubtful accounts................................................... $ - $ 16
Accrued liabilities............................................................... 165 406
Cash to accrual................................................................... - (846)
Operating loss carry forward...................................................... 147 317
Depreciation...................................................................... - (19)
----------------- ------------------
Deferred tax asset (liability)................................................ 312 (126)
Valuation allowance............................................................... (147) (187)
================= ==================
Net deferred tax assets (liabilities)......................................... $ 165 $ (313)
================= ==================
</TABLE>
The Company's effective income tax rate varied from the U.S. federal statutory
tax rate as follows.
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------
1994 1995 1996
----------- ----------- ----------
<S> <C> <C> <C>
U.S. federal statutory rate........................................................ 34.0 % (34.0) % 34.0 %
State taxes, net of federal income tax benefit..................................... 1.3 (4.2) 2.2
Income of S corporation............................................................ (20.0) 15.1 (28.4)
Conversion to S corporation........................................................ - (5.8) -
Valuation allowance against net operating loss..................................... 12.1 13.6 3.7
Other.............................................................................. 0.6 - -
----------- ----------- ----------
Effective tax rate............................................................. 28.0 % (15.3) % 11.5 %
=========== =========== ==========
</TABLE>
Prior to the Acquisitions, Cotelligent Group, Inc. had established a
valuation allowance against the tax assets associated with the net operating
losses of previous years due to the uncertainty of realization through future
income. Subsequent to the Acquisitions, the Company reversed a portion of the
valuation allowance as a result of the estimated utilization of the operating
losses against future taxable income.
As discussed in Note 2, ISI was a C corporation until December 31, 1994 at
which time ISI elected to be taxed as an S corporation, and therefore, any tax
liabilities subsequent to this date were the responsibility of ISI's
shareholder. Accordingly, net deferred tax liabilities of approximately $117 as
of December 31, 1994 were recognized in income upon the conversion in 1994.
As a result of the merger with Cotelligent on June 28, 1996, ISI's and
ESP's S corporation elections terminated. Approximately $800 of deferred tax
liabilities were recorded at this time and these federal and state taxes will be
paid ratably over the next four years.
Effective January 1, 1996, JasTech of Florida, Inc. also elected to be
taxed as an S corporation and therefore any tax liabilities subsequent to this
date and prior to the merger date with Cotelligent are the responsibility of the
stockholder of JasTech of Florida, Inc.
F-22
<PAGE>
<TABLE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Amounts)
The following unaudited pro forma income tax information is presented in
accordance with Statement of Financial Accounting Standards No. 109 as if ESP,
ISI and JTI had been C corporations subject to federal and state income taxes
for all periods presented.
<CAPTION>
For the Six Months Ended
For the Year Ended March 31, September 30,
------------------------------------- -------------------------------
1994 1995 1996 1995 1996
--------- --------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Income (loss) before provision for income taxes $ 585 $ (546) $ 1,290 $ 473 $ 2,708
Provision (benefit) for income taxes 275 (132) 507 120 1,029
======== ========== =========== ============ ===============
Pro forma net income (loss) $ 310 $ (414) $ 783 $ 353 $ 1,679
======== ========== =========== ============ ===============
</TABLE>
Note 8-Lease Commitments
Cotelligent leases various office space and certain equipment under
noncancellable lease agreements which expire at various dates.
<TABLE>
Future minimum rental payments under such leases are as follows.
<CAPTION>
Year Ending March 31,
-------------------------------
Capital Operating
Leases Leases
------------ --------------
<C> <C> <C>
1997............................................................................ $ 192 $ 875
1998............................................................................ 163 861
1999............................................................................ 89 848
2000............................................................................ 32 640
2001............................................................................ - 312
Thereafter...................................................................... - 32
------------ --------------
Total minimum lease payments.................................................... 476 $ 3,568
==============
Less: Amounts representing interest............................................. (86)
=============
Present value of net minimum lease payments..................................... $ 390
=============
</TABLE>
Rental expense under these leases was $37, $34 and $117 for the years ended
March 31, 1994, 1995 and 1996.
Note 9-Related Parties
The Company recognized $5 in revenue for providing computer consulting
services to CyberSAFE (an entity owned in part by a few Cotelligent stockholders
who are also officers of FDSI) for the period subsequent to the Acquisitions
through March 31, 1996, all of which was included in accounts receivable at
March 31, 1996.
In May 1994, the Company negotiated a perpetual software marketing
agreement with CyberSAFE to sublicense CyberSAFE software in exchange for
royalty payments of 15% of the purchase price for every copy licensed. For the
period subsequent to the Acquisitions through March 31, 1996, the Company paid
no royalties to CyberSAFE.
In addition, the Company has made short-term advances to CyberSAFE. The
balance due on these short-term advances, bearing interest at 9% per annum at
March 31, 1996 was $103. Included in interest income is $2 for the period
subsequent to the Acquisitions through March 31, 1996, on the advances.
F-23
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Amounts)
The Company leases general offices, and transportation equipment under
operating leases, occupied or used by BFR, from a third party, which is mostly
owned by several Cotelligent stockholders who are also officers of BFR. Rental
expense under these leases was $20 for the period subsequent to the Acquisitions
through March 31, 1996. In addition, the Company leases certain office equipment
under capital leases from the same entity. Payments under these capital leases
for the period subsequent to the Acquisitions through March 31, 1996, were $6.
The Company leases office space, occupied by DASI, from the Strathmore
Realty Trust. Two Cotelligent stockholders, one of whom is an officer of DASI
and a Director of the Company, are the sole trustees and beneficiaries of the
Strathmore Realty Trust. Rental expense recorded for this office space was $12
for the period subsequent to the Acquisitions through March 31, 1996.
F-24
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Amounts)
Prior to its acquisition by Cotelligent, ESP was related to Electronic
Systems Personnel, Inc. through common ownership. ESP shares office space as
well as various administrative resources with Electronic Systems Personnel, Inc.
Additionally, certain ESP employees are hired through Electronic Systems
Personnel, Inc., a placement firm. Below is a summary of significant
transactions and account balances for the two companies:
<TABLE>
<CAPTION>
1995 1994
--------------- ------------
<S> <C> <C>
Due to Electronic Systems Personnel, Inc. $ 6 $ 209
Administrative expense 164 73
Placement fee expense 527 526
</TABLE>
At March 31, 1996, ESP had a $94 note receivable from its principal
stockholder due in five equal principal installments of $19 beginning January 1,
1997. Interest at 8% is due quarterly with the first payment on April 1, 1996.
JTI currently leases office space in Boca Raton, Florida from a shareholder
of the Company. JTI leases the space on a month to month basis. Rent expense
associated with this lease amounted to $22 for each of the two years ended March
31, 1995 and 1996.
Note 10 - Employee Benefit Plans
BFR has a salary reduction plan (401(k)) for the benefit of all employees
after 30 days of service. The plan is non-contributory and is funded by the
amounts used to reduce employee salaries. In addition, BFR has the option to
contribute to the plan on the employees' behalf. BFR did not make any
contributions to the plan for the period subsequent to the Acquisitions through
March 31, 1996.
BFR maintains a profit sharing plan for the benefit of substantially all
salaried employees. Contributions to the plan are made at the discretion of the
Company. The Company did not make any contributions to the plan for the period
subsequent to the Acquisitions through March 31, 1996.
FDSI maintains a discretionary profit-sharing (401(k)) plan which covers
all employees who have met minimum age and employment requirements. FDSI made no
contributions to this plan for the period subsequent to the Acquisitions through
March 31, 1996.
In September 1992, FDSI adopted a discretionary cash bonus profit sharing
plan for employees who have completed 1,500 hours of service to FDSI and who are
employees of FDSI on the payout date. FDSI made no contributions to this plan
for the period subsequent to the Acquisitions through March 31, 1996.
DASI maintains an unfunded, discretionary profit-sharing plan, which
includes substantially all full-time employees who have at least one year of
continuous service. No contributions were made to this plan for the period
subsequent to the Acquisitions through March 31, 1996.
ISI maintains an unfunded 401 (k) plan which includes employees who have at
least one-half a year of continuous service. Contributions to the plan are made
at the discretion of ISI based on employee elections. ISI made no contributions
for the years ended March 31, 1994, 1995 or 1996.
ESP adopted a salary reduction/profit sharing plan (the "Plan") in 1994
under the provisions of Section 401 (k) of the Internal Revenue Code. The Plan
covers all full-time employees who have completed one full year of service with
ESP. ESP is required to contribute an amount equal to 25% of the salary
reduction elected by each employee up to a maximum reduction of 4% of their
annual salary. In addition, ESP may make a discretionary contribution. ESP
contributions totaled $ -0- , $27 and $15 for March 31, 1994, 1995 and 1996,
respectively.
F-25
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Amounts)
JTI maintains a salary reduction plan (401(k)) for the benefit of all
employees after six months of continuous service. Contributions to the plan are
at the discretion of the employee with no employer matching.
In September 1995, Cotelligent's Board of Directors and stockholders
approved Cotelligent's 1995 Long-Term Incentive Plan (the "Plan"). The purpose
of the Plan is to provide directors, officers, key employees and consultants
with additional incentives by increasing their ownership interests in the
Company.
Effective as of September 8, 1995, Cotelligent granted to each of two
officers an option to purchase 92,676 shares of common stock at $2.70 per share.
Such options vest as follows: 18,536 on February 21, 1996, and thereafter, an
additional 18,535 shares on each subsequent February 21 until all 92,676 shares
have vested. The options are each exercisable for a period of seven years after
the effective date of the grant.
On February 14, 1996, Cotelligent granted certain employees options to
purchase 196,000 shares of Common Stock at $9.00 per share. On various dates
subsequent to February 14, 1996, through September 30, 1996, additional grants
of options to purchase 154,800 shares of Common Stock at prices ranging from
$9.00 to $18.38 were made to certain employees. Such options vest ratably over
four years on the anniversary of the option grant date. The term of each option
grant is determined by the Compensation Committee of the Board of Directors.
However, the term of any incentive stock option or a stock appreciation right
granted in tandem therewith, shall not exceed 10 years from the date of the
grant.
Each director who is not an employee of the Company receives an annual
retainer fee of $12. Effective January 12, 1996, each non-employee director of
the Company was granted an initial option under the Company's 1995 Long-Term
Incentive Plan to acquire 10,000 shares of Common Stock at an exercise price of
$10.00 per share. In addition, each non-employee director will receive an
automatic annual option grant under the 1995 Long-Term Incentive Plan to acquire
5,000 shares of Common Stock on the date of each of the Company's annual
meetings held after March 31, 1997. All of such options have or will have an
exercise price equal to the fair market value of the Common Stock on the date of
grant and, or will be, exercisable immediately except as limited by the rules
and regulations of the Securities Act and the Securities Exchange Act of 1934,
as amended, and will expire ten years from the date of grant. Directors are also
reimbursed for out-of-pocket expenses incurred in attending meetings of the
Board of Directors or committees thereof, or for other expenses incurred in
their capacity as directors.
Note 11-Commitments and Contingencies
Employment Agreements
Each named executive officer has entered into an employment agreement with
the Company providing for an annual base salary of $150. Pursuant to such
employment agreements, each such officer is eligible to earn bonus compensation
payable out of a bonus pool determined by the Board of Directors or its
Compensation Committee. Bonuses will be determined by measuring, among other
objective and subjective measures, such officer's performance, the performance
of the local operation for which such officer has primary responsibility and the
Company's performance against targets. Each executive officer employment
agreement is for a term of three years and, unless terminated or not renewed by
the employee, shall continue thereafter on a year-to-year basis on the same
terms and conditions. In the event of a termination of employment by the Company
without cause, such employee shall be entitled to receive from the Company such
employee's then current salary for the remaining term of the agreement or for
one year, whichever amount is greater, without regard to whether the employee
obtains subsequent employment. In the event of change in control of the Company,
if the employee is not given at least five days notice of such change in
control, the employee may elect to terminate his employment and shall be
entitled to receive a minimum of three years' current base salary as
compensation. In the event the employee is given at least five days
F-26
<PAGE>
notice of
such a change in control, the employee may elect to terminate his employment
agreement and receive a minimum of two years' current salary as compensation.
Each executive officer employment agreement contains a covenant not to
compete with the Company for a period equivalent to the longer of two years
immediately following the termination of his employment or, in the case of a
termination without cause for a period of one year following the termination of
his employment. If any court of competent jurisdiction determines that the
scope, time or territorial restrictions contained in the covenant are
unreasonable, the covenant not to compete shall be reduced to the maximum period
permitted by such court. The compensation to which such employee is entitled
shall nonetheless be paid to the employee.
In addition, certain of the principals of the Company's subsidiaries who
are not executive officers of the Company have entered into an employment
agreement with the Company or a subsidiary, as the case may be, effective upon
consummation of the Acquisitions and the Offering or the acquisitions of the
Pooled Companies, as the case may be, with a base compensation ranging between
$150 per annum and $200 per annum.
In June 1991, in connection with the purchase of certain assets of
Professional Resources, Inc., ESP entered into employment and non-compete
agreements with the entity's president. The employment agreement provides for
payment of monthly compensation of $13 plus bonuses equal to 10% of ESP's
monthly net income. This bonus was $23, $18 and $47 in 1994, 1995 and 1996,
respectively. The non-compete agreement states that the former president may not
compete, directly or indirectly, during his employment with ESP and for one year
thereafter. This agreement was terminated with the acquisition of ESP by
Cotelligent and the individual entered into a new employment agreement with ESP.
ESP Stock Redemption
On May 5, 1994, ESP entered into an agreement with a stockholder owning a
47% interest in the Company to redeem all of the 953 shares held for him for
$206, of which $41 was paid at closing and the balance of $165 payable quarterly
over an eight year period with interest accruing at the rate of 2% in excess of
the index rate established by National City Bank. In addition, the agreement
provided for an additional payment for the stock in the event of a subsequent
sale of ESP. The balance outstanding on this obligation at March 31, 1995 and
1996 was $150 and $136 respectively.
In conjunction with the agreement and plan of reorganization and merger,
the remaining principal balance of the note payable above was paid in full on
June 28, 1996. Additionally, $552 was paid as a distribution to the former
stockholder in accordance with the terms of the stock redemption agreement.
ESP Deferred Compensation Plan
In connection with the stock redemption agreement discussed above, ESP
entered into a salary continuation agreement with the former stockholder in
recognition of his contributions to the growth, management and success of ESP.
The salary continuation agreement provided that the stockholder be paid an
annual sum of $45 for each of the years 1994 through 1997, and an annual sum of
$93 for each of the years 1998 through 2005. The agreement provides for a
discount rate of 8% to arrive at the present value of the unpaid salary
continuation payments. The unpaid present value of this obligation at March 31,
1995 and 1996 was $548.
In conjunction with the agreement and plan of reorganization and merger,
the remaining principal balance of the deferred compensation was paid in full on
June 28, 1996.
JTI Deferred Compensation Plan
JTI was paying a former employee termination benefits amounts to $3 per
month starting in January 1992 continuing through June 2002 in accordance with a
separation agreement. During July 1996 the Company cashed out the agreement for
the present value resulting in the payments of $235.
F-27
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Amounts)
Consulting Contract
The Company entered into a consulting contract with a former employee of
BFR effective February 19, 1996, whereby the former employee is required to
perform certain management advisory services as required by and at the request
of the Company. Payments under the contract are $8 per month, continue through
December 2000 and have been fully recorded as an obligation of the Company as of
March 31, 1996.
Legal Matters
The Company is involved in various legal matters in the normal course of
business. In the opinion management, these matters are not anticipated to have a
material adverse effect on the financial position or results of operations or
cash flows of the Company.
Note 12 - Subsequent Event
Cotelligent and each of the Founding Companies had separate banking
relationships through May 31, 1996. Effective June 1, 1996, the separate banking
relationships were consolidated into a single banking relationship with a major
bank, providing a more efficient means of managing operating capital. The new
relationship provided a credit facility in the amount of $10.0 million, secured
by accounts receivable and other assets of the company. The Pooled Companies,
except for JTI, terminated their separate banking relationships and began
participating in the Cotelligent banking relationship in September 1996.
Borrowings on the facility bear interest at the bank's prime rate. In October
1996, the amount of the credit facility was increased to $20.0 million.
F-28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholder
of JasTech, Inc. and JasTech of Florida, Inc.
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations, of stockholder's equity (deficit) and of cash
flows present fairly, in all material respects, the financial position of
Jastech, Inc. at December 31, 1994 and 1995, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 1, on September 30, 1996, JasTech, Inc. entered into
and completed an agreement and plan of reorganization and merger with
Cotelligent Group, Inc.
Price Waterhouse LLP
Minneapolis, Minnesota
October 11, 1996
F-29
<PAGE>
JASTECH, INC.
<TABLE>
COMBINED BALANCE SHEET
(In Thousands, Except Share Amounts)
<CAPTION>
(Unaudited)
December 31, June 30,
------------------------------- ---------------
1994 1995 1996
------------- ------------- ---------------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash.................................................................. $ 34 $ 3 $ 20
Accounts receivable, less allowance for doubtful accounts of $40
at December 1994 and 1995 and $50 at June 30, 1996, respectively.. 1,135 1,514 1,703
Prepaid expenses and other current assets ............................ 6 19 93
------------- ------------- ---------------
Total current assets............................................... 1,175 1,536 1,816
Deferred income taxes................................................. 165 120 -
Property and equipment, net........................................... 46 57 53
Other assets.......................................................... 4 8 3
============= ============= ===============
Total assets....................................................... $ 1,390 $ 1,721 $ 1,872
============= ============= ===============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Bank line of credit.................................................. $ 590 $ 624 $ 600
Current portion of capital lease obligation.......................... 3 6 6
Accounts payable - trade............................................. 73 205 254
Book overdraft....................................................... 53 151 139
Related party payable................................................ 265 244 -
Accrued compensation and payroll taxes............................... 443 393 523
Other liabilities.................................................... 21 28 19
------------- ------------- ---------------
Total current liabilities......................................... 1,448 1,651 1,541
Capital lease obligation................................................ 7 6 4
Stockholder's equity (deficit):
Common stock Jastech Inc. - shares authorized: 1,000, no par
value, issued and outstanding 25 shares........................... - - -
Common stock Jastech of Florida, Inc. - shares authorized: 10,000,
$1.00 par value, issued and outstanding 1,000 shares................. 1 1 1
Additional Paid-In-Capital........................................... 2 2 2
Retained earnings (deficit).......................................... (68) 61 324
------------- ------------- ---------------
Total stockholders equity (deficit)............................... (65) 64 327
============= ============= ===============
Total liabilities and stockholder's equity (deficit).............. $ 1,390 $ 1,721 $ 1,872
============= ============= ===============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-30
<PAGE>
<TABLE>
JASTECH, INC.
COMBINED STATEMENT OF OPERATIONS
(In Thousands)
<CAPTION>
(Unaudited)
For the Year Ended For the Six Months Ended
December 31, June 30,
--------------------------------------- -------------------------------------------
1994 1995 1995 1996
-------------------- --------------- -------------------- -----------------
<S> <C> <C> <C> <C>
Revenues.............................. $ 7,670 $ 8,698 $ 4,223 $ 5,236
Cost of services...................... 5,780 6,718 3,343 3,974
-------------------- --------------- -------------------- --------------------
Gross margin.................... 1,890 1,980 880 1,262
Selling, general and
administrative expenses............ 1,798 1,763 737 1,137
-------------------- --------------- -------------------- --------------------
Operating income...................... 92 217 143 125
Other (income) expense:
Interest income.................... - (1) (1) (1)
Interest expense................... 54 50 24 21
Other income....................... (5) (34) (12) (282)
-------------------- --------------- ---------------- --------------------
Total other (income)expense..... 49 15 11 (262)
-------------------- --------------- ---------------- --------------------
Income before provision for
income taxes....................... 43 202 132 387
Provision for income taxes............ 13 72 47 120
-------------------- --------------- ---------------- --------------------
Net income............................ $ 30 $ 130 $ 85 267
==================== =============== ================ ====================
Unaudited Pro Forma information:
Income before provision for
income taxes ...................... $ 387
Pro Forma provision for
income taxes....................... 151
------------------
Pro Forma net income
(see Note 6) ...................... $ 236
==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
<TABLE>
JASTECH, INC.
COMBINED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(In Thousands, Except Share Amounts)
<CAPTION>
Jastech Inc. Jastech of Florida, Inc. Additional
Common Stock Common Stock Retained Paid-In
Shares Amount Shares Amount Earnings Capital Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993....... 25 $ - - $ - $ (98) $ 2 $ (96)
Shares Issued................... - - 1,000 1 - - 1
Net income...................... - - - - 30 - 30
-------- ------- --------- ------ ------- ------ --------
Balance at December 31, 1994....... 25 - 1,000 1 (68) 2 (65)
Dividends Paid.................. - - - - (1) - (1)
Net Income...................... - - - - 130 - 130
-------- ------- --------- ------ ------- ------ --------
Balance at December 31, 1995....... 25 - 1,000 1 61 2 64
Dividends Paid - - - - (4) - (4)
Net Income...................... - - - - 267 - 267
-------- ------- --------- ------ ------- ------ --------
Balance at June 30, 1996
(Unaudited)..................... 25 $ - 1,000 $ 1 $ 324 $ 2 $ 327
======== ======= ========= ======= ======= ====== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
<TABLE>
JASTECH, INC.
COMBINED STATEMENT OF CASH FLOWS
(In Thousands)
<CAPTION>
For the Year Ended (Unaudited)
December 31, For the Six Months Ended June 30,
-------------------------------- ----------------------------------
1994 1995 1995 1996
---------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 30 $ 130 $ 85 $ 267
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 26 20 10 10
Gain on disposal of property and equipment (5) - - (272)
Change in Deferred income taxes, net - 45 - 120
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable.... (270) (379) 235 (190)
(Increase) decrease in prepaids and
other current assets....................... 16 (13) (13) (74)
Increase (decrease) in accounts payable and
accrued liabilities.......................... 259 60 150 170
Income taxes payable 10 6 34 -
Other assets 4 (2) - 5
-------------- -------------- -------------- --------------
Net cash provided by (used in) operating
activities............................. 70 (133) 501 36
-------------- -------------- -------------- --------------
Cash flows from investing activities:
Proceeds on the sale of assets 8 - - 275
Purchases of property and equipment................ (5) (24) (16) (8)
-------------- -------------- -------------- --------------
Net cash (used in) investing activities... 3 (24) (16) 267
-------------- -------------- -------------- --------------
Cash flows from financing activities:
Issuance of stock.................................. 1 - - -
Net repayments from (advances to) related parties.. - - - (244)
Dividends to stockholder............................... - (1) - (4)
Payments on capital lease obligations.............. - (5) (2) (2)
Net borrowing (repayments) on bank line of credit. (140) 34 (345) (24)
-------------- -------------- -------------- --------------
Net cash provided by (used in)financing
activities.......................... (139) 28 (347) (274)
-------------- -------------- -------------- --------------
Net increase (decrease) in cash........................ (66) (129) 138 29
Cash (overdraft)at beginning of period................. 47 (19) (19) (148)
============== ============== ============== ==============
Cash (overdraft)at end of period....................... $ (19) $(148) $ 119 $ (119)
============== ============== ============== ==============
Supplemental disclosures of cash flow information:
Interest paid...................................... $ 54 $ 50 $ 24 $ 19
Income taxes paid.................................. $ 13 $ 64 $ 39 $ -
Non cash transactions Investing and financing
activities..........................
Capital lease obligations incurred............ $ 10 $ 8 $ 8 $ -
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
JASTECH, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
Note 1 - Business Organization
JasTech, Inc. and JasTech of Florida, Inc. are professional services firms
that provide information systems analysis, programming and support to various
industries. JasTech, Inc. and JasTech of Florida, Inc. are herein collectively
referred to as "JasTech" or the "Company." JasTech, Inc. was incorporated in
December 1984 and JasTech of Florida, Inc. was incorporated in December 1993.
Substantially all of the Company's operations are in Ohio and Florida.
On September 30, 1996, JasTech entered into and completed an agreement and
plan of reorganization and merger with Cotelligent Group Inc. ("Cotelligent"),
whereby the Company exchanged all of its outstanding stock for common stock of
Cotelligent. The business combination will be accounted for under the
pooling-of-interests method of accounting.
Note 2 - Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Basis of Combination
The accompanying financial statements combine the accounts of JasTec, Inc.
and JasTech of Florida, Inc. as both entities are controlled under common
ownership.
