<PAGE>
Filed Pursuant to Rule 424(b)(2)
Registration Number 333-2604
PROSPECTUS SUPPLEMENT DATED JUNE 28, 1996
2,500,000 SHARES
[Logo of Cotelligent COTELLIGENT GROUP, INC.
Group appears here]
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 supplements the Prospectus dated April 8, 1996 which covers 2,500,000
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 Supplement 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"). This
Prospectus Supplement consists of the Company's Annual Report on Form 10-K for
the fiscal period ended March 31, 1996 filed with the Securities and Exchange
Commission on June 27, 1996.
The Common Stock of the Company is included for quotation on the Nasdaq
National Market. As of June 10, 1996, the Company had 6,234,305 shares of its
Common Stock outstanding of which 2,725,500 shares 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 June 24, 1996,
the closing price of the Common Stock on the Nasdaq National Market was $16.00
per share as published in The Wall Street Journal on June 25, 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 Supplement is June 28, 1996.
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from to
COMMISSION FILE NUMBER 0-25372
COTELLIGENT GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3173918
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 CALIFORNIA STREET, SUITE 2050
SAN FRANCISCO, CALIFORNIA 94111
(Address of principal executive offices) (Zip Code)
(415) 439-6400
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
----------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [_] NO [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $81,013,454 as of June 10, 1996.
The number of shares of the issuers common stock outstanding as of June 10,
1996 was 6,234,305.
DOCUMENTS INCORPORATED BY REFERENCE
There is incorporated by reference the registrants Proxy Statement for the 1996
Annual Meeting of Stockholders, expected to be filed with the Securities and
Exchange Commission within 120 days after the end of the registrants fiscal
year, in Part III hereof.
1
<PAGE>
PART I
ITEM 1. BUSINESS.
---------
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 owns four
subsidiaries: BFR Co., Inc. ("BFR"), Chamberlain Associates, Inc. ("CAI"), Data
Arts & Sciences, Inc. ("DASI") and Financial Data Systems, Inc. ("FDSI"), which
operate offices in eight metropolitan areas including Boston, New York, San
Francisco/Silicon Valley and Seattle. All four subsidiaries (the "Founding
Companies") were acquired simultaneously (the "Acquisitions") with the closing
of the Companys initial public offering of common stock (the "Offering") on
February 20, 1996.
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, Lucent Technologies, Microsoft, 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 Item 1, "Business-Business Strategy."
--------
The Company has eight operating offices located in eight states across the
United States and, at March 31, 1996, had a staff of approximately 700 persons,
including approximately 600 technical software professionals. In 1996, Company
employees provided approximately 1,047,000 hours of technical services for over
150 clients. The Company has provided services to approximately 100 clients
listed on the Fortune 1000 over the last 3 years. 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.
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.
2
<PAGE>
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
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.
3
<PAGE>
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 whom 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. The following are key elements for
achieving this objective.
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 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 Item 1, "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
4
<PAGE>
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. While the Company cannot be certain that its acquisition strategy
will be successful, it believes that acquisition opportunities exist. A
significant number of software professional services firms providing
applications consulting and contract services are locally or regionally based
organizations. As competitive pressures increase and as clients continue to seek
national service capabilities, such firms are expected to seek affiliation with
a nationwide organization.
As consideration for future acquisitions, the Company intends to use various
combinations of its Common Stock, cash and notes.
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 87% 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 40,000 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 computer
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
5
<PAGE>
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.
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.
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,
outplacement agencies and the Company's skills/resume retrieval networks. The
Company maintains a staff of 25 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, and
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.
<TABLE>
<S> <C> <C>
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
</TABLE>
As of March 31, 1996, the Company had a staff of approximately 700 employees,
including approximately 600 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 26 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 as well as
providing 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
6
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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.
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.
ITEM 2. PROPERTIES.
-----------
The Company's principal executive offices and the headquarters of its four
subsidiaries are located in five facilities with an aggregate of approximately
34,800 square feet and are leased at aggregate current monthly rents of
approximately $55,000 for terms not expiring before the year 2000. The Company's
remaining five offices aggregate approximately 12,630 square feet and are leased
at aggregate current monthly annual rents of approximately $24,000 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.
ITEM 3. LEGAL PROCEEDINGS.
------------------
The Company is, from time to time, a party to litigation arising in the normal
course of its business. The Company is not presently subject to any material
litigation.
7
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
Not applicable.
8
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PART II
ITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER
---------------------------------------------------------------
MATTERS.
--------
The Company's Common Stock has traded on the NASDAQ National Market since
February 14, 1996, the date of the Company's initial public offering. On March
31, 1996, the last sale price of the Common Stock was $11.75 per share, as
published in The Wall Street Journal on April 1, 1996. At March 31, 1996, there
were 58 stockholders of record of the Company's Common Stock. The following
table sets forth the range of high and low sale prices for the Common Stock for
the period from February 14, 1996, through March 31, 1996 and the period from
April 1, 1996 through June 10, 1996.
<TABLE>
<CAPTION>
HIGH LOW
------------------------------
<S> <C> <C>
February 14, 1996 through
March 31, 1996.......................... $ 11.75 $ 8.25
======= ======
April 1, 1996 through June 10, 1996...... $ 21.50 $11.13
======= ======
</TABLE>
The Company intends to retain all of its earnings 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
line of credit facility restricts the Companys ability to pay dividends without
the consent of the lender.
9
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ITEM 6. SELECTED FINANCIAL DATA.
------------------------
The Company was founded in February 1993 to create a nationwide computer
consulting and contract programming company. On February 20, 1996 Cotelligent
acquired BFR, CAI, DASI and FDSI (the "Founding Companies") simultaneously with
the completion of the Offering. These Founding Companies and Cotelligent,
for the periods prior to the Acquisitions (February 20, 1996), are herein
referred to as the "Combined Predecessor Companies". The historical financial
statements of the Combined Predecessor Companies have been combined for the
periods prior to the Acquisitions as if these companies had always been members
of the same operating group. However, during these periods presented, the
Combined Predecessor Companies were not under common control or management, and
one of the Founding Companies, BFR, was an S corporation through March 31, 1995
and therefore, not subject to federal income tax. Accordingly, the data
presented may not be comparable to or indicative of, the post-combination
results to be achieved by the Company. The financial data presented for the
Successor Cotelligent Group represents the results of the consolidated entity
subsequent to the Acquisitions (February 20, 1996).
The following 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 and with respect to the Combined Predecessor Companies combined balance
sheets as of March 31, 1994 and 1995, 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,
and with respect to the Combined Predecessor Companies combined balance sheets
as of March 31, 1992 and 1993, 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. In addition, the Cotelligent Group, Inc. consolidated
balance sheet as of March 31, 1996 has also been audited by Price Waterhouse
LLP. The Successor Cotelligent Group, Inc. consolidated statement of operations
for the period February 20, 1996 through March 31, 1996, as presented in the
following selected data, has been prepared by management and represents the
results of the consolidated entity subsequent to the Acquisitions.
The pro forma statement of operations has been derived from unaudited
financial data and gives effect to compensation differentials to employees
and former owners of the Combined Predecessor Companies, the planned
termination of contributions to retirement plans, incremental selling,
general and administrative costs of the corporate activities of Cotelligent and
adjustments to reflect income taxes at the effective statutory rate for the
combined entity.
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., financial statements, the Combined Predecessor
Companies financial statements, the individual financial statements of BFR, CAI,
DASI and FDSI, the related notes thereto and "Managements Discussion and
Analysis of Financial Condition and Results of Operations" in this Form 10-K.
10
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SUCCESSOR
COTELLIGENT
COMBINED PREDECESSOR COMPANIES (1) GROUP, INC. (2) PRO FORMA (3)
------------------------------------------------------------ --------------- -------------
YEAR ENDED MARCH 31,
---------------------------------------------
YEAR ENDED
APRIL 1, 1995- FEB 20, 1996- MARCH 31,
1992 1993 1994 1995 FEB 19, 1996 MAR 31, 1996 1996
--------- ---------- ---------- --------- -------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.......................... $23,974 $31,138 $39,434 $50,028 $55,746 $ 8,265 $64,011
Cost of services.................. 18,030 23,090 29,941 38,488 42,362 6,173 48,236
------- ------- ------- ------- ------- -------- -------
Gross margin...................... 5,944 8,048 9,493 11,540 13,384 2,092 15,775
Selling, general and
administrative
expenses......................... 5,721 7,035 8,055 10,743 10,788 1,481 11,962
------- ------- ------- ------- ------- -------- -------
Operating income.................. 223 1,013 1,438 797 2,596 611 3,813
Other expense (income),
net.............................. 68 109 165 179 394 (25) 222
------- ------- ------- ------- ------- -------- -------
Income before provision
for income taxes................. 155 904 1,273 618 2,202 636 3,591
Provision for income taxes........ 58 211 339 393 1,952 125 1,436
------- ------- ------- ------- ------- -------- -------
Income from continuing
operations....................... 97 693 934 225 250 511 2,155
Discontinued operations (4)....... - (257) (285) (184) - - -
------- ------- ------- ------- ------- -------- -------
Net income........................ $ 97 $ 436 $ 649 $ 41 $ 250 $ 511 $ 2,155
======= ====== ====== ====== ===== ========= =======
Pro forma net income per
share (5)........................ $ .46
=======
UNAUDITED PRO FORMA DATA (6):
Income before provisions for
income taxes.................... $ 155 904 1,273 618 2,202
Provision for income taxes....... 65 328 566 333 881
------ ----- ------ ------ ------
Income from continuing operations 90 576 707 285 1,321
====== ===== ====== ====== ======
MARCH 31, MARCH 31,
-------------------------------------------- ---------
1992 1993 1994 1995 1996
------- -------- --------- -------- ---------
BALANCE SHEET DATA:
Working capital................. $ 2,309 $ 3,220 $ 3,806 $ 3,621 $17,363
Total assets.................... $ 3,427 $ 7,689 $ 8,936 $ 11,048 $27,991
Long-term debt, less
current portion................ $ 1,453 $ 1,535 $ 944 $ 838 $ 258
Stockholders' equity............ $ 2,303 $ 2,788 $ 3,532 $ 3,632 $18,050
</TABLE>
(1) As a result of the substantial continuing interests in the Company of the
former stockholders of FDSI, BFR, DASI, CAI and Cotelligent, (the "Combined
Predecessor Companies"), the historical financial information of the
Combined Predecessor Companies has been combined on a historical cost basis
for the periods presented. Financial data presented represents the results
of the Combined Predecessor Companies prior to the consummation of the
Acquisitions by Cotelligent Group, Inc. on February 20, 1996.
(2) Represents the statement of operations and balance sheet data of the
consolidated entity subsequent to the Acquisitions on February 20, 1996.
(3) Pro forma data reflect adjustments for the Acquisitions including: (i)
compensation differentials to former owners and employees of the Combined
Predecessor Companies; (ii) termination of contributions to retirement
plans; (iii) incremental selling, general and administrative costs
associated with Cotelligent corporate activities; and (iv) 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
March 31, 1996 Cotelligent Group, Inc. financial statements which includes
the detailed pro forma statement of operations for the year ended March 31,
1996.
(4) Discontinued operations represent the results of a security system software
development and marketing subsidiary of FDSI which was spun off to FDSI
stockholders in June 1994. See note 14 of Notes to the Financial
Statements of the Combined Predecessor Companies.
(5) Pro forma weighted average shares outstanding used to determined pro forma
net income per share were 4,636,664. Shares used to calculate the weighted
average shares were as follows: (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 for the Founding Companies, were
considered outstanding for the entire period; (ii) additional shares sold
to the public in the Offering and (iii) dilution attributable to options to
purchase common stock in applying the treasury stock method.
(6) One of the Founding Companies, BFR, was an S corporation through March 31,
1995 and, accordingly, was not subject to federal income taxes. The
unaudited pro forma information is presented for the purpose of reflecting
a provision for income taxes as if all of the Founding Companies had been
subject to income tax for all periods presented, calculated in accordance
with FAS 109, based on tax laws that were in effect during the respective
periods.
11
<PAGE>
SELECTED FINANCIAL DATA
FOUNDING COMPANIES AND COTELLIGENT
(IN THOUSANDS)
The following table presents selected information for each of the Founding
Companies and Cotelligent for the five most recent fiscal years.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, APRIL 1, 1995-
----------------------------------------------------------------------------- FEBRUARY 19,
1992 1993 1994 1995 1996
----------------------------------------------------------------------------- --------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
FDSI:
Revenues................... $6,119 $8,206 $11,191 $15,807 $16,468
Gross margin............... 1,659 2,362 2,955 3,541 4,314
Selling, general and
administrative expenses... 1,543 1,927 2,419 3,120 3,166
Income from continuing
operations................ 55 278 314 223 1,022
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 2,648 2,833 4,173 3,589
Net income (loss).......... 17 364 681 (179) (702)
DASI:
Revenues................... $7,170 $9,396 $10,065 $12,437 $14,455
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 income (loss).......... -- (38) (167) (201) (423)
</TABLE>
12
<PAGE>
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS.
- --------------
Cotelligent was formed in February 1993 to create a nationwide computer
consulting and contract programming company. Cotelligent acquired,
simultaneously with the closing of its initial public offerings of common stock,
(the "Offering"), four established businesses (the Founding Companies) which
provide a wide variety of computer consulting services in various metropolitan
areas of the country. The Founding Companies have operated since 1975 (DASI),
1980 (CAI), 1982 (FDSI) and 1985 (BFR). During the periods discussed below,
except for the period February 20, 1996 through March 31, 1996, the Combined
Predecessor Companies were not under common control or management; therefore,
the data presented may not be comparable to or indicative of the post-
combination results to be achieved by the Company. The entire fiscal year ended
March 31, 1996 is compared to the entire fiscal year ended March 31, 1995
because, in the opinion of management, the consolidated period in fiscal 1996 is
not material to the year taken as a whole and there were no significant events
during the consolidated period that would make the results of operations during
such period inconsistant with the pre-consolidation results of operations.
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 or if fixed-fee engagements (which historically have not
constituted a significant portion of total revenues) are not properly priced.
Operating income (gross margin less selling, general and administrative
expenses) can be adversely impacted by administrative staff compensation,
expenses related to growing and expanding the Company's business, which may be
incurred before revenues are generated from such investment, or high levels of
unutilized time (work activities not chargeable to clients or unrelated to
client services) of full-time service professional employees.
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 election BFR had in effect through March 31, 1995. The
Companys effective statutory tax rate as of April 1, 1995 is approximately 40%.
As a result of the substantial continuing interests in the Company of the
former stockholders of BFR, CAI, DASI, FDSI and Cotelligent (the "Combined
Predecessor Companies"), the historical financial information of the Combined
Predecessor Companies have been combined on a 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 fair value of the assets of businesses which it may acquire.
Pro forma data reflect adjustments for the Acquisitions including: (i)
compensation differentials to former owners and employees of the Combined
Predecessor Companies; (ii) termination of contributions to retirement plans;
(iii) incremental selling, general and administrative costs associated with
Cotelligent corporate activities; and (iv) income taxes as if the entities were
combined and subject to the effective federal and state statutory rates
throughout the periods discussed.
As part of its strategic plan, the Company intends to acquire other computer
consulting and contract programming companies. Should the Company be successful
in acquiring such businesses, the period in which such acquisition is
consummated could be adversely impacted by costs associated with such
acquisition. In addition, financial periods subsequent to the completion of an
acquisition could be adversely impacted by costs and activities associated with
the assimilation and integration of the acquired company.
13
<PAGE>
As a professional services organization, the Company responds to service
demands from its clients. Accordingly, the Company has limited control over the
timing and circumstances under which its services are provided. Therefore, the
Company can experience volatility in its operating results from quarter to
quarter. The operating results for any quarter are not necessarily indicative of
the results for any future period.
RESULTS OF OPERATIONS
The following discusses the results of operations for the fiscal years
ended March 31, 1994, 1995 and 1996. For fiscal years ended March 31, 1994 and
1995, the results of operations represent the results of the Combined
Predecessor Companies . For the fiscal year ended March 31, 1996, the results of
operations represent the Combined Predecessor Companies, for the period April 1,
1995 through February 19, 1996 and have been combined with the results of the
Successor Cotelligent Group, Inc. for the period February 20, 1996 through March
31, 1996 subsequent to the Acquisitions.
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,
-----------------------------------
PRO FORMA
1994 1995 1996 1996
-----------------------------------
<S> <C> <C> <C> <C>
Revenues.............................. 100.0% 100.0% 100.0% 100.0%
Cost of services...................... 75.9 76.9 75.8 75.4
----- ----- ----- -----
Gross margin........................ 24.1 23.1 24.2 24.6
Selling, general and administrative
expenses............................. 20.4 21.5 19.2 18.7
----- ----- ----- -----
Operating income.................... 3.7 1.6 5.0 5.9
----- ----- ----- -----
Other expense, net.................... 0.4 0.3 0.6 0.3
----- ----- ----- -----
Income before provision for income
taxes................................ 3.3 1.3 4.4 5.6
----- ----- ----- -----
Provision for income taxes............ 0.9 0.8 3.2 2.2
Income from continuing operations..... 2.4% 0.5% 1.2% 3.4%
===== ===== ===== =====
</TABLE>
PRO FORMA COMBINED RESULTS OF OPERATIONS
PRO FORMA 1996 COMPARED TO HISTORICAL 1996
Revenues. Revenues were $64.0 million for 1996 on both a pro forma and
historical basis.
Gross Margin. The pro forma gross margin was 24.6% of pro forma revenues
compared to historical gross margin of 24.2% of historical revenues in 1996. The
increase in pro forma gross margin as a percentage of pro forma revenues
compared to historical 1996 results is primarily due to the renegotiation of
executive compensation arrangements in connection with the Acquisitions and
elimination of retirement fund contributions since the Company plans to make no
such contributions in the future.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses on a pro forma basis were $12 million, or 18.7% of pro
forma revenues, compared to historical selling, general and administrative
expenses of $12.3 million, or 19.2% of historical revenues in 1996. The reduced
selling, general and administrative expenses on a pro forma basis reflect a
reduction in executive compensation from historical levels due to the
renegotiation of executive compensation arrangements in connection with the
Acquisitions 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.
14
<PAGE>
Interest expense, Net. Net interest expense on a pro forma basis was $261,000,
or .4% of pro forma revenues, compared to historical net interest expense of
$408,000, or .6% of historical revenues in 1996. The reduced net interest
expense on a pro forma basis reflects the elimination of interest expense
associated with the borrowings of BFR's Employee Stock Ownership and Money
Purchase Plan.
Provision for Income Taxes. Provision for Income Taxes on a pro forma basis
were $1.4 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
$2.1 million, or an effective rate of 73.2% of income before provision for
income taxes in 1996. The reduced provision for income taxes on a pro forma
basis reflects an effective tax rate of 40% whereas the historical effective
rate includes a $925,000 liability recorded in April 1995 due to the termination
by BFR of its S corporation election and the inability of Cotelligent Group,
Inc. to recognize a tax benefit on net operating losses incurred prior to the
Acquisitions.
HISTORICAL COMBINED RESULTS OF OPERATIONS
1996 COMPARED TO 1995
Revenues. Revenues increased $14.0 million, or 28%, to $64.0 million in 1996
from $50.0 million in 1995. The increase was primarily attributable to a 24.9%
increase in total client service hours provided to 1,047,000 hours in 1996 from
838,000 hours in 1995, and a 6.2% increase in the average hourly billing rate to
$60.78 in 1996 from $57.24 in 1995. 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 and were offset by the absence of $1.6
million of revenue from FDSI's fixed-price business.
Gross Margin. Gross margin increased $3.9 million, or 34.1%, to $15.5 million
in 1996 from $11.5 million in 1995, primarily as a result of an increase in
hours of service provided to clients. Gross margin as a percentage of revenues
increased to 24.2% in 1996 from 23.1% in 1995, principally due to hourly billing
rates having risen faster than compensation costs. These gains were partially
offset by a nonrecurring $297,000 contribution made to the BFR Plan and costs
(for which there were no revenues) incurred by FDSI in connection with winding
down its fixed-price hardware and software systems integration services it
provided primarily to government organizations which FDSI ceased providing in
1995 ("FDSI's fixed-price business").
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.6 million, or 14.2%, to $12.3 million in
1996 from $10.7 million in 1995. The increase in absolute dollars was primarily
due to increased compensation to existing staff and staff added to support
anticipated growth, increased occupancy expenses and related operating costs
associated with the Company's growth. Selling, general and administrative
expenses decreased as a percentage of revenues from 21.5% in 1995 to 19.2% in
1996, reflecting greater operating efficiencies and a larger revenue base. The
Company cannot be certain that such efficiencies can be sustained in the near
term as it undertakes to integrate the Founding Companies, expand geographically
and acquire other companies.
Interest Expense, Net. Interest expense, net of interest income, increased
$199,000 to $408,000 from $209,000 in 1995, reflecting increased borrowings
under the Company's various bank revolving credit facilities and $147,000
associated with contributions to the BFR Plan. 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
$1.7 million to $2.1 million, an effective rate of 73.2%, in 1996, from
$393,000, an effective rate of 63.5%, in 1995. The increase in the provision
for income taxes is due to an increase in income before taxes to $2.8 million in
1996 from $618,000 in 1995 and the liability of $925,000 recorded in April 1995
due to the termination by BFR of its S corporation election. The Company's
effective statutory tax rate as of April 1, 1995 is 40%.
1995 COMPARED TO 1994
Revenues. Revenues increased $10.6 million, or 26.9% to $50.0 million in 1995
from $39.4 million in 1994. The increase was attributable to a 27.4% increase in
total client service hours provided to 838,000 in 1995 from 658,000 hours in
1994 and a 2.1% increase in the average hourly billing rate to $57.24 in 1995
from $56.04 in 1994. The increase in hours of service was primarily due to
greater utilization of personnel. The increase in hourly billing rate reflects
increased
15
<PAGE>
demand for employees and consultants with higher skill levels. The increases
discussed above were supplemented by a slight increase in placement fee revenues
and were offset by a decrease of $639,000 of revenue from $2.3 million in 1994
to $1.6 million in 1995 from FDSI's fixed-price business.
Gross Margin. Gross margin increased $2.0 million, or 21.6%, to $11.5 million
in 1995 from $9.5 million in 1994, primarily as a result of an increase in hours
of service provided to clients. Gross margin as a percentage of revenues
decreased from 24.1% in 1994 to 23.1% in 1995, principally due to compensation
costs which rose more rapidly than hourly billing rates due to increased
competition for qualified personnel, a $704,000 contribution made to the BFR
Plan and an increase in costs relative to revenues in connection with FDSI's
fixed-price business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.7 million, or 33.4%, to $10.7 million in
1995 from $8.0 million in 1994 primarily due to increased compensation to
existing staff, an increase in officers' compensation of $696,000, a $196,000
contribution made to the BFR Plan and an increase from $608,000 to $663,000 in
the costs incurred in connection with FDSI's fixed-price business. The increase
in officers' compensation consists of an increase of $790,000 paid by BFR in
anticipation of the termination of its S corporation election, increases
incurred by CAI and DASI of $81,000 and $51,000, respectively, and a decrease in
officers' compensation incurred by FDSI of $226,000. Selling, general and
administrative expenses increased as a percentage of revenues to 21.5% in 1995
from 20.4% in 1994, reflecting higher staffing levels and the factors described
above.
Interest Expense, Net. Interest expense, net of interest income, increased
$50,000 to $209,000 in 1995 from $159,000 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 increased
$54,000 to $393,000, an effective rate of 63.5%, in 1995 from $339,000, an
effective rate of 26.6%, in 1994. The effective tax rate increased significantly
because little benefit was derived from BFR's operating loss due to its S
corporation election, and no separate company tax benefit was obtained from
Cotelligent's separate company operating loss.
QUARTERLY OPERATING RESULTS 1996 AND 1995
The Companys 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 are summarized below. Data for the fourth quarter of 1996 is
separated to distinguish the results of operation before and after the
Acquisition.
<TABLE>
<CAPTION>
(IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------------------
SUCCESSOR
COTELLIGENT
COMBINED PREDECESSOR COMPANIES GROUP, INC.
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1995 YEAR ENDED MARCH 31, 1996
- -------------------------------------------------------------------- -------------------------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD JAN 1- FEB 20-
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER FEB 19 MARCH 31
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $11,409 $11,654 $13,033 $ 13,941 $14,781 $15,855 $16,140 $ 8,970 $ 8,265
Gross Profit 2,754 3,015 3,269 2,511 3,357 3,669 4,192 2,166 2,092
Operating Income 543 331 538 (794) 619 637 1,022 (76) 636
- -----------------------------------------------------------------------------------------------------------------------------------
Income from
continuing
operations $ 393 $ 288 $ 370 $ (826) $ 332 $ 332 $ 620 $ (116) $ 511
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<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 of the individual Founding
Companies.
The Company's primary sources of liquidity are cash, credit facilities and the
collection of its accounts receivable. Accounts receivable have grown as the
Company's operations have grown. Receivables were 67 days of revenue at March
31, 1996 and 1995. 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 draw upon available cash or existing credit facilities to
finance its operations.
Cash used by operating activities of Cotelligent and the Founding Companies
was $48,000 for the year ended March 31, 1996. The Company has supplemented cash
generated by operations periodically with short-term borrowings under various
credit facilities with banks. The average balance of such borrowings outstanding
was approximately $4.0 million and approximately $2.7 million during 1996 and
1995, respectively.
At March 31, 1996, the Company had $14.0 million in cash and cash equivalents
as compared to $603,000 at March 31, 1995 reflecting primarily the net cash
proceeds from the Offering. At March 31, 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 $2.4 million. Long-term
obligations, consisting primarily of capital lease obligations, totaled $258,000
at March 31, 1996 compared to $838,000 at March 31, 1995. The Company had
approximately $2.1 million available under bank credit facilities at March 31,
1996. The bank facilities bear interest at rates ranging from 8.25% to 9.75%
and are secured by accounts receivable, various assets of the Founding Companies
and are guaranteed by the principals of each of the Founding Companies. The
Company is not in default under any of its credit agreements.
Cotelligent and each of the Founding Companies had separate banking
relationships through May 31, 1996. Effective June 1, 1996, the Company's
separate banking relationships were consolidated into a single banking
relationship with a major bank. The single relationship will provide for a more
effective means of managing operating capital. The new relationship provides a
credit facility in the amount of $10.0 million for the Company, secured by
accounts receivable and other assets of the Company. Borrowings on the facility
will 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 election. As a result,
federal and state income taxes of approximately $925,000 are expected to be paid
ratably over the next four years.
The Company believes the remaining 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
for operations and acquisitions at least through the next six months.
RECENTLY ISSUED ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", which is required for fiscal years beginning after December 15,
1995 and adoption of the recognition and measurement provisions for non employee
transactions no later than December 15, 1995. The new standard defines a fair
value method of accounting for stock options and other equity instruments. Under
the fair value method, compensation cost is measured at the grant date based on
the fair value of the award and is recognized over the service period, which is
usually the vesting period.
Pursuant to the new standard, companies are encouraged, but are not required,
to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", but would be required to disclose in a note to the
financial statements pro forma net income earnings per share as if the Company
had applied the new method of accounting.
17
<PAGE>
The accounting requirements of the new method are effective for all employee
awards granted after the beginning of the fiscal year of adoption. The Company
plans to account for employee-stock based compensation under Accounting
Principles Board Opinion No. 25. Accordingly, the Company does not anticipate
that the adoption of the standard will have any material impact on the Company's
financial position, results of operations or cash flows.
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------
The remainder of this page is left intentionally blank.
19
<PAGE>
COTELLIGENT GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
COTELLIGENT GROUP, INC.
Report of Price Waterhouse LLP,
Independent Accountants................ 22
Consolidated Balance Sheet at
March 31, 1995 and 1996................ 23
Consolidated Statement of
Operations for the Years Ended March
31, 1994, 1995 and 1996................ 24
Consolidated Statement of
Stockholders' Equity for the Years
Ended March 31, 1994, 1995 and 1996.... 25
Consolidated Statement of Cash
Flows for the Years Ended March 31,
1994, 1995 and 1996.................... 26
Notes to Consolidated Financial
Statements............................. 27
COMBINED PREDECESSOR COMPANIES
Report of Price Waterhouse LLP,
Independent Accountants................ 36
Balance Sheet as of March 31, 1994
and 1995............................... 37
Statement of Operations for the
Years Ended March 31, 1994 and 1995,
and for the Period April 1, 1995
Through February 19, 1996............... 38
Statement of Stockholders' Equity
for the Years Ended March 31, 1994
and 1995 and for the Period April 1, 1995
Through February 19, 1996............... 39
Statement of Cash Flows for the
Years Ended March 31, 1994 and 1995
and for the Period April 1, 1995 Through
February 19, 1996....................... 40
Notes to Financial Statements............ 42
FINANCIAL DATA SYSTEMS, INC.
Report of Price Waterhouse LLP,
Independent Accountants................. 53
Consolidated Balance Sheet as of
March 31, 1994 and 1995................. 54
Consolidated Statement of
Operations for the Years Ended March 31,
1994 and 1995, and for the Period
April 1, 1995 Through February 19, 1996. 55
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....................... 56
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....................... 57
Notes to Consolidated Financial
Statements.............................. 58
BFR CO., INC.
Report of Price Waterhouse LLP,
Independent Accountants................. 66
Balance Sheet as of March 31, 1994
and 1995................................ 67
Statement of Operations for the
Years Ended March 31, 1994 and 1995,
and for the Period April 1, 1995 Through
February 19, 1996....................... 68
Statement of Stockholders' Equity
for the Years Ended March 31, 1994 and
1995 and for the Period April 1, 1995
Through February 19, 1996............... 69
Statement of Cash Flows for the
Years Ended March 31, 1994 and 1995
and for the Period April 1, 1995 Through
February 19, 1996....................... 70
Notes to Financial Statements............ 71
</TABLE>
20
<PAGE>
COTELLIGENT GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
DATA ARTS & SCIENCES, INC.
Report of Price Waterhouse LLP,
Independent Accountants................. 77
Combined Balance Sheet as of
March 31, 1994 and 1995................. 78
Combined Statement of Operations
for the Years Ended March 31, 1994 and
1995, and for the Period April 1, 1995
Through February 19, 1996............... 79
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....................... 80
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............... 81
Notes to Financial Statements............ 82
CHAMBERLAIN ASSOCIATES, INC.
Report of Price Waterhouse LLP,
Independent Accountants................. 88
Balance Sheet as of March 31,
1994 and 1995........................... 89
Statement of Operations for the
Years Ended March 31, 1994 and 1995,
and for the Period April 1, 1995 Through
February 19, 1996....................... 90
Statement of Stockholders' Equity
for the Years Ended March 31, 1994 and
1995 and for the Period April 1, 1995
Through February 19, 1996............... 91
Statement of Cash Flows for the
Years Ended March 31, 1994 and 1995
and for the Period April 1, 1995 Through
February 19, 1996....................... 92
Notes to Financial Statements............ 93
</TABLE>
21
<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 (deficit) 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
22
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
ASSETS 1995 1996
---------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.............. $ 3,608 $14,005,920
Accounts receivable, less allowance for
doubtful accounts of $0 and $40,000... -- 11,681,000
Note receivable from stockholder....... -- 37,902
Note receivable from related party..... -- 104,844
Deferred income taxes.................. -- 286,138
Prepaid expenses and other current
assets................................ -- 517,398
----------- -----------
Total current assets................. 3,608 26,633,202
=========== ===========
Property and equipment, net............ -- 1,061,749
Deferred income taxes.................. -- 146,450
Other assets........................... -- 149,832
----------- -----------
Total assets......................... $ 3,608 $27,991,233
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term debt........................ $ 51,501 $ 2,408,765
Accounts payable....................... 27,140 573,901
Accrued compensation and related
payroll liabilities................... -- 3,096,652
Income taxes payable................... -- 1,168,192
Deferred income taxes.................. -- 846,041
Other accrued liabilities.............. -- 1,176,485
----------- -----------
Total current liabilities............ 78,641 9,270,036
=========== ===========
Long-term debt........................... -- 257,999
Deferred income taxes.................... -- 19,569
Other long-term liabilities.............. -- 393,484
Commitments and contingencies
(Notes 8 and 11)........................ -- --
Stockholders' equity:
Common Stock, $0.01 par value; 100,000,000
shares authorized; 574,662 and 6,216,305
shares outstanding, respectively...... 1,550 62,163
Preferred Stock, $0.01 par value; 500,000
shares authorized; none issued and
outstanding........................... -- --
Additional paid-in capital............. 328,955 18,305,299
Retained deficit....................... (405,538) (317,317)
----------- -----------
Total stockholders' equity (deficit). (75,033) 18,050,145
----------- -----------
Total liabilities and
stockholders' equity $ 3,608 $27,991,233
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED)
PRO FORMA
YEAR ENDED
YEAR ENDED MARCH 31, MARCH 31,
----------------------------------------------- 1996
1994 1995 1996 (NOTE 3)
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues. ........................ $ -- $ -- $8,265,303 $64,011,234
Cost of services.................. -- -- 6,173,229 48,236,177
--------- --------- ---------- -----------
Gross margin.................... -- -- 2,092,074 15,775,057
--------- --------- ---------- -----------
Selling, general and
administrative expenses........... 167,356 200,781 1,895,462 11,961,966
--------- --------- ---------- -----------
Operating income................. (167,356) (200,781) 196,612 3,813,091
--------- --------- ---------- -----------
Other (income) expense:
Interest expense................. -- -- 53,413 369,116
Interest income.................. (22) (116) (66,535) (108,063)
Other............................ -- -- (3,028) (39,203)
--------- --------- ---------- ------------
Total other.................... (22) (116) (16,150) 221,850
--------- --------- ---------- -----------
Income before provision for
income taxes...................... (167,334) (200,665) 212,762 3,591,241
--------- --------- ---------- -----------
Provision for income taxes......... -- -- 124,541 1,436,497
Net Income......................... $(167,334) $(200,665) $ 88,221 $ 2,154,744
========= ========= ========== ===========
Net Income per share............... $ .46
===========
Weighted average shares outstanding 4,636,664
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL RETAINED STOCKHOLDERS'
PAID-IN EARNINGS EQUITY
COMMON STOCK CAPITAL (DEFICIT) (DEFICIT)
------------------------ ---------- --------- --------------
SHARES AMOUNT
---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1994.............. 417,781 $ 1,127 $ 121,173 $(204,873) $ (82,573)
Issuance of common stock............... 156,881 423 207,782 -- 208,205
Net loss............................... -- -- -- (200,665) (200,665)
--------- ------- ----------- --------- -----------
Balance at March 31, 1995.............. 574,662 1,550 328,955 (405,538) (75,033)
Redistribution of capital for stock
dividend.............................. -- 4,197 (4,197) -- --
Issuance of common stock prior to
Offering.............................. 120,478 1,205 380,895 -- 382,100
Redemption of common stock prior to
Offering.............................. (74,140) (742) (119,258) (120,000)
Reclassification of Founding Companies'
equities on date of Acquisitions...... -- -- 4,307,367 -- 4,307,367
Issuance of common stock............... 5,595,305 55,953 16,753,488 -- 16,809,441
Distribution to Founding stockholders.. -- -- (3,491,951) -- (3,491,951)
Net income............................. -- -- -- 88,221 88,221
--------- ------- ----------- --------- -----------
Balance at March 31, 1996.............. 6,216,305 $62,163 $18,155,299 $(317,317) $17,900,145
========= ======= =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------
1994 1995 1996
---------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)..................... $ (167,334) $(200,665) $ 88,221
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization....... -- -- 43,573
Deferred income taxes, net.......... -- -- (584,067)
Changes in current assets and
liabilities:
Accounts receivable............... -- -- (1,278,350)
Prepaid expenses and other current
assets........................... -- -- (197,712)
Accounts payable and
accrued expenses................. 36,046 (12,406) 374,974
Income taxes payable.............. -- -- 335,997
Changes in other assets............. -- -- 21,994
---------- --------- ------------
Net cash (used in) operating
activities....................... (131,288) (213,071) (1,195,370)
---------- --------- ------------
Cash flows from investing activities:
Purchases of property and equipment... -- -- (380,222)
Advances to stockholder............... -- -- 25,519
Net advances to related parties....... -- -- (2,921)
Cash balances of subsidiaries at date
of Acquisition....................... -- -- 525,461
---------- --------- ------------
Net cash provided by investing
activities....................... -- -- 167,837
---------- --------- ------------
Cash flows from financing activities:
Proceeds from notes payable........... -- -- 64,414
Payments on long-term debt............ -- -- (4,788)
Payments on capital lease obligations. -- -- (10,716)
Net borrowings (repayments) on
short-term debt...................... -- -- 8,134
Proceeds from notes to related parties 41,650 4,851 449,560
Advances from related parties......... -- -- 397,800
Repayments with related parties....... -- -- (640,300)
Net proceeds from issuance of common
stock................................ 92,300 208,205 18,377,692
Repurchase of common stock............ -- -- (120,000)
Distribution to Founding stockholders. -- -- (3,491,951)
---------- --------- ------------
Net cash provided by financing
activities......................... 133,950 213,056 15,029,845
---------- --------- ------------
Net increase (decrease) in cash and
cash equivalents..................... 2,662 (15) 14,002,312
Cash and cash equivalents at
beginning of period.................. 961 3,623 3,608
---------- --------- ------------
Cash and cash equivalents at end of
period............................... $ 3,623 $ 3,608 $ 14,005,920
========== ========= ============
Supplemental disclosures of cash flow
information:
Interest paid......................... $ -- $ -- $ 59,540
Income taxes paid..................... $ -- $ -- $ 229,410
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
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 an initial public offering
(the "Offering") of such Common Stock.
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
$35,303,905. The aggregate consideration for each of the Founding Companies was
as follows: BFR: $11,958,283, consisting of $1,450,000 paid in cash and
1,167,587 shares of Common Stock; CAI: $3,998,849, consisting of $300,000 paid
in cash, 388,761 shares of Common Stock and $200,000 in short-term and related-
party debt; DASI: $5,606,396, consisting of $400,000 paid in cash, 443,044
shares of Common Stock and $1,219,000 in short-term and related-party debt; and
FDSI: $13,740,377, consisting of $1,341,951 paid in cash, 1,207,483 shares of
Common Stock and $1,531,079 in short-term, long-term and related-party debt.
The accompanying consolidated financial statements include Cotelligent
Group, Inc. through the date of the Acquisitions, after which the financial
statements reflect the results of Cotelligent Group, Inc. and its wholly-owned
subsidiaries. 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 $414,528 of
selling, general and administrative expenses and had a net loss before provision
for income taxes of $423,740.
As a result of the substantial continuing interests in the Company of the
former stockholders of BFR, CAI, DASI, FDSI and Cotelligent, the Acquisitions
have been accounted for on a historical cost basis.
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.
27
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
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.
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. Earnings per share has been presented on a pro forma basis
only for the year ended March 31, 1996 (See Note 3).
NOTE 3-PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
The following unaudited pro forma combined financial statements presents
the results as if the Acquisitions referred to in Note 1, occurred on April 1,
1995. Unaudited pro forma adjustments are based upon historical information,
estimates and certain assumptions management deems appropriate. The unaudited
pro forma combined financial data 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 combined financial statements should be read in
conjunction with the other financial statements and notes thereto appearing
elsewhere in the Form 10-K.
28
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
COMBINED
PREDECESSOR PRO FORMA PRO FORMA
COMPANIES ADJUSTMENTS COMBINED
----------- ----------- ---------
<S> <C> <C> <C>
Revenues......................................... $64,011,234 $ -- $64,011,234
Cost of services................................. 48,534,798 11,032 (a) 48,236,177
(309,653)(b)
----------- ---------- -----------
Gross margin................................... 15,476,436 298,621 15,775,057
Selling, general and administrative expenses..... 12,269,178 (231,676)(a) 11,961,966
(75,536)(b)
----------- ---------- -----------
Operating income............................... 3,207,258 605,833 3,813,091
Other (income) expense
Interest expense............................... 516,434 (147,318)(b) 369,116
Interest income................................ (108,063) -- (108,063)
Other.......................................... (39,203) -- (39,203)
----------- ---------- -----------
Total other expense............................ 369,168 (147,318) 221,850
----------- ---------- -----------
Income before provision for income taxes......... 2,838,090 753,151 3,591,241
Provision for income taxes....................... 2,076,485 (639,988)(c) 1,436,497
----------- ---------- -----------
Net Income....................................... $ 761,605 $1,393,139 $ 2,154,744
=========== ========== ===========
Net income per share............................. $ .46
===========
Weighted average shares outstanding.............. 4,636,664 (d)
===========
</TABLE>
(a) Adjustment to reflect the reduction in compensation to former owners
and employees ($924,255) as a result of the renegotiation of executive
compensation arrangements, consulting contract to a former employee and the
termination of contributions to employee benefit plans made in conjunction with
the transaction. These reductions are partially offset by increased expenses for
corporate operating activities ($703,000) related to the newly formed public
entity.
(b) Adjustment to eliminate $532,506 of expense recorded in connection with
BFR's Employee Stock Ownership and Money Purchase Plan. This Plan was converted
to a profit sharing plan in December 1995 and no future contributions will be
made.
(c) Adjustment to calculate the provision for income taxes on the combined
pro forma results at the effective statutory tax rates (40%).
(d) Pro forma weighted average shares outstanding used to determine pro
forma earnings per share were 4,636,664. Shares used to calculate the weighted
average shares were: (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 and
(iii) dilution attributable to options to purchase common stock in applying the
treasury stock method.
29
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4-ALLOWANCE FOR DOUBTFUL ACCOUNTS
Allowance for doubtful accounts activity is as follows.
Balance, March 31, 1994 and 1995..... $ --
Balance of subsidiaries allowance
for doubtful accounts at Acquisition... 40,000
Charges to costs and expenses..... 4,109
Write-offs........................ (4,109)
-------
Balance at March 31, 1996......... $40,000
=======
NOTE 5-PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following.
MARCH 31,
------------------------------
1995 1996
------------- -------------
Automobiles................... $ -- $ 4,500
Equipment..................... -- 1,461,036
Furniture and fixtures........ -- 513,827
Leasehold improvements........ -- 313,783
------------ ----------
-- 2,293,146
Less: Accumulated depreciation
and amortization............. -- 1,231,397
============ ==========
$ -- $1,061,749
============ ==========
Depreciation and amortization expense for the year ended March 31, 1996 was
$43,573.
NOTE 6-CREDIT FACILITIES
Credit facilities consist of the following at March 31, 1996.
Short-Term Debt
MARCH 31,
---------------------------------
1995 1996
------------- ----------------
Note payable for consulting
services performed, which bears
interest at the rate of 10% from June $51,501 $ --
1995, and is due on completion of the
Offering...............................
Bank line of credit, with maximum
borrowings of $1,250,000, secured by
FDSI's accounts 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).............. -- 1,096,397
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 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).......... -- 809,079
Bank line of credit, for
borrowings of up to $1,500,000,
secured by all of BFR's assets, due
May 31, 1996. Interest at bank's prime
rate of 8.25% at March 31, 1996........ -- 300,000
Capital lease obligations............... 100,401
Current portion of long-term debt....... -- 102,888
------- ----------
Total short-term debt............. $51,501 $2,408,765
======= ==========
30
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Long-Term Debt
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------
1995 1996
---------------- ---------------
<S> <C> <C>
Note payable to bank, monthly payments of $5,937, 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............................................................................. $ -- $ 130,894
Note payable to bank, monthly payments of $2,482, 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......................................................................................... -- 56,024
Capital lease obligations..................................................................... -- 274,370
---- ---------
-- 461,288
Less: Current maturities...................................................................... -- (203,289)
---- ---------
Total long-term debt.......................................................................... $ -- $ 257,999
==== =========
</TABLE>
Total maturities of long-term debt are as follows.
YEAR ENDING YEAR ENDING
MARCH 31, MARCH 31,
1995 1996
------------ ------------
[S] [C] [C]
1997................. $ -- $ 203,289
1998................. -- 194,074
1999................. -- 40,574
2000................. -- 23,351
---- ----------
$ -- $ 461,288
==== ==========
NOTE 7-INCOME TAXES
Cotelligent will file a consolidated federal income tax return for periods
subsequent to the Acquisitions described in Note 1.
The provision (benefit) for income taxes is as follows.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------
1994 1995 1996
--------------------------------------
<S> <C> <C> <C>
Current:
Federal........................... $ -- $ -- $ 626,056
State............................. -- -- 131,967
-------- -------- ---------
-- -- $ 758,023
---------- --------- ---------
Deferred:
Federal........................... (57,000) (68,000) (486,093)
State............................. (10,000) (12,000) (107,389)
-------- -------- ---------
(67,000) (80,000) (593,482)
Valuation Allowance............... 67,000 80,000 (40,000)
-------- -------- ---------
Total provision for income taxes $ -- $ -- $ 124,541
======== ======== =========
</TABLE>
31
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred tax assets (liabilities) are comprised of the following.
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------
1995 1996
-----------------------------
<S> <C> <C>
Allowance for doubtful accounts........... $ -- $ 16,471
Accrued liabilities....................... -- 286,117
Cash to accrual........................... -- (846,041)
Operating loss carryforward............... 147,000 317,000
Depreciation.............................. -- (19,569)
--------- ---------
Deferred tax asset (liability)........... 147,000 (246,022)
Valuation allowance....................... (147,000) (187,000)
--------- ---------
Net deferred tax assets (liabilities).... $ -- $(433,022)
========= =========
</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............... -- -- 3.9%
Valuation allowance against net operating loss............... 34.0% 34.0% 18.5%
Nondeductible expenses....................................... -- -- 1.1%
Other........................................................ -- -- 1.0%
----- ----- ----
Effective tax rate......................................... (0.0)% (0.0)% 58.5%
===== ===== ====
</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.
32
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8-LEASE COMMITMENTS
Cotelligent leases various office space and certain equipment under
noncancellable lease agreements which expire at various dates.
Future minimum rental payments under such leases are as follows.
<TABLE>
<CAPTION>
MARCH 31
-------------------------------------
CAPITAL LEASES OPERATING LEASES
-------------------------------------
<S> <C> <C>
1997............................... $131,663 $ 791,155
1998............................... 105,223 778,865
1999............................... 72,490 788,655
2000............................... 28,000 640,436
2001............................... -- 312,609
Thereafter......................... -- 31,700
-------- ----------
Total minimum lease payments....... 337,376 $3,343,420
==========
Less: Amounts representing interest (63,006)
--------
Present value of net minimum
lease payments.................... $274,370
========
</TABLE>
Rental expense under these leases was $73,094 for the year ended March 31,
1996.
NOTE 9-RELATED PARTIES
The Company recognized $5,000 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 $103,416. Included in interest income is $1,995 for the
period subsequent to the Acquisitions through March 31, 1996, on the advances.
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 $19,750 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 $5,953.
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 the
other of whom is a Director of the Company, are the sole trustees and
beneficiaries of the Strathmore Realty Trust. Rental expense recorded for this
office space was $11,700 for the period subsequent to the Acquisitions through
March 31, 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.
33
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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, and through March 31, 1996, additional grants
of options to purchase 47,700 shares of Common Stock at prices ranging from
$9.00 to $10.25 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 $12,000. 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 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 $150,000. 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
34
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 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 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 Founding Companies who did
not become executive officers of the Company upon consummation of the
Acquisitions and the Offering remain executive officers of one of the Founding
Companies. Each of such individuals entered into an employment agreement with
such Founding Company effective upon consummation of the Acquisitions and the
Offering, with a base compensation not to exceed $150,000 per annum.
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 $8,333 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 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 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 provides a credit facility in the amount of $10.0 million,
secured by accounts receivable and other assets of the company. Borrowings on
the facility bear interest at the bank's prime rate.
35
<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
36
<PAGE>
COMBINED PREDECESSOR COMPANIES
BALANCE SHEET
<TABLE>
<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
=========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
37
<PAGE>
COMBINED PREDECESSOR COMPANIES
STATEMENT OF OPERATIONS
<TABLE>
<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
============ ============= ===============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
38
<PAGE>
COMBINED PREDECESSOR COMPANIES
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------------ --------------------------
SHARES AMOUNT SHARES AMOUNT
------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at March 31, 1993................... 100,395 $60,236 1,331,087 $ 106,658
Issuance of common stock.................... -- -- 93,409 252
Issuance of preferred stock................. 500 7,875 -- --
Issuance of preferred stock
charged to compensation expense............ 500 9,425 -- --
Conversion of preferred stock to
common stock............................... (2,143) (6,198) 2,143 6,198
Net income.................................. -- -- -- --
------------- -------------- ----------- ------------
Balance at March 31, 1994................... 99,252 71,338 1,426,639 113,108
Issuance of common stock.................... -- -- 123,526 333
Stock distribution of subsidiary............ -- -- -- --
Conversion of preferred stock to
common stock............................... (320) (2,724) 320 2,724
Net income.................................. -- -- -- --
------------- -------------- ----------- ------------
Balance at March 31, 1995................... 98,932 68,614 1,550,485 116,165
Dividends................................... -- -- -- --
Redistribution of capital for
stock dividend............................. -- -- -- 4,197
Issuance of common stock.................... -- -- 158,183 11,205
Issuance of preferred stock................. 400 14,000 -- --
Repurchase of common stock.................. -- -- (76,240) (5,717)
Purchase of BFR's ESOP shares............... -- -- -- --
Release of unearned shares to
BFR's ESOP.................................. -- -- -- --
Conversion of BFR's ESOP to
defined contribution plan.................. -- -- -- --
Net income.................................. -- -- -- --
------------- -------------- ----------- ------------
Balance at February 19, 1996................ 99,332 $82,614 $1,632,428 $ 125,850
============= ============== =========== ============
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL UNEARNED TOTAL
PAID-IN RETAINED ESOP STOCKHOLDERS'
CAPITAL EARNINGS SHARES EQUITY
------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at March 31, 1993................... $ 48,635 $2,572,425 $ $2,787,954
Issuance of common stock.................... 77,048 -- -- 77,300
Issuance of preferred stock................. -- -- -- 7,875
Issuance of preferred stock
charged to compensation expense............ -- -- -- 9,425
Conversion of preferred stock to
common stock............................... -- -- -- --
Net income.................................. -- 649,170 -- 649,170
------------- -------------- ----------- ------------
Balance at March 31, 1994................... 125,683 3,221,595 -- 3,531,724
Issuance of common stock.................... 162,872 -- -- 163,205
Stock distribution of subsidiary............ -- (103,849) -- (103,849)
Conversion of preferred stock to
common stock............................... -- -- -- --
Net income.................................. -- 41,313 -- 41,313
------------ -------------- ------------- ------------
Balance at March 31, 1995................... 288,555 3,159,059 -- 3,632,393
Dividends................................... -- (159,468) -- (159,468)
Redistribution of capital for
stock dividend............................. (4,197) -- -- --
Issuance of common stock.................... 382,895 -- -- 394,100
Issuance of preferred stock................. -- -- -- 14,000
Repurchase of common stock.................. (119,258) -- -- (124,975)
Purchase of BFR's ESOP shares............... -- -- (3,150,000) (3,150,000)
Release of unearned shares to
BFR's ESOP.................................. -- -- 1,114,286 1,114,286
Conversion of BFR's ESOP to
defined contribution plan.................. -- -- 2,035,714 2,035,714
Net income.................................. -- 249,644 -- 249,644
------------- -------------- ----------- ------------
Balance at February 19, 1996................ $547,995 $3,249,235 $ (0) $4,005,694
============= ============== =========== ============
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
39
<PAGE>
COMBINED PREDECESSOR COMPANIES
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Years End
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:
Purchase 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
=========== =========== ===========
</TABLE>
40
<PAGE>
COMBINED PREDECESSOR COMPANIES
STATEMENT OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Fiscal Years End
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...... $ - $ 74,903 $ -
Conversion of preferred stock to common stock............. $ 6,198 $ 2,724 $ -
Debt refinancing.......................................... $ - $178,986 $ -
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
41
<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.
42
<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
The activity in the allowance for doubtful accounts is as follows.
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO BALANCE
BEGINNING COSTS AND WRITE- AT END
OF PERIOD EXPENSES OFFS 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>
43
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5-PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following.
<TABLE>
<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
========== ==========
</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 $149,059,
$180,396 and $170,178 respectively.
44
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6-CREDIT FACILITIES
Short-Term Debt
Short-term debt consists of the following.
<TABLE>
<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
========== ==========
</TABLE>
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.
45
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Long-Term Debt
Long-term debt consists of the following.
<TABLE>
<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>
Total maturities of long-term debt are as follows.
YEAR ENDING
MARCH 31,
-----------
1997............................................. $ 64,103
1998............................................. 159,413
1999............................................. 206,453
2000............................................. --
2001............................................. --
Thereafter....................................... 200,000
---------
$ 629,969
=========
46
<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.
YEAR ENDED APRIL 1,
MARCH 31, 1995
------------------------ FEBRUARY 19,
1994 1995 1996
------------------------ ------------
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
========= ========= ==========
Deferred tax assets (liabilities) are comprised of the following.
MARCH 31,
---------------------------
1994 1995
----------- -----------
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)
========== ===========
The Company's effective income tax rate varied from the U.S. federal statutory
tax rate as a result of the following.
APRIL 1,
YEAR ENDED MARCH 31, 1995 -
-------------------- FEBRUARY 19,
1994 1995 1996
-------------------- ------------
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%
====== ==== ====
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.
47
<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.
Future minimum rental payments under such leases are as follows.
YEAR ENDING MARCH 31,
---------------------------------
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
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
=========
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.
48
<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.
49
<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 granted 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
50
<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 Matters
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.