Property and Equipment
Property and equipment are stated at historical cost. Depreciation,
including amortization of capital leases, is provided over the estimated useful
lives of the respective assets on a straight line basis. The useful lives vary
from five to seven years. Leasehold improvements are depreciated over the
shorter of the remaining lease term or estimated useful life.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
Receivables arising from services provided to clients are not collateralized and
accordingly, the Company performs ongoing credit evaluations of its clients to
reduce the risk of loss.
Revenue Recognition
Revenue is recognized as services are performed.
F-34
<PAGE>
JASTECH, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Amounts)
Fair Value of Financial Instruments
The fair value of debt is considered to approximate carrying value as the
interest rates approximate those currently available.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). The asset and liability approach used in SFAS 109 requires the recognition
of deferred tax assets and liabilities for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities.
Effective January 1, 1996, JasTech of Florida, Inc. elected to be taxed as
an S corporation for federal and state income tax purposes. Accordingly, any tax
liabilities subsequent to this date and prior to the merger with Cotelligent,
are the responsibility of the stockholder of JasTech of Florida, Inc.
Effective September 30, 1996, JasTech of Florida, Inc.'s S corporation
status terminated as a result of the merger with Cotelligent.
Earnings Per Share
Historical earnings per share has not been presented because it is not
considered to be meaningful as a result of the merger with Cotelligent as
discussed in Note 1.
Unaudited Interim Financial Statements
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of June 30, 1996 and the results of
operations and cash flows for the six months ended June 30, 1995 and 1996, as
presented in the accompanying unaudited interim financial statements.
Note 3 - Property and Equipment
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1994 1995
--------------- ----------------
<S> <C> <C>
Office equipment and computer............................. $ 96 $ 127
Furniture and fixtures.................................... 79 80
--------------- ----------------
175 207
Less: Accumulated depreciation............................ 129 150
=============== ================
$ 46 $ 57
=============== ================
</TABLE>
Depreciation and amortization expense for the years ended 1994 and 1995 was
$26 and $20, respectively.
F-35
<PAGE>
JASTECH, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Amounts)
Note 4 - Credit Facilities
<TABLE>
Short-Term Debt
Short-term debt consists of the following.
<CAPTION>
December 31,
---------------
1994 1995
---- ----
<S> <C> <C>
Revolving lines of credit $590 $624
Current portion of capital lease obligation 3 6
</TABLE>
The Company has two line of credit agreements with two separate banks
providing for borrowings up to a maximum of $900 and $300. Borrowings bear
interest at the prime rate plus 0.50% and 1.25% per annum (9.00% and 9.75% at
December 31, 1995, respectively), payable quarterly and monthly, respectively.
The agreements, which expire April 30, 1997 and May 31, 1997, respectively, are
secured by accounts receivable and fixed assets of the Company. The line is
personally guaranteed by the shareholder of the company.
The lines of credit contain various covenants that include among other
things, restrictions on debt and distributions, expenditures and the maintenance
of certain financial ratios. The Company was in default of these covenants at
December 31, 1995, the latest measurement period. As a result of the merger with
Cotelligent, one of the lines of credit was paid off, while the other has been
allowed to continue until JasTech can begin participating in Cotelligent's
banking relationship.
Long-Term Debt
Long-term debt consists of a capital lease obligation, net of the current
portion.
Note 5 - Lease Commitments
Operating Leases
Future minimum lease payments for the Company's operating leases are as
follows.
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<C> <C>
1996 ........................................ $ 94
1997 ........................................ 89
1998 ........................................ 89
========
$ 272
========
</TABLE>
Total lease expense recorded by the Company was $101 and $123 for
the years ended December 31, 1994 and 1995, respectively.
F-36
<PAGE>
JASTECH, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Amounts)
Capital Leases
Future minimum lease payments for the Company's capital leases are as
follows.
<TABLE>
<CAPTION>
Year Ending
December 31,
<C> <C>
1996................................................ $ 7
1997................................................ 7
----------
14
Less: Amounts representing interest................. (2)
----------
Present value of minimum lease payments............. $ 12
==========
</TABLE>
The Company leases certain equipment under a lease arrangement, which has
been accounted for as a capital lease. Assets under capital lease with a cost of
$18 and net book value of $15 at December 31, 1995 are included in the property,
and equipment in the accompanying balance sheet.
Note 6 -Income Taxes
The provision for income taxes is as follows.
<TABLE>
<CAPTION>
December 31,
1994 1995
<S> <C> <C>
Current
Federal........................ $ 13 $ 117
Deferred
Federal........................ - (45)
-------- ---------
Total provision for taxes........ $ 13 $ 72
======== =========
</TABLE>
Deferred tax assets are comprised of accrued liabilities, primarily
related to deferred compensation, of $165 and $120 at December 31, 1994
and 1995.
The Company's effective income tax rate varied from the federal
statutory tax date as follows.
<TABLE>
<CAPTION>
Ended December 31,
1994 1995
<S> <C> <C>
US federal statutory rate........ 25.0% 34.0%
Other............................ 5.2% 1.1%
========= ==========
Effective tax rate............... 30.2% 35.1%
========= ===========
</TABLE>
As discussed in Note 1, JasTech of Florida, Inc. elected to be taxed as an
S Corporation effective January 1, 1996. Accordingly, the unaudited pro forma
income tax information presented on the Statement of Operations is presented in
accordance with Statement of Financial Accounting Standards No.109 ("SFAS 109")
as if JasTech of Florida, Inc. had been subject to federal income taxes for the
interim period presented.
F-37
<PAGE>
JASTECH, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Amounts)
Note 7 - Employee Benefit Plans
The Company maintains a salary reduction plan (401(k)) for the benefit of
all employees after six months of continuous service. Contributions to the plan
are at the discretion of the employee with no employer matching.
Note 8 - Related Parties
Related Party Transactions
The Company currently leases office space in Boca Raton, Florida from the
shareholder of the Company. The Company leases the space on a month to month
basis. Rent expense associated with this lease amounted to $22 for each of the
two years ended December 31, 1994 and 1995.
The Company rented certain equipment from an affiliate of the shareholder
during 1994 and 1995. Total payments made on such equipment were $16 for each of
the years ended December 31, 1994 and 1995.
Deferred Compensation Plan
The Company was paying a former employee termination benefits amounting to
$3 per month starting in January 1992 continuing through June 2002 in accordance
with a separation agreement. During July 1996 the Company cashed out the
agreement for the present value resulting in the payment of $235.
Note 9 - Significant Clients
During 1995 and 1994, three major clients generated revenues that exceeded
10% of total revenues. The percentage of net revenues from these clients is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------ ------------------------
1994 1995
----------------------- -----------------------
<S> <C> <C>
Client A 11.8% 14.9%
Client B 15.2% 10.1%
Client C - * 14.5%
* Amount did not exceed 10%
</TABLE>
Note 10 - Subsequent Events
On January 2, 1996, JasTech entered into an agreement to sell to an
unrelated third party substantially all of its assets and businesses associated
with its branch operations located in Charlotte, North Carolina for a sales
price of $275. A gain of $272 was recognized on the sale.
F-38
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholder
of ESP Software Services, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of ESP Software
Services, Inc. at December 31, 1995 and 1994, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 1, on June 28, 1996, ESP Software Services, Inc.
entered into and completed an agreement and plan of reorganization and merger
with Cotelligent Group, Inc.
Price Waterhouse LLP
Minneapolis, Minnesota
July 23, 1996
F-39
<PAGE>
<TABLE>
ESP SOFTWARE SERVICES, INC.
BALANCE SHEET
(In Thousands, Except Share Amounts)
<CAPTION>
(Unaudited)
December 31, March 31,
------------------------------- ---------------
ASSETS 1995 1994 1996
------------- ------------- ---------------
<S> <C> <C> <C>
Current assets:
Cash.................................................................... $ 1 $ -- $ --
Accounts receivable, less allowance for doubtful accounts of $15
at March 31, 1996................................................... 1,423 1,096 1,715
Prepaid expenses and other assets....................................... 100 57 64
------------- ------------- ---------------
Total current assets................................................. 1,524 1,153 1,779
Property and equipment, net............................................. 287 79 300
Note receivable - stockholder........................................... 94 -- 91
Other assets............................................................ 1 4 --
============= ============= ===============
Total assets......................................................... $1,906 $1,236 $2,170
============= ============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Cash overdraft.......................................................... $ -- $ 11 $ 53
Bank line of credit..................................................... 625 -- 824
Current portion of long-term debt....................................... 51 14 52
Accounts payable - trade................................................ 70 31 188
Related party payable................................................... 6 208 --
Unearned revenue........................................................ -- 62 --
Accrued compensation and payroll taxes.................................. 301 312 280
Other liabilities....................................................... 1 3 1
------------- ------------- ---------------
Total current liabilities............................................ 1,054 641 1,398
Long-term debt; including related party of $136, $150, and $-0-............ 188 136 175
Deferred compensation..................................................... 548 548 548
Stockholders' equity (deficit):
Common stock - authorized 20,000 shares, no par
value, issued and outstanding 1,074 shares........................... 1 1 1
Retained earnings (deficit)............................................. 115 (90) 48
------------- ------------- ---------------
Total stockholders' equity (deficit)................................. 116 (89) 49
============= ============= ===============
Total liabilities and stockholders' equity (deficit)................. $1,906 $ 1,236 $2,170
============= ============= ===============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-40
<PAGE>
<TABLE>
ESP SOFTWARE SERVICES, INC.
STATEMENT OF OPERATIONS
(In Thousands)
<CAPTION>
(Unaudited)
For the Year Ended For the Three Months Ended
December 31, March 31,
---------------------------------------------- ------------------------------------------
1995 1994 1996 1995
-------------------- ---------------------- -------------------- ----------------
<S> <C> <C> <C> <C>
Revenues.............................. $ 10,274 $ 6,950 $ 2,757 $ 2,269
Cost of services...................... 6,712 4,496 1,798 1,419
-------------------- ---------------------- --------------------- -----------------
Gross margin.................... 3,562 2,454 959 850
Selling, general and
administrative expenses............ 3,247 2,660 994 816
-------------------- ---------------------- --------------------- -----------------
Operating income (loss)............... 315 (206) (35) 34
Other (income) expense:
Interest income.................... -- (3) (2) --
Interest expense................... 108 14 34 16
-------------------- ---------------------- --------------------- -----------------
Total other expense............. 108 11 32 16
-------------------- ---------------------- --------------------- -----------------
Income (loss) before provision for
income taxes....................... 207 (217) (67) 18
Provision for income taxes............ 2 2 -- --
-------------------- ---------------------- --------------------- -----------------
Net income (loss)..................... $ 205 $ (219) $ (67) $ 18
==================== ====================== ===================== =================
Unaudited Pro Forma information:
Income (loss) before provision for
income taxes ...................... $ 207 $ (217) $ (67) $ 18
Pro Forma provision (benefit) for
income taxes....................... 83 (87) (27) 7
--------------------- ----------------------- --------------------- -----------------
Pro Forma net income (loss)
(see Note 8) ...................... $ 124 $ (130) $ (40) $ 11
===================== ======================= ===================== =================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-41
<PAGE>
<TABLE>
ESP SOFTWARE SERVICES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(In Thousands, Except Share Amounts)
<CAPTION>
Common Stock
---------------------------------- Retained
Shares Amount Earnings Total
---------------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993................ 2,027 $ 2 $ 589 $ 591
Stock redemption........................ (953) (1) (206) (207)
Net (loss).............................. -- -- (219) (219)
Dividends paid.......................... -- -- (254) (254)
---------------- --------------- ------------------- -----------------
Balance at December 31, 1994................ 1,074 1 (90) (89)
Net income.............................. -- -- 205 205
---------------- --------------- ------------------- -----------------
Balance at December 31, 1995................ 1,074 1 115 116
Net (loss).............................. -- -- (67) (67)
--------------- --------------- ------------------ -----------------
Balance at March 31, 1996 (Unaudited)....... 1,074 $ 1 $ 48 $ 49
================ =============== =================== ==================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-42
<PAGE>
<TABLE>
ESP SOFTWARE SERVICES, INC.
STATEMENT OF CASH FLOWS
(In Thousands)
<CAPTION>
(Unaudited)
For the Year Ended For the Three Months Ended
December 31, March 31,
---------------------------------- ----------------------------------
1995 1994 1996 1995
---------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $ 205 $ (219) $ (67) $ 18
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 81 23 33 12
Changes in assets and liabilities:
Increase in accounts receivable................ (327) (431) (292) (11)
(Increase) decrease in prepaids and
other assets............................... (42) (45) 37 (32)
Increase (decrease) in accounts payable and
accrued liabilities.......................... (238) 381 91 100
Increase in deferred compensation.............. -- 550 -- --
--------------- --------------- ------------- ---------------
Net cash provided by (used in) operating
activities............................. (321) 259 (198) 87
--------------- --------------- ------------- ---------------
Cash flows from investing activities:
Purchase of equipment.............................. (156) (39) (45) (171)
Loan to stockholder................................ (94) -- 3 --
--------------- --------------- ------------- ---------------
Net cash (used in) investing activities... (250) (39) (42) (171)
--------------- --------------- ------------- ---------------
Cash flows from financing activities:
Stock redemption................................... -- (206) -- --
Dividends to stockholders.......................... -- (254) -- (185)
Proceeds from long-term debt....................... -- 165 -- 131
Principal payments of long-term debt............... (14) (15) (4) (8)
Payment of capital lease obligations............... (28) -- (9) --
Proceeds from bank line of credit.................. 625 -- 199 200
--------------- --------------- ------------- ---------------
Net cash provided (used in)
by financing activities............... 583 (310) 186 138
--------------- --------------- ------------- ---------------
Net increase (decrease) in cash........................
12 (90) (54) 54
Cash (overdraft) at beginning of period................ (11) 79 1 (11)
--------------- --------------- ------------- ---------------
Cash (overdraft) at end of period...................... $ 1 $ (11) $ (53) $ 43
=============== =============== ============= ===============
Supplemental disclosures of cash flow information:
Interest paid...................................... $ 108 $ 14 $ 34 $ 16
Income taxes paid.................................. $ 3 $ 1 $ -- $ --
<FN>
The Company had non-cash financing transactions relating to capital leases on new equipment of $131 in 1995.
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-43
<PAGE>
ESP SOFTWARE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
Note 1 - Business Organization
ESP Software Services, Inc. ("ESP") is a professional services firm that
provides information systems analysis, programming and support to various
industries. Substantially all of ESP's operations are in Minnesota.
On June 28, 1996, ESP entered into and completed an agreement and plan of
reorganization and merger with Cotelligent Group Inc. ("Cotelligent"), whereby
ESP exchanged all of its outstanding stock for common stock of Cotelligent. The
business combination will be accounted for under the pooling-of-interests method
of accounting.
Note 2 - Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Property and Equipment
Property and equipment are stated at historical cost. Depreciation,
including amortization of capital leases, is provided over the estimated useful
lives of the respective assets on a straight line basis. Leasehold improvements
are depreciated over the shorter of the remaining lease term or estimated useful
life.
Concentration of Credit Risk
Financial instruments that potentially subject ESP to concentrations of
credit risk consist principally of trade accounts receivable. Receivables
arising from services provided to clients are not collateralized and
accordingly, ESP performs ongoing credit evaluations of its clients to reduce
the risk of loss.
Revenue Recognition
Revenue is recognized as services are performed.
Fair Value of Financial Instruments
For cash and cash equivalents, the carrying amount approximates fair value
because of the short-term maturity of those instruments. The fair value of debt
is considered to approximate carrying value as the rates approximate those
currently available.
F-44
<PAGE>
ESP SOFTWARE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Amounts)
Income Taxes
ESP accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). The
asset and liability approach used in SFAS 109 requires the recognition of
deferred tax assets and liabilities for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities.
Prior to the merger on June 28, 1996, ESP elected to be taxed as an S
corporation for federal and state income tax purposes. Accordingly, any tax
liabilities were the responsibility of the ESP stockholder. The State of
Minnesota imposes a minimum fee on all corporations, which was $2 in both 1995
and 1994, and which has been properly reflected in the financial statements.
Effective June 28, 1996, ESP's S Corporation status terminated and the
Company will be taxed as a C corporation as a result of the merger with
Cotelligent. In connection with this conversion, approximately $608 was recorded
as income tax expense which represents the net deferred tax liabilities of ESP.
This amount will be paid ratably over a four-year period. See Note 8 for
unaudited pro forma income tax information.
Unaudited Interim Financial Statements
In the opinion of management, ESP has made all adjustments, consisting only
of normal recurring accruals, necessary for a fair presentation of the financial
condition of ESP as of March 31, 1996 and the results of operations and cash
flows for the three months ended March 31, 1995 and 1996, as presented in the
accompanying unaudited interim financial statements.
<TABLE>
Note 3 - Property and Equipment
<CAPTION>
1995 1994
--------------- ----------------
<S> <C> <C>
Office equipment.......................................... $ 369 $ 109
Software.................................................. 23 7
Leasehold improvements.................................... 11 --
--------------- ----------------
403 116
Less: Accumulated depreciation............................ 116 37
--------------- ----------------
$ 287 $ 79
=============== ================
<FN>
Depreciation and amortization expense for the years ended December 31, 1995 and 1994 was $81 and $23, respectively.
</FN>
</TABLE>
F-45
<PAGE>
ESP FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Amounts)
Note 4 - Credit Facilities
Bank Line of Credit
In 1995, Electronic Systems Personnel, Inc., an affiliated organization
through common ownership, and ESP obtained a combined revolving line of credit
of $1,000 personally guaranteed by the stockholder with interest at 1 1/4% over
the bank's base rate. The line of credit was secured by accounts receivables and
general tangible assets of both companies and required the maintenance of
certain financial covenants. ESP had outstanding advances of $625 and Electronic
Systems Personnel, Inc. had outstanding advances of $195 at December 31, 1995.
In conjunction with the merger with Cotelligent, ESP has subsequently repaid
this line of credit.
<TABLE>
Long-term debt consists of the following.
<CAPTION>
1995 1994
------------------- ------------------
<S> <C> <C>
Note - Former stockholder, payable in quarterly installments
of $7 plus interest at 2% over the index rate established
by National City Bank on January 1 of each year, due in
December 2001............................................. $ 136 $ 150
Lease obligation - Financial Management Leasing, payable
in monthly installments of $4 including interest at
14.35%, due in March 1998................................. 103 --
------------------- ------------------
239 150
Less: Current portion........................................ 51 14
------------------- ------------------
$ 188 $ 136
=================== ==================
</TABLE>
<TABLE>
Total maturities of long-term debt are as follows.
<CAPTION>
Years ending December 31,
------------------------------------------------------------
<S> <C>
1996........................ $ 51
1997........................ 58
1988........................ 42
1999........................ 20
2000........................ 22
Thereafter.................. 46
--------------
Less: Current portion....... 51
--------------
Total long-term debt........ $ 188
==============
<FN>
The note payable to a former stockholder in the amount of $136 was subsequently paid in full in conjunction with the
merger with Cotelligent on June 28, 1996.
</FN>
</TABLE>
F-46
<PAGE>
ESP FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Amounts)
Note 5 - Related Parties
Related Party Transactions
ESP is related to Electronic Systems Personnel, Inc. through common
ownership. ESP shares office space as well as various administrative resources
with Electronic Systems Personnel, Inc. Additionally, certain ESP employees are
hired through Electronic Systems Personnel, Inc., a placement firm. Below is a
summary of significant transactions and account balances between the two
companies:
<TABLE>
<CAPTION>
1995 1994
---------------- ---------------
<S> <C> <C>
Due to Electronic Systems Personnel, Inc............................. $ 6 $ 209
Administrative expense............................................... 164 73
Placement fee expense................................................ 527 526
</TABLE>
Stock Redemption
On May 5, 1994, ESP entered into an agreement with a stockholder owning a
47% interest in the Company to redeem all of the 953 shares held by him for
$206, of which $41 was paid at closing and the balance of $165 payable quarterly
over an eight year period with interest accruing at the rate of 2% in excess of
the index rate established by National City Bank. In addition, the agreement
provided for an additional payment for the stock in the event of a subsequent
sale of ESP. The balance outstanding on this obligation at December 31, 1995 and
1994 was $136 and $150, respectively.
In conjunction with the agreement and plan of reorganization and merger,
the remaining principal balance of the note payable above was paid in full on
June 28, 1996. Additionally, $552 was paid as a distribution to the former
stockholder in accordance with the terms of the stock redemption agreement.
Deferred Compensation Plan
In connection with the stock redemption agreement discussed above, ESP
entered into a salary continuation agreement with the former stockholder in
recognition of his contributions to the growth, management and success of ESP.
The salary continuation agreement provided that the stockholder be paid an
annual sum of $45 for each of the years 1994 through 1997, and an annual sum of
$93 for each of the years 1998 through 2005. The agreement provides for a
discount rate of 8% to arrive at the present value of the unpaid salary
continuation payments. The unpaid present value of this obligation at December
31, 1995 and 1994 was $548.
In conjunction with the agreement and plan of reorganization and merger,
the remaining principal balance of the deferred compensation was paid in full on
June 28, 1996.
F-47
<PAGE>
ESP FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Amounts)
Note Receivable - Stockholder
At December 31, 1995, ESP had a $94 note receivable from its principal
stockholder due in five equal principal installments of $19 beginning January 1,
1997. Interest at 8% is due quarterly with the first payment on April 1, 1996.
Note 6 - Pension Plan
ESP adopted a salary reduction/profit sharing plan (the "Plan") in 1994
under the provisions of Section 401(k) of the Internal Revenue Code. The Plan
covers all full-time employees who have completed one full year of service with
ESP. ESP is required to contribute an amount equal to 25% of the salary
reduction elected by each employee up to a maximum reduction of 4% of their
annual salary. In addition, ESP may make a discretionary contribution. ESP
contributions totaled $27 and $15 for December 31, 1995 and 1994, respectively.
Note 7 - Commitments
In June 1991, in connection with the purchase of certain assets of
Professional Resources, Inc., employment and non-compete agreements were entered
into with this entity's president. The employment agreement provides for payment
of monthly compensation of $13 plus bonuses equal to 10% of ESP's monthly net
income. This bonus was $47 and $18 in 1995 and 1994, respectively. The
non-compete agreement states that the former president may not compete, directly
or indirectly, during his employment with ESP and for one year thereafter.
Note 8 - Unaudited Pro Forma Income Tax Information
As described in Note 2, effective June 28, 1996, ESP will be taxed as a C
corporation as a result of the merger with Cotelligent. The following unaudited
pro forma income tax information is presented in accordance with Statement of
Financial Accounting Standards No. 109 as if ESP had been a C corporation
subject to federal and state income taxes through the periods presented.
<TABLE>
<CAPTION>
For the Year Ended For the Three Months Ended
December 31, March 31,
------------------------------- -------------------------------
1995 1994 1996 1995
------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
Income (loss) before provision for income taxes... $ 207 $ (217) $ (67) $ 18
Provision (benefit) for income taxes.............. 83 (87) (27) 7
------------- ------------- -------------- -------------
Pro forma net income (loss)....................... $ 124 $ (130) $ (40) $ 11
============= ============= ============== =============
</TABLE>
Note 9 - Significant Clients
One client accounted for approximately 15% and 15% of revenues in 1995 and
1994, respectively.
F-48
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholder of
INNOVA Solutions, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of INNOVA Solutions, Inc. at December
31, 1995 and 1994, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 1, on June 28, 1996, INNOVA Solutions, Inc. entered
into and completed an agreement and plan of reorganization and merger with
Cotelligent Group, Inc.
Price Waterhouse LLP
Minneapolis, Minnesota
July 1, 1996
F-49
<PAGE>
<TABLE>
INNOVA SOLUTIONS, INC.
BALANCE SHEET
(In Thousands, Except Share Amounts)
<CAPTION>
(Unaudited)
December 31, March 31,
---------------------------------------- ------------------
ASSETS 1995 1994 1996
------------------ --------------- ------------------
<S> <C> <C>
Current assets:
Cash................................................... $ 6 $ 203 $ 355
Restricted cash........................................ 100 -- --
Accounts receivable, less allowance for doubtful
accounts of $15 at March 31, 1996................... 1,161 437 1,190
Receivable from stockholder............................ 28 -- 28
Other current assets................................... 1 3 --
------------------ --------------- ------------------
Total current assets................................ 1,296 643 1,573
Property and equipment, net............................ 45 22 54
Receivable from stockholder............................ - 36 -
------------------ --------------- ------------------
Total assets........................................ $ 1,341 $ 701 $ 1,627
================== =============== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt, including notes payable to related
parties of $99 and $159, respectively............... $ 196 $ 159 $ 281
Accounts payable....................................... 54 13 --
Accrued compensation................................... 255 147 261
Accrued income taxes................................... -- 35 --
Other liabilities...................................... 15 17 45
------------------ ---------------- -------------------
Total current liabilities........................... 520 371 587
Capital lease obligation, less current portion............ 12 -- 11
Stockholder's equity:
Common stock - $.01 par value, 100,000 shares
authorized and issued, 51,000 shares outstanding.... 1 1 1
Additional paid-in capital............................. 9 9 9
Treasury stock - 49,000 shares......................... (100) (100) (100)
Retained earnings...................................... 899 420 1,119
------------------ --------------- ------------------
Total stockholder's equity.......................... 809 330 1,029
------------------ --------------- ------------------
Total liabilities and stockholder's equity.......... $ 1,341 $ 701 $ 1,627
================== =============== ==================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-50
<PAGE>
<TABLE>
INNOVA SOLUTIONS, INC.
STATEMENT OF OPERATIONS
(In Thousands)
<CAPTION>
(Unaudited)
For the Year Ended For the Three Months Ended
December 31, March 31,
------------------------------------ ------------------------------------
1995 1994 1996 1995
----------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
Revenues................................ $ 5,867 $ 2,860 $ 2,034 $ 1,283
Cost of services........................ 4,017 1,887 1,369 865
------------------ ------------------ ------------------ ------------------
Gross margin..................... 1,850 973 665 418
Selling, general and administrative
expenses............................. 1,174 1,140 350 223
------------------ ------------------ ------------------ ------------------
Operating income (loss)................ 676 (167) 315 195
Other (income) expense:
Interest expense..................... 17 19 5 2
Interest income...................... (6) (8) -- (1)
Other................................ (3) (7) -- --
------------------ ------------------ ------------------ -------------------
Total other expense................ 8 4 5 1
------------------ ------------------ ------------------ -------------------
Income (loss) before provision for
income taxes......................... 668 (171) 310 194
(Benefit) for income taxes............. -- (92) -- --
------------------ ------------------ ------------------ ------------------
Net income (loss)...................... $ 668 $ (79) $ 310 $ 194
================== ================== ================== ==================
Unaudited Pro Forma information:
Income (loss) before provision
for income taxes.................. $ 668 $ (171) $ 310 $ 194
Pro Forma provision (benefit)
for income taxes.................. 227 (58) 124 66
------------------ ------------------ ------------------ -----------------
Pro Forma net income (loss)........... $ 441 $ (113) $ 186 $ 128
================== ================== ================== =================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-51
<PAGE>
<TABLE>
INNOVA SOLUTIONS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands, Except Share Amounts)
<CAPTION>
Additional
Common Stock Paid-In Retained Treasury
Shares Amount Capital Earnings Stock Total
---------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993.. 100,000 $ 1 $ 9 $ 499 $ (100) $ 409
Net (loss)........................ -- -- -- (79) -- (79)
---------- --------- -------- ---------- ---------- ---------
Balance at December 31, 1994... 100,000 1 9 420 (100) 330
Dividends......................... -- -- -- (189) -- (189)
Net income........................ -- -- -- 668 -- 668
---------- --------- --------- ---------- ---------- ---------
Balance at December 31, 1995... 100,000 1 9 899 (100) 809
Net income........................ -- -- -- 310 -- 310
Dividends......................... -- -- -- (90) -- (90)
---------- --------- --------- ---------- ---------- ---------
Balance at March 31, 1996 (Unaudited).... 100,000 $ 1 $ 9 $1,119 $ (100) $ 1,029
========== ========= ========= ========== ========== =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-52
<PAGE>
<TABLE>
INNOVA SOLUTIONS, INC.
STATEMENT OF CASH FLOWS
(In Thousands)
<CAPTION>
(Unaudited)
For the Year Ended For the Three Months Ended
December 31, March 31,
---------------------------------- --------------------------------
1995 1994 1996 1995
---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $ 668 $ (79) $ 310 $ 194
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation..................................... 8 22 3 1
Deferred income taxes, net....................... -- 47 -- --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable..... (724) 254 (29) (217)
(Increase) decrease in prepaid expenses and
other current assets......................... 2 (3) 1 (6)
(Decrease) in income taxes payable............. (35) (39) -- --
Increase (decrease) in accounts payable
and accrued expenses....................... 147 (114) (18) 54
--------------- --------------- -------------- --------------
Net cash provided (used in)by operating
activities................................ 66 88 267 26
--------------- --------------- -------------- --------------
Cash flows from investing activities:
Purchase of property and equipment................. (12) (20) (12) (1)
Stockholder receivable............................. 8 (25) -- 10
--------------- --------------- -------------- --------------
Net cash provided by (used in) investing
activities................................ (4) (45) (12) 9
--------------- --------------- -------------- --------------
Cash flows from financing activities:
Proceeds from line of credit, net.................. 95 -- 100 --
Payment on capital lease obligations............... (5) -- (1) --
Payment of loans from related parties.............. (60) -- (15) --
Payment of dividends............................... (189) -- (90) --
Proceeds from related parties loans................ -- 10 -- --
Payment of other long-term debt.................... -- (32) -- --
--------------- --------------- -------------- --------------
Net cash provided by (used in) financing
activities................................ (159) (22) (6) --
--------------- --------------- -------------- --------------
Net (decrease) increase in cash and cash equivalents... (97) 21 249 35
Cash and restricted cash at beginning of period........ 203 182 106 203
=============== =============== ============== ==============
Cash and restricted cash at end of period.............. $ 106 $ 203 $ 355 $ 238
=============== =============== ============== ==============
Supplemental disclosures of cash flow information:
Interest paid...................................... $ 18 $ 23 $ 5 $ 5
Income taxes paid.................................. $ 35 $ -- $ -- $ --
<FN>
ISI had non-cash financing transactions relating to capital leases on new equipment of $19 in 1995.
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-53
<PAGE>
INNOVA SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
Note 1 - Business Organization
Innova Solutions, Inc. ("ISI"), a Texas corporation, commenced operations
in 1991. ISI is a professional services firm that provides computer consulting
and contract programming services.
On June 28, 1996, ISI entered into and completed an agreement and plan of
reorganization and merger with Cotelligent Group, Inc. ("Cotelligent"), whereby
ISI exchanged all of its outstanding stock for common stock of Cotelligent. The
business combination will be accounted for under the pooling-of-interests method
of accounting.
Note 2 - Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Restricted Cash
In accordance with the terms of ISI's line of credit, ISI is required to
maintain a restricted cash reserve of $100.
Property and Equipment
Property and equipment are recorded at cost. Depreciation, including
amortization of capitalized leases, is calculated using the straight-line method
over the estimated useful lives of the respective assets.
Concentration of Credit Risk
Financial instruments that potentially subject ISI to concentrations of
credit risk consist principally of trade accounts receivable. Receivables
arising from services provided to clients are not collateralized and accordingly
the Company performs ongoing credit evaluations of its clients to reduce the
risk of loss.
Revenue Recognition
Revenue is recognized as services are performed.
Income Taxes
ISI accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). The
asset and liability approach used in SFAS 109 requires the recognition of
deferred tax assets and liabilities for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities.
F-54
<PAGE>
INNOVA SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Amounts)
Effective with the tax year beginning January 1, 1995, ISI elected to be
taxed for federal and state income tax purposes as an S corporation.
Accordingly, as an S corporation, any tax liabilities are the responsibility of
the ISI shareholder.
In addition, effective June 28, 1996 the Company's S corporation status
terminated and the Company will be taxed as a C corporation as a result of the
merger with Cotelligent. In connection with this conversion, approximately $191
was recorded as income tax expense which represents the net deferred tax
liabilities of ISI. See also Notes 5 and 8.
Fair Value of Financial Instruments
For cash and cash equivalents, the carrying amount approximates fair value
because of the short-term maturity of those instruments. The fair value of debt
is considered to approximate carrying value as the rates approximate those
currently available.
Unaudited Interim Financial Statements
In the opinion of management, ISI has made all adjustments, consisting only
of normal recurring accruals, necessary for a fair presentation of the financial
condition of ISI as of March 31, 1996 and the results of operations and cash
flows for the three months ended March 31, 1995 and 1996, as presented in the
accompanying unaudited interim financial statements.
Note 3 - Property & Equipment
<TABLE>
Property and equipment consists of the following.
<CAPTION>
1995 1994
--------------------- ------------------
<S> <C> <C>
Automobiles and trucks....................... $ 20 $ --
Furniture and fixtures....................... 18 15
Office equipment............................. 39 31
--------------------- ------------------
77 46
Less: Accumulated depreciation.............. 32 24
--------------------- ------------------
$ 45 $ 22
===================== ==================
<FN>
Depreciation expense for the years ended December 31, 1995 and 1994 was $8 and $22, respectively.
</FN>
</TABLE>
Note 4 - Credit Facilities
<TABLE>
Short-term debt consists of the following:
<CAPTION>
1995 1994
--------------------- -------------------
<S> <C> <C>
Revolving line of credit...................... $ 95 $ --
Loans from related parties.................... 99 159
Current portion of capital lease obligation... 2 --
--------------------- ------------------
$ 196 $ 159
===================== ==================
</TABLE>
F-55
<PAGE>
INNOVA SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Amounts)
ISI's line of credit agreement with its bank provides for borrowings up to
a maximum amount of $250. Borrowings bear interest at the prime rate plus 2.0%
per annum (10.5% at December 31, 1995), payable monthly. The agreement, which
expired May 9, 1996, is secured by accounts receivable and property and
equipment. The line is personally guaranteed by the stockholder.
The loans from related parties bear interest between 8.0 % and 12.5%,
payable on demand and contain no financial or restrictive covenants.
Long-Term Debt
Long-term debt consists of a capital lease obligation, net of the current
portion, of $12 and $0 as of December 31, 1995 and 1994, respectively.
Note 5 - Income Taxes
As discussed in Note 2, ISI was a C corporation until December 31, 1994 at
which time ISI elected to be taxed as an S corporation, and therefore, any tax
liabilities subsequent to this date were the responsibility of ISI's
shareholder. Accordingly, net deferred tax liabilities of approximately $117 as
of December 31, 1994 were recognized in income upon the conversion in 1994.
<TABLE>
The provision (benefit) for income taxes is as follows:
<CAPTION>
1994
------------
<S> <C>
Current federal................................................................................... $ 51
Deferred federal.................................................................................. (143)
------------
Total........................................................................................ $ (92)
============
</TABLE>
<TABLE>
The Company's effective income tax rate varied from the U.S. federal statutory rate as follows:
<CAPTION>
1994
-------------
<S> <C>
U.S. federal statutory rate...................................................................... (34.0)%
Conversion to S corporation...................................................................... (19.8)
=============
Effective rate........................................................................ (53.8)%
=============
</TABLE>
As a result of the merger with Cotelligent on June 28, 1996, ISI's S
corporation will be terminated. Approximately $191 of deferred tax liabilities
was recorded at this time and these federal and state taxes will be paid ratably
over the next four years.
F-56
<PAGE>
INNOVA SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Amounts)
Note 6 - Lease Commitments
<TABLE>
Future minimum lease payments under ISI's operating leases are as follows:
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1996 ............................................................ $ 3
1997 ............................................................ 3
1998 ............................................................ 1
=============
$ 7
=============
</TABLE>
Total rent and lease expense recorded by ISI in fiscal years 1995 and 1994
was $44 and $34, respectively.
ISI leases certain equipment under a lease arrangement, which has been
accounted for as a capital lease. Assets under capital lease with a cost of $19
and net book value of approximately $17 at December 31, 1995 are included in
property, plant, and equipment in the accompanying balance sheet. Depreciation
of the capital lease is included in depreciation expense.
Note 7 - Employee Benefit Plans
ISI maintains an unfunded 401(k) plan which includes employees who have at
least one-half a year of continuous service. Contributions to the plan are made
at the discretion of ISI based on employee elections. ISI made no contributions
for the years ended December 31, 1995 or 1994.
Note 8 - Unaudited Pro Forma Income Tax Information
As described in Note 2, effective June 28, 1996, ISI will be taxed as a C
corporation as a result of the merger with Cotelligent. The following unaudited
pro forma income tax information is presented in accordance with Statement of
Financial Accounting Standards No. 109 as if ISI had been a C corporation
subject to federal and state income taxes through the periods presented.
<TABLE>
<CAPTION>
For the Year Ended For the Three Months Ended
December 31, March 31,
--------------------------------- -----------------------------------
1995 1994 1996 1995
---------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Income (loss) before provision
for income taxes........................... $ 668 $ (171) $ 310 $ 194
Provision (benefit) for income taxes........... 227 (58) 124 66
--------------- -------------- --------------- ---------------
Pro forma net income (loss)................... $ 441 (113) 186 128
=============== ============= ================ ===============
</TABLE>
Note 9 - Significant Clients
During 1995 and 1994, four major clients generated revenues that exceeded
10% of total revenues. The percentage of net revenues from these clients is as
follows:
<TABLE>
<CAPTION>
1995 1994
--------------------- ---------------------
<S> <C> <C>
Client A................................ 20% ---
Client B................................ 13% 21%
Client C................................ 14% 23%
Client D................................ 14% 12%
Client E................................ --- 15%
</TABLE>
F-57
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
the Combined Predecessor Companies
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of the Combined
Predecessor Companies at March 31, 1995 and 1994 and the results of their
operations and cash flows for the years ended March 31, 1995 and 1994 and for
the period April 1, 1995 through February 19, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Minneapolis, Minnesota
April 20, 1996
F-58
<PAGE>
<TABLE>
COMBINED PREDECESSOR COMPANIES
BALANCE SHEET
<CAPTION>
March 31, March 31,
1994 1995
-------------- ---------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................................... $ 230,133 $ 602,752
Accounts receivable, less allowance for doubtful
accounts of $40,000............................................................. 7,086,545 9,202,012
Due from related party -- 111,877
Deferred income taxes ......................................................... 64,081 14,081
Net assets of discontinued business............................................. 483,630 --
Prepaid expenses and other current assets....................................... 294,823 196,416
-------------- ---------------
Total current assets....................................................... 8,159,212 10,127,138
-------------- ---------------
Property and equipment, net ........................................................ 475,958 525,280
Deferred income taxes................................................................ 11,341 12,599
Other assets......................................................................... 289,574 382,773
============== ===============
Total assets............................................................... $ 8,936,085 $ 11,047,790
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt, including notes payable to related
party of $441,500 and $100,000 respectively.................................. $ 1,406,364 $ 2,414,852
Accounts payable ............................................................. 764,286 683,547
Accrued compensation and related payroll liabilities............................ 1,362,770 2,271,645
Income taxes payable -- 81,890
Deferred income taxes ......................................................... 369,147 453,487
Other accrued liabilities....................................................... 450,876 600,314
-------------- ---------------
Total current liabilities.................................................. 4,353,443 6,505,735
-------------- ---------------
Long-term debt, including notes payable to related
parties of $440,000............................................................... 944,218 837,662
Deferred income taxes ............................................................. 106,700 72,000
Commitments and contingencies (Notes 8 and 12)....................................... -- --
Stockholders' equity:
Preferred stock ................................................................ 71,338 68,614
Common stock ................................................................ 113,108 116,165
Additional paid-in capital...................................................... 125,683 288,555
Retained earnings ............................................................. 3,221,595 3,159,059
-------------- ---------------
Total stockholders' equity................................................. 3,531,724 3,632,393
============== ===============
Total liabilities and stockholders' equity................................. $ 8,936,085 $11,047,790
============== ===============
<FN>
The accompanying notes are an integral part of these combined financial statements.
</FN>
</TABLE>
F-59
<PAGE>
<TABLE>
COMBINED PREDECESSOR COMPANIES
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended March 31, April 1, 1995 -
----------------------------------- February 19,
1994 1995 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues $39,434,234 $50,028,639 $55,745,931
Cost of services................................................. 29,940,654 38,488,220 42,361,569
----------------- ----------------- -----------------
Gross margin........................................... 9,493,580 11,540,419 13,384,362
Selling, general and administrative
expenses .................................................... 8,055,171 10,743,231 10,788,244
----------------- ----------------- -----------------
Operating income....................................... 1,438,409 797,188 2,596,118
Other (income) expense:
Interest expense............................................ 194,363 246,508 472,266
Interest income............................................. (35,748) (37,336) (41,561)
Other....................................................... 6,961 (29,866) (36,175)
----------------- ----------------- -----------------
Total other expense.................................... 165,576 179,306 394,530
----------------- ----------------- -----------------
Income before provision for
income taxes.................................................. 1,272,833 617,882 2,201,588
Provision for income taxes....................................... 339,103 392,565 1,951,944
----------------- ----------------- -----------------
Income from continuing
operations.................................................... 933,730 225,317 249,644
Loss from operations of
discontinued business (net of
applicable income tax benefit of
$159,700 (1994) and $80,100 (1995)
respectively)................................................. (284,560) (184,004) --
----------------- ----------------- -----------------
Net income....................................................... $ 649,170 $ 41,313 $ 249,644
================= ================= =================
<FN>
The accompanying notes are an integral part of these combined financial statements.
</FN>
</TABLE>
F-60
<PAGE>
<TABLE>
COMBINED PREDECESSOR COMPANIES
STATEMENT OF STOCKHOLDERS' EQUITY
<CAPTION>
Additional Unearned Total
Paid-in Retained ESOP Stockholders'
Preferred Stock Common Stock Capital Earnings Shares Equity
------------------- ----------------------- ------------ ------------- ----------- --------------
Shares Amount Shares Amount
-------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1993. 100,395 $60,236 1,331,087 $ 106,658 $ 48,635 $2,572,425 $ -- $2,787,954
Issuance of common stock... -- -- 93,409 252 77,048 -- -- 77,300
Issuance of preferred stock. 500 7,875 -- -- -- -- -- 7,875
Issuance of preferred stock
charged to compensation
expense.................. 500 9,425 -- -- -- -- -- 9,425
Conversion of preferred
stock to common stock...... (2,143) (6,198) 2,143 6,198 -- -- -- --
Net income................. -- -- -- -- -- 649,170 -- 649,170
--------- --------- ------------ ---------- ------------ ------------- ---------- -------------
Balance at March 31, 1994. 99,252 71,338 1,426,639 113,108 125,683 3,221,595 -- 3,531,724
Issuance of common stock... -- -- 123,526 333 162,872 -- -- 163,205
Stock distribution of
subsidiary............... -- -- -- -- -- (103,849) -- (103,849)
Conversion of preferred
stock to common stock...... (320) (2,724) 320 2,724 -- -- -- --
Net income................. -- -- -- -- -- 41,313 -- 41,313
--------- --------- ------------ ---------- ------------ ------------- ----------- --------------
Balance at March 31, 1995. 98,932 68,614 1,550,485 116,165 288,555 3,159,059 -- 3,632,393
Dividends.................. -- -- -- -- -- (159,468) -- (159,468)
Redistribution of capital
for stock dividend......... -- -- -- 4,197 (4,197) -- -- --
Issuance of common stock... -- -- 158,183 11,205 382,895 -- -- 394,100
Issuance of preferred stock. 400 14,000 -- -- -- -- -- 14,000
Repurchase of common
stock.................... -- -- (76,240) (5,717) (119,258) -- -- (124,975)
Purchase of BFRs ESOP (3,150,000) (3,150,000)
shares..................... -- -- -- -- -- --
Release of unearned shares
to BFR's ESOP.............. -- -- -- -- -- -- 1,114,286 1,114,286
Conversion of BFRs ESOP
to defined contribution
plan....................... -- -- -- -- -- -- 2,035,714 2,035,714
Net income................. -- -- -- -- -- 249,644 249,644
--------- --------- ----------- ----------- ------------- ------------- --------- -------------
Balance at February 19,1996 99,332 $82,614 1,632,428 $ 125,850 $ 547,995 $ 3,249,235 $ (0) $4,005,694
================================================================================= ==============
<FN>
The accompanying notes are an integral part of these combined financial statements.
</FN>
</TABLE>
F-61
<PAGE>
<TABLE>
COMBINED PREDECESSOR COMPANIES
STATEMENT OF CASH FLOWS
<CAPTION>
Fiscal Years Ended
March 31,
----------------------------------- April 1, 1995-
1994 1995 February 19, 1996
---------------- ----------------- ---------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 649,170 $ 41,313 $ 249,644
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization........................... 177,641 186,370 170,178
Loss (gain) on disposal of property and equipment....... 2,176 655 (22,719)
Deferred income taxes, net.............................. (26,751) 98,382 506,201
Preferred stock issued and charged to compensation...... 9,425 -- 14,000
Changes in current assets and liabilities:
Accounts receivable................................... (1,685,432) (2,190,397) (1,200,457)
Prepaid expenses and other current assets............. (42,653) 117,378 469,590
Accounts payable and accrued expenses................. 500,477 977,574 318,907
Income taxes payable.................................. (81,602) 108,525 750,305
Deferred revenue........................................ -- -- (168,405)
Changes in other assets................................. (25,463) (69,346) (480,510)
---------------- ----------------- ---------------------
Net cash provided by (used in) operating
activities........................................ (523,012) (729,546) 606,734
---------------- ----------------- ---------------------
Cash flows from investing activities:
Purchases of property and equipment....................... (113,814) (50,962) (502,344)
Proceeds from the sale of investments..................... -- 14,989 11,000
Cash surrender value of life insurance.................... (16,146) (15,491) (22,325)
Advances to stockholders................................. -- -- 25,519
Net repayments from (advances to) related parties......... 127,673 83,900 (19,544)
Changes in net assets of discontinued operations.......... (66,924) 184,004 --
Increase in deferred transaction costs, net of related
accounts payable........................................ -- -- (932,545)
---------------- ----------------- ---------------------
Net cash provided by (used in) investing
activities........................................ (69,211) 216,440 (1,440,239)
---------------- ----------------- ---------------------
Cash flows from financing activities:
Payments on long-term debt................................ (61,200) (165,199) (284,291)
Payments on capital lease obligations..................... (48,304) (76,745) (77,382)
Net borrowings (advances) on short-term debt.............. 240,614 622,964 716,294
Borrowings from related parties........................... -- 341,500 172,474
Payments on loans with related parties.................... (25,000) -- --
Proceeds from issuance of common and preferred stock...... 85,175 163,205 349,125
Repurchases of common stock............................... -- -- (120,000)
---------------- ----------------- ---------------------
Net cash provided by (used in) financing
activities........................................ 191,285 885,725 756,220
---------------- ----------------- ---------------------
Net increase (decrease) in cash and cash equivalents........ (400,938) 372,619 (77,285)
Cash and cash equivalents at beginning of period............ 631,071 230,133 602,752
================ ================= =====================
Cash and cash equivalents at end of period.................. $ 230,133 $ 602,752 $ 525,467
================ ================= =====================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-62
<PAGE>
<TABLE>
COMBINED PREDECESSOR COMPANIES
STATEMENT OF CASH FLOWS (Continued)
<CAPTION>
Fiscal Years Ended
March 31, April 1, 1995-
-----------------------------------
1994 1995 Feb 19,1996
---------------- ----------------- ------------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid............................................. $ 183,811 $ 226,244 $ 462,241
Income taxes paid......................................... $ 184,506 $ 105,583 $ 765,808
Schedule of noncash investing and financing transactions:
Capital lease obligations incurred........................ $ 99,780 $ 179,241 $ --
Conversion of accounts receivable to note receivable...... $ -- $ 74,930 $ --
Conversion of preferred stock to common stock............. $ 6,198 $ 2,724 $ --
Debt refinancing.......................................... $ -- $ 178,986 $ --
<FN>
The accompanying notes are an integral part of these combined financial statements.
</FN>
</TABLE>
F-63
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business Organization
In February 1993, Cotelligent Group, Inc. ("Cotelligent" or the "Company")
was formed to create a professional services firm devoted to providing computer
consulting and contract programming services. 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 and the
initial public offering (the "Offering") of such Common Stock.
Note 2 - Basis of Presentation
As discussed above, simultaneously with the closing of the Offering,
Cotelligent acquired by merger each of the four operating businesses, FDSI, BFR,
DASI and CAI. The accompanying combined financial statements and related notes
to combined financial statements are presented on a combined basis without
giving effect to the Acquisitions or the Offering. The assets and liabilities of
the Predecessor Companies are reflected at their historical amounts.
Discontinued Business
A previous division of FDSI, CyberSAFE Corporation (CyberSAFE) was
incorporated and became a wholly-owned subsidiary of FDSI in December 1993. The
stock of this subsidiary was subsequently distributed to FDSI's stockholders on
June 1, 1994 in a tax-free reorganization. The financial results of the
operations of this entity have been presented as discontinued operations in the
Statement of Operations for all periods presented. See further discussion in
Note 14.