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
==========
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.
51
<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.
FISCAL YEAR
ENDED MARCH 31, APRIL 1, 1995-
-------------------- FEBRUARY 19,
1994 1995 1996
----------- --------- --------------
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
========== ========= ===========
52
<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
53
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, MARCH 31,
1994 1995
----------- -----------
ASSETS
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
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
54
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED
MARCH 31, APRIL 1, 1995 -
------------------------ FEBRUARY 19,
1994 1995 1996
------------------------- -----------
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
=========== =========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
55
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<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........... 98,332 $ 82,614 10,348 $ 115,960 $ 857,405 $ 1,055,979
======== ========= ====== ========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
56
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-------------------------- APRIL 1,
1995-FEBRUARY
1994 1995 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:
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
========== ========== =============
</TABLE>
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.
57
<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.
58
<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.
Supplemental Disclosures of Cash Flow Information
<TABLE>
<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
</TABLE>
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.
<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>
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.
<TABLE>
<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>
59
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--ALLOWANCE FOR DOUBTFUL ACCOUNTS AND NOTES RECEIVABLE
<TABLE>
<CAPTION>
BALANCE AT TRANSFER BALANCE
BEGINNING CHARGED TO TO CYBER- AT END
OF PERIOD EXPENSE 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
Property and equipment consist of the following.
<TABLE>
<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
Short-term debt consists of the following.
<TABLE>
<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
60
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
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.
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
Long-term debt consists of.
<TABLE>
<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
========== ==========
</TABLE>
Principal maturities on notes payable over the next five years are as follows
(see Note 7 for capital lease obligations).
<TABLE>
<CAPTION>
YEAR ENDING
MARCH 31, 1995
--------------
<S> <C>
1996...................................................... $ 53,120
1997...................................................... 59,413
1998...................................................... 66,453
---------
$ 178,986
=========
</TABLE>
61
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--INCOME TAXES
The provision (benefit) for income taxes is as follows.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, APRIL 1-
---------------------------------------------- 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>
Deferred tax assets (liabilities) are comprised of the following.
<TABLE>
<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>
The Company's effective income tax rate for continuing operations varied
from the U.S. federal statutory rate as follows.
<TABLE>
<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, taxes and maintenance) and pro rata common area charges. The Company
also leases furniture and equipment under leases classified as capital leases.
Property and equipment includes the following leased property under capital
leases.
<TABLE>
<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>
62
<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
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.
63
<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>
<S> <C>
Cash ............................. $ 4,660
Accounts receivable .............. 209,892
Prepaid expenses and other 28,797
current assets ..................
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>
64
<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.
65
<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
66
<PAGE>
BFR CO., INC.
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1994 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............ $ 210,442 $ 466,885
Accounts receivable .................. 3,388,164 3,263,436
Prepaid 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
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
67
<PAGE>
BFR CO., INC.
STATEMENT OF OPERATIONS
<TABLE>
<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)
============ ============= =============
The accompanying notes are an integral part of these financial statements.
</TABLE>
68
<PAGE>
BFR CO., INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<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
------- ------- ---- ---- ----------- ----------- ------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
69
<PAGE>
BFR CO., INC.
STATEMENT OF CASH FLOWS
<TABLE>
<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
</TABLE>
The accompanying notes are an integral part of these financial statements.
70
<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.
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.
71
<PAGE>
BFR CO., 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.
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
Property and equipment is comprised of the following:
<TABLE>
<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
========== ========
</TABLE>
Depreciation and amortization 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.
NOTE 4--CREDIT FACILITIES
Short-Term Debt
Short-term debt consists of the following:
<TABLE>
<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
========= ========
</TABLE>
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.
72
<PAGE>
BFR CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--INCOME TAXES
The provision (benefit) for income taxes is as follows.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, APRIL 1, 1995-
----------------------------- 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>
Deferred tax assets (liabilities) are comprised of the following.
<TABLE>
<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>
The Company's effective income tax rate varied from the statutory tax rate as
a result of the following:
<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 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>
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.
73
<PAGE>
BFR CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
Future minimum rental payments under such leases for the years ending March 31
are as follows.
<TABLE>
<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.
74
<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.
75
<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>
76
<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
77
<PAGE>
DATA ARTS & SCIENCES, INC.
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1994 1995
----------- -----------
<S> <C> <C>
ASSETS
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
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
78
<PAGE>
DATA ARTS & SCIENCES, INC.
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<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
=========== =========== ==============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
79
<PAGE>
DATA ARTS & SCIENCES, INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<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
====== ====== ===== ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
80
<PAGE>
DATA ARTS & SCIENCES, INC.
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<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
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
81
<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.
82
<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:
The activity in the allowance for doubtful accounts and notes receivable is
as follows.
<TABLE>
<CAPTION>
BALANCE BALANCE
AT AT END
BEGINNING CHARGED TO OF
OF PERIOD EXPENSE WRITE-OFFS 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
Property and equipment consists of the following.
<TABLE>
<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: Accumulated depreciation.............. 230,270 273,559
-------- --------
$112,918 $ 79,531
======== ========
</TABLE>
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.
83
<PAGE>
DATA ARTS & SCIENCES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5-CREDIT FACILITIES
Short-Term Debt
Short-term debt consists of the following.
<TABLE>
<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
Long-term debt consists of the following.
<TABLE>
<CAPTION>
MARCH 31,
------------------
1994 1995
-------- --------
<S> <C> <C>
Loans from officers and stockholders........................ $440,000 $440,000
Autombile 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:
Due October 25, 1996................... $ 100,000
Due December 25, 1997.................. 140,000
Due October 25, 2006................... 200,000
---------
$ 440,000
=========
84
<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.
Total maturities of long-term debt are as follows.
<TABLE>
<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
The provision (benefit) for income taxes is as follows.
<TABLE>
<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>
85
<PAGE>
DATA ARTS & SCIENCES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Deferred tax assets are comprised of the following.
<TABLE>
<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.
As described in Note 5, the Company has loans outstanding to its
stockholders totaling $440,000 at March 31, 1994 and 1995.
86
<PAGE>
DATA ARTS & SCIENCES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
87
<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
88
<PAGE>
CHAMBERLAIN ASSOCIATES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1994 1995
---------- -----------
<S> <C> <C>
ASSETS
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
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
89
<PAGE>
CHAMBERLAIN ASSOCIATES, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
APRIL 1, 1995
YEAR ENDED MARCH 31, FEBRUARY 19,
------------------------- --------------
1994 1995 1996
---------- ---------- ----------
<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
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
90
<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
=== ==== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
91
<PAGE>
CHAMBERLAIN ASSOCIATES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<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
</TABLE>
The accompanying notes are an integral part of these financial statements.
92
<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.
93
<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
The property and equipment is comprised of the following.
<TABLE>
<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
Short-term debt consists of the following.
<TABLE>
<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.
94
<PAGE>
CHAMBERLAIN ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5-INCOME TAXES
The provision (benefit) for income taxes is as follows.
<TABLE>
<CAPTION>
APRIL 1,
YEAR ENDED MARCH 31, 1995-FEB. 19,
------------------------- --------------
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>
Deferred tax assets (liabilities) are comprised of the following.
<TABLE>
<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 APRIL 1,
MARCH 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.
95
<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.
96
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
- ---------------------
Not applicable.
97
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
---------------------------------------------------
(a) The information called for by Item 10 with respect to identification of
directors and executive officers of the Company is incorporated herein by
reference to the material under the caption "Election of Directors" in the
Company's Proxy Statement for its 1996 Annual Meeting of Shareholders which will
be filed with the Securities and Exchange Commission within 120 days after the
end of the registrant's fiscal year (the "1996 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
-----------------------
The information called for by Item 11 with respect to management
remuneration and transactions is incorporated herein by reference to the
material under the caption "Executive Compensation" in the 1996 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
---------------------------------------------------------------
The information called for by Item 12 with respect to security ownership of
certain beneficial owners and management is incorporated herein by reference
to the material under the caption "Certain Holders of Voting Securities" in the
1996 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information called for by Item 13 with respect to security ownership of
certain beneficial owners and management is incorporated herein by reference to
the material under the caption "Certain Holders of Voting Securities" in the
1996 Proxy Statement.
98
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
-----------------------------------------------------------------
(a) 1. Financial Statements required by Item 14 are included and indexed
in Part II, Item 8.
(a) 2. Financial Statement Schedule
Included in Part IV of this report
Schedule II is omitted because the information is included in
the Notes to Consolidated Financial Statements.
(a) 3. EXHIBITS
1. The following is a list of all Exhibits filed as part of this report.
The Exhibits designated by an asterisk are management contracts and
compensatory plans and arrangements required to be filed as Exhibits
to this Form 10-K.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
2.1 Agreement and Plan of Reorganization dated as of December 8, 1995,
by and among Cotelligent Group, Inc., James R. Lavelle, BFR Co.,
Inc., BFR Acquisition Corporation, and the Stockholders named
therein (Exhibit 2.1 of the Registration Statement of Form S-1 (File
No. 33-80267) effective February 16, 1996, is hereby incorporated by
reference)
2.2 Agreement and Plan of Reorganization dated as of December 8, 1995,
by and among Cotelligent Group, Inc., James R. Lavelle, Chamberlain
Associates, Inc., Chamberlain Acquisition Corporation, and the
Stockholders named therein (Exhibit 2.2 of the Registration
Statement of Form S-1 (File No. 33-80267) effective February 16,
1996, is hereby incorporated by reference)
2.3 Agreement and Plan of Reorganization dated as of December 8, 1995,
by and among Cotelligent Group, Inc., James R. Lavelle, BFR Co.,
Inc., Data Arts & Sciences, Inc., DASI Acquisition Corporation, and
the Stockholders named therein (Exhibit 2.3 of the Registration
Statement of Form S-1 (File No. 33-80267) effective February 16,
1996, is hereby incorporated by reference)
2.4 Agreement and Plan of Reorganization dated as of December 8, 1995,
by and among Cotelligent Group, Inc., James R. Lavelle, Financial
Data Systems, Inc., FDSI Acquisition Corporation, and the
Stockholders named therein (Exhibit 2.4 of the Registration
Statement of Form S-1 (File No. 33-80267) effective February 16,
1996, is hereby incorporated by reference)
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)
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)*
</TABLE>
99
<PAGE>
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 (contained in Exhibit 2.1) (Exhibit 10.5 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 (contained in Exhibit 2.2) (Exhibit 10.6 of the
Registration Statement on Form S-1 (File No. 33-80267) effective
February 16, 1996, is hereby incorporated by reference)*
10.7 Form of Employment Agreement between CAI, Cotelligent and Linda M.
Cassell (contained in Exhibit 2.2) (Exhibit 10.7 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 Lease Agreement between BFR Properties and BFR Co., Inc. effective
April 1, 1995, at 7 Clyde Road.
10.10 Lease Agreement between BFR Properties and BFR Co., Inc. effective
April 1, 1995, at 31 Clyde Road.
10.11 Lease Agreement between Quinlan Properties, L.P. and BFR Co., Inc.
effective December 29, 1995.
10.12 Sublease Agreement between San Francisco Satellite Center and
Cotelligent Group, Inc. effective March 1, 1996.
10.13 Business Loan Agreement between Cotelligent Group, Inc. and U.S.
Bank of Washington, National Association effective May 1, 1996.
11.1 Statement re: computation of per share earnings, reference is made
to Note 3 of the Cotelligent Group, Inc. consolidated financial
statements contained in this Form 10-K.
21.1 Subsidiaries of the registrant
23.1 Consent of Price Waterhouse LLP
27.1 Financial Data Schedule
(b) There were no reports on Form 8-K filed by the registrant during the last
quarter of the period covered by this report.
100
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SAN
FRANCISCO, STATE OF CALIFORNIA ON THE 28TH DAY OF JUNE, 1996.
COTELLIGENT GROUP, INC.
BY: /S/ JAMES R. LAVELLE
----------------------------------
JAMES R. LAVELLE
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
/S/ JAMES R. LAVELLE CHAIRMAN OF THE JUNE 28, 1996
- ------------------------ BOARD OF DIRECTORS
JAMES R. LAVELLE AND CHIEF EXECUTIVE
OFFICER (PRINCIPAL
EXECUTIVE OFFICER)
/S/ EDWARD E. FABER VICE CHAIRMAN OF THE JUNE 28, 1996
- ------------------------ BOARD OF DIRECTORS
EDWARD E. FABER
/S/ MICHAEL L. EVANS PRESIDENT AND CHIEF JUNE 28, 1996
- ------------------------ OPERATING OFFICER AND
MICHAEL L. EVANS DIRECTOR
/S/ DUANE W. BELL SENIOR VICE PRESIDENT AND JUNE 28, 1996
- ------------------------ CHIEF FINANCIAL OFFICER
DUANE W. BELL (PRINCIPAL FINANCIAL
OFFICER) (PRINCIPAL
ACCOUNTING OFFICER)
/S/ DANIEL M. BEALS DIRECTOR JUNE 28, 1996
- ------------------------
DANIEL M. BEALS
/S/ JEFFREY J. BERNARDIS DIRECTOR JUNE 28, 1996
- ------------------------
JEFFREY J. BERNARDIS
/S/ LINDA M. CASSELL DIRECTOR JUNE 28, 1996
- ------------------------
LINDA M. CASSELL
/S/ JOHN E. CHAMBERLAIN DIRECTOR JUNE 28, 1996
- ------------------------
JOHN E. CHAMBERLAIN
/S/ ANTHONY M. FRANK DIRECTOR JUNE 28, 1996
- ------------------------
ANTHONY M. FRANK
/S/ B. TOM GREEN DIRECTOR JUNE 28, 1996
- ------------------------
B. TOM GREEN
/S/ BJORN E. NORDEMO DIRECTOR JUNE 28, 1996
- ------------------------
BJORN E. NORDEMO
/S/ HARVEY L. POPPEL DIRECTOR JUNE 28, 1996
- ------------------------
HARVEY L. POPPEL
101
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
2.1 Agreement and Plan of Reorganization dated as of December 8, 1995,
by and among Cotelligent Group, Inc., James R. Lavelle, BFR Co.,
Inc., BFR Acquisition Corporation, and the Stockholders named
therein (Exhibit 2.1 of the Registration Statement of Form S-1 (File
No. 33-80267) effective February 16, 1996, is hereby incorporated by
reference)
2.2 Agreement and Plan of Reorganization dated as of December 8, 1995,
by and among Cotelligent Group, Inc., James R. Lavelle, Chamberlain
Associates, Inc., Chamberlain Acquisition Corporation, and the
Stockholders named therein (Exhibit 2.2 of the Registration
Statement of Form S-1 (File No. 33-80267) effective February 16,
1996, is hereby incorporated by reference)
2.3 Agreement and Plan of Reorganization dated as of December 8, 1995,
by and among Cotelligent Group, Inc., James R. Lavelle, BFR Co.,
Inc., Data Arts & Sciences, Inc., DASI Acquisition Corporation, and
the Stockholders named therein (Exhibit 2.3 of the Registration
Statement of Form S-1 (File No. 33-80267) effective February 16,
1996, is hereby incorporated by reference)
2.4 Agreement and Plan of Reorganization dated as of December 8, 1995,
by and among Cotelligent Group, Inc., James R. Lavelle, Financial
Data Systems, Inc., FDSI Acquisition Corporation, and the
Stockholders named therein (Exhibit 2.4 of the Registration
Statement of Form S-1 (File No. 33-80267) effective February 16,
1996, is hereby incorporated by reference)
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)
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 (contained in Exhibit 2.1) (Exhibit 10.5 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 (contained in Exhibit 2.2) (Exhibit 10.6 of the
Registration Statement on Form S-1 (File No. 33-80267) effective
February 16, 1996, is hereby incorporated by reference)*
10.7 Form of Employment Agreement between CAI, Cotelligent and Linda
M. Cassell (contained in Exhibit 2.2) (Exhibit 10.7 of the
Registration Statement on Form S-1 (File No. 33-80267) effective
February 16, 1996, is hereby incorporated by reference)*
</TABLE>
102
<PAGE>
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 Lease Agreement between BFR Properties and BFR Co., Inc. effective
April 1, 1995, at 7 Clyde Road.
10.10 Lease Agreement between BFR Properties and BFR Co., Inc. effective
April 1, 1995, at 31 Clyde Road.
10.11 Lease Agreement between Quinlan Properties, L.P. and BFR Co., Inc.
effective December 29, 1995.
10.12 Sublease Agreement between San Francisco Satellite Center and
Cotelligent Group, Inc. effective March 1, 1996.
10.13 Business Loan Agreement between Cotelligent Group, Inc. and U.S.
Bank of Washington, National Association effective May 1, 1996.
11.1 Statement re: computation of per share earnings , reference is made
to Note 3 of the Cotelligent Group, Inc. consolidated financial
statements contained in this Form 10-K.
21.1 Subsidiaries of the registrant
23.1 Consent of Price Waterhouse LLP
27.1 Financial Data Schedule
103
<PAGE>
2,500,000 SHARES
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 covers 2,500,000 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 6,216,305 shares of its Common Stock listed on the
Nasdaq National Market of which 2,725,500 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 April 4, 1996, the closing price of
the Common Stock on the Nasdaq National Market was $13.75 per share as
published in The Wall Street Journal on April 5, 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) 391-0300.
The date of this Prospectus is April 8, 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. In February 1996, Cotelligent
acquired (the "Acquisitions"), simultaneously with the closing of its initial
public offering of an aggregate of 2,725,500 shares of its Common Stock (the
"Offering"), four software professional services businesses (the "Founding
Companies"). The Company, through the Founding Companies, operates offices in
eight metropolitan areas including Boston, 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, Microsoft, 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>
SUMMARY FINANCIAL DATA
COMBINED PREDECESSOR COMPANIES (1)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, NINE MONTHS ENDED DECEMBER 31,
--------------------------------------------------------- -------------------------------------
PRO FORMA PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995(2) 1994 1995 1994(2) 1995(2)
-------- -------- -------- -------- -------- --------- -------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................. $ 20,694 $ 23,974 $ 31,138 $ 39,434 $ 50,028 $ 50,028 $ 36,087 $46,776 $ 36,087 $ 46,776
Cost of services.......... 15,819 18,030 23,090 29,941 38,488 37,718 27,059 35,558 26,977 35,272
-------- -------- -------- -------- -------- -------- -------- ------- -------- --------
Gross margin............. 4,875 5,944 8,048 9,493 11,540 12,310 9,028 11,218 9,110 11,504
Selling, general and
administrative expenses.. 4,790 5,721 7,035 8,055 10,743 10,042 7,494 8,630 7,144 9,004
-------- -------- -------- -------- -------- -------- -------- ------- -------- --------
Operating income......... 85 223 1,013 1,438 797 2,268 1,535 2,588 1,966 2,500
Other expense, net........ 38 68 109 165 179 179 122 310 122 190
-------- -------- -------- -------- -------- -------- -------- ------- -------- --------
Income before provision
for income taxes......... 47 155 904 1,273 618 2,089 1,412 2,278 1,844 2,310
Provision for income
taxes.................... 13 58 211 339 393 836 361 1,911 738 924
-------- -------- -------- -------- -------- -------- -------- ------- -------- --------
Income from continuing
operations............... 34 97 693 934 225 1,253 1,052 367 1,106 1,386
Discontinued
operations(3)............ -- -- (257) (285) (184) -- (184) -- -- --
-------- -------- -------- -------- -------- -------- -------- ------- -------- --------
Net income................ $ 34 $ 97 $ 436 $ 649 $ 41 $ 1,253 $ 868 $ 367 $ 1,106 $ 1,386
======== ======== ======== ======== ======== ======== ======== ======= ======== ========
Pro forma net income per
share(4)................. $ .28 $ .25 $ .32
======== ======== ========
UNAUDITED PRO FORMA DATA(5):
Income before provision
for income taxes........ $ 47 $ 155 $ 904 $ 1,273 $ 618 $ 1,412 $ 2,278
Provision for income
taxes................... 16 65 328 566 333 614 978
-------- -------- -------- -------- -------- -------- -------
Income from continuing
operations.............. $ 31 $ 90 $ 576 $ 707 $ 285 $ 798 $ 1,292
======== ======== ======== ======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------
SUPPLEMENTAL
ACTUAL PRO FORMA (6) PRO FORMA (7)
------ ------------- -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 623 $ 623 $14,497
Working capital............................. 320 (3,172) 18,130
Total assets................................ 14,434 14,434 25,904
Long-term debt, less current portion........ 727 727 287
Stockholders' equity (deficit).............. 2,201 (1,291) 18,046
</TABLE>
- --------
(1) As a result of the substantial continuing interests in the Company of the
former stockholders of BFR, CAI, DASI, FDSI and Cotelligent (the "Combined
Predecessor Companies"), the historical financial information of the
Combined Predecessor Companies has been combined on a historical cost basis
for all periods presented.
(2) Pro forma data reflect adjustments for the Acquisitions including: (i)
compensation differentials to former owners and employees of the Combined
Predecessor Companies; (ii) termination of contributions to retirement
plans; (iii) incremental selling, general and administrative costs
associated with Cotelligent corporate activities; and (iv) 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 Combined Financial Statements.
(3) Discontinued operations represent the results of a security system software
development and marketing subsidiary of FDSI which was spun off to FDSI
stockholders in June 1994. See note 13 of Notes to the Financial Statements
of the Combined Predecessor Companies.
(4) Pro forma weighted average shares outstanding of 4,400,215 consists of: (i)
621,000 shares issued by Cotelligent prior to the Offering; (ii) 3,169,805
shares issued to the stockholders of the Founding Companies in connection
with the Acquisitions; (iii) 479,664 shares sold in the Offering to pay the
cash portion of the consideration for the Founding Companies; and (iv)
129,746 shares related to the dilution attributable to options to purchase
185,352 shares of Common Stock granted at $2.70 per share, using the
Offering price of $9.00 per share in applying the treasury stock method.
(5) One of the Founding Companies, BFR, was an S corporation through March 31,
1995 and, accordingly, was not subject to federal income taxes. The
unaudited pro forma information is presented for the purpose of reflecting
a provision for income taxes as if all of the Founding Companies had been
subject to income tax for all periods presented, calculated in accordance
with FAS 109, based on tax laws that were in effect during the respective
periods.
(6) Gives effect to a liability for the cash consideration of $3,491,951 paid
to the stockholders of the Founding Companies.
(7) Supplemental pro forma balance sheet data gives effect to the sale of
2,725,500 shares of Common Stock in the Offering and the application of the
proceeds thereof. See Notes to the Pro Forma Combined Financial Statements
for further detail on the pro forma data.
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 the Offering.
Cotelligent acquired the Founding Companies simultaneously with the closing of
the Offering. Prior to the consummation of the Offering, the Founding
Companies operated as separate independent entities, and 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
Founding Companies cover periods when the Founding Companies 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 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 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
5
<PAGE>
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."
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 Founding Company,
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 1995, one
client, Bell Communications Research, Inc., accounted for approximately 11.0%
of the Company's revenues, four clients accounted for approximately 30.6% of
the Company's revenues and 20 clients accounted for approximately 64.1% 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
6
<PAGE>
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, 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 financings. 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 intends to obtain a line of credit as
soon as practicable to be used for working capital and other general corporate
purposes, which may include acquisitions. There can be no assurance, however,
that any line of credit will be obtained or that, if obtained, it will be on
terms that are favorable to the Company or 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.
7
<PAGE>
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. The Company has
solicited quotes and is working with an insurance underwriter to design a
comprehensive business liability insurance program to cover all of its
operations, including actions taken by employees while on assignment. However,
there can be no assurance that the Company will be able to obtain adequate
insurance for such purposes on terms the Company deems favorable. To the
extent that such insurance is not available, or is not available on terms the
Company deems acceptable, or if any insurance which is acquired 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 the
Founding Companies. 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
or individual Founding Companies will enter 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 or such Founding
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."
Control by Existing Management. The executive officers and directors of the
Company beneficially own approximately 31.5% of the outstanding shares of
Common Stock and may be able, if acting in concert, to exercise control over
the Company's affairs. These stockholders acting together would be able to
influence the election of members of the Board of Directors. See "Principal
Stockholders."
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. These
shares are not being offered by this Prospectus and 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 who received these 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 President 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,
8
<PAGE>
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."
9
<PAGE>
THE COMPANY
The Company was formed to acquire, own and operate computer consulting and
contract programming businesses. The Company acquired, upon consummation of
the Offering, the four businesses described below. For a description of these
transactions, see "Certain Transactions."
BFR CO., INC. ("BFR")--BFR's principal office is in central New Jersey. BFR
has been in operation since 1985 and had revenues in 1995 of $15.2 million.
BFR also has an office in New York City. Jeffrey J. Bernardis, the President
of BFR, has been in the computer industry for 17 years and continues to serve
as its President.
CHAMBERLAIN ASSOCIATES, INC. ("CAI")--CAI's office is in the San Francisco
Bay Area. CAI has been in operation since 1980 and had revenues in 1995 of
$6.6 million. John E. Chamberlain, President of CAI, has been in the computer
industry for over 29 years and continues to serve as its President.
DATA ARTS & SCIENCES, INC. ("DASI")--DASI's office is in the Boston
metropolitan area. DASI has been in operation since 1975 and had revenues in
1995 of $12.4 million. John C. Travers, President of DASI, has been in the
computer industry for 29 years and continues to serve as its President.
FINANCIAL DATA SYSTEMS, INC. ("FDSI")--FDSI's principal office is in the
Seattle metropolitan area. FDSI has been in operation since 1982 and had
revenues in 1995 of $15.8 million. FDSI also has offices in Denver, Phoenix
and Portland. Michael L. Evans, the President of FDSI, has been in the
computer industry for 18 years. Mr. Evans is also Senior Vice President, Chief
Operating Officer and a director of the Company. Mr. Evans continues to serve
in each of these capacities.
The aggregate consideration paid by Cotelligent to acquire the Founding
Companies was approximately $35.3 million, consisting of approximately $3.5
million in cash, 3,206,875 shares of Common Stock of the Company and the
assumption of approximately $3.0 million in debt. The aggregate consideration
paid for each Founding Company was: (i) BFR--$12.0 million; (ii) CAI--$4.0
million; (iii) DASI--$5.6 million; and (iv) FDSI--$13.7 million. The
consideration paid by Cotelligent for the Founding Companies was determined by
negotiations among Cotelligent and representatives of the Founding Companies.
See "Risk Factors--Substantial Proceeds of Offering Payable to Affiliates" and
"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) 391-
0300.
10
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded on the Nasdaq National Market since
February 14, 1996. On April 4, 1996, the last sale price of the Common Stock
was $13.75 per share, as published in The Wall Street Journal on April 5,
1996. At April 4, 1996, there were 37 stockholders of record of the Company's
Common Stock. The following table sets forth the range of high and low sale
prices for the Common Stock for the period from February 14, 1996, the date of
the Company's initial public offering, through April 4, 1996.
<TABLE>
<CAPTION>
HIGH LOW
------- -----
<S> <C> <C>
February 14, 1996 through April 4, 1996................... $14.125 $8.25
======= =====
</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, in the event the Company is successful in obtaining a
line of credit, it is likely that such facility will include restrictions on
the ability of the Company to pay dividends without the consent of the lender.
11
<PAGE>
SELECTED COMBINED FINANCIAL DATA
The Company was founded to create a nationwide computer consulting and
contract programming company. Cotelligent acquired, simultaneously with the
closing of the Offering in February 1996, FDSI, BFR, DASI and CAI (the
Founding Companies and Cotelligent are herein referred to as the "Combined
Predecessor Companies"). The historical financial statements of the Combined
Predecessor Companies have been combined for all periods presented, as if
these companies had always been members of the same operating group. However,
during the periods presented, the Combined Predecessor Companies were not
under common control or management, and one of the Founding Companies, BFR,
was an S corporation through March 31, 1995 and therefore not subject to
federal income tax. Accordingly, the data presented may not be comparable to
or indicative of the post-combination results achieved by the Company.
The following selected combined financial data with respect to the Combined
Predecessor Companies combined statements of operations for the years ended
March 31, 1993, 1994 and 1995 and with respect to the Combined Predecessor
Companies combined balance sheets as of March 31, 1994 and 1995 have been
derived from the Combined Predecessor Companies Financial Statements that have
been audited by Price Waterhouse LLP and that appear elsewhere in this
Prospectus. The selected combined financial data with respect to the Combined
Predecessor Companies combined statements of operations for the years ended
March 31, 1991 and 1992 and the nine months ended December 31, 1994 and 1995
and with respect to the Combined Predecessor Companies combined balance sheets
as of March 31, 1991, 1992 and 1993 and December 31, 1995 have been derived
from unaudited financial statements which, in the opinion of management of the
Combined Predecessor Companies, reflect all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of such data.
Operating results for the nine months ended December 31, 1995 are not
necessarily indicative of results for future periods, including the year
ending March 31, 1996.
The pro forma statement of operations data give effect to compensation
differentials to employees and former owners of the Combined Predecessor
Companies, the termination of contributions to retirement plans, incremental
selling, general and administrative costs of the corporate activities of
Cotelligent and adjustments to reflect income taxes at the effective statutory
rates for the combined entity. The pro forma balance sheet data reflect as
liabilities the amounts distributed to the Founding Companies' stockholders.
The supplemental pro forma balance sheet data reflect the results of the
Offering and application of the proceeds thereof. See the Pro Forma Combined
Financial Statements and the related notes thereto.
The selected financial data for FDSI, BFR, DASI, CAI and Cotelligent for the
years ended March 31, 1993, 1994 and 1995 have been derived from the audited
financial statements of each of these companies that appear elsewhere in this
Prospectus. The selected financial data for each of FDSI, BFR, DASI, CAI and
Cotelligent for the years ended March 31, 1991 and 1992 and for the nine
months ended December 31, 1994 and 1995 have been derived from unaudited
financial statements of these companies which, in the opinion of the
management of such company, reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of such data.
The selected combined financial data provided should be read in conjunction
with the Combined Predecessor Companies Financial Statements, the Pro Forma
Combined Financial Statements, the individual financial statements of FDSI,
BFR, DASI, CAI and Cotelligent, the related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
12
<PAGE>
SELECTED COMBINED FINANCIAL DATA
COMBINED PREDECESSOR COMPANIES
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, NINE MONTHS ENDED DECEMBER 31,
-------------------------------------------------- -------------------------------
PRO PRO PRO
FORMA FORMA FORMA
1991 1992 1993 1994 1995 1995(1) 1994 1995 1994(1) 1995(1)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $20,694 $23,974 $31,138 $39,434 $50,028 $50,028 $36,087 $46,776 $36,087 $46,776
Cost of services........ 15,819 18,030 23,090 29,941 38,488 37,718 27,059 35,558 26,977 35,272
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross margin........... 4,875 5,944 8,048 9,493 11,540 12,310 9,028 11,218 9,110 11,504
Selling, general and
administrative
expenses............... 4,790 5,721 7,035 8,055 10,743 10,042 7,494 8,630 7,144 9,004
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income....... 85 223 1,013 1,438 797 2,268 1,535 2,588 1,966 2,500
Other expense, net...... 38 68 109 165 179 179 122 310 122 190
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income before provision
for income taxes....... 47 155 904 1,273 618 2,089 1,412 2,278 1,844 2,310
Provision for income
taxes.................. 13 58 211 339 393 836 361 1,911 738 924
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from continuing
operations............. 34 97 693 934 225 1,253 1,052 367 1,106 1,386
Discontinued
operations(2).......... -- -- (257) (285) (184) -- (184) -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income.............. $ 34 $ 97 $ 436 $ 649 $ 41 $ 1,253 $ 868 $ 367 $ 1,106 $ 1,386
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Pro forma net income per
share(3)............... $ .28 $ .25 $ .32
======= ======= =======
UNAUDITED PRO FORMA
DATA(4):
Income before
provisions for income
taxes................. $ 47 $ 155 $ 904 $ 1,273 $ 618 $ 1,412 $ 2,278
Provision for income
taxes................. 16 65 328 566 333 614 978
------- ------- ------- ------- ------- ------- -------
Income from continuing
operations............ $ 31 $ 90 $ 576 $ 707 $ 285 $ 798 $ 1,300
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, 1995
----------------------------------- ---------------------
1991 1992 1993 1994 1995 ACTUAL PRO FORMA (5)
------ ------ ------ ------ ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $2,163 $2,309 $3,220 $3,806 $ 3,621 $ 623 $ 623
Total assets............ 4,836 3,427 7,689 8,936 11,048 14,434 14,434
Long-term debt, less
current portion........ 1,126 1,453 1,535 944 838 727 727
Stockholders' equity.... 2,214 2,303 2,788 3,532 3,632 2,201 (1,291)
</TABLE>
- --------
(1) Pro forma data reflect adjustments for the Acquisitions including: (i)
compensation differentials to former owners and employees of the Combined
Predecessor Companies; (ii) termination of contributions to retirement
plans; (iii) incremental selling, general and administrative costs
associated with Cotelligent corporate activities; and (iv) 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 Combined Financial Statements.
(2) Discontinued operations represent the results of a security system
software development and marketing subsidiary of FDSI which was spun off
to FDSI stockholders in June 1994. See note 13 of Notes to the Financial
Statements of the Combined Predecessor Companies.
(3) Pro forma weighted average shares outstanding of 4,400,215 consists of:
(i) 621,000 shares issued by Cotelligent prior to the Offering; (ii)
3,169,805 shares issued to the stockholders of the Founding Companies in
connection with the Acquisitions; (iii) 479,664 shares sold in the
Offering to pay the cash portion of the consideration for the Founding
Companies; and (iv) 129,746 shares related to the dilution attributable to
options to purchase 185,352 shares of Common Stock granted at $2.70 per
share, using the Offering price of $9.00 per share in applying the
treasury stock method.
(4) One of the Founding Companies, BFR, was an S corporation through March 31,
1995 and, accordingly, was not subject to federal income taxes. The
unaudited pro forma information is presented for the purpose of reflecting
a provision for income taxes as if all of the Founding Companies had been
subject to income tax for all periods presented, calculated in accordance
with FAS 109, based on tax laws that were in effect during the respective
periods.
(5) Gives effect to a liability for the cash consideration of $3,491,951 paid
to the stockholders of the Founding Companies.
13
<PAGE>
SELECTED FINANCIAL DATA
FOUNDING COMPANIES AND COTELLIGENT
The following table presents selected information for each of the Founding
Companies and Cotelligent for the five most recent fiscal years as well as the
most recent interim period and comparative period of the prior year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
----------------------------------------- ------------------
1991 1992 1993 1994 1995 1994 1995
------ ------ ------- ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
FDSI:
Revenues................ $5,239 $6,119 $ 8,206 $11,191 $15,807 $ 11,176 $ 13,995
Gross margin............ 1,311 1,659 2,362 2,955 3,541 2,570 3,672
Selling, general and
administrative
expenses............... 1,206 1,543 1,927 2,419 3,120 2,346 2,800
Income from continuing
operations............. 57 55 278 314 223 126 505
Net income (loss)....... 57 55 22 29 39 (58) 505
BFR:
Revenues................ $7,523 $7,958 $10,138 $14,440 $15,221 $ 11,442 $ 12,962
Gross margin............ 1,966 2,065 3,069 3,626 3,981 3,556 3,321
Selling, general and
administrative
expenses............... 1,960 2,047 2,648 2,833 4,173 2,655 2,518
Net income (loss)....... 6 17 364 681 (179) 788 (522)
DASI:
Revenues................ $5,306 $7,170 $ 9,396 $10,065 $12,437 $ 9,014 $ 12,020
Gross margin............ 1,103 1,549 1,884 2,094 2,696 1,978 2,707
Selling, general and
administrative
expenses............... 1,091 1,427 1,693 1,862 2,195 1,602 1,979
Net income (loss)....... (15) 47 71 80 235 178 380
CAI:
Revenues................ $2,626 $2,727 $ 3,398 $ 3,738 $ 6,563 $ 4,455 $ 7,799
Gross margin............ 495 671 733 818 1,322 924 1,517
Selling, general and
administrative
expenses............... 533 704 728 774 1,054 759 1,094
Net income (loss)....... (14) (22) 17 26 147 91 244
COTELLIGENT:
Revenues................ -- -- -- -- --
Gross margin............ -- -- -- -- --
Selling, general and
administrative
expenses............... $ 38 $ 167 $ 201 $ 132 $ 240
Net income (loss)....... (38) (167) (201) (132) (240)
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Cotelligent was formed in February 1993 to create a nationwide computer
consulting and contract programming company. Cotelligent acquired,
simultaneously with the closing of the Offering, four established businesses
which provide a wide variety of computer consulting services in various
metropolitan areas of the country. The Founding Companies have operated since
1975 (DASI), 1980 (CAI), 1982 (FDSI) and 1985 (BFR). During the periods
discussed below, the Combined Predecessor Companies were not under common
control or management; therefore, the data presented 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 or if fixed-fee engagements
(which historically have not constituted a significant portion of total
revenues) are not properly priced. Operating income (gross margin less
selling, general and administrative expenses) can be adversely impacted by
administrative staff compensation, expenses related to growing and expanding
the Company's business, which may be incurred before revenues are generated
from such investment, or high levels of unutilized time (work activities not
chargeable to clients or unrelated to client services) of full-time service
professional employees.
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 election BFR had in effect through March 31, 1995. The
Company expects its effective statutory tax rate as of April 1, 1995 to be
approximately 40%.
As a result of the substantial continuing interests in the Company of the
former stockholders of BFR, CAI, DASI, FDSI and Cotelligent (the "Combined
Predecessor Companies"), the historical financial information of the Combined
Predecessor Companies have been combined on a 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.
Pro forma data reflect adjustments for the Acquisitions including: (i)
compensation differentials to former owners and employees of the Combined
Predecessor Companies; (ii) termination of contributions to retirement plans;
(iii) incremental selling, general and administrative costs associated with
Cotelligent corporate activities; and (iv) income taxes as if the entities
were combined and subject to the effective federal and state statutory rates
throughout the periods discussed.
15
<PAGE>
As a professional services organization, the Company responds to service
demands from its clients. Accordingly, the Company has limited control over
the timing and circumstances under which its services are provided. Therefore,
the Company can experience volatility in its operating results from quarter to
quarter. The operating results for any quarter are not necessarily indicative
of the results for any future period.
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, NINE MONTHS ENDED DECEMBER 31,
-------------------------- -----------------------------------
PRO PRO PRO
FORMA FORMA FORMA
1993 1994 1995 1995 1994 1995 1994 1995
----- ----- ----- ----- ------- ------- -------- --------
<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........ 74.2 75.9 76.9 75.4 75.0 76.0 74.8 75.4
----- ----- ----- ----- ------- ------- ------- -------
Gross margin.......... 25.8 24.1 23.1 24.6 25.0 24.0 25.2 24.6
Selling, general and
administrative
expenses............... 22.6 20.4 21.5 20.0 20.8 18.5 19.8 19.3
----- ----- ----- ----- ------- ------- ------- -------
Operating income...... 3.2 3.7 1.6 4.6 4.2 5.5 5.4 5.3
Other expense, net...... 0.3 0.4 0.3 0.4 0.3 0.7 0.3 0.4
----- ----- ----- ----- ------- ------- ------- -------
Income before provision
for income taxes....... 2.9 3.3 1.3 4.2 3.9 4.8 5.1 4.9
Provision for income
taxes.................. 0.7 0.9 0.8 1.7 1.0 4.1 2.0 1.9
----- ----- ----- ----- ------- ------- ------- -------
Income from continuing
operations............. 2.2% 2.4% 0.5% 2.5% 2.9% 0.7% 3.1% 3.0%
===== ===== ===== ===== ======= ======= ======= =======
</TABLE>
PRO FORMA COMBINED RESULTS OF OPERATIONS
NINE MONTHS ENDED DECEMBER 31, 1995 COMPARED TO NINE MONTHS ENDED DECEMBER
31, 1994
Revenues. Revenues for the pro forma Combined Predecessor Companies
increased $10.7 million, or 29.6%, to $46.8 million in the nine months ended
December 31, 1995 ("first nine months of 1996") from $36.1 million in the nine
months ended December 31, 1994 ("first nine months of 1995"). The increase was
primarily attributable to a 28.6% increase in total client service hours
provided to 769,000 hours in the first nine months of 1996 from 598,000 hours
in the first nine months of 1995, and a 0.7% increase in the average hourly
billing rate to $60.52 in the first nine months of 1996 from $60.11 in the
first nine months of 1995. The increase in hours of service was primarily due
to greater utilization of personnel. 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
$236,000 in the first nine months of 1996 from $139,000 in the first nine
months of 1995. Revenues in the first nine months of 1995 also included $1.5
million from the fixed-price hardware and software systems integration
services primarily for governmental organizations which FDSI ceased providing
in 1995 ("FDSI's fixed-price business").
Gross Margin. The pro forma combined gross margin increased $2.4 million, or
26.2%, to $11.5 million in the first nine months of 1996 from $9.1 million in
the first nine months of 1995, primarily as a result of an increase in hours
of service provided to clients. Gross margin as a percentage of pro forma
revenues decreased from 25.2% in the first nine months of 1995 to 24.6% in the
first nine months of 1996, principally due to compensation costs which rose
more rapidly than hourly billing rates due to increased competition for
qualified personnel.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses on a pro forma basis increased $1.9 million, or 26.0%,
to $9.0 million in the first nine months of 1996 from $7.1 million in the
first nine months of 1995. 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, an increase in
professional fees of $60,000 incurred by BFR in connection with the
establishment at the end of 1995 of a qualified retirement plan
16
<PAGE>
for the benefit of its employees (the "BFR Plan") and $449,000 of costs
associated with the opening of two new offices. These cost increases were
offset by a reduction of $533,000 of costs incurred in connection with FDSI's
fixed-price business.
Selling, general and administrative expenses as a percentage of pro forma
revenues were 19.2% for the first nine months of 1996 as compared to 19.8% for
the first nine months of 1995. Pro forma selling, general and administrative
expenses decreased as a percentage of pro forma revenues in the first nine
months of 1996 compared to the first nine months of 1995 primarily due to
greater operating efficiencies and a larger revenue base. The Company cannot
be certain that such efficiencies can be sustained in the near term as it
undertakes to integrate the Founding Companies and engage in activities to
expand geographically and acquire other companies.
PRO FORMA 1995 COMPARED TO HISTORICAL 1995
Revenues. Revenues for the pro forma Combined Predecessor Companies were
$50.0 million for 1995, reflecting revenues of the Combined Predecessor
Companies.
Gross Margin. The pro forma combined gross margin in 1995 was $12.3 million
or 24.6% of pro forma revenues. The increase in pro forma gross margin as a
percentage of pro forma revenues compared to historical 1995 results is
primarily due to the renegotiation of executive compensation arrangements in
connection with the Acquisitions and elimination of retirement fund
contributions since the Company plans to make no such contributions in the
future.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses on a pro forma basis were $10.0 million, or 20.0% of
pro forma revenues, for 1995. This amount reflects a reduction in executive
compensation from historical levels due to the renegotiation of executive
compensation arrangements in connection with the Acquisitions 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 of $1.0 million related to Cotelligent's corporate
operating activities.
Provision for Income Taxes. Pro forma income tax expense has been estimated
at $836,000 for 1995. This amount reflects an effective tax rate of 40.0%,
which represents anticipated federal and state income tax expenses of the
Founding Companies. The Founding Companies operated as separate entities for
tax purposes for all periods presented but will file as a consolidated group
for federal income tax purposes for all periods following consummation of the
Offering.
HISTORICAL COMBINED RESULTS OF OPERATIONS
NINE MONTHS ENDED DECEMBER 31, 1995 COMPARED TO NINE MONTHS ENDED DECEMBER
31, 1994
Revenues. Revenues increased $10.7 million, or 29.6%, to $46.8 million in
the first nine months of 1996 from $36.1 million in the first nine months of
1995. The increase was primarily attributable to a 28.6% increase in total
client service hours provided to 769,000 hours in the first nine months of
1996 from 598,000 hours in the first nine months of 1995, and a 0.7% increase
in the average hourly billing rate to $60.52 in the first nine months of 1996
from $60.11 in the first nine months of 1995. The increase in hours of service
was primarily due to greater utilization of personnel. 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 and
were offset by the absence of $1.5 million of revenue from FDSI's fixed-price
business.
Gross Margin. Gross margin increased $2.2 million, or 24.3%, to $11.2
million in the first nine months of 1996 from $9.0 million in the first nine
months of 1995, primarily as a result of an increase in hours of service
provided to clients. Gross margin as a percentage of revenues decreased from
25.0% in the first nine months of
17
<PAGE>
1995 to 24.0% in the first nine months of 1996, principally due to
compensation costs which rose more rapidly than hourly billing rates due to
increased competition for qualified personnel, a $297,000 contribution made to
the BFR Plan and costs (for which there were no revenues) incurred by FDSI in
the first nine months of 1996 in winding down its fixed-price business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.1 million, or 15.2%, to $8.6 million in
the first nine months of 1996 from $7.5 million in the first nine months of
1995. The increase in absolute dollars was primarily due to increased
compensation to existing staff and staff added to support anticipated growth,
increased occupancy expenses and related operating costs associated with the
Company's growth, a $63,000 contribution made to the BFR Plan, an increase in
professional fees of $60,000 incurred in connection with the establishment of
the BFR Plan and $449,000 of costs associated with the opening of two new
offices. These cost increases were offset by a reduction of $533,000 of costs
incurred relating to FDSI's fixed-price business. Selling, general and
administrative expenses decreased as a percentage of revenues from 20.8% in
the first nine months of 1995 to 18.5% in the first nine months of 1996,
reflecting greater operating efficiencies and a larger revenue base. The
Company cannot be certain that such efficiencies can be sustained in the near
term as it undertakes to integrate the Founding Companies, expand
geographically and acquire other companies.
Interest Expense, Net. Interest expense, net of interest income, increased
$205,000 to $350,000 from $145,000 in the first nine months of 1995,
reflecting increased borrowings under the Company's various bank revolving
credit facilities and $120,000 of interest paid on behalf of the BFR Plan in
order to service such Plan's debt obligation. Such borrowings were required to
support the expansion of the Company's infrastructure.
Provision for Income Taxes. The Company's provision for income taxes
increased $1.5 million to $1.9 million, an effective rate of 83.9%, in the
first nine months of 1996, from $361,000, an effective rate of 25.5%, in the
first nine months of 1995. The increase in the provision for income taxes is
due to an increase in income before taxes to $2.3 million in the first nine
months of 1996 from $1.4 million in the first nine months of 1995 and the
liability of $925,000 recorded in April 1995 due to the termination by BFR of
its S corporation election. The Company expects that its effective statutory
tax rate as of April 1, 1995 will approximate 40%.
1995 COMPARED TO 1994
Revenues. Revenues increased $10.6 million, or 26.9% to $50.0 million in
1995 from $39.4 million in 1994. The increase was attributable to a 27.3%
increase in total client service hours provided to 838,000 in 1995 from
658,000 hours in 1994 and a 2.1% increase in the average hourly billing rate
to $57.24 in 1995 from $56.04 in 1994. The increase in hours of service was
primarily due to greater utilization of personnel. The increase in hourly
billing rate reflects increased demand for employees and consultants with
higher skill levels. The increases discussed above were supplemented by a
slight increase in placement fee revenues and were offset by a decrease of
$639,000 of revenue from $2.3 million in 1994 to $1.6 million in 1995 from
FDSI's fixed-price business.
Gross Margin. Gross margin increased $2.0 million, or 21.6%, to $11.5
million in 1995 from $9.5 million in 1994, primarily as a result of an
increase in hours of service provided to clients. Gross margin as a percentage
of revenues decreased from 24.1% in 1994 to 23.1% in 1995, principally due to
compensation costs which rose more rapidly than hourly billing rates due to
increased competition for qualified personnel, a $704,000 contribution made to
the BFR Plan and an increase in costs relative to revenues in connection with
FDSI's fixed-price business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.7 million, or 33.4%, to $10.7 million in
1995 from $8.0 million in 1994 primarily due to increased compensation to
existing staff, an increase in officers' compensation of $696,000, a $196,000
contribution made to the BFR Plan and an increase from $608,000 to $663,000 in
the costs incurred in connection with FDSI's fixed-price business. The
increase in officers' compensation consists of an increase of $790,000 paid by
BFR in anticipation of the termination of its S corporation election,
increases incurred by CAI and DASI of $81,000 and $51,000,
18
<PAGE>
respectively, and a decrease in officers' compensation incurred by FDSI of
$226,000. Selling, general and administrative expenses increased as a
percentage of revenues to 21.5% in 1995 from 20.4% in 1994, reflecting higher
staffing levels and the factors described above.
Interest Expense, Net. Interest expense, net of interest income, increased
$50,000 to $209,000 in 1995 from $159,000 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
increased $54,000 to $393,000, an effective rate of 63.5%, in 1995 from
$339,000, an effective rate of 26.6%, in 1994. The effective tax rate
increased significantly because little benefit was derived from BFR's
operating loss due to its S corporation election, and no separate company tax
benefit was obtained from Cotelligent's separate company operating loss.
1994 COMPARED TO 1993
Revenues. Revenues increased $8.3 million, or 26.6%, to $39.4 million in
1994 from $31.1 million in 1993. The increase was attributable to an 11.7%
increase in total client service hours provided to 658,000 in 1994 from
589,000 hours in 1993 and a 10.9% increase in the average hourly billing rate
to $56.04 in 1994 from $50.52 in 1993. The increase in hours of service was
primarily due to greater utilization of personnel. The increase in hourly
billing rate reflects increased demand for employees and consultants with
higher skill levels. The increases discussed above were supplemented by an
increase in placement fee revenues generated to $285,000 in 1994 from $75,000
in 1993 and an increase of $1.0 million of revenue from $1.3 million in 1993
to $2.3 million in 1994 relating to FDSI's fixed-price business.
Gross Margin. Gross margin increased $1.5 million, or 18.0%, to $9.5 million
in 1994 from $8.0 million in 1993, primarily as a result of an increase in
hours of service provided to clients. Gross margin as a percentage of revenue
decreased from 25.8% in 1993 to 24.1% in 1994, principally due to a large
fixed-fee project on which BFR generated nominal gross margin and compensation
costs which rose more rapidly than hourly billing rates due to increased
competition for qualified personnel.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.1 million, or 14.5% to $8.1 million in
1994 from $7.0 million in 1993 primarily due to increased compensation to
existing staff, an increase in officers' compensation of $71,000, and an
increase from $561,000 to $608,000 in the costs incurred relating to FDSI's
fixed-price business. The increase in officers' compensation consists of
increases incurred by BFR, CAI and FDSI of $46,000, $10,000, and $182,000,
respectively, and a decrease in officers' compensation incurred by DASI of
$168,000. Selling, general and administrative expenses decreased as a
percentage of revenues to 20.4% in 1994 from 22.6% in 1993, reflecting greater
operating efficiencies and a larger revenue base.
Interest Expense, Net. Interest expense, net of interest income, increased
$38,000 to $159,000 in 1994 from $121,000 in 1993 as a result of increased
borrowings under the Company's various bank revolving credit facilities. Such
borrowings were used to support normal operating needs.
Provision for Income Taxes. The Company's provision for income taxes
increased $128,000 to $339,000, an effective rate of 26.6%, in 1994 from
$211,000, an effective rate of 23.3%, in 1993. The increase in effective rate
is attributable to higher state tax rates and higher income before income tax
expense.
19
<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 of the individual Founding
Companies.
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 60 days of revenue at December 31, 1995 from
67 days of revenue at March 31, 1995. 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 draw upon available cash or
existing credit facilities to finance its operations.
Cash flow provided by operating activities was $1.3 million for the nine
months ended December 31, 1995. The Company has supplemented cash generated by
operations periodically with short-term borrowings under various credit
facilities with banks. The average balance of such borrowings outstanding was
approximately $2.5 million and approximately $1.6 million during the first
nine months of 1996 and 1995, respectively.
At December 31, 1995, the Company had $623,000 in cash and cash equivalents
as compared to $603,000 at March 31, 1995. At December 31, 1995, 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
$4.0 million. Long-term obligations, consisting primarily of notes payable to
officers and capital lease obligations, totaled $727,000 at December 31, 1995
compared to $838,000 at March 31, 1995. The Company had approximately $1.0
million available under bank credit facilities at December 31, 1995. The bank
facilities bear interest at rates ranging from 8-3/4% to 10-3/4% and are
secured by accounts receivable, various assets of the Founding Companies and
are guaranteed by the principals of each of the Founding Companies. The
Company is not in default under any of its credit agreements.
Cotelligent and each of the Founding Companies presently have separate
banking relationships. The Company is currently engaged in discussions with
financial institutions regarding a single banking relationship and credit
facility for the Company. The Company intends to enter into such a banking
relationship and obtain a credit facility as soon as practicable. 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. There is no assurance that any such relationship will ensure that
funds will be available to the Company when, if, or to the extent needed.
As of April 1, 1995, BFR terminated its S corporation election. As a result,
federal and state income taxes of approximately $925,000 are expected to be
paid ratably over the next four years.
The Company believes the remaining 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 twelve months.
20
<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 which operate offices in eight
metropolitan areas including Boston, 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, Microsoft, 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 eight operating offices located in eight states across the
United States and, at December 31, 1995, had a staff of approximately 600,
including approximately 500 technical software professionals. In 1995, Company
employees provided approximately 838,000 hours of technical services for over
150 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]
21
<PAGE>
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, scalable
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.