Note 3 - Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation, including
amortization of capitalized leases, is provided over the estimated useful lives
of the respective assets (generally ranging from five to ten years) on a
straight-line or an accelerated basis. Leasehold improvements are amortized over
the shorter of the lease term or the estimated useful life.
F-64
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
Receivables arising from services provided to clients are not collateralized and
accordingly, the Company performs ongoing credit evaluations of its clients to
reduce the risk of loss.
Revenue Recognition
Revenue is recognized as services are performed.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, ''Accounting for Income Taxes'' (SFAS
109). The asset and liability approach used in SFAS 109 requires the recognition
of deferred tax assets and liabilities for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities.
BFR was an S corporation through March 31, 1995 for federal income tax
purposes and, accordingly any federal income tax liabilities through this date
are the responsibility of BFR's stockholders. Effective April 1, 1995, BFR
terminated its S status. See further discussion in Note 7.
Earnings Per Share
Historical earnings per share has not been presented because it is not
considered to be meaningful as a result of the Acquisitions and the Offering as
discussed in Note 1.
Note 4 - Allowance for Doubtful Accounts
<TABLE>
The activity in the allowance for doubtful accounts is as follows.
<CAPTION>
Balance at Charges to Balance
Beginning Costs and Write-offs at End
of Period Expenses of Period
------------- ------------- --------------------------
<S> <C> <C> <C> <C>
Year ended March 31, 1994............................................... $ 35,000 $ 10,000 $ -- $45,000
============= ============= ==========================
Year ended March 31, 1995............................................... $ 45,000 $ 21,368 $(26,368) $40,000
============= ============= ==========================
</TABLE>
F-65
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 5Property and Equipment
<TABLE>
Property and equipment is comprised of the following.
<CAPTION>
March 31,
--------------------------
1994 1995
------------ -------------
<S> <C> <C>
Automobiles....................................................................... $ 64,150 $ 64,150
Equipment......................................................................... 1,050,217 1,261,672
Furniture and fixtures............................................................ 235,246 238,031
Leasehold improvements............................................................ 59,015 36,539
------------- -------------
1,408,628 1,600,392
Less: Accumulated depreciation and amortization................................... 932,670 1,075,112
------------- -------------
$ 475,958 $ 525,280
============= =============
<FN>
Depreciation and amortization expense for the years ended March 31, 1994 and 1995 and for the period April 1, 1995
through February 19, 1996 was $149,059, $180,396 and $170,178 respectively.
</FN>
</TABLE>
F-66
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 6 - Credit Facilities
<TABLE>
Short-Term Debt
Short-term debt consists of the following.
<CAPTION>
March 31,
1994 1995
------------- --------------
<S> <C> <C>
Bank line of credit, with maximum borrowings of $1,250,000, secured by FDSI's accounts
receivable, property and equipment, and personally guaranteed by FDSI's principal
stockholders. Interest at the prime rate (6.25% and 9.00% at March 31, 1994 and
1995,respectively) plus 1.50% per annum.................................................$ 430,964 $ 1,134,077
Bank line of credit, for borrowings up to the lesser of $1,300,000 or 70% of the DASI's
eligible accounts receivable, secured by all assets of DASI, as well as the personal
guarantees of DASI's stockholders. Interest at 1.25% above the bank's base lending
rate (8.75% at March 31, 1995), prior to January 31, 1995, 2.00% above the bank's base
lending rate (6.25% at March 31, 1994), .50% fee on the unused portion.................. 168,000 398,000
Bank line of credit, for borrowings of up to $1,500,000, secured by all of BFR's assets.
Interest at prime plus .50% on (6.75%), prime (9.00%) at March 31, 1994 and 1995,
respectively............................................................................ 550,000 --
Bank line of credit for borrowings of up to $300,000, guaranteed by the President and Vice
President of the CAI. Interest at 2.00% plus prime (11.00% as of March 31,1995) ....... -- 235,000
Note payable, interest at 10%, due upon completion of initial public offering............. 46,650 51,501
Note payable to CAI's President (also a stockholder) and his son, due on December 31,
1995. Interest at 2.00% plus prime (11.00% at March 31,1995)........................... -- 150,000
Notes payable to FDSI's principal stockholders, unsecured, interest at
9.25%, due on demand and subordinated to bank debt..................................... -- 191,500
Note payable to FDSI stockholder, personally guaranteed by the
principal stockholders of FDSI, interest at 9.00%...................................... 100,000 100,000
Current capital lease obligations......................................................... 43,303 90,671
Current maturities on long-term debt...................................................... 67,447 64,103
----------------------------
Total short-term debt........................................................... $1,406,364 $2,414,852
============================
<FN>
The lines of credit were executed pursuant to agreements that contain various restrictive covenants that include,
among other things, restrictions on additional debt and distributions, and maintenance of certain financial ratios and
net worth requirements. The Predecessor Companies were in compliance with all restrictive covenants for the periods
presented.
</FN>
</TABLE>
F-67
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (Continued)
Long-Term Debt
<TABLE>
Long-term debt consists of the following.
<CAPTION>
March 31,
-----------------------------
1994 1995
-------------- --------------
<S> <C> <C>
Note payable to a bank; monthly payments of $5,937, including interest
at the bank's prime rate (9.00% at March 31, 1995) plus 2.25% per
annum; maturing March 30, 1998 and secured by FDSI's assets and
the personal guarantee of FDSI's principal stockholders............................. $ -- $ 178,986
Note payable to a bank; monthly payments of $6,218, including interest
at the bank's prime rate (6.25% at March 31, 1994) plus 2.75% per
annum; refinanced in 1995........................................................... 227,771 --
Loans payable to the officers and stockholders of DASI, interest at the
rate of 10.00% and payable monthly. Principal amount matures as
follows: $100,000 on October 25, 1996, $140,000 on December 25,
1997 and $200,000 on October 25, 2006. The $200,000 is
subordinated to DASI's line of credit............................................... 440,000 440,000
Automobile loan, interest at 9.75%, monthly principal and interest
payments of $1,060, assumed by a stockholder of DASI in September 1995.............. 22,121 10,983
Loan against the cash surrender value of DASI's officers' life insurance
policies............................................................................ 105,276 --
Capital lease obligations.............................................................. 259,800 362,467
-------------- --------------
1,054,968 992,436
Less: Current maturities............................................................... (110,750) (154,774)
-------------- --------------
Total long-term debt......................................................... $ 944,218 $ 837,662
============== ==============
</TABLE>
<TABLE>
Total maturities of long-term debt are as follows.
<CAPTION>
Year Ending
March 31,
----------------
<S> <C>
1997................................................................................................ $ 64,103
1998................................................................................................ 159,413
1999................................................................................................ 206,453
2000................................................................................................ --
2001................................................................................................ --
Thereafter.......................................................................................... 200,000
----------------
</TABLE>
F-68
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 7 - Income Taxes
The Predecessor Companies will file a consolidated federal income tax
return for periods subsequent to the Acquisitions. The Founding Companies will
file ''short period'' federal tax returns through the date prior to the
Acquisitions, February 20, 1996.
The provision (benefit) for income taxes on continuing operations is as
follows.
<TABLE>
<CAPTION>
Year Ended April 1, 1995-
March 31, February 19,
------------------------------
1994 1995 1996
------------- ---------------- ----------------
<S> <C> <C> <C>
Current:
Federal.......................................................... $ 315,021 $ 333,455 $ 847,989
State............................................................ 25,292 44,229 236,243
------------- ---------------- ----------------
340,313 377,684 1,084,232
Deferred:
Federal.......................................................... (76,533) 12,209 947,243
State............................................................ 75,323 2,672 (79,531)
------------- ---------------- ----------------
(1,210) 14,881 867,712
============= ================ ================
Total provision for income taxes............................ $ 339,103 $ 392,565 $ 1,951,944
============= ================ ================
</TABLE>
<TABLE>
Deferred tax assets (liabilities) are comprised of the following.
<CAPTION>
March 31,
----------------------------------
1994 1995
----------------- ----------------
<S> <C> <C>
Accounts receivable................................................................ $ (531,744) $ (812,991)
Accounts payable and accrued liabilities........................................... 160,451 242,034
Cash to accrual.................................................................... (142,900) (111,700)
Operating loss carryforward........................................................ 100,859 167,839
Depreciation . (6,259) (3,901)
Other ............................................................................. 19,168 19,912
================= ================
Net deferred tax liability............................................... $ (400,425) $ (498,807)
================= ================
</TABLE>
<TABLE>
The Company's effective income tax rate varied from the U.S. federal statutory tax rate as a result of the following.
<CAPTION>
April 1, 1995 -
Year Ended March 31, February 19,
----------------------------------
1994 1995 1996
---------------- ----------------- ----------------
<S> <C> <C> <C>
U.S. federal statutory rate....................................... 34.0% 34.0% 34.0%
State taxes, net of federal income tax benefit.................... 6.7 4.0 4.7
Nondeductible expenses............................................ 1.7 5.5 6.5
(Income) losses of S corporation.................................. (20.2) 10.2 --
Conversion to C corporation.................................... -- -- 42.0
Other ............................................................ 4.4 9.8 (.7)
----------------- ---------------- ----------------
Effective tax rate........................................... 26.6% 63.5% 86.5%
================ ================= ================
</TABLE>
BFR was an S corporation through March 31, 1995 for federal income tax
purposes and, accordingly, any federal income tax liabilities through that date
were the responsibility of the stockholders of BFR. Appropriate provisions were
made for state income taxes. Effective April 1, 1995, BFR terminated its S
election. In connection with BFR's conversion from an S corporation to a C
corporation, approximately $925,000 of federal and state income taxes is
expected to be paid pro rata over the next four years. See Note 15 for Unaudited
Pro Forma Tax Information.
F-69
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 8 - Lease Commitments
The Predecessor Companies lease various office space and certain equipment
under noncancellable lease agreements which expire at various dates.
<TABLE>
Future minimum rental payments under such leases are as follows.
<CAPTION>
Year Ending March 31,
-------------------------------------------
Capital Leases Operating Leases
---------------------
<S> <C> <C>
1997 ................................................. $ 130,066 $ 442,016
1998 ................................................. 130,066 451,475
1999 ................................................. 103,626 434,160
2000 ................................................. 72,357 407,026
2001 ................................................. 43,000 370,100
--------------------- ---------------------
Total minimum lease payments..................... 479,115 $2,104,777
=====================
Less: Amounts representing interest................... (116,648)
=====================
Present value of net minimum lease payments........... $ 362,467
=====================
</TABLE>
Rental expense under these leases was $422,058, $462,352 and $497,458 for
each of the years ended March 31, 1994 and 1995 and for the period April 1, 1995
through February 19, 1996, respectively.
Note 9 - Related Parties
FDSI recognized a total of $76,192 and $5,000 in revenue for providing
computer consulting services to CyberSAFE (an affiliated entity) during the year
ended March 31, 1995 and the period April 1, 1996 through February 19, 1996,
respectively. At March 31, 1995, $59,720 was due from CyberSAFE for services up
through that date and is included in accounts receivable.
In May 1994, FDSI negotiated a perpetual software marketing agreement with
CyberSAFE to sublicense CyberSAFE software in exchange for royalty payments of
15% of the purchase price for every copy licensed. For the year ended March 31,
1995 and for the period April 1, 1996 through February 19, 1996 FDSI paid no
royalties to CyberSAFE.
F-70
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (Continued)
In addition, FDSI has made short-term advances to CyberSAFE. The balance
due on these short-term advances, bearing interest at 9% per annum, at March 31,
1995 was $111,877. Included in other income is $41,265 for the year ended March
31, 1995 for management services provided to CyberSAFE. Included in interest
income was $7,335 and $16,208 for the year ended March 31, 1995 and for the
period April 1, 1995 through February 19, 1996 on the advances, respectively.
BFR leases its general offices, and certain computer and transportation
equipment under operating leases, from a third party, which is owned principally
by the former principal Stockholders of BFR. Rental expense under these leases
was $175,814, $176,104 and $174,874 for the years ended March 31, 1994 and 1995
and for the period April 1, 1995 through February 19, 1996, respectively.
Two former stockholders of FDSI each own in excess of 10% of the equity
interests in VoiceNet, Inc. (''VoiceNet''), a voicemail service bureau from
which FDSI obtained voicemail services. In 1995, consideration paid by FDSI to
VoiceNet was approximately $17,500. FDSI paid for services at VoiceNet's
advertised rates.
DASI leases its office space from the Strathmore Realty Trust. The former
stockholders of DASI are the sole trustees and beneficiaries of the Strathmore
Realty Trust. Rental expense recorded for this office space was $96,831, $97,462
and $92,673 for the years ended March 31, 1994 and 1995 and for the period April
1, 1995 through February 19, 1996, respectively. DASI renegotiated its lease
agreement for its office space with Strathmore Realty Trust (an affiliated
company) in November 1995. The provisions of the agreement allow for a five year
fixed term, with one successive option to extend the term for a period of five
years. The annual rental amount is $104,400 triple net, with a variable
provision for escalation.
Note 10 - Employee Benefit Plans
BFR has a salary reduction plan (401(k)) for the benefit of all employees
after 30 days of service. The plan is non-contributory and is funded by the
amounts used to reduce employee salaries. In addition, BFR has the option to
contribute to the plan on the employee's behalf. BFR did not make any
contributions to the plan for the years ended March 31, 1994 and 1995 and for
the period April 1, 1995 through February 19, 1996.
BFR previously maintained an Employee Stock Ownership ("ESOP") and Money
Purchase Plan (the "BFR Plan") which covered substantially all salaried
employees. Annual contributions to the ESOP were made at the discretion of BFR's
Board of Directors. The BFR Plan required fixed minimum annual contributions of
10% of eligible payroll for the initial year ending March 31, 1995 and 5% of
eligible payroll for subsequent years. Employees' scheduled vesting of these
benefits occurs over seven years. In April 1995, the BFR Plan incurred a
$2,250,000 liability to a bank with respect to the ESOP portion of the BFR Plan,
which, together with a $900,000 cash contribution from BFR, enabled the BFR Plan
to purchase all of the 300,000 outstanding shares of BFR's Class A common stock
for $3,150,000 from BFR's stockholders. The ESOP shares were allocated to
participants as contributions were made to the Plan. During the year ended March
31, 1995, BFR made contributions of $900,000 to the BFR Plan. As the debt was
repaid, shares were released from collateral and allocated to active employees
based upon the proportion of debt service paid in the year. BFR recorded
compensation expense equal to the market value of the shares at the release
date. On December 7, 1995, the BFR Plan was converted to a profit sharing plan.
Contributions to the BFR Plan are made at the discretion of the Company. The
Company did not make any contributions to the BFR Plan for the period from
December 7, 1995 through February 19, 1996.
FDSI maintains a discretionary profit-sharing (401(k)) plan which covers
all employees who have met minimum age and employment requirements. FDSI made no
contributions to this plan for the years ended March 31, 1994 and 1995 and the
period April 1, 1995 through February 19, 1996.
F-71
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (Continued)
In September 1992, FDSI adopted a cash bonus profit sharing plan for
employees who have completed 1,500 hours of service to FDSI and who are
employees of FDSI on the payout date. FDSI recorded $10,000, $24,000 and $30,000
of expense related to this Plan for the years ended March 31, 1994 and 1995 and
the period April 1, 1995 through February 19, 1996, respectively.
DASI maintains an unfunded profit-sharing plan, which includes
substantially all full-time employees who have at least one year of continuous
service. Contributions to the plan are made at the discretion of the Board of
Directors, based upon earnings levels. No contributions have been made for the
years ended March 31, 1994 and 1995 or for the period April 1, 1996 through
February 19, 1996. DASI previously maintained a pension plan which was
terminated in 1988 and no further contributions made.
In September 1995, Cotelligent's Board of Directors and stockholders
approved Cotelligent's 1995 Long-Term Incentive Plan (the "Plan"). The purpose
of the Plan is to provide directors, officers, key employees and consultants
with additional incentives by increasing their ownership interests in the
Company.
Effective as of September 8, 1995, Cotelligent granted to each of two
officers an option to purchase 92,676 shares of common stock at $2.70 per share.
Such options vest as follows: 18,536 one day after consummation of an initial
public offering of the Company's common stock and thereafter, an additional
18,535 shares on the annual anniversary of such initial vesting until all 92,676
shares have vested. The options are each exercisable for a period of seven years
after the effective date of the grant. On May 2, 1996, one officer exercised the
option to purchase 18,000 shares of Common Stock.
On February 14, 1996, Cotelligent granted certain employees options to
purchase 196,200 shares of Common Stock at $9.00 per share. Such options vest
ratably over four years on the anniversary of the option grant date. The term of
each option grant is determined by the Compensation Committee of the Board of
Directors. However, the term of any incentive stock option or a stock
appreciation right ranted in tandem therewith, shall not exceed 10 years from
the date of the grant.
Note 11 - Capital Structure
In November 1995, Cotelligent reincorporated in Delaware and increased the
number of authorized shares of common stock from 1,000,000 to 100,000,000,
authorized the issuance of up to 500,000 shares of preferred stock and exchanged
its then outstanding Class A and Class B shares for shares of a single class of
new common stock. Additionally, on November 29, 1995, Cotelligent's Board of
Directors declared a 2.71-for-one stock dividend to each stockholder of
Cotelligent's common stock. The financial statements have been adjusted to
reflect the changes resulting from the reincorporation and the stock dividend
for all periods presented.
Note 12 - Commitments and Contingencies
Employment Agreements
Effective April 20, 1995, BFR entered into employment agreements with the
four shareholders and officers of BFR. The agreements provide for minimum annual
compensation of $464,000 in addition to directors compensation, potential salary
increases and bonuses. The agreements include noncompete clauses and continue
through years ranging between 2001 and 2021, assuming the maintenance of certain
ownership percentages. These employment agreements were terminated in connection
with the Acquisition by Cotelligent, and three of such officers entered into new
employment agreements and one entered into a consulting agreement.
DASI and its stockholders are parties to a stock purchase agreement which
is effective upon the death of a stockholder. The terms of the agreement require
DASI to buy $350,000 of DASI's stock held by the deceased stockholder's
F-72
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (Continued)
estate and require the surviving stockholder to buy from the stockholder's
estate all of the remaining shares owned by the stockholder at that time. In the
event of a stockholder's death, the ''fair market value'' of the outstanding
stock of DASI will be equal to 60% of the average gross revenues of DASI for the
three most recent years preceding the stockholder's death; however, the value of
such stock shall not be less than the proceeds of the life insurance contracts
maintained on that stockholder. Since DASI's obligation to purchase common stock
from a deceased stockholder's estate will be fully funded by a life insurance
policy maintained by DASI, the related common stock has been classified as
permanent equity. This agreement was terminated upon the Acquisition of DASI by
Cotelligent and certain of the officers.
Consulting Contract
BFR entered into a consulting contract with a former employee effective
February 19, 1996, whereby the former employee is required to perform management
advisory services at the request of BFR. In connection with the contract, BFR
recorded a $470,000 charge to selling, general and administration expenses
during the period April 1, 1995 through February 19, 1996. Payments under the
contract are $ 8,333 per month and continue through December 2000.
Legal Maters
The Company is involved in various legal matters in the normal course of
business. In the opinion of the Predecessor Companies' management, these matters
are not anticipated to have a material adverse effect on the financial position
or results of operations or cash flows of the Company.
Note 13 - Significant Client
One client accounted for approximately 15% and 11% of the Combined
Predecessor Companies' revenues during the fiscal years ending March 31, 1994
and 1995, respectively. During the period April 1, 1995 through February 19,
1996, no individual client accounted for more than 10% of the Combined
Predecessor Companies' revenues.
Note 14 - Discontinued Operations
CyberSAFE was previously a separate business division of FDSI, which
developed and marketed security system software for a separate group of clients.
In December 1993, CyberSAFE was incorporated and became a wholly-owned
subsidiary of FDSI. Revenues for this business were approximately $117,000,
$861,000 and $84,000 for each of the fiscal years ended March 31, 1993, 1994 and
1995, respectively. Net assets of approximately $446,000 were transferred by
FDSI to the subsidiary. Management of FDSI subsequently decided to discontinue
this business segment and, accordingly, distributed the stock of this subsidiary
to its stockholders in a tax-free reorganization in June 1994.
Accordingly, the operating results of this business have been presented as
discontinued operations, net of applicable income taxes, for all periods
presented. The assets and liabilities of CyberSAFE have been presented as ''Net
assets from discontinued business'' on the March 31, 1994 balance sheet. These
March 31, 1994 assets consisted of the following.
<TABLE>
<CAPTION>
<S> <C>
Cash...................................................................................... $ 4,660
Accounts receivable....................................................................... 209,892
Prepaid expenses and other current assets................................................. 28,797
Other assets.............................................................................. 39,234
Capitalized software...................................................................... 497,203
Property and equipment.................................................................... 144,284
Accounts payable and accrued liabilities.................................................. (164,855)
Deferred income taxes..................................................................... (103,300)
Long-term debt............................................................................ (172,285)
------------
Net............................................................................. $ 483,630
============
</TABLE>
The net assets of CyberSAFE at June 1994, which approximated $103,000, were
distributed to its stockholders and this distribution has been reflected
appropriately in stockholders' equity.
F-73
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 15 - Unaudited Pro Forma Income Tax Information
The following unaudited pro forma tax information is presented in
accordance with Statement of Financial Accounting Standards No. 109 ("SFAS 109")
as if BFR Co., Inc., an S corporation, had been a C corporation subject to
federal and state income taxes throughout the periods presented.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31, April 1, 1995 -
--------------------------------- Februqry 19,
1994 1995 1996
---------------- --------------- --------------
<S> <C> <C> <C>
Income from continuing operations
before provision for income taxes...................... $1,272,833 $ 617,882 $ 2,201,588
Provision for income taxes................................ (565,975) (333,485) (1,023,100)
---------------- --------------- --------------
Income from continuing
operations............................................. 706,858 284,397 1,178,488
Loss from operations on
discontinued business (net of applicable income taxes). (284,560) (184,004) --
---------------- --------------- --------------
Pro forma net income...................................... $ 422,298 $ 100,393 $ 1,178,488
================ =============== ==============
</TABLE>
F-74
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Financial Data Systems, Inc.