22
<PAGE>
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
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 OPPORTUNITY
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 1993, 1994 and 1995,
approximately 86.7%, 85.7% and 85.0%, 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 will 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 intends to
operate 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
23
<PAGE>
operations, thereby reducing the quality of services, focus and creativity
provided to clients. Therefore, it is the Company's intent to permit the
Founding Companies, and any subsequently 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
will be managed or provided on a centralized basis. The Company believes that
this approach will enable the Founding Companies and any subsequently acquired
businesses to 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 of the Founding Companies possesses
unique expertise in certain technologies or vertical markets. The Company
intends to foster an environment, structure and communications infrastructure
to enable the Founding Companies, and any additional acquired businesses, to
continually share knowledge, expertise, resources and information. The Company
believes such activities will allow the Founding Companies, and any additional
acquired businesses, 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 the Founding Companies will enable the Company to
continue to focus marketing efforts on clients requiring national service
capabilities. To date, the Company believes that the Founding Companies have
been constrained in their ability to compete effectively for such business
because of their limited geographic scope.
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 will seek 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
24
<PAGE>
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 acquiror
of additional businesses.
While the Company cannot be certain that its acquisition strategy will be
successful, it believes that acquisition opportunities exist. A significant
number of software professional services firms providing applications
consulting and contract services are locally or regionally based
organizations. As competitive pressures increase and as clients continue to
seek national service capabilities, such firms are expected to seek
affiliation with a nationwide organization. Certain of the principals of the
Founding Companies have leadership roles in both national and regional
computer consulting and contract programming professional organizations and
groups, including the National Association of Computer Consultant Businesses.
See "Management." The Company believes that the visibility of these
individuals within such organizations will raise the awareness of the Company
and its strategies, thereby attracting local and regional firms.
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.
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 1995.
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 40,000 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
25
<PAGE>
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.
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,
outplacement agencies and the Company's skills/resume retrieval networks. The
Company maintains a staff of 21 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 and 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 the Founding Companies' separate databases in a manner that
will allow each Founding Company 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
Data Analysis Analysis
As of December 31, 1995, the Company had a staff of approximately 600
employees, including approximately 500 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. See
"Risk Factors--Dependence on Availability of Qualified 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 22 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
26
<PAGE>
opportunity to service a client's needs more quickly and efficiently as well
as providing 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 intends to expand its marketing efforts by coordinating the
Founding Companies' responses to requests for proposals from current clients.
The Company also intends to pursue new client accounts primarily in those
geographic areas presently serviced by the Founding Companies. The Company
believes that its size will create opportunities to more effectively compete
in vendor list selection, large contract programming assignments and project
engagements.
The Company's clients are engaged in a broad spectrum of industries. The
following is a list of certain of the Company's significant clients which
generated revenues in excess of $500,000 in 1995:
Bell Communications Research, Inc. Tandem Computers Inc.
Ortho Diagnostics Systems, Inc. Washington Mutual Inc.
U S West Inc. First Interstate Bank
Liberty Mutual Insurance Company Pacific Bell
Digital Equipment Corp. U S West NewVector Group Inc.
AT&T Apple Computer, Inc.
Information Services International Hewlett-Packard Company
AT&T Wireless (formerly McCaw Cellular TRW Financial Services, Inc.
Communications, Inc.)
Microsoft Corporation
The Company has historically derived a significant percentage of its total
revenue from a relatively small number of clients. In 1995, Bell
Communications Research, Inc. provided 11.0% of the Company's revenues, and
the Company's four largest clients accounted for 30.6% of the Company's
revenue. In 1995, the Company generated 64.1% of its revenue from its top 20
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. See "Risk Factors--Client
Concentration."
OPERATIONS
Through its decentralized management structure, the Company intends to
implement its business strategy by supporting the successful, entrepreneurial
culture of the Founding Companies while at the same time centralizing and
maintaining certain administrative support and planning activities. The
Company believes that by removing administrative and support responsibilities,
the principals of the Founding Companies and future acquired businesses, if
any, will be able to focus more thoroughly on pursuing new business
opportunities.
As an example of the Company's efforts at centralizing administrative and
support activities, in September 1995, the Company's Board of Directors
appointed a Technology Committee to develop plans for integrating the
information systems of the Founding Companies. The technology plan will also
establish the method by which newly acquired businesses, if any, may be
quickly integrated into the Company's communications and information systems.
The Technology Committee is also developing system requirements and
specifications for a Company-wide recruiting management system which, when
implemented, will link the Company's client and consultant skills databases.
27
<PAGE>
Phase one of the technology plan calls for the implementation of both local
and wide area networks linking all of the locations and work stations within
90 days of consummation of the Offering. The Company's system features at that
time will include a Company-wide communications infrastructure. Phase two will
focus on linking other aspects of the Company's technology system, such as its
financial data systems. Longer term, the Company will focus on the selection
and implementation of a common recruiting and sales system utilizing a
distributed database allowing access of all candidate and client information
by all authorized users.
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 acquiror 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 BFR, CAI,
DASI and FDSI are located in six facilities with an aggregate of approximately
34,800 square feet and are leased at aggregate current monthly rents of
approximately $55,000 for terms not expiring before the year 2000. The
Company's remaining six offices aggregate approximately 12,630 square feet and
are leased at aggregate current monthly annual rents of approximately $24,000
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.
28
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers and their ages as of December
31, 1995 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Edward E. Faber(1)(3)... 62 Chairman of the Board
James R. Lavelle........ 44 President and Chief Executive Officer; Director
Michael L. Evans(2)..... 43 Senior Vice President and Chief Operating Officer;
Director
Duane W. Bell........... 44 Senior Vice President, Chief Financial Officer and
Secretary
Daniel E. Jackson....... 35 Senior Vice President, Corporate Development and
General Counsel
Daniel M. Beals......... 44 Director
Jeffrey J.
Bernardis(2)........... 39 Director
Linda M. Cassell (2).... 47 Director
John E. Chamberlain..... 54 Director
Anthony M.
Frank(1)(2)(3)......... 64 Director
B. Tom Green(1)(2)(3)... 53 Director
Bjorn E. Nordemo........ 53 Director
Harvey L. Poppel(1)(2).. 57 Director
</TABLE>
- --------
(1) Member of the Audit Committee
(2) Member of the Executive Committee
(3) Member of the Compensation Committee
Edward E. Faber is Chairman of the Board of Directors of the Company. Mr.
Faber has served in that capacity since August 1995, having joined the Company
as a director in March 1993. 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.
James R. Lavelle is the founder and President, Chief Executive Officer and a
director of the Company. Mr. Lavelle has served in these capacities 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. 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.
Michael L. Evans is Senior Vice President and Chief Operating Officer and a
director of the Company. Mr. Evans has served as Senior Vice President and
Chief Operating Officer since September 1995 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 and, since 1987, has served as its President.
Mr. Evans has a bachelor of science degree from Washington State University.
29
<PAGE>
Duane W. Bell is Senior Vice President, Chief Financial Officer and
Secretary of the Company. Mr. Bell has served in these capacities since July
1995. In 1994, Mr. Bell served as Senior Vice President--Finance and
Operations for Discovery Toys, Inc., an international distributor of
educational and developmental children's products. From 1992 through 1993, he
was Executive Director of the law firm of Buchalter, Nemer, Fields & Younger
in Los Angeles, California. From 1988 to 1992, Mr. Bell served as Corporate
Vice President, Chief Financial Officer and Secretary of The Failure Group
Inc., an engineering consulting firm. From 1974 to 1988, he was affiliated
with the international accounting firm, KPMG Peat Marwick LLP, the last five
years of which as a partner. Mr. Bell is a Certified Public Accountant and
received his bachelor of science degree in accounting from Illinois State
University.
Daniel E. Jackson is Senior Vice President, Corporate Development and
General Counsel of the Company. Mr. Jackson has served in these capacities
since September 1995. 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 industry consolidation 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.
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 FDSI from its
inception to 1987 and, from 1990 until consummation of the Offering, 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. 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 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 had worked at Pacific Bell as a
systems programmer and technical analyst. 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.
30
<PAGE>
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.
Bjorn E. Nordemo is a director of the Company. He joined the Company in that
capacity in December 1994. From 1977 to 1981, Mr. Nordemo was President of
DASI. From 1981 until consummation of the Offering, Mr. Nordemo served as Vice
President and Treasurer of DASI. Mr. Nordemo is a founder, past President,
past Chairman and current member of the board of directors of the NACCB, and
is a founder and past President of the NACCB's New England Chapter.
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.
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 Nordemo; 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."
DIRECTOR COMPENSATION
Directors who are employees of the Company do not receive additional
compensation for serving as directors. 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 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.
EXECUTIVE COMPENSATION
The Company was incorporated in February 1993 and conducted limited
operations and generated no revenue prior to the consummation of the Offering.
The Company anticipates that during 1996 its most highly compensated officers
will be Mr. Lavelle, Mr. Bell, Mr. Evans and Mr. Jackson (collectively, the
"named executive officers"). Each named executive officer has entered into an
employment agreement with the Company
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<PAGE>
providing for an annual base salary of $150,000. See "Management--Employment
Agreements; Covenants-Not-To-Compete." Pursuant to such employment agreements,
each such officer is eligible to earn additional 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. In addition, certain of the principals of the
Founding Companies who did not become executive officers of the Company upon
consummation of the Acquisitions and the Offering remain executive officers of
one of the Founding Companies. Each of such individuals entered into an
employment agreement with such Founding Company effective upon consummation of
the Acquisitions and the Offering, with a base compensation not to exceed
$150,000 per annum. The 1995 compensation for certain of such individuals, and
for Mr. Lavelle, the Company's Chief Executive Officer, is set forth in the
table below.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------------------- --------------------
RESTRICTED
STOCK OPTIONS/ ALL OTHER
NAME AND POSITION YEAR SALARY($) BONUS ($) OTHER($) AWARD(S)(#) SARS(#) COMPENSATION($)
- ----------------- ---- --------- --------- -------- ----------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
James R. Lavelle,
President and Chief
Executive Officer...... 1995 122,133 0 0 0 0 0
Charles F. Fowler, Vice
President, Chief
Financial Officer of
BFR.................... 1995 123,500 370,800(1) 40,000(2) 0 0 20,625(3)
Bernard J. Ruddock, Vice
President of BFR....... 1995 106,000 309,000(1) 40,000(2) 0 0 23,195(3)
Jeffrey J. Bernardis,
President of BFR....... 1995 106,000 309,000(1) 40,000(2) 0 0 23,080(3)
John E. Chamberlain,
President of CAI....... 1995 120,000 133,220 8,306(4) 0 0 0
</TABLE>
- --------
(1) The bonus amounts reflect distributions made by BFR to its stockholders in
connection with the termination of BFR's S corporation election effective
as of April 1, 1995.
(2) Represents annual fee paid for services as a member of BFR's board of
directors.
(3) Represents allocations made to the named executives under the BFR Plan.
(4) Represents payments made for a company car.
EMPLOYMENT AGREEMENTS; COVENANTS-NOT-TO-COMPETE
Messrs. Lavelle, Evans, Bell and Jackson, and each of the individuals named
in the table above, 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
32
<PAGE>
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.
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 exercisable
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 exercisable for a period of ten years from the
effective date of grant. See "Management--Director Compensation." In addition,
effective January 12, 1996, certain employees of the Founding Companies were
granted options to acquire an aggregate of 200,000 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). Such options vest over a four-
year period commencing on the one year anniversary of the date of grant and
are exercisable for a period of seven years from the effective date of grant.
33
<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 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. The Company has agreed to use its best efforts to, and expects to be
able to, have the personal guarantees of the balance of this indebtedness
released by August 15, 1996. In the event that any such personal guarantee
cannot be released by such date, the Company has agreed to repay the balance
of the related indebtedness. It is also the Company's intention to obtain, as
soon as practicable, a consolidated line or lines of credit at the parent
company level to finance day to day operations and the expansion of the
business of the Company. The Company is currently in active negotiations with
a number of lenders in respect of such a line of credit. If the Company
obtains a consolidated line or lines of credit, it may refinance all or a
portion of such $2.8 million of indebtedness, but would not do so at terms
less favorable than current terms.
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
34
<PAGE>
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 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 $2,035,714.32.
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 $2,035,714.32. 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 cancelled 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
cancelled 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 repayed
these loans in full, including all accumulated but unpaid interest. In
addition, as of December 31, 1995, CyberSAFE Corporation, formerly a
35
<PAGE>
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.
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.
36
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain 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>
Michael L. Evans........................................ 348,147 5.6%
Daniel M. Beals......................................... 331,949 5.3
John E. Chamberlain(1).................................. 271,529 4.4
Charles F. Fowler....................................... 243,423 3.9
James R. Lavelle........................................ 238,732 3.8
Bjorn E. Nordemo........................................ 226,522 3.6
Jeffrey J. Bernardis.................................... 222,020 3.5
Bernard J. Ruddock...................................... 222,020 3.5
Linda M. Cassell(2)..................................... 135,767 2.2
B. Tom Green(3)......................................... 87,847 1.4
Edward E. Faber(3)...................................... 39,656 *
Anthony M. Frank(3)..................................... 39,656 *
Daniel E. Jackson(4).................................... 24,097 *
Harvey L. Poppel(3)..................................... 24,828 *
Duane W. Bell(4)........................................ 20,761 *
All executive officers and directors as a group
(13 persons)(5)........................................ 2,011,511 32.0
</TABLE>
- --------
* less than 1.0%
(1) 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.
(2) 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.
(3) Includes 10,000 shares issuable upon exercise of options exercisable within
60 days from March 1, 1996.
(4) Includes 18,536 shares issuable upon exercise of options exercisable within
60 days from March 1, 1996.
(5) Includes 77,072 shares issuable upon exercise of options exercisable within
60 days from March 1, 1996.
37
<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 March 1, 1996,
the Company had outstanding 6,216,305 shares of Common Stock and no shares of
Preferred Stock. As of April 4, 1996, there were 37 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
38
<PAGE>
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 (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.
39
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The Company has outstanding 6,216,305 shares of Common Stock. The 2,725,500
shares sold in the Offering are freely tradeable without restriction unless
purchased 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 acquiror 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 Company and its officers and directors and the Selling Stockholder have
agreed not to sell or otherwise dispose of any shares of Common Stock for a
period of 180 days after February 14, 1996 without the prior written consent
of Volpe, Welty & Company, except that the Company may issue Common Stock in
connection with acquisitions or upon the exercise of currently outstanding
options. In addition, 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 President 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 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 2,500,000 shares being offered by this Prospectus will generally be
freely tradeable 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 combined financial statements of the Combined Predecessor Companies, the
consolidated financial statements of FDSI, the financial statements of BFR,
the combined financial statements of DASI, the financial statements of CAI and
the financial statements of Cotelligent at March 31, 1994 and 1995 and for
each of the three years in the period ended March 31, 1995 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.
40
<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.
41
<PAGE>
COTELLIGENT GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COTELLIGENT GROUP, INC. PRO FORMA COMBINED COMPANIES
Introduction to Pro Forma Financial Information.......................... F-3
Pro Forma Combined Balance Sheet at December 31, 1995 (Unaudited)........ F-4
Pro Forma Combined Statement of Operations for the Year Ended March 31,
1995 (Unaudited)........................................................ F-5
Pro Forma Combined Statement of Operations for the Nine Months Ended
December 31, 1994 (Unaudited)........................................... F-6
Pro Forma Combined Statement of Operations for the Nine Months Ended
December 31, 1995 (Unaudited)........................................... F-7
Notes to Pro Forma Combined Financial Statements (Unaudited)............. F-8
COMBINED PREDECESSOR COMPANIES
Report of Price Waterhouse LLP, Independent Accountants.................. F-10
Balance Sheet as of March 31, 1994 and 1995 and December 31, 1995
(Unaudited)............................................................. F-11
Statement of Operations for the Years Ended March 31, 1993, 1994 and
1995, and for the Nine Months Ended December 31, 1994 (Unaudited) and
1995 (Unaudited)........................................................ F-12
Statement of Stockholders' Equity for the Years Ended March 31, 1993,
1994 and 1995 and for the Nine Months Ended December 31, 1995
(Unaudited)............................................................. F-13
Statement of Cash Flows for the Years Ended March 31, 1993, 1994 and 1995
and for the Nine Months Ended December 31, 1994 (Unaudited) and December
31, 1995 (Unaudited).................................................... F-14
Notes to Financial Statements............................................ F-15
FINANCIAL DATA SYSTEMS, INC.
Report of Price Waterhouse LLP, Independent Accountants.................. F-26
Consolidated Balance Sheet as of March 31, 1994 and 1995 and December 31,
1995 (Unaudited)........................................................ F-27
Consolidated Statement of Operations for the Years Ended March 31, 1993,
1994 and 1995, and for the Nine Months Ended December 31, 1994
(Unaudited) and 1995 (Unaudited)........................................ F-28
Consolidated Statement of Stockholders' Equity for the Years Ended March
31, 1993, 1994 and 1995 and for the Nine Months Ended December 31, 1995
(Unaudited)............................................................. F-29
Consolidated Statement of Cash Flows for the Years Ended March 31, 1993,
1994 and 1995 and for the Nine Months Ended December 31, 1994
(Unaudited) and December 31, 1995 (Unaudited)........................... F-30
Notes to Financial Statements............................................ F-31
BFR CO., INC.
Report of Price Waterhouse LLP, Independent Accountants.................. F-39
Balance Sheet as of March 31, 1994 and 1995 and December 31, 1995
(Unaudited)............................................................. F-40
Statement of Operations for the Years Ended March 31, 1993, 1994 and
1995, and for the Nine Months Ended December 31, 1994 (Unaudited) and
1995 (Unaudited)........................................................ F-41
Statement of Stockholders' Equity for the Years Ended March 31, 1993,
1994 and 1995 and for the Nine Months Ended December 31, 1995
(Unaudited)............................................................. F-42
Statement of Cash Flows for the Years Ended March 31, 1993, 1994 and 1995
and for the Nine Months Ended December 31, 1994 (Unaudited) and December
31, 1995 (Unaudited).................................................... F-43
Notes to Financial Statements............................................ F-44
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DATA ARTS & SCIENCES, INC.
Report of Price Waterhouse LLP, Independent Accountants.................. F-50
Combined Balance Sheet as of March 31, 1994 and 1995 and December 31,
1995 (Unaudited)........................................................ F-51
Combined Statement of Operations for the Years Ended March 31, 1993, 1994
and 1995, and for the Nine Months Ended December 31, 1994 (Unaudited)
and 1995 (Unaudited).................................................... F-52
Combined Statement of Stockholders' Equity for the Years Ended March 31,
1993, 1994 and 1995 and for the Nine Months Ended December 31, 1995
(Unaudited) ............................................................ F-53
Combined Statement of Cash Flows for the Years Ended March 31, 1993, 1994
and 1995 and for the Nine Months Ended December 31, 1994 (Unaudited) and
December 31, 1995 (Unaudited)........................................... F-54
Notes to Financial Statements............................................ F-55
CHAMBERLAIN ASSOCIATES, INC.
Report of Price Waterhouse LLP, Independent Accountants.................. F-62
Balance Sheet as of March 31, 1994 and 1995 and December 31, 1995
(Unaudited)............................................................. F-63
Statement of Operations for the Years Ended March 31, 1993, 1994 and
1995, and for the Nine Months Ended December 31, 1994 (Unaudited) and
1995 (Unaudited)........................................................ F-64
Statement of Stockholders' Equity for the Years Ended March 31, 1993,
1994 and 1995 and for the Nine Months Ended December 31, 1995
(Unaudited)............................................................. F-65
Statement of Cash Flows for the Years Ended March 31, 1993, 1994 and 1995
and for the Nine Months Ended December 31, 1994 (Unaudited) and December
31, 1995 (Unaudited).................................................... F-66
Notes to Financial Statements............................................ F-67
COTELLIGENT GROUP, INC.
Report of Price Waterhouse LLP, Independent Accountants.................. F-71
Balance Sheet as of March 31, 1994 and 1995 and December 31, 1995
(Unaudited)............................................................. F-72
Statement of Operations for the Years Ended March 31, 1993, 1994 and
1995, and for the Nine Months Ended December 31, 1994 (Unaudited) and
1995 (Unaudited)........................................................ F-73
Statement of Stockholders' Equity for the Years Ended March 31, 1993,
1994 and 1995 and for the Nine Months Ended December 31, 1995
(Unaudited)............................................................. F-74
Statement of Cash Flows for the Years Ended March 31, 1993, 1994 and 1995
and for the Nine Months Ended December 31, 1994 (Unaudited) and December
31, 1995 (Unaudited).................................................... F-75
Notes to Financial Statements............................................ F-76
</TABLE>
F-2
<PAGE>
COTELLIGENT GROUP, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
Cotelligent Group, Inc. (Cotelligent or the Company) was formed to create a
professional services firm devoted primarily to providing computer consulting
and contract programming services. On February 20, 1996, Cotelligent merged
with four companies (the Acquisitions): 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
the Cotelligent's Common Stock concurrently with the consummation of an
initial public offering (the Offering) of such Common Stock. The following
unaudited pro forma combined financial statements give effect to the
Acquisitions.
The unaudited pro forma combined balance sheet gives effect to the
Acquisitions, as if the Acquisitions had occurred as of December 31, 1995 and
reflects as a liability the cash consideration to be paid to the stockholders
of the Founding Companies. The Acquisitions will be recorded at predecessor
cost because the owners of the Founding Companies are considered promoters.
The unaudited pro forma balance sheet also presents, as supplemental pro forma
information, the effect of the issuance of common stock pursuant to this
Offering. The unaudited pro forma combined statements of operations present
pro forma results from operations for the year ended March 31, 1995 and for
the nine months ended December 31, 1994 and 1995, in each case as if the
Acquisitions had occurred on April 1, 1994.
Unaudited pro forma adjustments are based upon historical information,
preliminary estimates and certain assumptions management deems appropriate.
The unaudited pro forma combined financial data 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 combined financial statements should be
read in conjunction with the other financial statements and notes thereto
appearing elsewhere in the Prospectus.
F-3
<PAGE>
COTELLIGENT GROUP, INC.
PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED
PREDECESSOR PRO FORMA PRO FORMA SUPPLEMENTAL SUPPLEMENTAL
COMPANIES ADJUSTMENTS COMBINED ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equiva-
lents................ $ 623,169 $ -- $ 623,169 $20,301,435 (c) $14,496,632
(3,491,951)(e)
(540,000)(g)
(2,396,021)(d)
Accounts receivable... 9,796,419 9,796,419 9,796,419
Due from related par-
ty................... 133,525 133,525 133,525
Deferred income tax-
es................... 14,081 14,081 14,081
Prepaid expenses and
other current
assets............... 269,503 269,503 269,503
----------- ----------- ----------- ----------- -----------
Total current as-
sets............... 10,836,697 10,836,697 13,873,463 24,710,160
----------- ----------- ----------- ----------- -----------
Property and equipment,
net.................... 675,417 675,417 675,417
Deferred transaction
costs.................. 2,403,979 2,403,979 (2,403,979)(d) --
Other assets............ 518,103 518,103 518,103
----------- ----------- ----------- ----------- -----------
Total assets........ $14,434,196 $ -- $14,434,196 $11,469,484 $25,903,680
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term debt,
including notes
payable to related
parties of $100,000.. $ 3,963,602 $ $ 3,963,602 $ (100,000)(g) $ 1,827,888
(2,035,714)(f)
Accounts payable...... 2,212,622 2,212,622 (1,800,000)(d) 412,622
Accrued compensation.. 2,469,543 2,469,543 2,469,543
Accrued payroll lia-
bilities............. 455,643 455,643 455,643
Income taxes payable.. 622,120 622,120 622,130
Deferred income tax-
es................... 203,487 203,487 203,487
Other accrued liabili-
ties................. 589,325 589,325 589,325
Pro forma distribution
to the Founding Com-
panies'
stockholders......... 3,491,951 (a) 3,491,951 (3,491,951)(e) --
----------- ----------- ----------- ----------- -----------
Total current lia-
bilities........... 10,516,342 3,491,951 14,008,293 (7,427,665) 6,580,628
----------- ----------- ----------- ----------- -----------
Long-term debt, includ-
ing notes
payable to related par-
ties of $440,000....... 727,182 727,182 (440,000)(g) 287,182
Deferred income taxes... 953,500 953,500 -- 953,500
Other long-term liabili-
ties................... 36,136 36,136 -- 36,136
Stockholders' equity
(deficit):
Preferred stock....... 82,614 (82,614)(b) -- --
Common stock.......... 117,950 (75,907)(b) 37,908 24,255 (c) 62,163
Additional paid-in
capital.............. 530,895 3,607,007 (b) 4,844,614 20,277,180 (c) 18,629,843
(3,000,000)(d)
(3,491,951)(e)
Retained earnings
(accumulated
deficit)............. 3,505,291 (3,448,486)(b) (645,772) -- (645,772)
Less: unearned ESOP
shares............... (2,035,714) -- (2,035,714) 2,035,714 (f) --
Pro forma distribution
to the Founding Com-
panies'
stockholders......... (3,491,951)(a) (3,491,951) 3,491,951 (e) --
----------- ----------- ----------- ----------- -----------
Total stockholders'
equity (deficit)... 2,201,036 (3,491,951) (1,290,915) 19,337,149 18,046,234
----------- ----------- ----------- ----------- -----------
Total liabilities
and stockholders'
equity (deficit)... $14,434,196 $ -- $14,434,196 $10,134,647 $25,903,680
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-4
<PAGE>
COTELLIGENT GROUP, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED MARCH 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED
PREDECESSOR PRO FORMA PRO FORMA
COMPANIES ADJUSTMENTS COMBINED
----------- ----------- -----------
<S> <C> <C> <C>
Revenues.......................... $50,028,639 $ -- $50,028,639
Cost of services.................. 38,488,220 (66,233)(h) 37,718,187
-- (703,800)(i) --
----------- ----------- -----------
Gross margin.................... 11,540,419 770,033 12,310,452
Selling, general and
administrative expenses.......... 10,743,231 (504,982)(h) 10,042,049
-- (196,200)(i) --
----------- ----------- -----------
Operating income................ 797,188 1,471,215 2,268,403
Other (income) expense:
Interest expense................ 246,508 -- 246,508
Interest income................. (37,336) -- (37,336)
Other........................... (29,866) -- (29,866)
----------- ----------- -----------
Total other expense........... 179,306 -- 179,306
----------- ----------- -----------
Income before provision for income
taxes............................ 617,882 1,471,215 2,089,097
Provision for income taxes........ 392,565 443,074 (j) 835,639
----------- ----------- -----------
Income from continuing opera-
tions............................ $ 225,317 $ 1,028,141 $ 1,253,458
=========== =========== ===========
Net income from continuing
operations per share............. $ .28
===========
Weighted average shares
outstanding...................... 4,400,215(k)
===========
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-5
<PAGE>
COTELLIGENT GROUP, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED
PREDECESSOR PRO FORMA PRO FORMA
COMPANIES ADJUSTMENTS COMBINED
----------- ----------- -----------
<S> <C> <C> <C>
Revenues........................... $36,087,634 $ -- $36,087,634
Cost of services................... 27,059,087 (81,602)(h) 26,977,485
----------- -------- -----------
Gross margin...................... 9,028,547 81,602 9,110,149
Selling, general and administrative
expenses.......................... 7,493,821 (349,945)(h) 7,143,876
----------- -------- -----------
Operating income.................. 1,534,726 431,547 1,966,273
Other (income) expense:
Interest expense................. 173,330 -- 175,330
Interest income.................. (28,439) -- (28,439)
Other............................ (22,421) -- (22,421)
----------- -------- -----------
Total other expense............ 122,470 -- 122,470
----------- -------- -----------
Income before provision for income
taxes............................. 1,412,256 431,547 1,843,803
Provision for income taxes......... 360,659 376,862 (j) 737,521
----------- -------- -----------
Income from continuing operations.. $ 1,051,597 $ 54,685 $ 1,106,282
=========== ======== ===========
Net income from continuing opera-
tions per share................... $ .25
===========
Weighted average shares outstand-
ing............................... 4,400,215(k)
===========
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-6
<PAGE>
COTELLIGENT GROUP, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED
PREDECESSOR PRO FORMA PRO FORMA
COMPANIES ADJUSTMENTS COMBINED
------------ ----------- ------------
<S> <C> <C> <C>
Revenues........................ $ 46,776,238 $ -- $ 46,776,238
Cost of services................ 35,557,810 11,032 (h) 35,272,022
-- (296,820)(i) --
------------ ----------- ------------
Gross margin.................. 11,218,428 285,788 11,504,216
Selling, general and
administrative expenses........ 8,630,310 436,749 (h) 9,004,358
-- (62,701)(i) --
------------ ----------- ------------
Operating income.............. 2,588,118 (88,260) 2,499,858
Other (income) expense:
Interest expense.............. 387,382 (120,479)(i) 266,903
Interest income............... (36,956) -- (36,956)
Other......................... (40,281) -- (40,281)
------------ ----------- ------------
Total other expense......... 310,145 (120,479) 189,666
------------ ----------- ------------
Income before provision for in-
come taxes..................... 2,277,973 32,219 2,310,192
Provision for income taxes...... 1,910,996 (986,919)(j) 924,077
------------ ----------- ------------
Net income...................... $ 366,977 $ 1,019,138 $ 1,386,115
============ =========== ============
Net income per share............ $ .32
============
Weighted average shares
outstanding.................... 4,400,215(k)
============
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-7
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED)
UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
1. Adjustments to reflect the Acquisitions of the Founding Companies including
(reference is made to page 12 of this Prospectus for the aggregate
consideration being paid to acquire each of the Founding Companies):
(a) Recognition of the cash portion of the consideration to be paid to the
stockholders of the Founding Companies as a liability.