In our opinion, the accompanying consolidated balance sheet, and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Financial Data Systems, Inc. and its subsidiary at March 31, 1995 and 1994, and
the results of its operations and cash flows for each of the years ended March
31, 1995 and 1994 and for the period April 1, 1995 through February 19, 1996, in
conformity with generally accepted accounting principles. These consolidated
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Minneapolis, Minnesota
April 20, 1996
F-75
<PAGE>
<TABLE>
FINANCIAL DATA SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
<CAPTION>
March 31, March 31,
1994 1995
------------- --------------
ASSETS
<S> <C> <C>
Current assets:
Cash.......................................................................$ 622 $ 86,141
Accounts receivable, less allowance for doubtful accounts of
$10,000................................................................. 1,745,896 2,630,189
Receivable from related party.............................................. -- 111,877
Current portion of note receivable......................................... -- 58,279
Deferred income taxes...................................................... 52,000 2,000
Prepaid expenses and other current assets.................................. 35,575 73,096
Net assets of discontinued business........................................ 483,630 --
------------- --------------
Total current assets.................................................. 2,317,723 2,961,582
------------- --------------
Property and equipment, net..................................................... 139,474 272,396
Other assets ................................................................... 32,283 70,634
============= ==============
Total assets.......................................................... $2,489,480 $3,304,612
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt, including notes payable to related parties of
$291,500 and $0, respectively........................................... $ 595,926 $1,533,709
Accounts payable........................................................... 162,637 87,958
Accrued compensation....................................................... 790,540 795,465
Income taxes payable....................................................... -- 26,600
Other accrued liabilities 180,448 154,455
------------- --------------
Total current liabilities............................................. 1,729,551 2,598,187
------------- --------------
Long-term debt.................................................................. 211,787 257,473
Deferred income taxes 106,700 72,000
------------- --------------
Total liabilities..................................................... 2,048,038 2,927,660
------------- --------------
Commitments (Note 7)............................................................ -- --
Stockholders' equity:
Series A preferred stock - no par value; 100,000 shares
authorized, 85,000 shares issued and outstanding........................ 8,500 8,500
Series C preferred stock - no par value; 500,000 shares
authorized, 13,932 and 14,332 shares issued and
outstanding, respectively............................................... 62,838 60,114
Series A common stock - no par value; 1,000,000 shares
authorized, 9,813 and 9,713 shares issued and
outstanding, respectively............................................... 106,211 108,935
Retained earnings.......................................................... 263,893 199,403
------------- --------------
Total stockholders' equity............................................ 441,442 376,952
============= ==============
Total liabilities and stockholders' equity............................ $2,489,480 $3,304,612
============= ==============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
F-76
<PAGE>
<TABLE>
FINANCIAL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<CAPTION>
Fiscal Year Ended
March 31, April 1, 1995 -
---------------------------------- February 19,
1994 1995 1996
---------------- ----------------- ----------------
<S> <C> <C> <C>
Revenues....................................................... $11,191,023 $15,807,642 $16,467,743
Cost of services............................................... 8,235,708 12,265,956 12,153,114
---------------- ----------------- ----------------
Gross margin........................................ 2,955,315 3,541,686 4,314,629
Selling, general and administrative expenses.................. 2,419,362 3,119,699 3,166,349
---------------- ----------------- ----------------
Operating income.................................... 535,953 421,987 1,148,280
---------------- ----------------- ----------------
Other (income) expense:
Interest expense....................................... 60,771 117,445 157,991
Interest income........................................ (12,967) (11,393) (18,772)
Other, net............................................. 4,208 (29,428) (12,941)
---------------- ----------------- ----------------
52,012 76,624 126,278
Income from continuing operations
before income taxes...................................... 483,941 345,363 1,022,002
Income taxes . 170,000 122,000 364,000
---------------- ----------------- ----------------
Income from continuing operations........................... 313,941 223,363 658,002
Loss from operations of discontinued
business (net of applicable income
taxes of $159,700 and $80,100,
respectively) (Note 11).................................... (284,560) (184,004) --
---------------- ----------------- ----------------
Net income ................................................... $ 29,381 $ 39,359 $ 658,002
================ ================= ================
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
F-77
<PAGE>
<TABLE>
FINANCIAL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<CAPTION>
Preferred Stock Common Stock
-----------------------------------------------------
Retained Total
Shares Amount Shares Amount Earnings Equity
----------- ------------- ------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1993...................... 100,395 $ 60,236 7,350 $ 100,013 $ 234,512 $ 394,761
Conversion of preferred stock to common
stock....................................... (2,143) (6,198) 2,143 6,198 -- --
Issuance of preferred stock.................... 500 7,875 -- -- -- 7,875
Issuance of preferred stock charged to
compensation expense........................ 500 9,425 -- -- -- 9,425
Net income..................................... -- -- -- -- 29,381 29,381
----------- -------------- ------------ ------------- ------------- -------------
Balance at March 31, 1994...................... 99,252 71,338 9,493 106,211 263,893 441,442
Conversion of preferred stock to common
stock....................................... (320) (2,724) 320 2,724 -- --
Stock distribution of subsidiary............... -- -- -- -- (103,849) (103,849)
Net income..................................... -- -- -- -- 39,359 39,359
----------- ------------- ------------- ------------- ------------ --------------
Balance at March 31, 1995...................... 98,932 68,614 9,813 108,935 199,403 376,952
Issuance of Preference Stock................... 400 14,000 -- -- -- 14,000
Issuance of Common Stock -- -- 635 10,000 -- 10,000
Redemption of Common Stock..................... -- -- (100) (2,975) -- (2,975)
Net Income..................................... -- -- -- -- 658,002 658,002
----------- ------------- ------------- ------------- ------------ --------------
Balance at February 19, 1996................... 99,332 $ 82,614 10,348 $ 115,960 $ 857,405 $ 1,055,979
=========== ============= ============= ============= ============ ==============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
F-78
<PAGE>
<TABLE>
FINANCIAL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Fiscal Year Ended March 31, April 1, 1995-
1994 1995 February 19, 1996
--------------- ---------------- -----------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................ $ 29,381 $ 39,359 $ 658,002
Adjustments to reconcile net income to net cash:
provided by (used in) operating activities:
Depreciation and amortization............................ 79,511 82,512 85,664
Loss on disposal of property and equipment............... 4,208 655 --
Deferred income taxes.................................... (88,641) 15,300 (36,208)
Preferred stock issued and charged to compensation.... 9,425 -- 14,000
Change in current assets and liabilities:
Accounts receivable................................... (606,176) (959,223) (374,058)
Prepaid expenses and other assets..................... 6,998 (50,194) 74,688.
Accounts payable and accrued liabilities.............. 577,723 (95,747) 16,465
Income taxes payable.................................. -- 26,600 320,308.
Changes in other assets.................................. -- -- 1,051
---------------- ----------------- ---------------------
Net cash provided by (used in) operating activities 12,429 (940,738) 759,912
---------------- ----------------- ---------------------
Cash flows from investing activities:
Property and equipment expenditures........................ (22,970) (30,704) (170,939)
Investment in Cotelligent.................................. (15,000) (15,000) --
Deferred transaction costs................................ -- -- (82,017)
Repayments from (advances to) related party................ -- 83,900 (19,544)
Advances to Cotelligent.................................... -- --- (336,158)
Change in net assets of discontinued business.............. (66,924) 184,004 --
---------------- ----------------- ----------------------
Net cash provided by (used in) investing activities. (104,894) 222,200 (608,658)
---------------- ----------------- ----------------------
Cash flows from financing activities:
Proceeds from long-term debt............................... -- -- --
Net borrowings on short-term debt.......................... 130,964 703,113 173,938
Repayments on long-term debt............................... (51,932) (48,785) (43,303)
Payments under capital lease obligations................... (17,377) (41,771) (47,138)
Borrowings from related parties............................ -- 191,500 --
Payments to related parties................................ -- -- (291,500)
Proceeds from issuance of preferred stock.................. 7,875 -- --
Proceeds from issuance of common stock.................... -- -- 10,000
Retirement of preferred stock............................. -- -- (2,975)
---------------- ---------------- ----------------------
Net cash provided by (used in) financing activities. 69,530 804,057 (200,978)
---------------- ---------------- ----------------------
Net increase (decrease) in cash............................... (22,935) 85,519 (49,724)
Cash at beginning of period................................... 23,557 622 86,141
---------------- ---------------- ----------------------
Cash at end of period......................................... $ 622 $ 86,141 $ 36,417
================ ================ ======================
<FN>
Supplemental disclosures of cash flow information and non cash investing and financing activities are described in Note 2.
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
F-79
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business Organization
Financial Data Systems, Inc. ("FDSI" or the "Company"), a Washington
corporation, commenced operations in 1982. The Company is a professional
services firm that provides computer consulting and contract programming
services.
The Company and its stockholders entered into a definitive agreement with
Cotelligent Group, Inc. ("Cotelligent") pursuant to which the Company merged
with Cotelligent (the "Acquisition"). All outstanding shares of the Company were
exchanged for cash and shares of Cotelligent's common stock concurrent with the
consummation of the initial public offering of the common stock of Cotelligent.
Cotelligent completed the initial public offering on February 14, 1996, and on
February 20, 1996, completed the Acquisition of the Company.
Note 2 - Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Basis of Presentation
A previous division of the Company, CyberSAFE, was incorporated and became
a wholly-owned subsidiary of the Company in December, 1993. The stock of this
subsidiary was subsequently distributed to its stockholders on June 1, 1994 in a
tax-free reorganization. The financial results of the operations of this entity
have been presented as discontinued operations in the Statement of Operations
for all periods presented. See further discussion in Note 11.
Property and Equipment
Property and equipment are carried at cost. The cost of maintenance and
repairs is charged to expense as incurred. Depreciation, including amortization
of capitalized leases, is provided over the estimated useful lives of the
respective assets (five to seven years) on a straight line or accelerated basis.
Leasehold improvements are amortized over the shorter of the lease term or the
estimated useful life.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
Receivables arising from services provided to clients are not collateralized and
accordingly, the Company performs ongoing credit evaluations of its clients to
reduce the risk of loss.
Revenue Recognition
Revenue is recognized as services are performed.
Earnings Per Share
Historical earnings per share has not been presented because it is not
considered to be meaningful as a result of the Acquisitions and the offering as
discussed in Note 1.
F-80
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, ''Accounting for Income Taxes'' ("SFAS
109"). The asset and liability approach used in SFAS 109 requires the
recognition of deferred tax assets and liabilities for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable for
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities.
<TABLE>
Supplemental Disclosures of Cash Flow Information
<CAPTION>
For the Year Ended April 1, 1995 -
March 31, February 19,
------------------------------ ----------------
1994 1995 1996
---------------- ------------- ----------------
<S> <C> <C> <C>
Interest paid...................................................... $ 74,663 $ 117,795 $ 148,500
Federal income taxes (refunded) paid............................... $ (4,334) $ - $ 71,906
<FN>
Supplemental schedule of noncash investing and financing activities is as follows.
During 1995, the Company refinanced debt with a principal balance of $178,986.
Capital lease obligations of $99,780 and $179,241 were incurred when the Company entered into leases of new equipment
in the years ended March 31, 1994 and 1995, respectively.
In 1995, the Company converted a trade accounts receivable into a note receivable with a principal balance of $74,930.
The following assets and liabilities were transferred by the Company to CyberSAFE, a wholly-owned subsidiary, in
December 1993 in exchange for 10,000,000 shares of $.01 par value common stock.
</FN>
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Accounts receivable..................................................................................... $ 343,222
Prepaid expenses........................................................................................ 21,927
Property and equipment, net............................................................................. 81,796
Other assets............................................................................................ 29,892
Software development costs, net......................................................................... 503,148
Accounts payable and accrued expenses, including $174,191 due to the Company............................ (310,261)
Long-term debt and capital lease obligations............................................................ (120,287)
Deferred income taxes................................................................................... (103,300)
================
Net assets.................................................................................... $ 446,137
================
</TABLE>
<TABLE>
On June 1, 1994, the Company distributed the stock of CyberSAFE to its stockholders in a tax-free reorganization. The
following is a summary of the assets and liabilities of CyberSAFE as of that date.
<CAPTION>
<S> <C>
Cash ................................................................................................... $ 1,095
Accounts receivable...................................................................................... 141,740
Prepaid expenses and other current assets................................................................ 107,011
Property and equipment, net.............................................................................. 139,617
Other assets, net........................................................................................ 37,926
Software development costs, net.......................................................................... 485,827
Accounts payable and accrued expenses, including $240,385 due to the Company............................. (543,936)
Long-term debt and capital lease obligations............................................................. (162,131)
Deferred income taxes.................................................................................... (103,300)
=============
Net reduction in retained earnings............................................................. $ 103,849
=============
</TABLE>
F-81
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
Note 3 - Allowance for Doubtful Accounts and Notes Receivable
<CAPTION>
Balance at Charged to Transfer Balance
Beginning Expense to Cyber- at End
of Period SAFE of Period
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Year ended March 31, 1994........................................ $ 5,000 $ 10,000 $ -- $ 15,000
============ ============ ============ ============
Year ended March 31, 1995........................................ $ 15,000 $ -- $ (5,000) $ 10,000
============ ============ ============ ============
</TABLE>
Note 4 - Property and Equipment
<TABLE>
Property and equipment consist of the following.
<CAPTION>
March 31,
-------------------------
1994 1995
----------- -------------
<S> <C> <C>
Equipment.............................................................................. $233,327 $433,642
Furniture and fixtures................................................................. 37,097 37,808
Leasehold improvements................................................................. 22,476 --
----------- -------------
292,900 471,450
Less: Accumulated depreciation and amortization........................................ (153,426) (199,054)
=========== =============
$139,474 $272,396
=========== =============
</TABLE>
Depreciation and amortization expense for the years ended March 31, 1994
and 1995 and for the period April 1, 1995 through February 19, 1996 was $50,929,
$76,538 and $85,664, respectively.
As described in Note 7, the Company leases certain equipment under capital
leases.
Note 5 - Credit Facilities
Short-Term Debt
<TABLE>
Short-term debt consists of the following.
<CAPTION>
March 31,
---------------------------
1994 1995
------------ --------------
<S> <C> <C>
Line of credit.......................................................................... $430,964 $1,134,077
Equipment line of credit................................................................ -- --
Current capital lease obligations....................................................... 8,653 55,012
Current maturities on long-term debt.................................................... 56,309 53,120
Notes payable to related parties........................................................ 100,000 291,500
============ ==============
$595,926 $1,533,709
============ ==============
</TABLE>
The Company's line of credit agreement with a bank provides for borrowings
up to a maximum amount of $1,250,000 based on eligible accounts receivable, at
the prime rate (6.25% and 9.00% at March 31, 1994 and 1995, respectively) plus
1.50 % per annum. The agreement, which expires June 30, 1996, is secured by
accounts receivable, property and equipment, and personally guaranteed by the
Company's principal stockholders. The agreement contains certain financial
covenants with which the Company is in compliance as of March 31, 1995.
F-82
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In May 1995, the Company established a line of credit with a bank which
provides for borrowing of up to $75,000 for the purchase of furniture and
fixtures and equipment. The line bears an interest rate of prime plus 2.25% and
is secured by the Company's accounts with the bank.
During 1995, the Company borrowed a total of $191,500 from its principal
stockholders. The notes are unsecured, bear interest at 9.25% per annum payable
monthly, are due on demand and subordinated to the bank debt. Accrued interest
includes $748 of interest on these notes at March 31, 1995. Interest expense
included $14,025 related to these notes for the year ended March 31, 1995, and
$13,465 for the period April 1, 1995 through February 20, 1996.
The Company borrowed $100,000 from a stockholder in 1993. The note, which
required interest at 9% per annum payable monthly, was paid on September 15,
1995. Accrued interest included $370 at March 31, 1994 and $393 at March 31,
1995 related to this note. Interest expense for the years ended March 31, 1994
and 1995 included $9,000 and $9,000, respectively, related to this note.
Long-Term Debt
<TABLE>
Long-term debt consists of.
<CAPTION>
March 31,
--------------------------------
1994 1995
---------------- ---------------
<S> <C> <C>
Capital lease obligations............................................................ $ 48,978 $ 186,619
Note payable to a bank; monthly payments of $5,937, including interest at
the bank's prime rate (9.00% at March 31, 1995) plus 2.25% per annum;
maturing March 30, 1998 and secured by the Company's assets and the
personal guarantee of the Company's principal stockholders........................ -- 178,986
Note payable to a bank; monthly payments of $6,218, including interest at
the bank's prime rate (6.25% at March 31, 1994) plus 2.75% per annum;
refinanced in 1995................................................................ 227,771 --
---------------- ---------------
276,749 365,605
Less: Current maturities............................................................. (64,962) (108,132)
--------------- ---------------
$ 211,787 $ 257,473
================ ===============
<FN>
Principal maturities on notes payable over the next five years are as follows (see Note 7 for capital lease
obligations).
</FN>
</TABLE>
<TABLE>
<CAPTION>
Year Ending
March 31, 1995
-----------------
<S> <C>
1996.................................................................................................. $ 53,120
1997.................................................................................................. 59,413
1998.................................................................................................. 66,453
=================
$ 178,986
=================
</TABLE>
F-83
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6 - Income Taxes
<TABLE>
The provision (benefit) for income taxes is as follows.
<CAPTION>
Year Ended March 31, April 1, 1995 -
------------------------------------ February 19,
1994 1995 1996
----------------- ------------------ ----------------
<S> <C> <C> <C>
Continuing operations:
Current - federal............................................. $ 233,100 $ 190,200 $ 403,010
Deferred - federal............................................ (63,100) (68,200) (39,010)
----------------- ------------------ ----------------
Total.................................................. 170,000 122,000 364,000
Discontinued operations - federal.................................. (159,700) (80,100) --
----------------- ------------------ ----------------
Total provision for income taxes................................. $ 10,300 $ 41,900 $ 364,000
=====================================================
</TABLE>
<TABLE>
Deferred tax assets (liabilities) are comprised of the following.
<CAPTION>
March 31,
----------------------------------
1994 1995
---------------- -----------------
<S> <C> <C>
Accrued liabilities.................................................................. $ 51,100 $ 54,600
Cash to accrual conversion........................................................... (142,900) (111,700)
Depreciation......................................................................... (17,600) (16,500)
Net operating loss carryforward...................................................... 48,200 --
Other................................................................................ 6,500 3,600
---------------- -----------------
Total................................................................................ $ (54,700) $ (70,000)
==================================
</TABLE>
<TABLE>
The Company's effective income tax rate for continuing operations varied from the U.S. federal statutory rate as
follows.
<CAPTION>
April 1-
Year Ended March 31, February 19,
---------------------------------- ----------------
1994 1995 1996
----------------- ---------------- ----------------
<S> <C> <C> <C>
U.S. federal statutory rate............................. 34.0% 34.0% 34.0%
Non-deductible expenses................................. .9 3.0 1.4
Other................................................... .2 (1.7) 1.1
================= ================ ================
Effective income tax rate............................... 35.1% 35.3% 36.5%
================= ================ ================
</TABLE>
Note 7 - Lease Commitments
The Company leases business offices under long-term lease agreements. The
leases are classified as operating leases and expire between 1997 and 2001.
Under such leases, the Company is responsible for all executory costs
(insurance, axes and maintenance) and pro rata common area charges. The Company
also leases furniture and equipment under leases classified as capital leases.
<TABLE>
Property and equipment includes the following leased property under capital leases.
<CAPTION>
March 31,
--------------------------------
1994 1995
---------------- ---------------
<S> <C> <C>
Equipment............................................................................ $ 57,779 $ 236,042
Less: Accumulated amortization....................................................... (10,867) (46,957)
================ ===============
$ 46,912 $ 189,085
================ ===============
</TABLE>
F-84
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following is a schedule of future minimum lease payments for capital
and operating leases (with initial or remaining terms in excess of one year).
<TABLE>
<CAPTION>
Year Ending March 31,
Capital Operating
Leases Leases
------------- -------------
<S> <C> <C>
1997.......................................................................................... $ 79,066 $ 172,172
1998.......................................................................................... 79,066 202,368
1999.......................................................................................... 52,626 198,662
2000.......................................................................................... 21,357 201,026
2001.......................................................................................... - 179,100
------------- ------------
Total minimum lease payments............................................................... 232,115 $ 953,328
============
Less: Amounts representing interest........................................................... (45,496)
-------------
Present value of net minimum lease payments................................................... $ 186,619
=============
</TABLE>
Rent expense amounted to $78,549, $108,630 and $188,038 respectively, for
the years ended March 31, 1994 and 1995 and for the period April 1, 1995 through
February 19, 1996, respectively.
Note 8 - Related Party Transactions
Three individuals own 79% of the outstanding Series A preferred stock, and
are referred to as the ''principal stockholders.''
For the year ended March 31, 1995, the Company recognized a total of
$76,192 in revenue for providing computer consulting services to CyberSAFE. At
March 31, 1995, $59,720 was due from CyberSAFE for these services and are
included in accounts receivable.
In May 1994, the Company negotiated a perpetual software marketing
agreement with CyberSAFE to sublicense CyberSAFE software in exchange for
royalty payments of 15% of the purchase price for every copy licensed. For the
year ended March 31, 1995, and for the period April 1, 1995 through February 19,
1996, the Company paid no royalties to CyberSAFE.
In addition, the Company has made short-term advances to CyberSAFE. The
balance due on these short-term advances, bearing interest at 9% per annum at
March 31, 1995 was $111,877. Included in other income is $41,265 for the year
ended March 31, 1995 for management services provided to CyberSAFE . Included in
interest income on the advances was $7,335 and $14,213 for the year ended March
31, 1995 and for the period April 1, 1995 through February 19, 1996,
respectively.
Two stockholders of the Company each own in excess of 10% of the equity
interests in VoiceNet, Inc. (''VoiceNet''), a voicemail service bureau from
which FDSI obtained voicemail services. For the year ended March 31, 1995,
consideration paid by FDSI to VoiceNet was approximately $17,500. FDSI paid for
services at VoiceNet's advertised rates.
The Company carries its investment in Cotelligent (see Note 1) at cost. The
investment, which totaled $15,000 and $30,000 at March 31, 1994 and 1995,
respectively, is included in the ''Other assets'' in the accompanying Balance
F-85
<PAGE>
Sheet.
Note 9 - Employee Benefit Plans
The Company maintains a discretionary 401(k) profit-sharing plan which
covers all employees who have met minimum age and employment requirements. The
Company made no contributions to this plan, for the years ended March 31, 1994
and 1995 and for the period April 1, 1995 through February 19, 1996.
F-86
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In September 1992, the Company adopted a cash bonus profit-sharing plan for
employees who have completed 1,500 hours of service to the Company. Individuals
must be an employee of the Company on the payout date. The Company recorded
$10,000, $24,000 and $30,000 of expense related to this plan for the years ended
March 31, 1994 and 1995 and the period April 1, 1995 through February 19, 1996,
respectively.
Note 10 - Preferred and Common Stock
In 1990, the Company's articles of incorporation were amended to allow for
new classes of stock. Holders of the Company's previously issued common stock
exchanged their shares for newly issued Series A voting preferred stock. Holders
of the Company's outstanding and exercisable stock options exchanged their
options for newly issued Series C voting preferred stock in conjunction with the
termination of the Company's stock option plan.
Holder of Series C preferred stock are required to convert their shares to
Series A common stock (voting) upon the termination of employment with the
Company.
The Company has authorized Series B and D preferred stock and Series B
common stock; each series of stock is unissued and has different rights. Series
B and D preferred and Series B common stock are nonvoting. The following
summarizes the authorized shares for each series of stock:
Preferred stock:
Series B, 100,000 shares authorized
Series D, 150,000 shares authorized
Common stock:
Series B, 150,000 shares authorized
Note 11 - Discontinued Operations
As discussed in Note 2, CyberSAFE was previously a separate business
division of FDSI, which developed and marketed security system software for a
separate group of customers. In December 1993, CyberSAFE was incorporated and
became a wholly-owned subsidiary of the Company. Revenues for this business were
approximately $861,000 and $84,000 for the fiscal years ended March 31, 1994 and
1995, respectively. Net assets of approximately $446,000 were transferred by
FDSI to the subsidiary. Management of FDSI subsequently decided to discontinue
this business segment and, accordingly, distributed the net assets to its
stockholders in a tax-free reorganization in June 1994.
Accordingly, the operating results of this business have been presented as
discontinued operations, net of applicable income taxes, for all periods
presented. The assets and liabilities of CyberSAFE have been presented as ''Net
assets from discontinued business'' on the March 31, 1994 balance sheet. These
March 31, 1994 assets consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Cash............................................................................................... $ 4,660
Accounts receivable................................................................................ 209,892
Prepaid expenses and other current assets.......................................................... 28,797
Other assets....................................................................................... 39,234
Capitalized software............................................................................... 497,203
Property and equipment............................................................................. 144,284
Accounts payable and accrued liabilities........................................................... (164,855)
Deferred income taxes.............................................................................. (103,300)
Long-term debt..................................................................................... (172,285)
--------------
Net...................................................................................... $ 483,630
==============
</TABLE>
F-87
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The net assets of CyberSAFE at June 1994, which approximated $103,000, were
distributed to its shareholders and this distribution has been reflected
appropriately in stockholders' equity.
Note 12 - Significant Clients
During the year ended March 31, 1994, two clients accounted for 14% and 11%
of revenues, respectively, one client accounted for 26% of revenues for the year
ended March 31, 1995, and two clients accounted for 12% and 24% of revenue,
respectively, for the period April 1, 1995 through February 19, 1996.
Additionally, these clients accounted for approximately 22% and 23% of the
accounts receivable balance as of March 31, 1994 and 1995, respectively.
F-88
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
BFR Co., Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of BFR Co., Inc. at March 31, 1995 and
1994, and the results of its operations and cash flows for the years ended March
31, 1995 and 1994 and for the period April 1, 1995 through February 19, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Minneapolis, Minnesota
April 20, 1996
F-89
<PAGE>
<TABLE>
BFR CO., INC.