(b) Reclassification of certain components of stockholders' equity
(preferred stock, common stock, additional paid-in capital and retained
earnings) of the acquired Founding Companies so as to appropriately present
these components of stockholders' equity of Cotelligent immediately subsequent
to the Mergers, as follows:
<TABLE>
<CAPTION>
PRIOR TO MERGERS SUBSEQUENT TO MERGERS
----------------- ----------------------
<S> <C> <C>
Preferred stock................ $ 82,614 --
Common stock................... 117,950 $ 37,908 (1)
Additional paid-in capital..... 530,895 4,844,614
Retained earnings (accumulated
deficit)...................... 3,505,291 (645,772)(2)
---------- ----------
Total........................ $4,236,750 $4,236,750
========== ==========
</TABLE>
- --------
(1) Reflects the common stock of Cotelligent, including 621,000 shares
outstanding prior to the Offering and the issuance of 3,169,805 shares to
the stockholders of the Founding Companies, at $0.01 par value.
(2) Represents the accumulated deficit of Cotelligent at December 31, 1995.
2. Adjustments to reflect the issuance of common stock and the proceeds raised
by the Offering as follows:
(c) Issuance of 2,425,500 shares of common stock and the receipt of the
proceeds raised from the Offering, net of underwriting discount.
(d) The payment of offering expenses and reclassification of related
deferred transaction costs.
(e) The use of a portion of the net proceeds to pay the cash portion of the
consideration to be paid to the stockholders of the Founding Companies.
(f) Repayment of the ESOP liability by the Selling Shareholder and the
related elimination of unearned ESOP shares.
(g) The use of a portion of the proceeds to reduce certain debt.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS
(h) Adjustment to reflect the reduction in compensation to former owners and
employees ($1,571,215, $1,181,547, and $302,219 for the year ended March 31,
1995 and for the nine months ended December 31, 1994 and 1995, respectively,)
as a result of the renegotiation of executive compensation arrangements and
the termination of contributions to employee benefit plans made in conjunction
with the transaction. These reductions are offset by increased expenses for
corporate operating activities ($1,000,000 for the year ended March 31, 1995
and $750,000 for each of the nine month periods ended December 31, 1994 and
1995) related to the newly formed public entity.
(i) Adjustment to eliminate $900,000 and $480,000 of expense recorded in
connection with BFR's Employee Stock Ownership and Money Purchase Plan for the
year ended March 31, 1995 and the nine months ended December 31, 1995,
respectively. This Plan will be converted to a profit sharing plan as part of
this transaction, and no future contributions will be made.
F-8
<PAGE>
(j) Adjustment to calculate the provision for income taxes on the combined
pro forma results at the effective statutory tax rates (40%).
(k) The weighted average shares outstanding used to calculate pro forma
earnings per share is based on the estimated average number of shares of common
stock of the pro forma combined company outstanding during the period
calculated as follows:
<TABLE>
<S> <C>
Shares issued by Cotelligent Group prior to the Offering......... 621,000
Shares issued to the stockholders of the Founding Companies...... 3,169,805
Shares issued in the Offering to cover the cash portion of the
purchase price to be paid in connection with the acquisitions of
the Founding Companies.......................................... 479,664
Dilution attributable to options to purchase 185,352 shares of
common stock granted at $2.70 per share, using the Offering
price of $9.00 per share in applying the treasury stock method.. 129,746
---------
4,400,215
=========
</TABLE>
F-9
<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 their cash flows for each of the three years in the
period ended March 31, 1995, 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
November 10, 1995, except as to Note 15 which is as of November 29, 1995
F-10
<PAGE>
COMBINED PREDECESSOR COMPANIES
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1995
MARCH 31, MARCH 31, DECEMBER 31, PRO FORMA
1994 1995 1995 COMBINED
---------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents... $ 230,133 $ 602,752 $ 623,169 $ 623,169
Accounts receivable, less
allowance for doubtful
accounts of $45,000,
$40,000 and $40,000,
respectively............... 7,086,545 9,202,012 9,796,419 9,976,419
Due from related party...... 111,877 133,525 133,525
Deferred income taxes....... 64,081 14,081 14,081 14,081
Net assets of discontinued
business................... 483,630 -- -- --
Prepaid expenses and other
current assets............. 294,823 196,416 269,503 269,503
---------- ----------- ----------- -----------
Total current assets...... 8,159,212 10,127,138 10,836,697 10,836,697
---------- ----------- ----------- -----------
Property and equipment, net... 475,958 525,280 675,417 675,417
Deferred income taxes......... 11,341 12,599 -- --
Deferred transaction costs.... -- -- 2,403,979 2,403,979
Other assets.................. 289,574 382,773 518,103 518,103
---------- ----------- ----------- -----------
Total assets.............. $8,936,085 $11,047,790 $14,434,196 $14,434,196
========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Short-term debt, including
notes payable to related
party of $441,500, $441,500
and $100,000 respectively.. $1,406,364 $ 2,414,852 $ 3,963,602 $ 3,963,602
Accounts payable............ 764,286 683,547 2,212,622 2,212,622
Accrued compensation........ 1,202,905 1,434,673 2,469,543 2,469,543
Accrued payroll
liabilities................ 159,865 836,972 455,643 455,643
Income taxes payable........ -- 81,890 622,120 622,120
Deferred income taxes....... 369,147 453,487 203,487 203,487
Other accrued liabilities... 450,876 600,314 589,325 589,325
Pro forma distribution to
the Founding Companies'
stockholders............... -- -- -- 3,491,951
---------- ----------- ----------- -----------
Total current
liabilities.............. 4,353,443 6,505,735 10,516,342 14,008,293
---------- ----------- ----------- -----------
Long-term debt, including
notes payable to related
parties of $440,000, $440,000
and $440,000, respectively... 944,218 837,662 727,182 727,182
Deferred income taxes......... 106,700 72,000 953,500 953,500
Other long-term liabilities... -- -- 36,136 36,136
Commitments and contingencies
(Notes 8 and 11)............. -- -- -- --
Stockholders' equity:
Preferred stock............. 71,338 68,614 82,614 --
Common stock................ 113,108 116,165 117,950 37,908
Additional paid-in capital.. 125,683 288,555 530,895 4,844,614
Retained earnings........... 3,221,595 3,159,059 3,505,291 (645,772)
Less: Unearned ESOP shares.. -- -- (2,035,714) (2,035,714)
Pro forma distribution to
the Founding Companies'
stockholders............... -- -- -- (3,491,951)
---------- ----------- ----------- -----------
Total stockholders'
equity................... 3,531,724 3,632,393 2,201,036 (1,290,915)
---------- ----------- ----------- -----------
Total liabilities and
stockholders' equity..... $8,936,085 $11,047,790 $14,434,196 $14,434,196
========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-11
<PAGE>
COMBINED PREDECESSOR COMPANIES
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEAR ENDED MARCH 31, ENDED DECEMBER 31,
------------------------------------- ------------------------
1993 1994 1995 1994 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $31,137,839 $39,434,234 $50,028,639 $36,087,634 $46,776,238
Cost of services........ 23,090,319 29,940,654 38,488,220 27,059,087 35,557,810
----------- ----------- ----------- ----------- -----------
Gross margin........ 8,047,520 9,493,580 11,540,419 9,028,547 11,218,428
Selling, general and
administrative
expenses............... 7,034,412 8,055,171 10,743,231 7,493,821 8,630,310
----------- ----------- ----------- ----------- -----------
Operating income.... 1,013,108 1,438,409 797,188 1,534,726 2,588,118
Other (income) expense:
Interest expense...... 151,055 194,363 246,508 173,330 387,382
Interest income....... (30,527) (35,748) (37,336) (28,439) (36,956)
Other................. (11,386) 6,961 (29,866) (22,421) (40,281)
----------- ----------- ----------- ----------- -----------
Total other
expense............ 109,142 165,576 179,306 122,470 310,145
----------- ----------- ----------- ----------- -----------
Income before provision
for income taxes....... 903,966 1,272,833 617,882 1,412,256 2,277,973
Provision for income
taxes.................. 210,797 339,103 392,565 360,659 1,910,996
----------- ----------- ----------- ----------- -----------
Income (loss) from
continuing operations.. 693,169 933,730 225,317 1,051,597 366,977
Loss from operations of
discontinued business
(net of applicable
income tax benefit of
$98,900, $159,700,
$80,100 and $80,100,
respectively).......... (256,754) (284,560) (184,004) (184,004) --
----------- ----------- ----------- ----------- -----------
Net income.............. $ 436,415 $ 649,170 $ 41,313 $ 867,593 $ 366,977
=========== =========== =========== =========== ===========
Unaudited Pro Forma
Information (Note 14):
Pro forma income
before provision for
income taxes......... $ 903,966 $ 1,272,833 $ 617,882 $ 1,412,256 $ 2,277,573
Pro forma provision
for income taxes..... 328,196 565,975 333,485 614,051 978,256
----------- ----------- ----------- ----------- -----------
Income from continuing
operations........... 575,770 706,858 284,397 798,205 1,299,717
Loss from operations
of discontinued
business (net of
applicable income
taxes)............... (256,754) (284,560) (184,004) (184,004) --
----------- ----------- ----------- ----------- -----------
Pro forma net income.. $ 319,016 $ 422,298 $ 100,393 $ 614,201 $ 1,299,717
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-12
<PAGE>
COMBINED PREDECESSOR COMPANIES
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL UNEARNED TOTAL
---------------- ------------------- PAID-IN RETAINED ESOP STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SHARES EQUITY
------- ------- --------- -------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31,
1992................... 98,879 $36,359 1,010,430 $105,793 $ 24,500 $2,136,010 $ -- $ 2,302,662
Issuance of common
stock.................. -- -- 320,657 865 24,135 -- -- 25,000
Issuance of preferred
stock charged to
compensation expense... 1,516 23,877 -- -- -- -- -- 23,877
Net income.............. -- -- -- -- -- 436,415 -- 436,415
------- ------- --------- -------- -------- ---------- ----------- -----------
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............... -- -- -- -- -- (20,745) -- (20,745)
Redistribution of
capital for stock
dividend............... -- -- -- 4,297 (4,297) -- -- --
Issuance of common
stock.................. -- -- 120,478 1,205 365,895 -- -- 367,100
Issuance of preferred
stock.................. 400 14,000 -- -- -- -- -- 14,000
Repurchase of common
stock.................. -- -- (74,240) (3,717) (119,258) -- -- (122,975)
Purchase of ESOP
shares................. -- -- -- -- -- -- (3,150,000) (3,150,000)
Release of unearned
shares to ESOP......... -- -- -- -- -- -- 1,114,286 1,114,286
Net income.............. -- -- -- -- -- 366,977 -- 366,977
------- ------- --------- -------- -------- ---------- ----------- -----------
Balance at December 31,
1995 (unaudited)....... 99,332 $82,614 1,596,723 $117,950 $530,895 $3,505,291 $(2,035,714) $ 2,201,036
======= ======= ========= ======== ======== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-13
<PAGE>
COMBINED PREDECESSOR COMPANIES
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------------- ------------------------
1993 1994 1995 1994 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............. $ 436,415 $ 649,170 $ 41,313 $ 867,593 $ 366,977
Adjustments to
reconcile net income
to net cash provided
by (used in) operating
activities:
Depreciation and
amortization.......... 192,656 177,641 186,370 140,041 127,111
Loss (gain) on disposal
of property and
equipment............. 2,250 2,176 655 (265,716) 644,099
Deferred income taxes,
net................... (731) (26,751) 98,382 -- 14,000
Preferred stock issued
and charged to
compensation.......... 23,877 9,425 -- -- (22,719)
Changes in current
assets and
liabilities:
Accounts receivable... (1,527,736) (1,685,432) (2,190,397) (459,805) (594,407)
Prepaid expenses and
other current
assets............... (775) (42,653) 117,378 (93,553) (5,165)
Accounts payable and
accrued expenses..... 883,331 500,477 977,574 1,353,222 432,577
Income taxes payable.. 17,189 (81,602) 108,525 547,755 540,230
Changes in other
assets................ (25,940) (25,463) (69,346) (50,000) (200,499)
----------- ----------- ----------- ---------- ----------
Net cash provided by
(used in) operating
activities.......... 536 (523,012) (729,546) 2,039,537 1,302,204
----------- ----------- ----------- ---------- ----------
Cash flows from
investing activities:
Purchases of property
and equipment......... (74,304) (113,814) (50,962) (48,786) (280,269)
Proceeds from the sale
of investments........ -- -- 14,989 14,989 --
Cash surrender value of
life insurance........ (25,745) (16,146) (15,491) (15,491) (17,752)
Net repayments from
(advances to) related
parties............... (136,556) 127,673 83,900 (82,993) (21,648)
Changes in net assets
of discontinued
operations............ (331,963) (66,924) 184,004 184,004 --
Increase in deferred
transaction costs, net
of related accounts
payable............... -- -- -- -- (628,794)
----------- ----------- ----------- ---------- ----------
Net cash provided by
(used in) investing
activities.......... (568,568) (69,211) 216,440 51,723 (948,463)
----------- ----------- ----------- ---------- ----------
Cash flows from
financing activities:
Proceeds from long-term
debt.................. 300,000 -- --
Payments on long-term
debt.................. (40,546) (61,200) (165,199) (155,538) (40,077)
Payments on capital
lease obligations..... (31,036) (48,304) (76,745) (46,200) (48,851)
Net borrowings
(repayments) on short-
term debt............. 430,000 240,614 622,964 (76,382) (184,081)
Borrowings from related
parties............... 290,000 -- 341,500 291,500 22,060
Payments on loans with
related parties....... (75,000) (25,000) -- -- (341,500)
Proceeds from issuance
of common and
preferred stock....... 25,000 85,175 163,205 148,315 382,100
Repurchases of common
stock................. -- -- -- -- (122,975)
----------- ----------- ----------- ---------- ----------
Net cash provided by
(used in) financing
activities.......... 898,418 191,285 885,725 161,695 (333,324)
----------- ----------- ----------- ---------- ----------
Net increase (decrease)
in cash and cash
equivalents............ 330,386 (400,938) 372,619 2,252,955 20,417
Cash and cash
equivalents at
beginning of period.... 300,685 631,071 230,133 230,133 602,752
----------- ----------- ----------- ---------- ----------
Cash and cash
equivalents at end of
period................. $ 631,071 $ 230,133 $ 602,752 $2,483,088 $ 623,169
=========== =========== =========== ========== ==========
Supplemental disclosures
of cash flow
information:
Interest paid.......... $ 134,036 $ 183,811 $ 226,244 $ 161,096 $ 380,954
Income taxes paid...... $ 71,474 $ 184,506 $ 105,583 $ 39,590 $ 726,669
Schedule of noncash
investing and financing
transactions:
Capital lease
obligations incurred.. $ 30,025 $ 99,780 $ 179,241 $ 147,956 --
Conversion of accounts
receivable to note
receivable............ -- -- 74,930 -- --
Conversion of preferred
stock to common
stock................. -- 6,198 2,724 -- --
Debt refinancing....... -- -- 178,986 -- --
Assumption of ESOP
debt.................. -- -- -- -- $2,035,714
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-14
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1--BUSINESS ORGANIZATION
In February 1993, Cotelligent Group, Inc. (Cotelligent or the Company) was
founded to create a nationwide professional services firm that provides
computer consulting and custom software services to organizations.
Cotelligent has entered into definitive agreements to acquire by merger,
simultaneously with the closing of an initial public offering (the Offering),
all of the issued and outstanding stock of four companies, Financial Data
Systems, Inc. (FDSI), BFR Co., Inc. (BFR), Data Arts & Sciences, Inc. (DASI)
and Chamberlain Associates, Inc. (CAI) for a combination of its common stock
and cash. The four operating businesses to be acquired and Cotelligent are
herein referred to as the "Predecessor Companies."
The aggregate consideration to be paid by Cotelligent in these transactions
is $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 aggregate consideration for each of the
Founding Companies is as follows: BFR: $11,958,283, consisting of $1,450,000
to be paid in cash and 1,167,587 shares of Common Stock; CAI: $3,998,849,
consisting of $300,000 to be paid in cash, 388,761 shares of Common Stock and
$200,000 in short-term and related-party debt; DASI: $5,606,396, consisting of
$400,000 to be paid in cash, 443,044 shares of Common Stock and $1,219,000 in
short-term and related-party debt; and FDSI: $13,740,377, consisting of
$1,341,951 to be paid in cash, 1,207,483 shares of Common Stock and $1,531,079
in short-term, long-term and related-party debt.
NOTE 2--BASIS OF PRESENTATION
As discussed above, simultaneously with the closing of the Offering,
Cotelligent will acquire by merger each of the four operating businesses,
FDSI, BFR, DASI and CAI (the Mergers). The accompanying combined financial
statements and related notes to combined financial statements are presented on
a combined basis without giving effect to the Mergers 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 the Company 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 13.
Unaudited Pro Forma Combined Balance Sheet
The pro forma combined balance sheet reflects as a liability the cash
consideration to be paid to the Stockholders of the founding companies, FDSI,
BFR, DASI and CAI and the elimination of preferred stock and retained earnings
of these companies.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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-15
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Deferred Transaction Costs
Deferred transaction costs consist of costs incurred in conjunction with the
transaction and offering and will be recorded as a reduction of equity when
the offering is completed.
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, the
Company terminated its S status and will be taxed as a C corporation. See
further discussion in Note 7.
Historical Net Income Per Share
Historical net income per share has not been presented as it is not deemed
to be a meaningful presentation as a result of the Mergers.
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 Company's financial position as of December 31, 1995 and
its results of operations and cash flows for the nine months ended December
31, 1994 and 1995, as presented in the accompanying unaudited interim
financial statements.
NOTE 4--ALLOWANCE FOR DOUBTFUL ACCOUNTS
The activity in the allowance for doubtful accounts is as follows:
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO BALANCE
BEGINNING COSTS AND WRITE- AT END
OF PERIOD EXPENSES OFFS OF PERIOD
---------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Year ended March 31, 1993
allowance for doubtful
accounts...................... $35,000 $ -- $ -- $35,000
Year ended March 31, 1994
allowance for doubtful
accounts...................... $35,000 $10,000 $ -- $45,000
Year ended March 31, 1995
allowance for doubtful
accounts...................... $45,000 $21,368 $(26,368) $40,000
</TABLE>
F-16
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<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
========== ==========
</TABLE>
Depreciation and amortization expense for the years ended March 31, 1993,
1994 and 1995 was $163,847, $149,059 and $180,396, respectively.
F-17
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--CREDIT FACILITIES
Short-Term Debt
Short-term debt consists of the following:
<TABLE>
<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 9.0% at March 31, 1994 and
1995, respectively) plus 1-1/2% 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% above the bank's base
lending rate (6.25% at March 31, 1994), 1/2% 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 1/2% on (6.75%), prime (9%)
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% plus prime
(11% as of March 31, 1995)......................... -- 235,000
Note payable, interest at 10%, due upon completion
of initial public offering......................... 46,650 51,501
Notes payable to related parties
Note payable to CAI's President (also a stockholder)
and his son, due on December 31, 1995. Interest at
2% plus prime (11% 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%..................................... 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
========== ===========
</TABLE>
F-18
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 at March 31, 1995.
Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<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 (9.0%
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% 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 stockholder 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>
Total maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
MARCH 31,
-----------
<S> <C>
1996............................................................. $ 64,103
1997............................................................. 159,413
1998............................................................. 206,453
1999............................................................. --
2000............................................................. --
Thereafter....................................................... 200,000
--------
$629,969
========
</TABLE>
F-19
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--INCOME TAXES
Cotelligent and the Predecessor Companies will file a consolidated federal
income tax return for periods subsequent to the Mergers described in Note 1.
The Predecessor Companies will file "short period" federal tax returns through
the date of the Mergers.
The provision (benefit) for income taxes on continuing operations is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal....................................... $ 41,443 $315,021 $333,455
State......................................... 23,220 25,292 44,229
-------- -------- --------
64,663 340,313 377,684
Deferred:
Federal....................................... 106,752 (76,533) 12,209
State......................................... 39,382 75,323 2,672
-------- -------- --------
146,134 (1,210) 14,881
-------- -------- --------
Total provision for income taxes............ $210,797 $339,103 $392,565
======== ======== ========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<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>
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1993 1994 1995
------- ------- ------
<S> <C> <C> <C>
U.S. federal statutory rate....................... 34.0% 34.0% 34.0%
State taxes, net of federal income tax benefit.... 5.3 6.7 4.0
Nondeductible expenses............................ 1.6 1.7 5.5
Income of S corporation........................... (15.5) (20.2) 10.2
Other............................................. (2.1) 4.4 9.8
------- ------- ------
Effective tax rate.............................. 23.3% 26.6% 63.5%
======= ======= ======
</TABLE>
F-20
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 the stockholders of BFR. Appropriate provisions
have been 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 14 for
Unaudited Pro Forma Tax Information.
NOTE 8--LEASE COMMITMENTS
The Predecessor Companies lease various office space and certain equipment
under noncancellable lease agreements which expire at various dates.
Future minimum rental payments under such leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
MARCH 31,
---------------------
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
1996...................... $ 130,066 $ 442,016
1997...................... 130,066 451,475
1998...................... 103,626 434,160
1999...................... 72,357 407,026
2000...................... 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 $397,502, $422,058, and $462,352 for
each of the years ended March 31, 1993, 1994 and 1995, respectively.
NOTE 9--RELATED PARTIES
FDSI recognized a total of $76,192 in revenue for providing computer
consulting services to CyberSAFE (an affiliated entity) during the year ended
March 31, 1995. At March 31, 1995, $59,720 was due from CyberSAFE for these
services 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 FDSI paid no royalties to CyberSAFE.
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 and interest income is $41,265 and
$7,335 for the year ended March 31, 1995 for management services provided to
CyberSAFE and interest income on the advances, respectively.
BFR leases its general offices, and certain computer and transportation
equipment under operating leases, from an affiliate of BFR, which is under
common control. Rental expense under these leases was $171,549, $175,814 and
$176,104 for the years ended March 31, 1993, 1994 and 1995, respectively.
F-21
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Two 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
stockholders of DASI are the sole trustees and beneficiaries of the Strathmore
Realty Trust. Rental expense recorded for this office space was $100,340,
$96,831 and $97,462 for the years ended March 31, 1993, 1994 and 1995,
respectively.
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, 1993, 1994 and 1995.
BFR currently maintains an Employee Stock Ownership (ESOP) and Money
Purchase Plan (the BFR Plan) which covers substantially all salaried
employees. Annual contributions to the ESOP are made at the discretion of
BFR's Board of Directors. The BFR Plan requires 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 debt is guaranteed by BFR, and the ESOP shares
are being allocated to participants over seven years as contributions are made
to the plans. 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
bank's prime rate less .10%.
During the year ended March 31, 1995, BFR made contributions of $900,000 to
the BFR Plan. As the debt is repaid, shares are released from collateral and
allocated to active employees based upon the proportion of debt service paid
in the year. BFR records compensation expense equal to the market value of the
shares at the release date.
Effective November 18, 1995, BFR terminated the money purchase provisions of
the BFR Plan and BFR will no longer be required to make minimum annual
contributions. In connection with the transaction with Cotelligent, the BFR
Plan will be converted to a profit sharing plan.
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, 1993, 1994 and 1995.
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 and $24,000 of
expense related to this Plan for the two years ended March 31, 1994 and 1995,
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, 1993, 1994 or 1995. DASI previously maintained a pension
plan which was terminated in 1988 and no further contributions made.
F-22
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
NOTE 11--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 will
be terminated in connection with the Merger with Cotelligent, and three of
such officers will enter into new employment agreements and one will enter
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 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 will be terminated upon the
merger of DASI with Cotelligent and certain of the officers.
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 12--SIGNIFICANT CLIENT
One client accounted for approximately 14%, 15% and 11% of the Combined
Predecessor Companies' revenues during the fiscal years ending March 31, 1993,
1994 and 1995, respectively.
NOTE 13--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.
F-23
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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>
<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.