BALANCE SHEET
<CAPTION>
March 31, March 31,
1994 1995
------------- --------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................ $ 210,442 $ 466,885
Accounts receivable...................................................... 3,388,164 3,263,436
Prepare expenses and other current assets................................ 167,819 13,411
------------- --------------
Total current assets................................................ 3,766,425 3,743,732
------------- --------------
Property and equipment, net................................................... 184,352 140,818
Other assets . 119,567 138,723
============= ==============
Total assets........................................................ $4,070,344 $4,023,273
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt.......................................................... $ 584,650 $ 35,659
Accounts payable......................................................... 191,448 71,840
Accrued payroll liabilities.............................................. 159,865 836,972
Deferred revenue......................................................... -- 168,405
Deferred income taxes 271,000 250,000
Other accrued liabilities................................................ 243,764 255,962
------------- --------------
Total current liabilities........................................... 1,450,727 1,618,838
------------- --------------
Capital lease obligations. 176,172 140,189
Commitments (Notes 6 and 9)................................................... -- --
Stockholders' equity :
Common stock, no par value; 1,000,000 shares of Class A and
1,000,000 shares of Class B authorized, 300,000 and 700,000
shares, issued and outstanding........................................ 1,000 1,000
Retained earnings ....................................................... 2,442,445 2,263,246
------------- --------------
Total stockholders' equity ......................................... 2,443,445 2,264,246
============= ==============
Total liabilities and stockholders' equity.......................... $4,070,344 $4,023,273
============= ==============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-90
<PAGE>
<TABLE>
BFR CO., INC.
STATEMENT OF OPERATIONS
<CAPTION>
April 1, 1995
Fiscal Year Ended March 31, February 19,
---------------------------------- -----------------
1994 1995 1996
----------------- ---------------- -----------------
<S> <C> <C> <C>
Revenues...................................................... $14,440,051 $ 15,220,645 $ 15,622,785
Cost of services.............................................. 10,813,662 11,239,778 11,494,132
----------------- ---------------- -----------------
Gross margin........................................ 3,626,389 3,980,867 4,128,653
Selling, general and administrative
expenses ................................................. 2,832,816 4,173,345 3,589,339
----------------- ---------------- -----------------
Operating income (loss)............................. 793,573 (192,478) 539,314
Other (income) expense:
Interest expense......................................... 53,228 33,109 181,713
Interest income.......................................... (20,770) (25,388) (20,694)
Other, net............................................... 3,934 -- --
----------------- ---------------- -----------------
36,392 7,721 161,019
----------------- ---------------- -----------------
Income (loss) before provision
(benefit) for income taxes................................. 757,181 (200,199) 378,295
Provision (benefit) for income taxes.......................... 76,000 (21,000) 1,080,162
----------------- ---------------- -----------------
Net income (loss)................................... $ 681,181 $ (179,199) $ (701,867)
================= ================ =================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-91
<PAGE>
<TABLE>
BFR CO., INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<CAPTION>
Unearned Total
Retained ESOP Stockholders
Common Stock Earnings Shares Equity
--------------------------------------------- ------------ ----------------- -----------------
Shares Amount
---------------------- ----------------------
Class A Class B Class A Class B
---------------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1993........ 300,000 700,000 $ 300 $ 700 $ 1,761,264 $ -- $ 1,762,264
Net income....................... -- -- -- -- 681,181 681,181
---------- ----------- ----------- ----------- ------------ ----------------- -----------------
Balance at March 31, 1994........ 300,000 700,000 300 700 2,442,445 -- 2,443,445
Net loss......................... -- -- -- -- (179,199) -- (179,199)
---------- ----------- ----------- ----------- ------------ ----------------- -----------------
Balance at March 31, 1995........ 300,000 700,000 300 700 2,263,246 -- 2,264,246
Purchase of ESOP shares.......... -- -- -- -- -- (3,150,000) (3,150,000)
Release of unearned shares to
ESOP.......................... -- -- -- -- -- 1,114,286 1,114,286
Conversion of ESOP to defined
contribution plan................ -- -- -- -- -- 2,035,714 2,035,714
Dividends........................ -- -- -- -- (138,723) -- (138,723)
Net loss......................... -- -- -- -- (701,867) -- (701,867)
---------- ----------- ----------- ----------- ------------- ---------------- -----------------
Balance at February 19, 1996..... 300,000 700,000 $ 300 $ 700 $ 1,422,656 $ 0 $ 1,423,656
========== =========== =========== =========== ============= ================ =================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-92
<PAGE>
<TABLE>
BFR CO., INC.
STATEMENT OF CASH FLOWS
<CAPTION>
Fiscal Years Ended April 1, 1995 -
March 31, February 19,
---------------------------- ----------------
1994 1995 1996
---------------------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................... $ 681,181 $ (179,199) $ (701,867)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation and amortization............................ 44,625 43,534 41,704
Deferred income taxes, net............................... 76,000 (21,000) 407,651
Changes in current assets and liabilities:
Accounts receivable................................... (893,938) 124,728 (99,222)
Prepaid expenses and other current
assets.............................................. (5,327) 154,408 331,860
Accounts payable and accrued expenses................. (260,851) 569,697 356,642
Income taxes payable.................................. -- -- 376,224
Deferred revenue...................................... -- 168,405 (168,405)
Changes in other assets.................................. (25,463) (19,156) (307,298)
---------------------------- ----------------
Net cash provided by (used in)
operating activities............................. (383,773) 841,417 237,289
---------------------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment........................ (8,126) -- (121,757)
Net repayments from related
parties ................................................. 127,673 -- --
Deferred transaction costs................................. -- -- (274,355)
Investment in Cotelligent.................................. -- -- (40,000)
Advances to Cotelligent.................................... -- -- (136,000)
---------------------------- ----------------
Net cash flows provided by (used in) investing
activities................................................. 119,547 -- (572,112)
---------------------------- ----------------
Cash flows from financing activities:
Net borrowings (repayments) on short-term
debt .................................................... 150,000 (550,000) 300,000
Payments on capital lease obligations...................... (30,927) (34,974) (30,244)
---------------------------- ----------------
Net cash provided by (used in)
financing activities............................. 119,073 (584,974) 269,756
---------------------------- ----------------
Net increase (decrease) in cash and cash
equivalents................................................ (145,153) 256,443 (65,067)
Cash and cash equivalents at beginning of
period .................................................... 355,595 210,442 466,885
============================ ================
Cash and cash equivalents at end of period.................... $ 210,442 $ 466,885 $ 401,818
============================ ================
Supplemental disclosures of cash flow
information:
Interest paid.............................................. $ 28,784 $ 12,495 $ 181,713
Income taxes paid.......................................... $ 25 $ 25 $ 439,500
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-93
<PAGE>
BFR CO., INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business Organization
BFR Co., Inc. ("BFR" or the "Company"), a New Jersey corporation, was
incorporated and commenced operations in 1985. The Company is a professional
services firm that provides computer consulting and contract programming
services.
The Company and its stockholders entered into a definitive agreement with
Cotelligent Group, Inc. ("Cotelligent") pursuant to which the Company merged
with Cotelligent (the "Acquisition"). All outstanding shares of the Company were
exchanged for cash and shares of Cotelligent's common stock concurrent with the
consummation of the initial public offering of the common stock of Cotelligent.
Cotelligent completed the initial public offering on February 14, 1996, and on
February 20, 1996, completed the Acquisition of the Company.
Note 2 - Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided over
the estimated useful lives of the related assets (generally ranging from five to
ten years) on an accelerated basis.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
Receivables arising from services provided to clients are not collateralized and
accordingly, the Company performs ongoing credit evaluations of its clients to
reduce the risk of loss.
Allowance for Doubtful Accounts
The Company does not maintain an allowance for doubtful accounts as
accounts receivable amounts are deemed fully collectible and historical
write-offs have been insignificant.
Revenue Recognition
Revenue is recognized as services are performed.
Deferred revenue at March 31, 1995 represents billings to clients under
fixed price contracts that have not been earned by the Company under its revenue
recognition policy.
F-94
<PAGE>
BFR CO., INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Earnings Per Share
Historical earnings per share has not been presented because it is not
considered to be meaningful as a result of the Acquisitions and the offering as
discussed in Note 1.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, ''Accounting for Income Taxes'' ("SFAS
109"). The asset and liability approach used in SFAS 109 requires the
recognition of deferred tax assets and liabilities for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities.
The Company was an S corporation through March 31, 1995 for federal income
tax purposes and, accordingly, any federal income tax liabilities through this
date are the responsibility of the stockholders. Appropriate provisions were
made for these periods for state income taxes. Effective April 1, 1995 the
Company terminated its S status and will be taxed as a C Corporation. See
further discussion in Note 5, Income Taxes.
Note 3 - Property and Equipment
<TABLE>
Property and equipment is comprised of the following:
<CAPTION>
March 31,
1994 1995
----------- -----------
<S> <C> <C>
Computer equipment........................................................................ $ 292,001 $ 292,001
Office equipment.......................................................................... 349,476 349,476
Leasehold improvements.................................................................... 24,818 24,818
----------- -----------
666,295 666,295
Less: Accumulated depreciation and amortization........................................... 481,943 525,477
----------- -----------
$ 184,352 $ 140,818
=========== ===========
<FN>
Depreciation and amortization expense for the years ended March 31, 1994 and 1995 and for the period April 1, 1995
through February 19, 1996 was $44,625, $43,534 and $41,704, respectively.
Included in office equipment is approximately $307,000 of gross assets under capital leases as of March 31, 1994.
</FN>
</TABLE>
Note 4 - Credit Facilities
Short-Term Debt
<TABLE>
Short-term debt consists of the following:
<CAPTION>
March 31,
-----------------------
1994 1995
----------- -----------
<S> <C> <C>
Line of credit.............................................................................. $ 550,000 $ --
Current portion of capital lease obligation................................................. 34,650 35,659
----------- -----------
$ 584,650 $ 35,659
=========== ===========
<FN>
F-95
<PAGE>
BFR CO., INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
The Company's line of credit agreement with a bank provides for borrowings of up to $1,500,000. The line of
credit is secured by all of the Company's assets not specifically pledged. The interest rate on this line of credit was
6.75% (prime plus .50 %) and 9% (prime) at March 31, 1994 and 1995, respectively.
</FN>
</TABLE>
Note 5 - Income Taxes
<TABLE>
The provision (benefit) for income taxes is as follows.
<CAPTION>
April 1, 1995-
Year Ended March 31, February 19,
--------------------------
1994 1995 1996
------------- ------------ ----------------
<S> <C> <C> <C>
Current:
Federal..................................................... $ -- $ -- $ 192,879
State....................................................... 76,000 (21,000) 117,968
------------- ------------ ----------------
76,000 (21,000) 310,847
Deferred:
Federal..................................................... -- -- 847,604
State....................................................... -- -- (78,289)
------------- ------------ ----------------
-- -- 769,315
------------- ------------ ----------------
$ 76,000 $ (21,000) $ 1,080,162
============= ============ ================
</TABLE>
<TABLE>
Deferred tax assets (liabilities) are comprised of the following.
<CAPTION>
March 31,
------------------------------
1994 1995
--------------- -------------
<S> <C> <C>
Current:
Cash to accrual......................................................... $ -- $ --
Accounts receivable..................................................... (318,000) (293,700)
Accounts payable and accrued expenses................................... 43,000 24,700
Unearned revenue........................................................ -- 15,200
Other .................................................................. 4,000 3,800
--------------- -------------
Total.............................................................. $ (271,000) $ (250,000)
=============== =============
</TABLE>
<TABLE>
The Company's effective income tax rate varied from the statutory tax rate as a result of the following:
<CAPTION>
Year Ended
March 31, April 1, 1995 -
------------------------ February 19,
1994 1995 1996
---------------------------- ----------------
<S> <C> <C> <C>
U.S. Federal statutory rate............................................ 34.0% 34.0% 34.0%
State statutory rate................................................... 9.0 9.0 6.9
Officers life insurance and other nondeductible expenses............... 1.0 1.5 (6.9)
Conversion to C corporation ........................................... -- -- 244.5
Other ................................................................. -- -- (10.2)
------------------------ ----------------
Effective tax rate................................................ 44.0% 44.5% 268.3%
======================== ================
</TABLE>
F-96
<PAGE>
BFR CO., INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Also, in connection with the conversion from an S corporation (cash basis)
to a C corporation (accrual basis), approximately $925,000 of federal and state
income taxes is expected to be paid pro rata over the next four years. See Note
11 for Unaudited Pro Forma Income Tax Information.
F-97
<PAGE>
Note 6 - Lease Commitments
The Company leases its general offices, and certain computer and
transportation equipment under operating leases from an affiliate, which is
under common control. Rental expense under these leases was $175,814, $176,104
and $174,874 for the years ended March 31, 1994 and 1995 and for the period
April 1, 1995 through February 19, 1996, respectively.
<TABLE>
Future minimum rental payments under such leases for the years ending March 31 are as follows.
<CAPTION>
Capital Operating
Leases Leases
------------- -------------
<S> <C> <C>
1997....................................................................... $ 51,000 $ 205,000
1998....................................................................... 51,000 196,000
1999....................................................................... 51,000 196,000
2000....................................................................... 51,000 206,000
2001....................................................................... 43,000 191,000
------------- -------------
Total minimum lease payments..................................... 247,000 $ 994,000
=============
Less: Future interest...................................................... (71,152)
--------------
Present value of net minimum lease payments................................ 175,848
Less: Current maturities................................................... (35,659)
--------------
$140,189
==============
</TABLE>
Note 7 - Common Stock
Effective March 31, 1995, the Company amended its Certificate of
Incorporation to provide for two classes of voting common stock (Class A and
Class B) with the authority to issue 1,000,000 shares of each class of common
stock with no par value. The existing shares outstanding were classified as
Class B shares.
On April 20, 1995 the Company declared and effected a stock split of 3,000
shares of Class A common stock for each share of Class B common stock in the
form of a stock dividend. On April 20, 1995, the Company declared and effected a
7,000-for-1 stock split of the Class B common stock. This stock split has been
retroactively reflected in the Company's Balance Sheet and Statement of
Stockholders' Equity.
On April 20, 1995, the Employee Stock Ownership Plan and the Money Purchase
Plan (the Plan) purchased from the shareholders of the Company all of the
300,000 shares of Class A common stock for $3,150,000. In connection with the
transaction, the Plan received a $900,000 cash contribution from the Company and
assumed a $2,250,000 liability to a bank. The Company guaranteed this
obligation. Approximately 214,000 Class A shares are pledged to the bank, and
the loan will be repaid in 84 monthly installments plus interest at the banks
prime rate less .10%. See further discussion regarding this Plan in Note 8 -
Retirement Plans.
Note 8 - Retirement Plans
401(k)
The Company has a 401(k) plan for the benefit of all employees after 30
days of service. The plan is non-contributory and is funded by the amounts used
to reduce employee salaries. In addition, the Company has the option to
contribute to the plan on the employee's behalf. The Company did not make any
contributions to the plan for the years ending March 31, 1994 and 1995 and for
the period April 1, 1995 through February 19, 1996.
F-98
<PAGE>
BFR CO., INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Employee Stock Ownership and Money Purchase Plan
The Company previously maintained an Employee Stock Ownership (ESOP) and
Money Purchase Plan (the Plan) which covered substantially all salaried
employees. Annual contributions to the ESOP were made at the discretion of the
Company's Board of Directors. The Plan required fixed minimum annual
contributions of 10% of eligible payroll for the initial year ending March 31,
1995 and 5% of eligible payroll for subsequent years. Employees' scheduled
vesting of these benefits occurs over seven years. In April 1995, the Plan
incurred a $2,250,000 liability to a bank with respect to the ESOP portion of
the Plan, which, together with a $900,000 cash contribution from the Company,
enabled the Plan to purchase all of the 300,000 outstanding shares of Class A
common stock for $3,150,000 from the stockholders. The ESOP shares were
allocated to participants as contributions were made to the Plan. During the
year ended March 31, 1995, the Company made contributions of $900,000 to this
Plan. As the debt was repaid, shares were released from collateral and allocated
to active employees based upon the proportion of debt service paid in the year.
The Company recorded compensation expense equal to the market value of the
shares at the release date. On December 7, 1995, the Plan was converted to a
profit sharing plan. Contributions to the Plan are made at the discretion of the
Company. The Company did not make any contributions to the Plan for the period
from December 7, 1995 through February 19, 1996.
Note 9 - Commitments
Employment Agreements
Effective April 20, 1995, the Company entered into employment agreements
with the four shareholders and officers of the Company. The agreements provided
for minimum annual compensation of $464,000 in addition to directors
compensation, potential salary increases and bonuses. The Agreements included
non-compete clauses and continued through years ranging between 2001 and 2021,
assuming the maintenance of certain ownership percentages. These employment
agreements were terminated in connection with the merger with Cotelligent and
certain of the officers entered into new employment contracts.
Note 10 - Major Clients
During the year ended March 31, 1994, three major clients accounted for
approximately 33%, 25% and 13% of revenues, respectively, during 1995 three
clients accounted for approximately 34%, 25% and 12% of revenues, respectively,
and during the period April 1, 1995 through February 19, 1996 four clients
accounted for 27%, 23%, 21% and 15% respectively.
Additionally, these clients accounted for approximately 28%, 22% and 13% of
the accounts receivable balance as of March 31, 1994 and 34%, 24% and 18% of the
accounts receivable balance as of March 31, 1995, respectively.
F-99
<PAGE>
BFR CO., INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 11 - Unaudited Pro Forma Income Tax Information
The following unaudited pro forma income tax information is presented in
accordance with Statement of Financial Accounting Standards No. 109 ("SFAS 109")
as if the Company had been a C corporation subject to federal and state income
taxes throughout the periods presented.
<TABLE>
<CAPTION>
Fiscal Year Ended April 1, 1995 - -
March 31, February 19,
------------------------------ ----------------
1994 1995 1996
------------- ---------------- ----------------
<S> <C> <C> <C>
Income (loss) before
provision (benefit) for income taxes............................. $ 757,181 $ (200,199) $ 378,295
Provision (benefit) for income taxes................................ 302,872 (80,080) 151,318
============= ================ ================
Pro forma net income (loss)......................................... $ 454,309 $ (120,119) $ 226,977
============= ================ ================
</TABLE>
F-100
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Data Arts & Sciences, Inc.
and Data Personnel, Inc.
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the combined financial position of
Data Arts & Sciences, Inc. and Data Personnel, Inc. at March 31, 1995 and 1994,
and the results of their operations and cash flows for each of the years ended
March 31, 1995 and 1994 and for the period April 1, 1995 through February 19,
1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the companies' management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Minneapolis, Minnesota
April 20, 1996
F-101
<PAGE>
<TABLE>
DATA ARTS & SCIENCES, INC.
COMBINED BALANCE SHEET
<CAPTION>
March 31, March 31,
1994 1995
-----------------------------
ASSETS
<S> <C> <C>
Current assets:
Accounts receivable, less allowance for doubtful accounts of
$30,000........................................................................... $1,431,730 $2,043,211
Income taxes receivable.............................................................. 26,635 --
Deferred income taxes................................................................ 12,081 12,081
Prepaid expenses and other current assets............................................ 64,794 51,630
-------------- --------------
Total current assets............................................................ 1,535,240 2,106,922
-------------- --------------
Property and equipment, net............................................................... 112,918 79,531
Deferred income taxes..................................................................... 11,341 12,599
Other assets ............................................................................. 137,675 228,166
============== ==============
Total assets.................................................................... $1,797,174 $2,427,218
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt...................................................................... $ 179,138 $ 408,983
Accounts payable..................................................................... 247,682 396,747
Accrued compensation................................................................. 323,669 401,116
Income taxes payable................................................................. -- 55,290
-------------- --------------
Total current liabilities....................................................... 750,489 1,262,136
-------------- --------------
Long-term debt, including notes payable to related parties of
$440,000 ............................................................................. 556,259 440,000
-------------- --------------
Total liabilities............................................................... 1,306,748 1,702,136
-------------- --------------
Commitments and contingencies (Notes 7 and 9)............................................. -- --
Stockholders' equity:
Common stock - DASI, no par value; 12,500 shares authorized,
300 shares issued and outstanding................................................. 2,000 2,000
Common stock - DPI, no par value; 10,000 shares authorized,
2,000 shares issued and outstanding............................................... 2,000 2,000
Retained earnings.................................................................... 486,426 721,082
-------------- --------------
Total stockholders' equity...................................................... 490,426 725,082
============== ==============
Total liabilities and stockholders' equity...................................... $1,797,174 $2,427,218
============== ==============
<FN>
The accompanying notes are an integral part of these combined financial statements.
</FN>
</TABLE>
F-102
<PAGE>
<TABLE>
DATA ARTS & SCIENCES, INC.
COMBINED STATEMENT OF OPERATIONS
<CAPTION>
Fiscal Year Ended April 1, 1995 -
March 31, February 19,
------------------------------------ -------------------
1994 1995 1996
----------------- ------------------ ------------------
<S> <C> <C> <C>
Revenue................................................................. $10,065,043 $12,436,865 $14,455,636
Cost of services........................................................ 7,971,100 9,740,902 11,254,223
----------------- ------------------ ------------------
Gross margin....................................................... 2,093,943 2,695,963 3,201,413
Selling, general and administrative expenses............................ 1,861,838 2,194,932 2,344,165
----------------- ------------------ ------------------
Operating income.............................................. 232,105 501,031 857,248
Other (income) expense:
Interest expense................................................... 80,013 80,150 109,318
Other, net......................................................... - - (22,719)
----------------- ------------------ ------------------
80,013 80,150 86,599
----------------- ------------------ ------------------
Income before provision for income taxes................................ 152,092 420,881 770,649
Provision for income taxes.............................................. 71,658 186,225 328,288
----------------- ------------------ ------------------
Net income.............................................................. $ 80,434 $ 234,656 $ 442,361
================= ================== ==================
<FN>
The accompanying notes are an integral part of these combined financial statements.
</FN>
</TABLE>
F-103
<PAGE>
<TABLE>
DATA ARTS & SCIENCES, INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
<CAPTION>
Total
Common Stock Common Stock Retained Stockholders
DASI DPI Earnings Equity
--------------------- -------------------------------------------------------
Shares Amount Shares Amount
--------- ----------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1993........... 300 $ 2,000 2,000 $ 2,000 $ 405,992 $ 409,992
Net income.......................... - - - - 80,434 80,434
--------- ----------- ------------------------- -------------- ---------------
Balance at March 31, 1994........... 300 2,000 2,000 2,000 486,426 490,426
Net income.......................... - - - - 234,656 234,656
--------- ----------- ------------------------- -------------- ---------------
Balance at March 31, 1995........... 300 2,000 2,000 2,000 721,082 725,082
Dividends........................... -- -- -- -- (20,745) (20,745)
Redemption.......................... -- -- (2,000) (2,000) -- (2,000)
Contributed Capital................. -- 2,000 -- -- -- 2,000
Net Income.......................... -- -- -- -- 442,361 442,361
--------- ----------- ------------------------- -------------- ---------------
Balance at February 19, 1996........ 300 $ 4,000 0 $ 0 $1,142,698 $1,146,698
========= =========== ========================= ============== ===============
<FN>
The accompanying notes are an integral part of these combined financial statements.
</FN>
</TABLE>
F-104
<PAGE>
<TABLE>
DATA ARTS & SCIENCES, INC.
COMBINED STATEMENT OF CASH FLOWS
<CAPTION>
Fiscal Year Ended April 1,1995-
March 31, February 19,
----------------------------- ----------------
1994 1995 1996
-------------- -------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................ $ 80,434 $ 234,656 $ 442,361
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation........................................................ 38,909 43,289 28,943
Gain on disposal of equipment....................................... -- -- (22,719)
Deferred income taxes, net.......................................... (35,555) (1,258) (21,480)
Changes in current assets and liabilities:
Accounts receivable.............................................. 50,713 (611,481) (463,964)
Prepaid expenses and other current assets........................ (44,324) 13,164 (15,418)
Accounts payable and accrued expenses............................ 35,724 226,512 (64,564)
Income taxes payable............................................. (81,602) 81,925 30,517
Changes in other assets............................................. -- (50,000) --
-------------- -------------- ----------------
Net cash provided by (used in) operating
activities.................................................. 44,299 (63,193) (86,324)
-------------- -------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment................................... (66,916) (9,902) (40,600)
Proceeds from sale of equipment...................................... -- -- 11,000
Deferred transaction costs........................................... -- -- (25,119)
Investment in Cotelligent............................................. -- (25,000) --
Advances to Cotelligent............................................... -- -- (73,000)
Investment in cash surrender value of life
insurance........................................................... (16,146) (15,491) (22,325)
-------------- -------------- ----------------
Net cash used in investing activities.......................... (83,062) (50,393) (150,044)
-------------- -------------- ----------------
Cash flows from financing activities:
Net borrowings (payments) on short-term debt (82,000) 230,000 242,356
Payments on long-term debt............................................ (9,268) (116,414) (5,988)
Payments on loan from related parties................................. (25,000) -- --
-------------- -------------- ----------------
Net cash provided by (used in) financing
activities.................................................. (116,268) 113,586 236,368
-------------- -------------- ----------------
Net decrease in cash and cash equivalents................................ (155,031) -- --
Cash and cash equivalents at beginning of period......................... 155,031 -- --
-------------- -------------- ----------------
Cash and cash equivalents at end of period............................... $ -- $ -- $ --
============================= ================
Supplemental disclosures of cash flow information:
Interest paid......................................................... $ 80,013 $ 80,150 $ 109,318
Income taxes paid..................................................... $ 188,815 $ 105,558 $ 254,402
<FN>
The accompanying notes are an integral part of these combined financial statements.