NOTE 14--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>
FOR THE NINE MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED DECEMBER 31,
-------------------------------- ----------------------
1993 1994 1995 1994 1995
--------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Income from continuing
operations before
provision for income
taxes.................. $ 903,966 $1,272,833 $ 617,882 $1,412,256 $2,277,573
Provision for income
taxes.................. (328,196) (565,975) (333,485) 614,051 978,256
--------- ---------- --------- ---------- ----------
Income from continuing
operations............. 575,770 706,858 284,397 798,205 1,299,717
Loss from operations on
discontinued business
(net of applicable
income taxes).......... (256,754) (284,560) (184,004) (184,004) --
--------- ---------- --------- ---------- ----------
Pro forma net income.... $ 319,016 $ 422,298 $ 100,393 $ 614,201 $1,299,717
========= ========== ========= ========== ==========
</TABLE>
NOTE 15--SUBSEQUENT EVENTS
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.
In October 1995, Cotelligent repurchased 37,070 shares of its common stock
for $60,000, sold 37,070 shares of its common stock for $2.70 per share to a
director of the Company, and sold an aggregate of 37,070 shares to three
directors of the Company for $4.72 per share.
F-24
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
F-25
<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. at March 31, 1995 and 1994, and the results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1995, 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
November 10, 1995
F-26
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, DECEMBER 31,
1994 1995 1995
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash...................................... $ 622 $ 86,141 $ 304
Accounts receivable, less allowance for
doubtful accounts of $15,000, $10,000 and
$10,000, respectively.................... 1,745,896 2,630,189 2,938,847
Receivable from related party............. -- 111,877 133,525
Current portion of note receivable........ -- 58,279 38,754
Deferred income taxes..................... 52,000 2,000 2,000
Prepaid expenses and other current
assets................................... 35,575 73,096 135,675
Net assets of discontinued business....... 483,630 -- --
Note receivable--Cotelligent.............. 61,000
---------- ---------- ----------
Total current assets.................... 2,317,723 2,961,582 3,310,105
---------- ---------- ----------
Property and equipment, net................. 139,474 272,396 359,831
Other assets................................ 32,283 70,634 141,425
---------- ---------- ----------
Total assets............................ $2,489,480 $3,304,612 $3,811,361
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt, including notes payable
to related parties of $100,000, $291,500
and $0, respectively..................... $ 595,926 $1,533,709 $1,398,913
Accounts payable.......................... 162,637 87,958 136,194
Accrued compensation...................... 790,540 795,465 707,144
Income taxes payable...................... -- 26,600 251,906
Other accrued liabilities................. 180,448 154,455 157,913
---------- ---------- ----------
Total current liabilities............... 1,729,551 2,598,187 2,652,070
---------- ---------- ----------
Long-term debt.............................. 211,787 257,473 157,877
Deferred income taxes....................... 106,700 72,000 72,000
Other long-term liabilities................. -- -- 36,136
---------- ---------- ----------
Total liabilities....................... 2,048,038 2,927,660 2,918,083
---------- ---------- ----------
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 8,500
Series C preferred stock--no par value;
500,000 shares authorized, 14,252, 13,932
and 14,332 shares issued and outstanding,
respectively............................. 62,838 60,114 74,114
Series A common stock--no par value;
1,000,000 shares authorized, 9,493, 9,813
and 9,713 shares issued and outstanding,
respectively............................. 106,211 108,935 105,960
Retained earnings......................... 263,893 199,403 704,704
---------- ---------- ----------
Total stockholders' equity.............. 441,442 376,952 893,278
---------- ---------- ----------
Total liabilities and stockholders'
equity................................. $2,489,480 $3,304,612 $3,811,361
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-27
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED DECEMBER 31,
------------------------------------ ------------------------
1993 1994 1995 1994 1995
---------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.................. $8,205,573 $11,191,023 $15,807,642 $11,176,222 $13,994,968
Cost of services.......... 5,843,476 8,235,708 12,265,956 8,606,503 10,322,485
---------- ----------- ----------- ----------- -----------
Gross margin.......... 2,362,097 2,955,315 3,541,686 2,569,719 3,672,483
Selling, general and
administrative expenses.. 1,927,183 2,419,362 3,119,699 2,345,767 2,799,647
---------- ----------- ----------- ----------- -----------
Operating income...... 434,914 535,953 421,987 223,952 872,836
---------- ----------- ----------- ----------- -----------
Other (income) expense:
Interest expense........ 43,430 60,771 117,445 81,903 141,067
Interest income......... (1,753) (12,967) (11,393) (11,246) (16,789)
Other, net.............. -- 4,208 (29,428) (22,220) (17,047)
---------- ----------- ----------- ----------- -----------
41,677 52,012 76,624 48,437 107,231
---------- ----------- ----------- ----------- -----------
Income from continuing
operations before income
taxes.................... 393,237 483,941 345,363 175,515 765,605
Income taxes.............. 114,800 170,000 122,000 49,089 260,304
---------- ----------- ----------- ----------- -----------
Income from continuing
operations............... 278,437 313,941 223,363 126,426 505,301
Loss from operations of
discontinued business
(net of applicable income
taxes of $98,900,
$159,700, $80,100 and
$80,100, respectively)
(Note 11)................... (256,754) (284,560) (184,004) (184,004) --
---------- ----------- ----------- ----------- -----------
Net income (loss)......... $ 21,683 $ 29,381 $ 39,359 $ (57,578) $ 505,301
========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
----------------- ----------------- RETAINED TOTAL
SHARES AMOUNT SHARES AMOUNT EARNINGS EQUITY
------- -------- ------ --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31,
1992................... 98,879 $ 36,359 7,350 $ 100,013 $ 212,829 $ 349,201
Issuance of preferred
stock charged to
compensation expense... 1,516 23,877 -- -- -- 23,877
Net income.............. -- -- -- -- 21,683 21,683
------- -------- ----- --------- --------- ---------
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
Redemption of Common
Stock.................. (100) (2,975) (2,975)
Net Income.............. 505,301 505,301
------- -------- ----- --------- --------- ---------
Balance at December 31,
1995
(unaudited)............ 99,332 $ 82,614 9,713 $ 105,960 $ 704,704 $ 893,278
======= ======== ===== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------- -----------------------
1993 1994 1995 1994 1995
--------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)...... $ 21,683 $ 29,381 $ 39,359 $ (57,578) $ 505,301
Adjustments to
reconcile net income
to net cash provided
by (used in) operating
activities:
Depreciation and
amortization......... 79,619 79,511 82,512 60,681 76,770
Preferred stock issued
and charged to
compensation......... 23,877 9,425 -- -- 14,000
Loss on disposal of
property and
equipment............ -- 4,208 655 -- --
Deferred income
taxes................ 14,324 (88,641) 15,300 (45,716) --
Change in current
assets and
liabilities:
Accounts receivable.. (322,660) (606,176) (959,223) (437,456) (308,658)
Prepaid expenses and
other assets........ 37,490 6,998 (50,194) 91,802 26,335
Accounts payable and
accrued
liabilities......... 157,884 577,723 (95,747) 10,653 (492)
Income taxes
payable............. -- -- 26,600 55,775 225,306
Changes in other
assets............... -- -- -- -- (140,179)
--------- --------- --------- --------- ---------
Net cash provided by
(used in) operating
activities......... 12,217 12,429 (940,738) (321,839) 398,383
--------- --------- --------- --------- ---------
Cash flows from
investing activities:
Property and equipment
expenditures.......... (25,394) (22,970) (30,704) (39,642) (164,205)
Investment in
Cotelligent........... -- (15,000) (15,000) (10,000) --
Repayments from
(advances to) related
party................. -- -- 83,900 (82,993) (21,648)
Advances to
Cotelligent........... -- -- -- -- (61,000)
Change in net assets of
discontinued
business.............. (331,963) (66,924) 184,004 184,004 --
--------- --------- --------- --------- ---------
Net cash used in
investing
activities......... (357,357) (104,894) 222,200 51,369 (246,853)
--------- --------- --------- --------- ---------
Cash flows from
financing activities:
Proceeds from long-term
debt.................. 300,000 -- -- 140,767 128,505
Net borrowings on
short-term debt....... -- 130,964 703,113 (42,011) (34,089)
Repayments on long-term
debt.................. (28,075) (51,932) (48,785) -- (2,975)
Repurchase of common
stock................. -- -- --
Payments under capital
lease obligations..... (3,686) (17,377) (41,771) (20,050) (37,308)
Borrowings from related
parties............... 100,000 -- 191,500 191,500 --
Payments on borrowings
from related parties.. -- -- -- -- (291,500)
Proceeds from issuance
of preferred stock.... -- 7,875 -- -- --
--------- --------- --------- --------- ---------
Net cash provided by
financing
activities......... 368,239 69,530 804,057 270,206 (237,367)
--------- --------- --------- --------- ---------
Net increase (decrease)
in cash................ 23,099 (22,935) 85,519 (264) (85,837)
Cash at beginning of
period................. 458 23,557 622 622 86,141
--------- --------- --------- --------- ---------
Cash at end of period... $ 23,557 $ 622 $ 86,141 $ 358 $ 304
========= ========= ========= ========= =========
</TABLE>
Supplemental disclosures of cash flow information and non cash investing and
financing activities (see Note 2).
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<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 intend to enter into a definitive agreement
with Cotelligent Group, Inc. (Cotelligent) pursuant to which the Company will
merge with Cotelligent (the Merger). All outstanding shares of the Company
will be 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.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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.
Effective April 1, 1993, the Company converted to the accrual method of
reporting for federal income tax purposes. Timing differences related to this
conversion from the cash method are being recognized in income ratably over a
four-year period.
F-31
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Supplemental Disclosures of Cash Flow Information
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDING
FOR THE YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------- --------------------
1993 1994 1995 1994 1995
--------- --------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest paid........... $ 55,659 $ 74,663 $ 117,795 $84,759 $134,109
Federal income taxes
(refunded) paid........ -- (4,334) -- -- 35,000
</TABLE>
Supplemental schedule of noncash investing and financing activities:
During 1995, the Company refinanced debt with a principal balance of
$178,986.
Capital lease obligations of $30,025, $99,780 and $179,241 were incurred
when the Company entered into leases of new equipment in the years ended
March 31, 1993, 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:
<TABLE>
<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>
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:
<TABLE>
<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>
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 Company's financial position as of December 31, 1995 and
its results of operations and cash flows for the nine months ended December
31, 1994 and 1995, as presented in the accompanying unaudited interim
financial statements.
F-32
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--ALLOWANCE FOR DOUBTFUL ACCOUNTS AND NOTES RECEIVABLE:
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO TRANSFER BALANCE
BEGINNING COSTS AND TO CYBER- AT END
OF PERIOD EXPENSES SAFE OF PERIOD
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Year ended March 31, 1993
allowance for doubtful
accounts...................... $ 5,000 $ -- $ -- $ 5,000
======= ======= ======= =======
Year ended March 31 1994
allowance for doubtful
accounts...................... $ 5,000 $10,000 $ -- $15,000
======= ======= ======= =======
Year ended March 31, 1995
allowance for doubtful
accounts...................... $15,000 $ -- $(5,000) $10,000
======= ======= ======= =======
</TABLE>
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<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, 1993,
1994 and 1995 was $50,810, $50,929 and $76,538, respectively.
As described in Note 9, the Company leases certain equipment under capital
leases.
NOTE 5--CREDIT FACILITIES
Short-Term Debt
Short-term debt consists of the following:
<TABLE>
<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 9.0% at March 31, 1994 and 1995, respectively) plus
1-1/2% per annum. The agreement, which expires March 31, 1996, is secured by
accounts
F-33
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 includes $14,025 related to these notes for the year ended March 31,
1995.
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 includes $370 at March 31, 1994 and $393 at March 31,
1995 related to this note. Interest expense for the years ended March 31,
1993, 1994 and 1995 includes $3,325, $9,000 and $9,000, respectively, related
to this note.
Long-Term Debt
Long-term debt consists of:
<TABLE>
<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 (9.0% 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
======== =========
</TABLE>
Principal maturities on notes payable over the next five years are as
follows (see Note 7 for capital lease obligations):
<TABLE>
<CAPTION>
YEAR ENDING
MARCH 31, 1995
--------------
<S> <C> <C> <C>
1996.................................................. $ 53,120
1997.................................................. 59,413
1998.................................................. 66,453
--------
$178,986
========
</TABLE>
F-34
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--INCOME TAXES
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------
1993 1994 1995
-------- --------- --------
<S> <C> <C> <C>
Continuing operations:
Current--federal........................... $(24,000) $ 233,100 $190,200
Deferred--federal.......................... 138,800 (63,100) (68,200)
-------- --------- --------
Total.................................... 114,800 170,000 122,000
Discontinued operations--federal............. (98,900) (159,700) (80,100)
-------- --------- --------
Total provision (benefit) for income taxes... $ 15,900 $ 10,300 $ 41,900
======== ========= ========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<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
--------- ---------
$ (54,700) $ (70,000)
========= =========
</TABLE>
The Company's effective income tax rate for continuing operations varied
from the U.S. federal statutory rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
U.S. federal statutory rate.......................... 34.0% 34.0% 34.0%
Non-deductible expenses.............................. 1.2 .9 3.0
Rate differentials................................... (6.0) -- --
Other................................................ -- .2 (1.7)
------ ------ ------
Effective income tax rate............................ 29.2% 35.1% 35.3%
====== ====== ======
</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 1996 and 2000.
Under such leases, the Company is responsible for all executory costs
(insurance, taxes and maintenance) and pro rata common area charges. The
Company also leases furniture and equipment under leases classified as capital
leases.
Property and equipment includes the following leased property under capital
leases:
<TABLE>
<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-35
<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> <C> <C>
1996........................ $ 79,066 $172,172
1997........................ 79,066 202,368
1998........................ 52,626 198,662
1999........................ 21,357 201,026
2000........................ -- 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 $69,877, $78,549 and $108,630, respectively, for
the years ended March 31, 1993, 1994 and 1995, 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, 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 and interest income is
$41,265 and $7,335 for the year ended March 31, 1995 for management services
provided to CyberSAFE and interest income on the advances, 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
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,
1993, 1994 and 1995.
F-36
<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 and $24,000 of expense related to this plan for the two years
ended March 31, 1994 and 1995, 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 $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 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>
<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-37
<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, 1993, two clients accounted for
approximately 16% and 11% of revenue, respectively. In 1994, these two clients
accounted for 14% and 11% of revenues, respectively, and one client accounted
for 26% of revenues for the year ended March 31, 1995.
Additionally, these clients accounted for approximately 22% and 23% of the
accounts receivable balance as of March 31, 1994 and 1995, respectively.
On June 1, 1995, the Company's largest client centralized all of its
consulting projects into a single contractual agreement with a competitor. The
competitor subcontracts work to the Company as needed. Under this agreement,
the Company estimates that fiscal 1996 revenues will approximate fiscal 1995
revenues from this client, although no assurance with respect to this can be
given.
F-38
<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 (deficit) 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 its cash flows
for each of the three years in the period ended March 31, 1995, 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
November 10, 1995
F-39
<PAGE>
BFR CO., INC.
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, DECEMBER 31,
1994 1995 1995
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 210,442 $ 466,885 $ 580,902
Accounts receivable....................... 3,388,164 3,263,436 3,306,904
Prepaid expenses and other current
assets................................... 167,819 13,411 27,278
Note Receivable--Cotelligent.............. -- -- 136,000
---------- ---------- -----------
Total current assets.................... 3,766,425 3,743,732 4,051,084
---------- ---------- -----------
Property and equipment, net................. 184,352 140,818 191,770
Other assets................................ 119,567 138,723 315,970
---------- ---------- -----------
Total assets............................ $4,070,344 $4,023,273 $ 4,558,824
========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Short-term debt........................... $ 584,650 $ 35,659 $ 2,070,714
Accounts payable.......................... 191,448 71,840 23,358
Accrued compensation...................... -- -- 899,405
Accrued payroll liabilities............... 159,865 836,972 455,643
Deferred revenue.......................... -- 168,405 130,297
Income taxes payable...................... -- -- 135,400
Deferred income taxes..................... 271,000 250,000 --
Other accrued liabilities................. 243,764 255,962 126,921
---------- ---------- -----------
Total current liabilities............... 1,450,727 1,618,838 3,841,738
---------- ---------- -----------
Capital lease obligations................... 176,172 140,189 129,305
Deferred income taxes....................... -- -- 881,500
Commitments (Notes 6 and 9).................
Stockholders' equity (deficit):
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 1,000
Retained earnings......................... 2,442,445 2,263,246 1,740,995
Unearned ESOP shares...................... -- -- (2,035,714)
---------- ---------- -----------
Total stockholders' equity (deficit).... 2,443,445 2,264,246 (293,719)
---------- ---------- -----------
Total liabilities and stockholders'
equity (deficit)....................... $4,070,344 $4,023,273 $ 4,558,824
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
BFR CO., INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED DECEMBER 31,
------------------------------------- ------------------------
1993 1994 1995 1994 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................ $10,138,534 $14,440,051 $15,220,645 $11,442,000 $12,961,651
Cost of services........ 7,069,872 10,813,662 11,239,778 7,885,675 9,640,246
----------- ----------- ----------- ----------- -----------
Gross margin........ 3,068,662 3,626,389 3,980,867 3,556,325 3,321,405
Selling, general and
administrative
expenses............... 2,648,079 2,832,816 4,173,345 2,654,730 2,517,577
----------- ----------- ----------- ----------- -----------
Operating income
(loss)............. 420,583 793,573 (192,478) 901,595 803,828
Other (income) expense:
Interest expense...... 43,494 53,228 33,109 27,429 137,857
Interest income....... (26,819) (20,770) (25,388) (16,813) (18,178)
Other, net............ (7,089) 3,934 -- -- --
----------- ----------- ----------- ----------- -----------
9,586 36,392 7,721 10,616 119,679
----------- ----------- ----------- ----------- -----------
Income (loss) before
provision (benefit) for
income taxes........... 410,997 757,181 (200,199) 890,979 684,149
Provision (benefit) for
income taxes........... 47,000 76,000 (21,000) 103,000 1,206,400
----------- ----------- ----------- ----------- -----------
Net income (loss)... $ 363,997 $ 681,181 $ (179,199) $ 787,979 $ (522,251)
=========== =========== =========== =========== ===========
Unaudited proforma
information:
Proforma net income
(loss) before
provision (benefit)
for proforma income
taxes................ 410,997 757,181 (200,199) 1,868,882 1,294,410
Proforma provision
(benefit) for income
taxes................ 164,399 302,872 (80,080) 747,553 517,764
----------- ----------- ----------- ----------- -----------
Proforma income (loss)
(see
Note 12)............. $ 246,598 $ 454,309 $ (120,119) $ 1,121,329 $ 776,646
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
BFR CO., INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------- TOTAL
SHARES AMOUNT UNEARNED STOCKHOLDERS'
--------------- --------------- RETAINED ESOP EQUITY
CLASS A CLASS B CLASS A CLASS B EARNINGS SHARES (DEFICIT)
------- ------- ------- ------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31,
1992................... 300,000 700,000 $300 $700 $1,397,267 $ -- $1,398,267
Net income.............. -- -- -- -- 363,997 -- 363,997
------- ------- ---- ---- ---------- ---------- ----------
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................. -- -- -- -- -- (3,150,00) (3,150,00)
Release of unearned
shares to ESOP......... -- -- -- -- -- 1,114,286 1,114,286
Net loss................ -- -- -- -- (522,251) -- (522,251)
------- ------- ---- ---- ---------- ---------- ----------
Balance at December 31,
1995 (unaudited)....... 300,000 700,000 300 700 1,740,995 (2,035,714) (293,719)
======= ======= ==== ==== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
BFR CO., INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------ ------------------------
1993 1994 1995 1994 1995
-------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)...... $363,997 $ 681,181 $(179,199) $ 787,979 $ (522,251)
Adjustments to
reconcile net income
to net cash provided
by (used in) operating
activities:
Depreciation and
amortization......... 62,418 44,625 43,534 31,948 16,326
Deferred income taxes,
net.................. 47,000 76,000 (21,000) (220,000) 631,500
Changes in current
assets and
liabilities:
Accounts receivable.. (805,901) (893,938) 124,728 776,108 (43,468)
Prepaid expenses and
other current
assets.............. (22,442) (5,327) 154,408 (197,773) (13,867)
Accounts payable and
accrued expenses.... 672,939 (260,851) 569,697 1,285,669 302,445
Income taxes
payable............. -- -- -- 323,000 135,400
Deferred revenue..... -- -- 168,405 -- --
Changes in other
assets............... (24,280) (25,463) (19,156) -- (162,247)
-------- --------- --------- ---------- ----------
Net cash provided by
(used in) operating
activities......... 293,731 (383,773) 841,417 2,786,931 343,838
-------- --------- --------- ---------- ----------
Cash flows from
investing activities:
Purchases of property
and equipment......... (12,404) (8,126) -- -- (67,278)
Net (advances to)
repayments from
related parties....... (136,556) 127,673 -- -- --
Investment in
Cotelligent........... -- -- -- -- (15,000)
Advances to
Cotelligent........... -- -- -- -- (136,000)
-------- --------- --------- ---------- ----------
Net cash flows provided
by (used in) investing
activities............. (148,960) 119,547 -- -- (218,278)
-------- --------- --------- ---------- ----------
Cash flows from
financing activities:
Net borrowings
(repayments) on short-
term debt............. 175,000 150,000 (550,000) (550,000) --
Payments on capital
lease obligations..... (27,350) (30,927) (34,974) (26,150) (11,543)
-------- --------- --------- ---------- ----------
Net cash provided by
(used in) financing
activities......... 147,650 119,073 (584,974) (576,150) (11,543)
-------- --------- --------- ---------- ----------
Net increase (decrease)
in cash and cash
equivalents............ 292,421 (145,153) 256,443 2,210,781 114,017
Cash and cash
equivalents at
beginning of period.... 63,174 355,595 210,442 210,442 466,885
-------- --------- --------- ---------- ----------
Cash and cash
equivalents at end of
period................. $355,595 $ 210,442 $ 466,885 $2,421,223 $ 580,902
======== ========= ========= ========== ==========
Supplemental disclosures
of cash flow
information:
Interest paid.......... $ 14,246 $ 28,784 $ 12,495 $ 12,339 $ 137,857
Income taxes paid...... $ -- $ 25 $ 25 $ -- $ 439,500
Noncash investing and
financing activities:
Assumption of ESOP
debt.................. $ -- $2,035,714
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<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 intend to enter into a definitive agreement
with Cotelligent Group, Inc. (Cotelligent) pursuant to which the Company will
merge with Cotelligent (the Merger). All outstanding shares of the Company
will be 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.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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. For income tax purposes,
the Company reports results of operations on the cash basis of accounting
which recognizes revenues when received and certain expenses when paid.
F-44
<PAGE>
BFR CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 have
been made 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.
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 Company's financial position as of December 31, 1995 and
its results of operations and cash flows for the nine months ended December
31, 1994 and 1995, as presented in the accompanying unaudited interim
financial statements.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<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
======== ========
</TABLE>
Depreciation and amortization expense for the years ended March 31, 1993,
1994 and 1995 was $62,418, $44,625 and $43,534, respectively.
Included in office equipment is approximately $307,000 of gross assets under
capital leases as of March 31, 1994.
NOTE 4--CREDIT FACILITIES
Short-Term Debt
Short-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------
1994 1995
-------- -------
<S> <C> <C>
Line of credit............................................. $550,000 $ --
Current portion of ESOP liability.......................... -- --
Current portion of capital lease obligation................ 34,650 35,659
-------- -------
$584,650 $35,659
======== =======
</TABLE>
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 1/2%) and 9% (prime) at March 31, 1994 and 1995,
respectively.
F-45
<PAGE>
BFR CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--INCOME TAXES
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Current:
Federal.......................................... $ -- $ -- $ --
State............................................ 47,000 76,000 (21,000)
------- ------- --------
47,000 76,000 (21,000)
Deferred:
Federal.......................................... -- -- --
State............................................ -- -- --
------- ------- --------
$47,000 $76,000 $(21,000)
======= ======= ========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<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>
The Company's effective income tax rate varied from the statutory tax rate
as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
State statutory rate............................... 9.0 9.0 9.0
Officers life insurance and other nondeductible
expenses.......................................... 2.4 1.0 1.5
------ ------ ------
Effective tax rate................................. 11.4% 10.0% 10.5%
====== ====== ======
</TABLE>
Due to its S corporation status, the Company was required to make payments
and leave on deposit with the Internal Revenue Service a certain amount as
computed by the Company, to maintain its fiscal year of March 31. As of April
1, 1995, the Company terminated its S status, and accordingly such deposit was
returned and no deposits are currently due or held by the Internal Revenue
Service.
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 Tax Information.
F-46
<PAGE>
BFR CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 $171,549, $175,814
and $176,104 for the years ended March 31, 1993, 1994 and 1995, respectively.
Future minimum rental payments under such leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
-------------------------
CAPITAL OPERATING
LEASES LEASES
----------- ------------
<S> <C> <C>
1996............................................... $ 51,000 $205,000
1997............................................... 51,000 196,000
1998............................................... 51,000 196,000
1999............................................... 51,000 206,000
2000............................................... 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 has 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, 1993, 1994 and 1995.
F-47
<PAGE>
BFR CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Employee Stock Ownership and Money Purchase Plan
The Company currently maintains an Employee Stock Ownership (ESOP) and Money
Purchase Plan (the Plan) which covers substantially all salaried employees.
Annual contributions to the ESOP are made at the discretion of the Company's
Board of Directors. The Plan requires 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 debt is guaranteed by the Company and the ESOP shares
are being allocated to participants over seven years as contributions are made
to the plans.
During the year ended March 31, 1995, the Company made contributions of
$900,000 to this Plan. As the debt is repaid, shares are released from
collateral and allocated to active employees based upon the proportion of debt
service paid in the year. The Company records compensation expense equal to
the market value of the shares at the release date.
Effective November 18, 1995, the Company terminated the money purchase
provisions of the Plan and the Company will no longer be required to make
minimum annual contributions. In connection with the transaction with
Cotelligent, the Plan will be converted to a profit sharing plan.
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 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 will be terminated in connection with the merger
with Cotelligent and certain of the officers will enter into new employment
contracts.
NOTE 10--MAJOR CLIENTS
During the year ended March 31, 1993, four major clients accounted for
approximately 42%, 10%, 20% and 10% of revenue, respectively. In 1994, three
of these clients accounted for 33%, 25% and 13% of revenues, respectively, and
34%, 25% and 12% of revenues, respectively, during 1995.
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.
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.
F-48
<PAGE>
BFR CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED DECEMBER 31,
------------------------------ -----------------------
1993 1994 1995 1994 1995
--------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income (loss) before
provision (benefit) for
income taxes........... $ 410,997 $ 757,181 $ (200,199) $ 1,868,882 $ 1,294,410
Provision (benefit) for
income taxes........... 164, 399 302,872 (80,080) 747,553 517,764
--------- --------- ---------- ----------- -----------
Pro forma net income
(loss)................. $ 246,598 $ 454,309 $ (120,119) $ 1,121,329 $ 776,646
========= ========= ========== =========== ===========
</TABLE>
F-49
<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 their cash flows for each of the
three years in the period ended March 31, 1995, 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
November 10, 1995
F-50
<PAGE>
DATA ARTS & SCIENCES, INC.