</FN>
</TABLE>
F-105
<PAGE>
DATA ARTS & SCIENCES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1 - Business Organization
Data Arts & Sciences, Inc. ("DASI" or the "Company"), a Massachusetts
corporation, commenced operations in 1975. The Company is a professional
services firm that provides computer consulting and contract programming
services.
The Company and its stockholders entered into a definitive agreement with
Cotelligent Group, Inc. ("Cotelligent") pursuant to which the Company merged
with Cotelligent (the "Acquisition"). All outstanding shares of the Company were
exchanged for cash and shares of Cotelligent's common stock concurrent with the
consummation of an initial public offering of the common stock of Cotelligent.
Cotelligent completed the initial public offering on February 14, 1996, and on
February 20, 1996, completed the Acquisition of the Company.
Note 2 - Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Basis of Combination
The accompanying financial statements include the accounts of Data
Personnel, Inc. ("DPI") which is owned and controlled by the stockholders of
Data Arts & Sciences, Inc. and which will also be included in the Acquisition by
Cotelligent. Accordingly, these entities have been combined and presented in the
accompanying financial statements. All intercompany balances and transactions
have been eliminated. On December 27, 1995, DPI was merged with DASI.
Cash and Cash Equivalents
The Company considers all highly liquid debt investments purchased with an
original maturity of three months or less to be cash equivalents. No such
investments were held at March 31, 1995 or 1994.
Property and Equipment
Property and equipment are recorded at cost. Maintenance and repair costs
are expensed as incurred. Depreciation of property and equipment is calculated
using the double declining balance method over the estimated useful lives of the
respective assets (generally over 5 years).
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
Receivables arising from services provided to clients are not collateralized and
accordingly, the Company performs ongoing credit evaluations of its clients to
reduce the risk of loss.
F-106
<PAGE>
DATA ARTS & SCIENCES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Revenue Recognition
Revenue is recognized as services are performed.
Earnings Per Share
Historical earnings per share has not been presented because it is not
considered to be meaningful as a result of the Acquisitions and the offering as
discussed in Note 1.
Revenue Recognition
Revenue is recognized as services are performed.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, ''Accounting for Income Taxes'' ("SFAS
109"). The asset and liability approach used in SFAS 109 requires the
recognition of deferred tax assets and liabilities for the tax consequences by
applying enacted statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities.
Note 3 - Allowance for Doubtful Accounts and Notes Receivable:
<TABLE>
The activity in the allowance for doubtful accounts and notes receivable is as follows.
<CAPTION>
Balance at Balance
Beginning Charged to at End
of Period Expense Write-offs of Period
------------- ---------------------------- -------------
<S> <C> <C> <C> <C>
Year ended March 31, 1994............................... $ 30,000 $ -- $ -- $30,000
============= ============= ============== =============
Year ended March 31, 1995............................... $ 30,000 $ 21,368 $(21,368) $30,000
============= ============= ============== =============
</TABLE>
Note 4 - Property and Equipment
<TABLE>
Property and equipment consists of the following.
<CAPTION>
March 31,
-------------------------
1994 1995
------------------------
<S> <C> <C>
Equipment...................................................................................... $187,016 $195,891
Furniture and fixtures......................................................................... 80,301 81,328
Automobiles.................................................................................... 64,150 64,150
Leasehold improvements......................................................................... 11,721 11,721
------------------------
343,188 353,090
Less: Accumulation depreciation................................................................ 230,270 273,559
------------------------
$112,918 $ 79,531
<FN>
========================
Depreciation expense for the years ended March 31, 1994 and 1995 and for the period April 1, 1995 through February
19, 1996 was $38,909, $43,289 and $28,943, respectively.
</FN>
</TABLE>
F-107
<PAGE>
DATA ARTS & SCIENCES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Note 5 - Credit Facilities
Short-Term Debt
<TABLE>
Short-term debt consists of the following.
<CAPTION>
March 31,
1994 1995
------------ ------------
<S> <C> <C>
Revolving line of credit..................................................................... $168,000 $398,000
Current maturities on long-term debt......................................................... 11,138 10,983
------------ ------------
$179,138 $408,983
============ ============
</TABLE>
The Company's line of credit agreement with a bank expires May 31, 1996.
Borrowings under the line are limited to the lesser of $1,300,000 or 70% of the
Company's eligible accounts receivable, as defined in the line of credit
agreement, and are secured by all assets of the Company, as well as the personal
guarantees of the Company's stockholders. Borrowings bear interest at the rate
of 1.25% above the bank's base lending rate (8.754% at March 31, 1995), payable
monthly in arrears. Prior to January 31, 1995, borrowings under the line of
credit bore interest at the rate of 2% above the bank's base lending rate (6.25%
at March 31, 1994). Additionally, a fee of .50% per annum is payable quarterly
on the unused portion of the line of credit.
The line of credit agreement contains certain restrictive covenants,
including a limitation on incurrence of additional debt (unless subordinated to
the line of credit), restrictions on the amount of distributions which can be
made to the Company's stockholders, as well as the maintenance of certain
financial ratios and net worth requirements. The Company is currently in
compliance with such covenants.
Long-Term Debt
<TABLE>
Long-term debt consists of the following.
<CAPTION>
March 31,
--------------------------
1994 1995
------------ -------------
<S> <C> <C>
Loans from officers and stockholders........................................................ $440,000 $440,000
Automobile loan............................................................................. 22,121 10,983
Loan against cash surrender value of life insurance policies................................ 105,276 -
------------ -------------
567,397 450,983
Less: Current portion....................................................................... 11,138 10,983
============ =============
$556,259 $440,000
</TABLE>
Loans from Officers
The Company has various loans payable to the officers and stockholders of
DASI. A total of $440,000 is outstanding at March 31, 1995 and 1994, $220,000 to
each stockholder. All of the loans bear interest at the rate of 10%, and
interest only is payable monthly until the maturity date, at which time all of
the principal is due. The loans contain no financial or restrictive covenants
and have the following maturity dates:
<TABLE>
<CAPTION>
<S> <C>
Due October 25, 1996................................ $ 100,000
Due December 25, 1997............................... 140,000
Due October 25, 2006................................ 200,000
=============
$ 440,000
=============
</TABLE>
F-108
<PAGE>
DATA ARTS & SCIENCES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
The $200,000 loan due October 25, 2006 is subordinated to repayment of the
Company's revolving line of credit.
Additionally, the Company had borrowed $50,000 from one stockholder on
January 22, 1992 and again on March 10, 1993 under similar arrangements. All of
these loans were repaid during fiscal years 1993 and 1994.
Automobile Loan
The Company purchased an automobile in fiscal year 1992 for $4,000 in cash
and a loan of $42,005. The loan bore interest at the rate of 9.75% and required
monthly principal and interest payments of $1,060 through maturity in March
1996. The loan was secured by the automobile. The loan and the automobile were
transferred to a stockholder of the Company in September 1995.
Loan on Officers' Life Insurance Policies
In fiscal year 1992, the Company had borrowed approximately $105,000
against the cash surrender value of its officers' life insurance policies. These
loans bore interest rates which adjusted based on the Moody's Corporate Bond
Index. The loans were repaid in August 1994.
<TABLE>
Total maturities of long-term debt are as follows.
<CAPTION>
Year Ending
March 31,
------------
<S> <C>
1997................................................................$ 10,983
1998................................................................ 100,000
1999................................................................ 140,000
2000................................................................ --
2001................................................................ --
Thereafter.......................................................... 200,000
------------
450,983
Less: Current portion............................................... 10,983
------------
Total long term debt............................................... $ 440,000
============
</TABLE>
Note 6 - Income Taxes
<TABLE>
The provision (benefit) for income taxes is as follows.
<CAPTION>
Year Ended April 1, 1995
March 31, February 19,
----------------------------------------
1994 1995 1996
------------ ---------- ----------------
<S> <C> <C> <C>
Current:
Federal.............................................$ 81,921 $ 143,255 $ 259,207
State............................................... 25,292 44,229 77,555
------------ ---------- ----------------
107,213 187,484 336,762
------------ ---------- ----------------
Deferred:
Federal............................................. (30,019) (1,063) (6,551)
State............................................... (5,536) (196) (1,778)
------------ ---------- ----------------
(35,555) (1,259) (8,329)
------------ ---------- ----------------
Provisions for income taxes..............................$ 71,658 $ 186,225 $ 328,433
============ ========== ================
</TABLE>
F-109
<PAGE>
DATA ARTS & SCIENCES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
<TABLE>
Deferred tax assets are comprised of the following.
<CAPTION>
March 31,
----------------------
1994 1995
----------- -----------
<S> <C> <C>
Accounts receivable reserves...................................$ 12,081 $ 12,081
Accumulated depreciation....................................... 11,341 12,599
---------- ----------
Total deferred tax assets............................$ 23,422 $ 24,680
========== ==========
</TABLE>
The Company's effective income tax rate varied from the U.S. federal
statutory rate as follows.
<TABLE>
<CAPTION>
Year Ended April 1, 1995
March 31, February 19,
---------------------------------------
1994 1995 1996
---------------------------------------
<S> <C> <C> <C>
U.S. federal statutory rate.................................................. 34.0% 34.0% 34.0%
State income taxes, net of federal income tax benefit........................ 7.3 6.8 6.5
Officers' life insurance and nondeductible meals and entertainment
expenses.................................................................. 5.2 3.1 1.1
Other........................................................................ 0.6 0.3 1.0
---------------------------------------
Effective tax rate........................................................... 47.1% 44.2% 42.6%
=======================================
</TABLE>
Note 7 - Lease Commitments
The Company leases certain automobiles under noncancelable operating leases
that expire at various dates through fiscal year 1998. Future minimum lease
payments are as follows.
<TABLE>
<CAPTION>
Year Ending
March 31,
---------------
<S> <C>
1997.............................................................. $ 17,766
1998.............................................................. 4,584
1999.............................................................. 2,292
---------------
$ 24,642
===============
</TABLE>
The Company also leases its office space from a related party trust (see
Note 8). Rental payments on this office space are based upon the principal and
interest payments required under the trust's mortgage loans and the operating
expenses of the facility. The lease agreement was renegotiated in November of
1995. The provisions of the agreement allow for a five year fixed term, with one
successive option to extend the term for a period of five years. The annual
rental amount is $104,400, triple net, with a variable provision for escalation.
Total rent and lease expense recorded by the Company in fiscal years 1994
and 1995 and for the period April 1, 1995 through February 19, 1996 was
$112,864, $114,136 and $96,284, respectively.
Note 8 - Related Party Transactions
As described in Note 7, the Company leases its office space from the
Strathmore Realty Trust. The stockholders of DASI are the sole trustees and
beneficiaries of the Strathmore Realty Trust. Rental expense recorded for this
office space was $96,831, $97,462 and $92,700 for the years ended March 31, 1994
and 1995 and for the period April 1, 1995 through February 19, 1996,
respectively.
F-110
<PAGE>
DATA ARTS & SCIENCES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
As described in Note 5, the Company has loans outstanding to its
stockholders totaling $440,000 at March 31, 1994 and 1995.
Pursuant to the definitive agreement referenced in Note 1, the Company
invested $5,000 and $25,000 during fiscal 1994 and 1995, respectively, in
Cotelligent's common stock. The investment is recorded at cost and included in
''Other assets'' in the accompanying Combined Balance Sheet.
Note 9 - Commitments and Contingencies
The Company is involved in various legal matters in the normal course of
business. As of March 31, 1995, as a result of a pending legal matter involving
a former employee of the Company, a court order required the Company to set
aside $50,000 in a restricted cash account, which is included in ''Other
assets''. The former employee claims that his relationship with the Company
entitled him to share in the profits of one of the divisions of the Company, and
has asserted damages of $200,000.
In the opinion of management, the resolution of the above matters will not
have a material adverse effect on the financial position or results of
operations or cash flows of the Company.
Note 10 - Employee Benefit Plans
The Company maintains an unfunded profit sharing plan which includes
substantially all full-time employees who have at least one year of continuous
service. Contributions to the plan are made at the discretion of the Board of
Directors, based on earning levels. No contributions have been made for the
years ended March 31, 1994, 1995 or for the period April 1, 1995 through
February 19, 1996. The Company previously maintained a pension plan for certain
of its employees. This plan was terminated in 1988 and no further contributions
have been made.
Note 11 - Stock Purchase Agreement
The Company and its stockholders were parties to a stock purchase agreement
which was effective upon the death of a stockholder. The terms of the agreement
required the Company to buy $350,000 of the Company's stock held by the deceased
stockholder's estate and required the surviving stockholder to buy from the
stockholder's estate all of the remaining shares owned by the stockholder at
that time. In the event of a stockholder's death, the ''fair market value'' of
the outstanding stock of the Company was to be equal to 60% of the average gross
sales of the Company for the three most recent years preceding the stockholder's
death; however, the value of such stock shall not be less than the proceeds of
the life insurance contracts maintained on that stockholder. Since the Company's
obligation to purchase common stock from a deceased stockholders' estate will be
fully funded by a life insurance policy maintained by the Company, the related
common stock has been classified as permanent equity. This agreement was
terminated upon the Acquisition by Cotelligent (see Note 1).
Note 12 - Significant Clients
Two clients each accounted for approximately 10% and 14% of revenues in
1994 and 1995. In addition, these clients accounted for approximately 26% and
19% of the accounts receivable balance at March 31, 1994 and 1995, respectively.
During the period April 1, 1995 through February 19, 1996 these two clients
accounted for approximately 16% and 10% of revenue, respectively.
F-111
<PAGE>
Note 13 - Other Assets
Included in "Other" assets on the accompanying Combined Balance Sheet is
the cash surrender value of certain life insurance policies held by the Company
on its officers. This cash surrender value totaled $132,675 and $148,166 at
March 31, 1994 and 1995, respectively. Increases in cash surrender value are
recorded as a reduction of annual insurance premium expense.
F-112
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Chamberlain Associates, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Chamberlain Associates, Inc. at
March 31, 1995 and 1994, and the results of its operations and cash flows for
the years ended March 31, 1995 and 1994 and for the period April 1, 1995 through
February 19, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Minneapolis, Minnesota
April 20, 1996
F-113
<PAGE>
<TABLE>
CHAMBERLAIN ASSOCIATES, INC.
BALANCE SHEET
<CAPTION>
March 31, March 31,
1994 1995
---------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................................................. $ 15,446 $ 46,118
Accounts receivable.................................................................... 520,755 1,265,176
---------------------------
Total current assets.............................................................. 536,201 1,311,294
Property and equipment, net................................................................. 39,214 32,535
Other assets . ............................................................................. 20,049 10,250
===========================
Total assets...................................................................... $ 595,464 $1,354,079
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt, including notes payable to related parties of $0 and $100,000,
respectively........................................................................... $ - $ 385,000
Accounts payable, including overdraft of $89,278 in 1994............................... 126,473 99,862
Accrued compensation................................................................... 85,196 238,092
Other accrued liabilities.............................................................. 26,664 21,492
Deferred income taxes.................................................................. 98,147 203,487
---------------------------
Total current liabilities......................................................... 336,480 947,933
---------------------------
Commitments (Note 6)........................................................................ -- --
Stockholders' equity:
Common stock, $1.00 par value; 10,000 shares authorized;
780 shares outstanding.............................................................. 780 780
Additional paid-in capital............................................................. 24,500 24,500
Retained earnings 233,704 380,866
---------------------------
Total stockholders' equity........................................................ 258,984 406,146
===========================
Total liabilities and stockholders' equity........................................ $595,464 $1,354,079
===========================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-114
<PAGE>
<TABLE>
CHAMBERLAIN ASSOCIATES, INC.
STATEMENT OF OPERATIONS
<CAPTION>
April 1, 1995
Year Ended March 31, February 19,
--------------------------------- ---------------
1995 1996
1994
--------------- ----------------- ---------------
<S> <C> <C> <C>
Revenues................................................................ $ 3,738,117 $ 6,563,487 $ 9,199,763
Cost of services........................................................ 2,920,184 5,241,584 7,460,097
--------------- ----------------- ---------------
Gross margin.................................................. 817,933 1,321,903 1,739,666
Selling, general and administrative
expenses ........................................................... 773,799 1,054,474 1,273,862
--------------- ----------------- ---------------
Operating income.............................................. 44,134 267,429 465,804
Other (income) expense:
Interest expense................................................... 351 15,804 13,999
Interest income.................................................... (1,989) (439) (2,062)
Other, net......................................................... (1,181) (438) (515)
--------------- ----------------- ---------------
(2,819) 14,927 11,422
--------------- ----------------- ---------------
Income before provision for income taxes................................ 46,953 252,502 454,382
Provision for income taxes.............................................. 21,445 105,340 179,494
--------------- ----------------- ---------------
Net income....................................................$ 25,508 $ 147,162 $ 274,888
=============== ================= ===============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
F-115
<PAGE>
CHAMBERLAIN ASSOCIATES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Total
Paid in Retained Stockholders'
Common Stock Capital Earnings Equity
----------------------- ---------------------------- ----------------
Shares Amount
---------- -----------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1993........... 780 $ 780 $ 24,500 $ 208,196 $ 233,476
Net income.......................... -- -- -- 25,508 25,508
---------- ----------- ---------------------------- ----------------
Balance at March 31, 1994........... 780 780 24,500 233,704 258,984
Net income.......................... -- -- -- 147,162 147,162
---------- ----------- ---------------------------- ----------------
Balance at March 31, 1995........... 780 780 24,500 380,866 406,146
Net income.......................... -- -- -- 274,888 274,888
========== =========== ============================ ================
Balance at February 19, 1996........ 780 $ 780 $ 24,500 $ 655,754 $ 681,034
========== =========== ============================ ================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-116
<PAGE>
<TABLE>
CHAMBERLAIN ASSOCIATES, INC.
STATEMENT OF CASH FLOWS
<CAPTION>
Fiscal Years Ended April 1, 1995
March 31, February 19,
--------------------------- ---------------
1994 1995 1996
------------- ------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................ $ 25,508 $ 147,162 $ 274,888
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation........................................................ 14,596 17,035 13,867
Loss (gain) on disposal of property and
equipment........................................................ (2,032) -- --
Deferred income taxes, net.......................................... 87,647 220,520 156,238
Changes in current assets and liabilities:
Accounts receivable.............................................. (236,031) (744,421) (263,213)
Income tax payable............................................... (66,202) (115,180) 23,256
Accounts payable and accrued liabilities........................ 111,835 121,113 259,548
Changes in other assets............................................ -- (5,190) (27,486)
------------- ------------- ---------------
Net cash provided by (used in) operating activities........... (64,679) (358,961) 437,098
------------- ------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment................................... (15,802) (10,356) (32,530)
Deferred transaction costs........................................... -- -- (25,660)
Proceeds from sale of investments..................................... -- 14,989 --
Advances to Cotelligent............................................... -- -- (52,800)
------------- ------------- ---------------
Net cash used in investing activities.......................... (15,802) 4,633 (110,990)
------------- ------------- ---------------
Cash flows from financing activities:
Net borrowings (repayments) on short-term debt........................ -- 235,000 --
Repayments on long-term debt......................................... -- -- (235,000)
Borrowings from related parties....................................... -- 150,000 (50,000)
------------- ------------- ---------------
Net cash provided by (used in) financing activities............ -- 385,000 (285,000)
------------- ------------- ---------------
Net increase (decrease) in cash and cash equivalents..................... (80,481) 30,672 41,108
Cash and cash equivalents at beginning of period 95,927 15,446 46,118
============= ============= ===============
Cash and cash equivalents at end of period............................... $ 15,446 $ 46,118 $ 87,226
============= ============= ===============
Supplemental disclosures of cash flow information:
Interest paid.........................................................$ 351 $ 15,804 $ 13,465
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-117
<PAGE>
CHAMBERLAIN ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business Organization
Chamberlain Associates, Inc. ("CAI" or the "Company"), a California
corporation, was incorporated and commenced operations in 1980. The Company is a
professional services firm that provides computer consulting and contract
programming services.
The Company and its stockholders entered into a definitive agreement with
Cotelligent Group, Inc. ("Cotelligent") pursuant to which the Company merged
with Cotelligent (the "Acquisition"). All outstanding shares of the Company were
exchanged for cash and shares of Cotelligent's common stock concurrent with the
consummation of the initial public offering of the common stock of Cotelligent.
Cotelligent completed the initial public offering on February 14, 1996, and on
February 20, 1996, completed the Acquisition of the Company.
Note 2 - Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided over
the estimated useful lives of the respective assets (5 years for office
equipment and 7 years for furniture and equipment) on a straight-line basis.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
Receivables arising from services provided to clients are not collateralized and
accordingly, the Company performs ongoing credit evaluations of its clients to
reduce the risk of loss.
Allowance for Doubtful Accounts
The Company does not maintain an allowance for doubtful accounts as
accounts receivable amounts are deemed fully collectible and historical
write-offs have been insignificant.
Revenue Recognition
Revenue is recognized as services are performed.
Earnings Per Share
Historical earnings per share has not been presented because it is not
considered to be meaningful as a result of the Acquisitions and the offering as
discussed in Note 1.
F-118
<PAGE>
CHAMBERLAIN ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, ''Accounting for Income Taxes'' ("SFAS
109"). The asset and liability approach used in SFAS 109 requires the
recognition of deferred tax assets and liabilities for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities.
Note 3 - Property and Equipment
<TABLE>
The property and equipment is comprised of the following.
<CAPTION>
March 31,
--------------------------
1994 1995
------------- -------------
<S> <C> <C>
Furniture and fixtures............................................................. $ 30,033 $ 32,298
Office equipment................................................................... 76,212 77,259
------------- -------------
106,245 109,557
Less: Accumulated depreciation..................................................... (67,031) (77,022)
------------- -------------
$ 39,214 $ 32,535
============= =============
</TABLE>
Depreciation expense for the years ended March 31, 1994 and 1995 and for
the period April 1, 1995 through February 19, 1996 was $14,596, $17,035 and
$13,867, respectively.
Note 4 - Credit Facilities
Short-Term Debt
<TABLE>
Short-term debt consists of the following.
<CAPTION>
March 31,
--------------------------
1994 1995
------------- ------------
<S> <C> <C>
Line of credit................................................................... $ -- $ 235,000
Notes payable to related party................................................... -- 150,000
------------- ------------
$ -- $ 385,000
============= ============
</TABLE>
The Company's line of credit agreement with a bank provides for borrowings
of up to $300,000 at a rate of 2% plus prime and is guaranteed by the President
and Vice President of the Company. The interest rate was 11% at March 31, 1995.
The line of credit was renewed on September 15, 1995 with the same provisions.
Notes payable is comprised of a $100,000 and $50,000 note to the Company's
President (also a stockholder) and his son, respectively. These notes, which
mature on December 31, 1995, bear an interest rate of 2% plus prime, which was
11% at March 31, 1995.
F-119
<PAGE>
CHAMBERLAIN ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 5 - Income Taxes
<TABLE>
The provision (benefit) for income taxes is as follows.
<CAPTION>
April 1, 1995-
Year Ended March Feb 19,
31,
------------------------- ----------------
1994 1995 1996
------------ ------------ ---------------
<S> <C> <C> <C>
Current:
Federal...........................................................$ -- $ -- $ 799
State............................................................. -- -- 40,720
------------ ------------ ---------------
-- -- 41,519
Deferred:
Federal........................................................... 16,586 81,472 137,439
State ............................................................ 4,859 23,868 536
------------ ------------ ---------------
21,445 105,340 137,975
------------ ------------ ---------------
Total provision (benefit) for income taxes $ 21,445 $ 105,340 $ 179,494
============ ============ ===============
</TABLE>
<TABLE>
Deferred tax assets (liabilities) are comprised of the following.
<CAPTION>
March 31,
-----------------------------
1994 1995
-------------- --------------
<S> <C> <C>
Current:
Accounts receivable...................................................... $(213,744) $ (519,291)
Accounts payable......................................................... 16,088 40,988
Accrued compensation..................................................... 34,969 97,725
Other current liabilities................................................ 10,944 8,821
Net operating loss carryforward.......................................... 52,659 167,839
Other ................................................................... 937 431
-------------- --------------
Total............................................................... $ (98,147) $ (203,487)
============== ==============
</TABLE>
The Company's effective income tax rate varied from the U.S. federal
statutory rate as follows.
<TABLE>
<CAPTION>
Year Ended March April 1,
31, 1995- Feb 19,
--------------------- ---------------
1994 1995 1996
----------------------- ---------------
<S> <C> <C> <C>
U.S. federal statutory rate................................................ 34.0% 34.0% 34.0%
State income taxes, net of federal income tax benefit...................... 6.8 6.2 6.0
Nondeductible expenses..................................................... 4.9 1.5 .3
Rate differentials......................................................... -- -- .9
--------------------- ---------------
Effective tax rate......................................................... 45.7% 41.7% 41.2%
===================== ===============
</TABLE>
Prior to the merger with Cotelligent, the Company reported results of
operations on the cash basis of accounting for income tax purposes. Upon
completion of the Merger with Cotelligent, the Company will convert to an
accrual basis taxpayer as part of the Cotelligent combined entity. Accordingly,
cash to accrual differences that exist at the time of the Acquisition will be
recognized ratably over the next four years.
F-120
<PAGE>
CHAMBERLAIN ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 6 - Lease Commitments
The Company maintains an operating lease for its office space and an
automobile. The future minimum lease payments under these operating leases are
as follows.
<TABLE>
<CAPTION>
Year Ending
March 31,
------------
<S> <C>
1997...............................................................................$ 47,078
1998............................................................................... 48,523
1999............................................................................... 37,206
2000............................................................................... --
2001............................................................................... --
------------
$ 132,807
============
</TABLE>
For the years ended March 31, 1994, and 1995 and for the period April 1,
1995 through February 19, 1996, the Company incurred expenses of $54,831,
$63,482 and $38,262 respectively, relating to the office and automobile leases.
Note 7 - Significant Clients
During the year ended March 31, 1994, two clients accounted for
approximately 30% and 11% of revenue, respectively, and in 1995 three clients
accounted for approximately 13%, 12% and 10% of revenues, respectively. During
the period April 1, 1995 through February 19, 1996 three clients accounted for
approximately 24%, 12%, and 12% of revenues, respectively.
Additionally, these clients accounted for approximately 32% and 34% of the
accounts receivable balance at March 31, 1994 and 1995, respectively.
F-121
<PAGE>
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
Offering other than those contained in this Prospectus and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any securities other than the shares of
Common Stock to which it relates or an offer to, or a solicitation of, any
person in any jurisdiction where such an offer or solicitation would be
unlawful. Neither the delivery of this Prospectus nor a sale made hereunder
shall, under any circumstances, create an implication that there has been no
change in the affairs of the Company or that information contained herein is
correct as of any time subsequent to the date hereof.
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page Page
<S> <C> <C> <C>
Prospectus Summary.......................... 3 Management.................................. 26
Risk Factors................................ 5 Certain Transactions........................ 32
The Company................................. 9 Principal Stockholders...................... 35
Price Range of Common Stock................. 9 Description of Capital Stock................ 36
Dividend Policy............................. 9 Shares Eligible for Future Sale............. 38
Selected Financial Data..................... 10 Legal Matters............................... 38
Management's Discussion and Analysis of Experts..................................... 38
Financial Condition and Results of Additional Information...................... 39
Operations............................... 13 Index to Financial Statements............... F-1
Business.................................... 19
</TABLE>
---------------------------------------
<PAGE>
(Alternate Cover)
Subject to Completion
November 14, 1996
[LOGO] COTELLIGENT GROUP, INC.
Common Stock
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------
This Prospectus, as appropriately amended or supplemented, may be used from
time to time principally by persons who have received shares of Common Stock,
$.01 par value (the "Common Stock" or the "Shares"), of Cotelligent Group, Inc.
(the "Company") in mergers or acquisitions of other businesses or properties
made by the Company (See "Business--Acquisition Strategy"), or their
transferees, and who wish to offer and sell such Shares in transactions in which
they and any broker-dealer through whom such Shares are sold may be deemed to be
underwriters within the meaning of the Securities Act of 1933, as amended (the
"Securities Act"), as more fully described herein. Any commissions paid or
concessions allowed to any broker-dealer, and, if any broker-dealer purchases
such Shares as principal, any profits received on the resale of such Shares, may
be deemed to be underwriting discounts and commissions under the Securities Act.
Printing, certain legal, filing and other similar expenses of this offering will
be paid by the Company. Selling Shareholders will bear all other expenses of
this offering, including brokerage fees, any underwriting discounts or
commissions.
Application will be made to list the Shares of Common Stock offered hereby
on the NASDAQ National Market. On November 11, 1996, the last sale price of the
Common Stock on the NASDAQ National Market was $17.50 per share.
The Company is a Delaware corporation and all references herein refer to
the Company and its subsidiaries unless the context requires otherwise. The
principal executive offices of the Company are located at 101 California Street,
Suite 2050, San Francisco, California 94111 and its telephone number is (415)
439-6400.
The date of this Prospectus is , 1996.
<PAGE>
[ALTERNATE PAGE]
MANNER OF OFFERING
This Prospectus, as appropriately amended or supplemented, may be used
from time to time principally by persons who have received shares of Common
Stock in acquisitions made by the Company of other businesses or properties, or
their transferees, and who wish to offer and sell such Shares (such persons are
herein referred to as the "Selling Shareholder" or "Selling Shareholders") in
transactions in which they and any broker-dealer through whom such Shares are
sold may be deemed to be underwriters within the meaning of the Securities Act.
The Company will receive none of the proceeds from any such sales. There
presently are no arrangements or understandings, formal or informal, pertaining
to the distribution of the Shares described herein. Upon the Company being
notified by a Selling Shareholder that any material arrangement has been entered
into with a broker-dealer from the sale of Shares bought through a block trade,
special offering, exchange distribution or secondary distribution, a
supplemented Prospectus will be filed, pursuant to Rule 424(b) under the
Securities Act, setting forth (i) the name of each Selling Shareholder and the
participating broker-dealer(s), (ii) the number of Shares involved, (iii) the
price at which the Shares were sold, (iv) the commissions paid or the discounts
allowed to such broker-dealer(s), where applicable, (v) that such
broker-dealer(s) did not conduct any investigation to verify the information set
out in this Prospectus and (vi) other facts material to the transaction.
Selling Shareholders may sell the Shares being offered hereby from time
to time in transactions (which may involve crosses and block transactions) on
the NASDAQ National Market in negotiated transactions or otherwise, at market
prices prevailing at the time of the sale or at negotiated prices. Selling
Shareholders may sell some or all of the shares in transactions involving
broker-dealers, who may act solely as agent and/or may acquire Shares as
principal. Broker-dealers participating in such transactions as agent may
receive commissions from Selling Shareholders (and, if they act as agent for the
purchaser of such Shares, from such purchaser), such commissions computed in
appropriate cases in accordance with the applicable rules of the NASDAQ National
Market, which commissions may be at negotiated rates where permissible under the
such rules. Participating broker-dealers may agree with Selling Shareholders to
sell a specified number of Shares at a stipulated price per share and, to the
extent such broker-dealer is unable to do so acting as an agent for Selling
Shareholders, to purchase as principal any unsold Shares at the price required
to fulfill the broker-dealer's commitment to Selling Shareholders. In addition
or alternatively, Shares may be sold by Selling Shareholders and/or by or
through other broker-dealers in special offerings, exchange distributions or
secondary distributions pursuant to and in compliance with the governing rules
of the NASDAQ National Market. Broker-dealers who acquire Shares as principal
may thereafter resell such Shares from time to time in transactions (which may
involve crosses and block transactions and which may involve sales to or through
other broker-dealers, including transactions of the nature described in the
preceding two sentences) on the NASDAQ National Market, in negotiated
transactions or otherwise at market prices prevailing at the time of sale or at
negotiated prices, and in connection with such resales may pay to or receive
commissions from the purchase of such Shares.
The Company may agree to indemnify each Selling Shareholder as an
underwriter under the Securities Act against certain liabilities, including
liabilities arising under the Securities Act. Each Selling Shareholder may
indemnify any broker-dealer that participates in transactions involving sales of
the Shares against certain liabilities, including liabilities arising under the
Securities Act.
1
<PAGE>
[ALTERNATE PAGE]
No person has been authorized to give information or make any
representations not contained in this Prospectus in connection with the offer
made hereby. If given or made, such information or representation must not be
relied upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the Company
since the date hereof.
TABLE OF CONTENTS
<PAGE>
<TABLE>
<CAPTION>
Page Page
<S> <C> <C>
Additional Information...................... 2 Business.................................... 19
Manner of Offering.......................... 2-A Management.................................. 26
Prospectus Summary.......................... 3 Principal Stockholders...................... 35
Risk Factors................................ 5 Description of Capital Stock................ 36
The Company................................. 9 Shares Eligible for Future Sale............. 38
Price Range of Common Stock................. 9 Legal Matters............................... 38
Dividend Policy............................. 9 Experts..................................... 38
Selected Financial Data..................... 10 Index to Financial Statements............... F-1
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 13
</TABLE>
---------------------------
2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses (other than underwriting
compensation expected to be incurred) in connection with the offering described
in this Registration Statement. All of such amounts (except the SEC Registration
Fee) are estimated.
<TABLE>
<CAPTION>
<S> <C>
SEC Registration Fee.................................................... $ 18,296.45
Blue Sky Fees and Expenses*............................................. 1,000.00
Printing and Engraving Costs*........................................... 20,000.00
Legal Fees and Expenses*................................................ 50,000.00
Accounting Fees and Expenses*........................................... 25,000.00
Transfer Agent and Registrar Fees and Expenses*......................... 1,000.00
Miscellaneous*.......................................................... 14,703.55
------------
Total........................................................... $ 130,000.00
============
</TABLE>
* estimated
Item 14. Indemnification of Directors and Officers.
The Company's By-laws provide that the Company shall, to the fullest
extent permitted by Section 145 of the General Corporation Law of the State of
Delaware, as amended from time to time, indemnify all persons whom it may
indemnify pursuant thereto.
Section 145 of the General Corporation Law of the State of Delaware
permits a corporation, under specified circumstances, to indemnify its
directors, officers, employees or agents against expenses (including attorney's
fees), judgments, fines and amounts paid in settlements actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
third parties by reason of the fact that they were or are directors, officers,
employees or agents of the corporation, if such directors, officers, employees
or agents acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, i.e., one by or in the right of the
corporation, indemnification may be made only for expenses actually and
reasonably incurred by directors, officers, employees or agents in connection
with the defense or settlement of an action or suit, and only with respect to a
matter as to which they shall have acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person shall
have been adjudged liable to the corporation, unless and only to the extent that
the court in which the action or suit was brought shall determine upon
application that the defendant directors, officers, employees or agents are
fairly and reasonably entitled to indemnity for such expenses despite such
adjudication of liability.
Article Seven of the Company's Certificate of Incorporation provides
that the Company's directors will not be personally liable to the Company or its
stockholders for monetary damages resulting from breaches of their fiduciary
duty as directors except (a) for any breach of the duty of loyalty to the
Company or its stockholders, (b) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (c) under
Section 174 of the General Corporation Law of the State of Delaware, which makes
directors liable for unlawful dividends or unlawful stock repurchases or
redemptions or (d) for transactions from which directors derive improper
personal benefit.
In accordance with Delaware law, the Company has entered into
indemnification agreements with its directors, pursuant to which it has agreed
to pay certain expenses, including attorneys' fees, judgments, fines and amounts
paid in settlement incurred by such directors in connection with certain
actions, suits or proceedings. These agreements require directors to repay the
amount of any expenses advanced if it shall be determined that they shall not
have been entitled to indemnification.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities.
The following information relates to securities of the Company issued
or sold within the past three years which were not registered under the
Securities Act of 1933, as amended (the "Securities Act"):
(i) Between August 1993 and April 1995, the Company sold an
aggregate of 61,020 shares of its Class A Common Stock at a price of $5.00
per share to certain individual investors, certain founding shareholders,
each of the Founding Companies and certain stockholders of such Founding
Companies. Of such shares, an aggregate of 10,000 shares were sold to two
investors in April 1995; these shares were repurchased by the Company in
August 1995 for $5.00 per share.
(ii) In October 1995, the Company sold 10,000 shares of its Class
A Common Stock for $10.00 per share to one director of the Company.
(iii) In October 1993, the Company sold an aggregate of two shares
of its Class B Common Stock for $5,000 per share with an aggregate offering
price of $10,000 to one investor and one Founding Company. Between July
1994 and April 1995, the Company sold an aggregate of five shares of its
Class B Common Stock for $5,000 per share to two Founding Companies and
three other investors; the three shares issued to the three other investors
were repurchased by the Company in August 1995 and October 1995 for $5,000
per share. In June 1995, the Company sold one share of its Class B Common
Stock for $15,000 to one Founding Company.
(iv) In October 1995, the Company repurchased an aggregate of
10,000 shares of its Class A Common Stock from two investors for an
aggregate of $50,000. In October 1995, the Company repurchased two shares
of its Class B Common Stock from two investors for an aggregate of $10,000
and sold an aggregate of 10,000 shares of its Class A Common Stock for
$17.50 per share to three directors of the Company.
(v) In connection with the reincorporation of Cotelligent in
Delaware in November 1995, Cotelligent exchanged each then outstanding
share of Class A Common Stock and Class B Common Stock for one share of a
single class of new Common Stock.
(vi) In November 1995, Cotelligent declared a 2.71-for-1 stock
dividend to each of its existing stockholders.
(vii) Simultaneously with the completion of the Offering, the
Company issued 3,206,875 gross shares of its Common Stock in connection
with the acquisition of four businesses. See "Certain Transactions."
(viii) In June 1996, the Company issued 1,056,309 shares of its
Common Stock in connection with the acquisitions of ESP Software Services,
Inc. and INNOVA Solutions, Inc. See "Certain Transactions."
(ix) In September 1996, the Company issued 644,826 shares of
its Common Stock in connection with the acquisition of JasTech, Inc. and
JasTech of Florida, Inc. See "Certain Transactions."
Other than the share number appearing in (vii), (viii) and (ix) above,
none of the share numbers or per share prices in this Item 15 have been adjusted
to reflect the reincorporation and recapitalization of the Company described in
(v) above or the stock dividend described in (vi) above.
Each of these transactions was completed without registration of the
relevant security under the Securities Act in reliance upon the exemptions
provided by Section 4(2) of the Securities Act for transactions not involving a
sale or a public offering.
II-2
<PAGE>
<TABLE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
<CAPTION>
Exhibit
Number Description
<S> <C>
3.1 Certificate of Incorporation of Cotelligent (Exhibit 3.1 of the Registration Statement on Form S-1
(File No. 33-80267) effective February 16, 1996, is hereby incorporated by reference)
3.2 By-laws of Cotelligent (Exhibit 3.2 of the Registration Statement on Form S-1 (File No. 33-80267)
effective February 16, 1996, is hereby incorporated by reference)
4.1 Form of certificate evidencing ownership of Common Stock of
Cotelligent (Exhibit 4.1 of the Registration Statement on Form S-1
(File No. 33-80267) effective February 16, 1996, is hereby
incorporated by reference)
5.1 Opinion of Morgan, Lewis & Bockius LLP (filed herewith)
10.1 Form of Employment Agreement between Cotelligent and James R. Lavelle (Exhibit 10.1 of the Registration
Statement on Form S-1 (File No. 33-80267) effective February 16,1996, is hereby incorporated by reference)
10.2 Form of Employment Agreement between Cotelligent and Michael L. Evans (Exhibit 10.2 of the Registration
Statement on Form S-1 (File No. 33-80267) effective February 16, 1996, is hereby incorporated by reference)
10.3 Form of Employment Agreement between Cotelligent and Duane W. Bell (Exhibit 10.3 of the Registration Statement on
Form S-1 (File No. 33-80267) effective February 16, 1996, is hereby incorporated by reference)
10.4 Form of Employment Agreement between Cotelligent and Daniel E. Jackson (Exhibit 10.4 of the Registration
Statement on Form S-1 (File No. 33-80267) effective February 16, 1996, is hereby incorporated by reference)
10.5 Form of Employment Agreement between BFR, Cotelligent and Jeffrey J. Bernardis (Filed as part of Exhibit 2.1 of the
Registration Statement on Form S-1 (File No. 33-80267) effective February 16, 1996, is hereby incorporated by
reference)
10.6 Form of Employment Agreement between CAI, Cotelligent and John E. Chamberlain (Filed as part of Exhibit 2.2 of the
Registration Statement on Form S-1 (File No. 33-80267) effective February 16, 1996, is hereby incorporated by
reference)
II-3
<PAGE>
Exhibit
Number Description
10.7 Form of Employment Agreement between CAI, Cotelligent and Linda M. Cassell (contained in Exhibit 2.2) (Filed as part
of Exhibit 2.2 of the Registration Statement on Form S-1 (File No. 33-80267) effective February 16, 1996, is hereby
incorporated by reference)
10.8 Cotelligent 1995 Long-Term Incentive Plan (Exhibit 10.9 of the Registration Statement on Form S-1
(File No. 33-80267) effective February 16, 1996, is hereby incorporated by reference)
10.9 Secured Term Promissory Note, Term Loan Agreement, Guarantee and pre-payment request by the BFR Plan related to the
superseded loan made by NatWest Bank N.A. to the BFR Plan dated April 20, 1995 (Exhibit 10.10 of the Registration
Statement on Form S-1 (File No. 33-80267) effective February 16, 1996, is hereby incorporated by reference)
10.10 Promissory Note executed by BFR in favor of NatWest Bank N.A., dated December 7, 1995, and the guarantees and pledge
agreements related thereto (Exhibit 10.11 of the Registration Statement on Form S-1 (File No. 33-80267) effective
February 16, 1996, is hereby incorporated by reference)
10.11 Note executed by the BFR Plan in favor of BFR, dated December 7, 1995 and the Loan and Security Agreement between BFR and
the BFR Plan related thereto (Exhibit 10.12 of the Registration Statement on Form S-1 (File No. 33-80267) effective
February 16, 1996, is hereby incorporated by reference)
10.12 Lease Agreement between BFR Properties and BFR Co., Inc. effective April 1, 1995 at 7 Clyde Road (Exhibit 10.9 to the
Form 10-K for the year ended March 31, 1996 is hereby incorporated by reference)
10.13 Lease Agreement between BFR Properties and BFR Co., Inc. effective April 1, 1995 at 31 Clyde Road (Exhibit 10.10 to the
Form 10-K for the year ended March 31, 1996 is hereby incorporated by reference)
10.14 Lease Agreement between Quinlan Properties, L.P. and BFR Co., Inc. effective December 29, 1995 (Exhibit 10.11 to
the Form 10-K for the year ended March 31, 1996 is hereby incorporated by reference)
10.15 Sublease Agreement between San Francisco Satellite Center and Cotelligent Group, Inc. effective March 1, 1996 (Exhibit
10.12 to the Form 10-K for the year ended March 31, 1996 is hereby incorporated by reference)
10.16 Business Loan Agreement between Cotelligent Group, Inc. and U.S. Bank of Washington, National Association effective May
1, 1996 (Exhibit 10.13 to the Form 10-K for the year ended March 31, 1996 is hereby incorporated by reference)
10.17 Business Loan Agreement between Cotelligent Group, Inc. and U.S. Bank of Washington, National Association effective
October 4, 1996.
21 List of subsidiaries of Cotelligent (filed herewith)
23.1 Consent of Price Waterhouse LLP (filed herewith)
23.3 Consent of Morgan, Lewis & Bockius LLP (contained in Exhibit 5.1)
24 Power of Attorney (included with the signature page hereof)
</TABLE>
(b) Financial Statement Schedules
Not applicable.
II-4
<PAGE>
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described in Item 14, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in such Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which any offers or sales are being
made, a post effective amendment to the registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any other material change to such information in the registration
statement.
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Francisco,
California, on this 14th day of November, 1996.
COTELLIGENT GROUP, INC.
By:
----------------------------------
Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirement of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity In Which Signed Date
<S> <C> <C>
Chairman of the Board and November 14, 1996
- - ----------------------------------------------------- Chief Executive Officer
James R. Lavelle
Vice Chairman of the Board November 14, 1996
- - -----------------------------------------------------
Edward E. Faber
Senior Vice President, Corporate November 14, 1996
- - ----------------------------------------------------- Development, General Counsel,
Daniel E. Jackson and Secretary (Principal
Financial Officer)
Vice President, Chief Accounting November 14, 1996
- - ----------------------------------------------------- Officer (Principal Accounting
Curtis J. Parker Officer)
Director November 14, 1996
- - -----------------------------------------------------
Michael L. Evans
Director November 14, 1996
- - -----------------------------------------------------
Daniel M. Beals
S-1
<PAGE>
Signature Capacity In Which Signed Date
Director November 14, 1996
- - -----------------------------------------------------
Jeffrey J. Bernardis
Director November 14, 1996
- - -----------------------------------------------------
Linda M. Cassell
Director November 14, 1996
- - -----------------------------------------------------
John E. Chamberlain
Director November 14, 1996
- - -----------------------------------------------------
Anthony M. Frank
Director November 14, 1996
- - -----------------------------------------------------
B. Tom Green
Director November 14, 1996
- - -----------------------------------------------------
Harvey L. Poppel
Director November 14, 1996
- - -----------------------------------------------------
John C. Travers
</TABLE>
S-2
<PAGE>
Exhibit 21
Cotelligent Group, Inc.
Post Effective Amendment to
Form S-1
List of Subsidiaries
The following is a listing of all subsidiaries of Cotelligent Group., Inc. All
subsidiaries are wholly-owned as of September 30, 1996 unless otherwise noted.
BFR Co., Inc.
Chamberlain Associates, Inc.
Data Arts & Sciences, Inc.
ESP Software Services, Inc.
Financial Data Systems, Inc.
INNOVA Solutions, Inc.
JasTech, Inc.
Data Processing Personnel, Inc. (acquired October 7, 1996)
S-3
<PAGE>
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our reports as of the dates, and related
to the financial statements of the companies, listed below which appear in such
Prospectus.
<TABLE>
<CAPTION>
Company Date
<S> <C>
Cotelligent Group, Inc. April 20, 1996, except as to the pooling of interests with ESP
Software Services, Inc. and INNOVA Solutions, Inc., which are
as of June 28, 1996, and the pooling of interests with JasTech,
Inc., which is as of September 30, 1996.
JasTech, Inc. October 11, 1996
ESP Software Services, Inc. July 23, 1996
INNOVA Solutions, Inc. July 1, 1996
Combined Predecessor Companies April 20, 1996
Financial Data Systems, Inc. April 20, 1996
BFR Co., Inc. April 20, 1996
Data Arts & Sciences, Inc. April 20, 1996
Chamberlain Associates, Inc. April 20, 1996
</TABLE>
We also consent to the references to us under the headings "Experts" and
"Selected Financial Data" in such Prospectus. However, it should be noted that
Price Waterhouse LLP has not prepared or certified such "Selected Financial
Data".
Price Waterhouse LLP
Minneapolis, Minnesota
November 14, 1996
S-4
<PAGE>
<PAGE>
(Letterhead of Morgan, Lewis & Bockius LLP)
Cotelligent Group, Inc.
101 California Street, Suite 2050
San Francisco, CA 94111
Re: Issuance of Shares Pursuant to
Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as counsel to Cotelligent Group, Inc. a Delaware
corporation (the "Company"), in connection with the preparation and filing with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "Act"), of a Registration Statement on Form S-1 (the "Registration
Statement") relating to the public offering by the Company of an aggregate of
3,500,00 shares, par value $.01 per share (the "Shares").
In so acting, we have examined originals, or copies certified or
otherwise identified to our satisfaction, of the Certificate of Incorporation
of the Company, the By-Laws of the Company and such other documents, records,
certificates and other instruments as in our judgment are necessary or
appropriate for purposes of this opinion.
Based on the foregoing, we are of the opinion that the Shares have
been duly authorized by the Company and, when issued and paid for as
contemplated by the Registration Statement, will be duly and validly issued and
fully paid and non-assessable.
We render this opinion as members of the Bar of the State of New York
and express no opinion as to any law other than the General Corporation Law of
the State of Delaware.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the use of our name under the caption "Legal Matters" in the
Registration Statement. In giving this consent, we do not admit that we are
acting within the category of persons whose consent, we do not admit that we are
acting within the category of persons whose consent is required under Section 7
of the Act.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
<PAGE>