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, DECEMBER 31,
1994 1995 1995
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Accounts receivable, less allowance for
doubtful accounts of $30,000, $30,000 and
$30,000, respectively.................... $1,431,730 $2,043,211 $2,085,470
Income taxes receivable................... 26,635 -- --
Deferred income taxes..................... 12,081 12,081 12,081
Prepaid expenses and other current
assets................................... 64,794 51,630 69,263
Note receivabe--Cotelligent............... 73,000
---------- ---------- ----------
Total current assets.................... 1,535,240 2,106,922 2,239,814
---------- ---------- ----------
Property and equipment, net................. 112,918 79,531 79,665
Deferred income taxes....................... 11,341 12,599 --
Other assets................................ 137,675 228,166 271,798
---------- ---------- ----------
Total assets............................ $1,797,174 $2,427,218 $2,591,277
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt........................... $ 179,138 $ 408,983 $ 256,000
Accounts payable.......................... 247,682 396,747 94,203
Accrued compensation...................... 323,669 401,116 563,000
Income taxes payable...................... -- 55,290 65,098
Other accrued liabilities................. -- -- 88,456
---------- ---------- ----------
Total current liabilities............... 750,489 1,262,136 1,066,757
---------- ---------- ----------
Long-term debt, including notes payable to
related parties of $440,000, $440,000 and
$440,000, respectively..................... 556,259 440,000 440,000
---------- ---------- ----------
Total liabilities....................... 1,306,748 1,702,136 1,506,757
---------- ---------- ----------
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 2,000
Common stock--DPI, no par value; 10,000
shares authorized, 2,000 shares issued
and outstanding.......................... 2,000 2,000 2,000
Retained earnings......................... 486,426 721,082 1,080,520
---------- ---------- ----------
Total stockholders' equity.............. 490,426 725,082 1,084,520
---------- ---------- ----------
Total liabilities and stockholders'
equity................................. $1,797,174 $2,427,218 $2,591,277
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
DATA ARTS & SCIENCES, INC.
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED DECEMBER 31,
---------------------------------- -----------------------
1993 1994 1995 1994 1995
---------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $9,395,699 $10,065,043 $12,436,865 $9,013,998 $12,020,318
Cost of services........ 7,512,163 7,971,100 9,740,902 7,035,693 9,313,164
---------- ----------- ----------- ---------- -----------
Gross margin.......... 1,883,536 2,093,943 2,695,963 1,978,305 2,707,154
Selling, general and
administrative
expenses............... 1,692,844 1,861,838 2,194,932 1,601,925 1,979,225
---------- ----------- ----------- ---------- -----------
Operating income.... 190,692 232,105 501,031 376,380 727,929
Other (income) expense:
Interest expense...... 64,051 80,013 80,150 55,486 95,889
Other................. -- -- -- -- (22,719)
---------- ----------- ----------- ---------- -----------
64,051 80,013 80,150 55,486 73,170
Income before provision
for income taxes....... 126,641 152,092 420,881 320,894 654,759
Provision for income
taxes.................. 55,784 71,658 186,225 142,850 274,576
---------- ----------- ----------- ---------- -----------
Net income.............. $ 70,857 $ 80,434 $ 234,656 $ 178,044 $ 380,183
========== =========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE>
DATA ARTS & SCIENCES, INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK
DASI DPI TOTAL
------------- ------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT EARNINGS EQUITY
------ ------ ------ ------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31,
1992.................... 300 $2,000 2,000 $2,000 $ 335,135 $ 339,135
Net income............... -- -- -- -- 70,857 70,857
--- ------ ----- ------ ---------- ----------
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)
Net Income............... 380,183 380,183
--- ------ ----- ------ ---------- ----------
Balance at December 31,
1995
(Unaudited)............. 300 2,000 2,000 2,000 $1,080,520 $1,084,520
=== ====== ===== ====== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE>
DATA ARTS & SCIENCES, INC.
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------- -----------------------
1993 1994 1995 1994 1995
--------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............. $ 70,857 $ 80,434 $ 234,656 $178,044 $380,183
Adjustments to
reconcile net income
to net cash provided
by (used in) operating
activities:
Depreciation.......... 34,759 38,909 43,289 33,752 21,803
Loss (gain) on
disposal of
equipment............ -- -- -- -- (22,719)
Deferred income taxes,
net.................. (41,725) (35,555) (1,258) -- 12,599
Changes in current
assets and
liabilities:
Accounts receivable.. (478,196) 50,713 (611,481) (332,247) (42,259)
Prepaid expenses and
other current
assets.............. (15,823) (44,324) 13,164 12,418 (17,633)
Accounts payable and
accrued expenses.... 78,215 35,724 226,512 (35,738) (52,204)
Income taxes
payable............. 3,646 (81,602) 81,925 103,266 9,808
Changes in other
assets............... -- -- (50,000) (50,000) (25,880)
--------- --------- --------- -------- --------
Net cash provided by
(used in) operating
activities......... (348,267) 44,299 (63,193) (90,511) 263,698
--------- --------- --------- -------- --------
Cash flows from
investing activities:
Purchases of property
and equipment......... (17,946) (66,916) (9,902) (3,471) (24,958)
Investment in
Cotelligent........... (5,000) -- (25,000) (25,000) --
Advances to
Cotelligent........... -- -- -- -- (73,000)
Investment in cash
surrender value of
life insurance........ (25,745) (16,146) (15,491) (15,491) (17,752)
--------- --------- --------- -------- --------
Net cash used in
investing
activities......... (48,691) (83,062) (50,393) (43,962) (115,710)
--------- --------- --------- -------- --------
Cash flows from
financing activities:
Net borrowings
(payments) on short-
term debt............. 250,000 (82,000) 230,000
Payments on long-term
debt.................. (12,471) (9,268) (116,414) (113,527) (5,988)
Borrowings from related
parties............... 190,000 -- -- 248,000 --
Payments on loan from
related parties....... (75,000) (25,000) -- -- (142,000)
--------- --------- --------- -------- --------
Net cash provided by
(used in) financing
activities......... 352,529 (116,268) 113,586 134,473 (147,988)
--------- --------- --------- -------- --------
Net decrease in cash and
cash equivalents....... (44,429) (155,031) -- -- --
Cash and cash
equivalents at
beginning of period.... 199,460 155,031 -- -- --
--------- --------- --------- -------- --------
Cash and cash
equivalents at end of
period................. $ 155,031 $ -- $ -- $ -- $ --
========= ========= ========= ======== ========
Supplemental disclosures
of cash flow
information:
Interest paid.......... $ 64,051 $ 80,013 $ 80,150 $ 55,486 $ 95,889
Income taxes paid...... $ 71,474 $ 188,815 $ 105,558 $ 39,590 $252,169
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE>
DATA ARTS & SCIENCES, INC.
NOTES TO 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 intend to enter into a definitive agreement
with Cotelligent Group, Inc. (Cotelligent) pursuant to which the Company will
merge with Cotelligent (the Merger). All outstanding shares of the Company
will be 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.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 Merger with
Cotelligent. Accordingly, these entities have been combined and presented in
the accompanying financial statements. All intercompany balances and
transactions have been eliminated.
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.
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.
F-55
<PAGE>
DATA ARTS & SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Unaudited Interim Financial Statements
In the opinion of management, the Company has made all adjustments,
consisting of only normal recurring accruals, necessary for a fair
presentation of the Company's financial position as of December 31, 1995 and
its results of operations and cash flows for the nine months ended December
31, 1994 and 1995, as presented in the accompanying unaudited interim
financial statements.
NOTE 3--ALLOWANCE FOR DOUBTFUL ACCOUNTS AND NOTES RECEIVABLE:
The activity in the allowance for doubtful accounts and notes receivable is
as follows:
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND WRITE- AT END
OF PERIOD EXPENSES OFFS OF PERIOD
---------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Year ended March 31, 1993
allowance for doubtful
accounts...................... $30,000 $ -- $ -- $30,000
======= ======= ======== =======
Year ended March 31, 1994
allowance for doubtful
accounts...................... $30,000 $ -- $ -- $30,000
======= ======= ======== =======
Year ended March 31, 1995
allowance for doubtful
accounts...................... $30,000 $21,368 $(21,368) $30,000
======= ======= ======== =======
</TABLE>
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<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
======== ========
</TABLE>
Depreciation expense for the years ended March 31, 1993, 1994 and 1995 was
$34,759, $38,909 and $43,289, respectively.
NOTE 5--CREDIT FACILITIES
Short-Term Debt
Short-term debt consists of the following:
<TABLE>
<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>
F-56
<PAGE>
DATA ARTS & SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company's line of credit agreement with a bank expires January 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 1-1/4% above the bank's base lending rate (8 3/4% 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 (6-1/4% at March 31, 1994). Additionally, a fee of 1/2% 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 was in compliance
with such covenants at March 31, 1995.
Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<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.
The loans have the following maturity dates:
$100,000 due October 25, 1996
$140,000 due December 25, 1997
$200,000 due October 25, 2006
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.
F-57
<PAGE>
DATA ARTS & SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
Total maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
MARCH 31,
-----------
<S> <C>
1996............................................................. $ 10,983
1997............................................................. 100,000
1998............................................................. 140,000
1999............................................................. --
2000............................................................. --
Thereafter....................................................... 200,000
--------
450,983
Less: Current portion............................................ 10,983
--------
$440,000
========
</TABLE>
NOTE 6--INCOME TAXES
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Current:
Federal........................................ $57,399 $81,921 $143,255
State.......................................... 17,721 25,292 44,229
------- ------- --------
75,120 107,213 187,484
------- ------- --------
Deferred:
Federal........................................ (16,325) (30,019) (1,063)
State.......................................... (3,011) (5,536) (196)
------- ------- --------
(19,336) (35,555) (1,259)
------- ------- --------
$55,784 $71,658 $186,225
======= ======= ========
</TABLE>
Deferred tax assets are comprised of the following:
<TABLE>
<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>
F-58
<PAGE>
DATA ARTS & SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company's effective income tax rate varied from the U.S. federal
statutory rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
U.S. federal statutory rate........................ 34.0% 34.0% 34.0%
State income taxes, net of federal income tax
benefit........................................... 7.0 7.3 6.8
Officers' life insurance and nondeductible meals
and entertainment expenses........................ 2.5 5.2 3.1
Other.............................................. 0.5 0.6 0.3
------ ------ ------
Effective tax rate................................. 44.0% 47.1% 44.2%
====== ====== ======
</TABLE>
Prior to September 30, 1989, DASI was a cash basis taxpayer for federal and
state income tax purposes. At that date, the Company converted to the accrual
basis of accounting for income tax reporting purposes. The impact of this
conversion was recorded as taxable income on the Company's federal and state
tax returns ratably over four years.
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>
1996............................................................. $ 17,766
1997............................................................. 4,584
1998............................................................. 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 1993,
1994 and 1995 was $116,134, $112,864 and $114,136, 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 $100,340, $96,831 and $97,462 for the years ended March 31,
1993, 1994 and 1995, respectively.
As described in Note 5, the Company has loans outstanding to its
stockholders totalling $440,000 at March 31, 1994.
F-59
<PAGE>
DATA ARTS & SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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" on the accompanying Combined Balance Sheet. 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.
The Company is a participant in a legal defense fund with the National
Association of Computer Consultant Businesses (NACCB). As a member of the
NACCB legal defense fund, the Company has guaranteed a maximum of $10,000 for
the calendar year ending December 31, 1995. Payments to the NACCB up to
$10,000 may be required to the extent litigation costs covered by the NACCB
Legal Defense Fund Agreement are incurred by any of the organization's
members.
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, 1993, 1994 or 1995. 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 are parties to a stock purchase agreement
which is effective upon the death of a stockholder. The terms of the agreement
require the Company to buy $350,000 of the Company's stock held by the
deceased stockholder's 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 the Company will 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 will be terminated upon the merger of the
Company with Cotelligent.
NOTE 12--SIGNIFICANT CLIENTS
Two clients each accounted for approximately 10% and 14% of revenues in
1993, 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.
F-60
<PAGE>
DATA ARTS & SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13--OTHER ASSETS
Included in other assets is the cash surrender value of certain life
insurance policies held by the Company on its officers. This cash surrender
value totalled $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-61
<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 its cash flows
for each of the three years in the period ended March 31, 1995, 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
November 10, 1995
F-62
<PAGE>
CHAMBERLAIN ASSOCIATES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, DECEMBER 31,
1994 1995 1995
--------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 15,446 $ 46,118 $ 10,704
Accounts receivable........................ 520,755 1,265,176 1,465,198
-------- ---------- ----------
Total current assets..................... 536,201 1,311,294 1,475,902
Property and equipment, net.................. 39,214 32,535 44,151
Notes receivable--Cotelligent................ -- -- 52,500
Other assets................................. 20,049 10,250 37,310
-------- ---------- ----------
Total assets............................. $595,464 $1,354,079 $1,609,863
======== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt, including notes payable to
related parties of $0, $150,000 and
$100,000, respectively.................... $ -- $ 385,000 $ 100,000
Accounts payable, including overdraft of
$89,278 in 1994........................... 126,473 99,862 156,542
Accrued compensation....................... 85,196 238,092 299,994
Other accrued liabilities.................. 26,664 21,492 30,000
Income taxes payable....................... -- -- 169,716
Deferred income taxes...................... 98,147 203,487 203,487
-------- ---------- ----------
Total current liabilities................ 336,480 947,933 959,739
-------- ---------- ----------
Commitments (Note 6)......................... -- -- --
Stockholders' equity:
Common stock, $1.00 par value; 10,000
shares authorized; 780 shares
outstanding............................... 780 780 780
Additional paid-in capital................. 24,500 24,500 24,500
Retained earnings.......................... 233,704 380,866 624,844
-------- ---------- ----------
Total stockholders' equity............... 258,984 406,146 650,124
-------- ---------- ----------
Total liabilities and stockholders'
equity.................................. $595,464 $1,354,079 $1,609,863
======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE>
CHAMBERLAIN ASSOCIATES, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED DECEMBER 31,
---------------------------------- ------------------------
1993 1994 1995 1994 1995
---------- ---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................ $3,398,033 $3,738,117 $6,563,487 $4,455,414 $7,799,301
Cost of services........ 2,664,808 2,920,184 5,241,584 3,531,216 6,281,915
---------- ---------- ---------- ---------- ----------
Gross margin........ 733,225 817,933 1,321,903 924,198 1,517,386
Selling, general and
administrative
expenses............... 728,738 773,799 1,054,474 759,192 1,093,594
---------- ---------- ---------- ---------- ----------
Operating income.... 4,487 44,134 267,429 165,006 423,792
Other (income) expense:
Interest expense...... 80 351 15,804 8,512 12,569
Interest income....... (1,926) (1,989) (439) (315) (1,956)
Other, net............ (4,297) (1,181) (438) (201) (515)
---------- ---------- ---------- ---------- ----------
(6,143) (2,819) 14,927 7,996 10,098
---------- ---------- ---------- ---------- ----------
Income before provision
for income taxes....... 10,630 46,953 252,502 157,010 413,694
Provision (benefit) for
income taxes........... (6,787) 21,445 105,340 65,720 169,716
---------- ---------- ---------- ---------- ----------
Net income.......... $ 17,417 $ 25,508 $ 147,162 $ 91,290 $ 243,978
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE>
CHAMBERLAIN ASSOCIATES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------- PAID IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1992....... 780 $780 $24,500 $190,779 $216,059
Net income...................... -- -- -- 17,417 17,417
--- ---- ------- -------- --------
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...................... 243,978 243,978
--- ---- ------- -------- --------
Balance at December 31, 1995
(Unaudited).................... 780 $780 $24,500 $624,844 $650,124
=== ==== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE>
CHAMBERLAIN ASSOCIATES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------ -----------------------
1993 1994 1995 1994 1995
-------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............. $ 17,417 $ 25,508 $ 147,162 $ 91,290 $243,978
Adjustments to
reconcile net income
to net cash provided
by (used in) operating
activities:
Depreciation.......... 15,860 14,596 17,035 13,660 12,212
Loss (gain) on
disposal of property
and equipment........ 2,250 (2,032) -- -- --
Deferred income taxes,
net.................. (20,330) 87,647 220,520 -- --
Changes in current
assets and
liabilities:
Accounts receivable.. 79,021 (236,031) (744,421) (466,210) (200,022)
Income tax
receivable.......... 13,543 (66,202) (115,180) 65,720 169,716
Accounts payable and
accrued
liabilities......... (29,207) 111,835 121,113 110,792 127,090
Changes in other
assets.............. (1,660) -- (190) -- (27,060)
-------- --------- --------- -------- --------
Net cash provided by
(used in) operating
activities......... 76,894 (64,679) (353,961) (184,748) 325,914
-------- --------- --------- -------- --------
Cash flows from
investing activities:
Purchases of property
and equipment......... (18,560) (15,802) (10,356) (5,673) (23,828)
Investment in
Cotelligent........... -- -- (5,000) (5,000) --
Proceeds from sale of
investments........... -- -- 14,989 14,989 --
Advances to
Cotelligent........... -- -- -- -- (52,500)
-------- --------- --------- -------- --------
Net cash used in
investing
activities......... (18,560) (15,802) (367) 4,316 (76,328)
-------- --------- --------- -------- --------
Cash flows from
financing activities:
Net borrowings
(repayments) on short-
term debt............. -- -- 235,000 80,000 (235,000)
Borrowings from related
parties............... -- -- 150,000 100,000 --
Payments on loans with
related parties....... -- -- -- -- (50,000)
-------- --------- --------- -------- --------
Net cash provided by
(used in) financing
activities......... -- -- 385,000 180,000 (285,000)
Net increase (decrease)
in cash and cash
equivalents............ 58,334 (80,481) 30,672 (432) (35,414)
Cash and cash
equivalents at
beginning of period.... 37,593 95,927 15,446 15,446 46,118
-------- --------- --------- -------- --------
Cash and cash
equivalents at end of
period................. $ 95,927 $ 15,446 $ 46,118 $ 15,014 $ 10,704
======== ========= ========= ======== ========
Supplemental disclosures
of cash flow
information:
Interest paid.......... $ 80 $ 351 $ 15,804 $ 8,512 $ 12,569
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<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 intend to enter into a definitive agreement
with Cotelligent Group, Inc. (Cotelligent) pursuant to which the Company will
merge with Cotelligent (the Merger). All outstanding shares of the Company
will be 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.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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. For income tax purposes,
the Company reports results of operations on the cash basis of accounting
which recognizes revenues when received and certain expenses when paid.
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 Company's financial position as of December 31, 1995 and
its results of operations and cash flows for the nine months ended December
31, 1994 and 1995, as presented in the accompanying unaudited interim
financial statements.
F-67
<PAGE>
CHAMBERLAIN ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--PROPERTY AND EQUIPMENT
The property and equipment is comprised of the following:
<TABLE>
<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, 1993, 1994 and 1995 was
$15,860, $14,596 and $17,035, respectively.
NOTE 4--CREDIT FACILITIES
Short-Term Debt
Short-term debt consists of the following:
<TABLE>
<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.
NOTE 5--INCOME TAXES
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Current:
Federal.......................................... $ 8,044 $ -- $ --
State............................................ 5,499 -- --
------- ------- --------
13,543 -- --
Deferred:
Federal.......................................... (15,723) 16,586 81,472
State............................................ (4,607) 4,859 23,868
------- ------- --------
(20,330) 21,445 105,340
------- ------- --------
Total provision (benefit) for income taxes..... $(6,787) $21,445 $105,340
======= ======= ========
</TABLE>
F-68
<PAGE>
CHAMBERLAIN ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<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 31,
------------------------
1993 1994 1995
-------- ------ ------
<S> <C> <C> <C>
U.S. federal statutory rate...................... 34.0% 34.0% 34.0%
State income taxes, net of federal income tax
benefit......................................... 5.5 6.8 6.2
Nondeductible expenses........................... (1.5) 4.9 1.5
Rate differentials............................... (101.9) -- --
-------- ------ ------
Effective tax rate............................... (63.9)% 45.7% 41.7%
======== ====== ======
</TABLE>
The Company currently reports 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.
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>
1996............................................................. $ 47,078
1997............................................................. 48,523
1998............................................................. 37,206
1999............................................................. --
2000............................................................. --
---------
$ 132,807
=========
</TABLE>
For the fiscal years ended March 31, 1993, 1994, and 1995 the Company
incurred expenses of $39,942, $54,831 and $63,482, respectively, relating to
the office and automobile leases.
F-69
<PAGE>
CHAMBERLAIN ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--RELATED PARTY TRANSACTIONS
Pursuant to the definitive agreement with Cotelligent referenced in Note 1,
the Company invested $5,000 during fiscal 1995 in Cotelligent's common stock.
The investment is recorded at cost and is included in "Other assets" on the
accompanying Balance Sheet.
NOTE 8--SIGNIFICANT CLIENTS
During the year ended March 31, 1993, one major client accounted for
approximately 32% of revenue. In 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.
Additionally, these clients accounted for approximately 32% and 34% of the
accounts receivable balance at March 31, 1994 and 1995, respectively.
F-70
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Cotelligent Group, 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 Cotelligent Group,
Inc. at March 31, 1995 and 1994 and the results of its operations and its cash
flows for each of the three years in the period ended March 31, 1995, 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.
Our previously issued report on the accompanying financial statements for
each of the three years in the period ended March 31, 1995, contained a
paragraph which indicated that there was substantial doubt about the Company's
ability to continue as a going concern because the Company was a non-operating
entity and had generated a working capital deficiency. As a result of the
acquisitions by the Company and its simultaneous initial public offering of
its stock as described in Note 6 to the financial statements, this substantial
doubt about the Company's ability to continue as a going concern has been
eliminated. Accordingly, our present opinion on the accompanying financial
statements presented herein is different from that expressed in our previous
report.
Price Waterhouse LLP
Minneapolis, Minnesota
November 10, 1995, except as to Note 5 which is as of November 29, 1995, and
except as to Note 6 which is as of February 28, 1996
F-71
<PAGE>
COTELLIGENT GROUP, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, DECEMBER 31,
1994 1995 1995
--------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................... $ 3,623 $ 3,608 $ 31,259
Prepaids and other current assets......... -- -- 67,921
--------- --------- ----------
Total current assets.................... 3,623 3,608 99,180
--------- --------- ----------
Deferred transaction costs.................. -- -- 2,166,191
--------- --------- ----------
Total assets............................ $ 3,623 $ 3,608 $2,265,371
========= ========= ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short-term debt, including notes payable
to related parties of $--,
$-- and $153,040......................... $ 46,650 $ 51,501 $ 460,475
Accounts payable.......................... 39,546 27,140 1,802,325
Other accrued liabilities................. -- -- 55,738
--------- --------- ----------
Total current liabilities............... 86,196 78,641 2,318,538
--------- --------- ----------
Stockholders' equity:
Common stock, $.01 par value; 100,000,000
shares authorized; 417,781, 574,662 and
621,000 shares outstanding,
respectively............................. 1,127 1,550 6,210
Preferred stock, $0.01 par value, 500,000
shares authorized; none issued or
outstanding.............................. -- -- --
Additional paid-in capital................ 121,173 328,955 586,395
Accumulated deficit....................... (204,873) (405,538) (645,772)
--------- --------- ----------
Total stockholders' deficit............. (82,573) (75,033) (53,165)
--------- --------- ----------
Total liabilities and stockholders'
deficit................................ $ 3,623 $ 3,608 $2,265,371
========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-72
<PAGE>
COTELLIGENT GROUP, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED DECEMBER 31,
------------------------------ -----------------------
1993 1994 1995 1994 1995
-------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Selling, general and
administrative
expenses............... $ 37,568 $ 167,356 $ 200,781 $ 132,207 $ 240,267
-------- --------- --------- --------- ---------
Operating loss...... 37,568 167,356 200,781 132,207 240,267
Interest income....... (29) (22) (116) (65) (33)
-------- --------- --------- --------- ---------
Loss before provision
for income taxes....... (37,539) (167,334) (200,665) (132,142) (240,234)
Provision for income
taxes.................. -- -- -- -- --
-------- --------- --------- --------- ---------
Net loss................ $(37,539) $(167,334) $(200,665) $(132,142) $(240,234)
======== ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-73
<PAGE>
COTELLIGENT GROUP, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
--------------- PAID-IN EARNINGS EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT)
------- ------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1992.... -- $ -- $ -- $ -- $ --
Issuance of common stock..... 320,657 865 29,135 -- 30,000
Net loss..................... -- -- -- (37,539) (37,539)
------- ------ -------- --------- --------
Balance at March 31, 1993.... 320,657 865 29,135 (37,539) (7,539)
Issuance of common stock..... 97,124 262 92,038 -- 92,300
Net loss..................... -- -- -- (167,334) (167,334)
------- ------ -------- --------- --------
Balance at March 31, 1994.... 417,781 1,127 121,173 (204,873) (82,573)
Issuance of common stock..... 156,881 423 207,782 -- 208,205
Net loss..................... -- -- -- (200,665) (200,665)
------- ------ -------- --------- --------
Balance at March 31, 1995.... 574,662 1,550 328,955 (405,538) (75,033)
Redistribution of capital for
stock dividend.............. -- 4,297 (4,297) -- --
Issuance of common stock..... 120,478 1,205 380,895 -- 382,100
Redemption of common stock... (74,140) (742) (119,258) (120,000)
Net loss..................... -- -- -- (240,234) (240,234)
------- ------ -------- --------- --------
Balance at December 31, 1995
(Unaudited)................. 621,000 $6,210 $586,395 $(645,772) $(53,167)
======= ====== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-74
<PAGE>
COTELLIGENT GROUP, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------ -----------------------
1993 1994 1995 1994 1995
-------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $(37,539) $(167,334) $(200,665) $(132,142) $ (240,234)
Adjustments to
reconcile net loss to
net cash provided by
(used in) operating
activities:
Changes in current
assets and
liabilities:
Prepaid expenses and
other............... -- -- --
Accounts payable and
accrued expenses.... 3,500 36,046 (12,406) (18,154) 55,738
Other assets......... -- -- -- -- (67,921)
-------- --------- --------- --------- ----------
Net cash used in
operating
activities......... (34,039) (131,288) (213,071) (150,296) (252,417)
-------- --------- --------- --------- ----------
Cash flows from
financing activities:
Proceeds from notes
payable................ 4,851 64,414
Proceeds from notes
payable to related
parties............... 5,000 41,650 4,851 -- 344,560
Proceeds from issuance
of common stock....... 30,000 92,300 208,205 188,315 382,100
Repurchase of common
stock................. -- -- -- -- (120,000)
Increase in deferred
transaction costs, net
of related accounts
payable............... -- -- -- -- (391,006)
-------- --------- --------- --------- ----------
Net cash provided by
financing
activities......... 35,000 133,950 213,056 193,166 280,068
-------- --------- --------- --------- ----------
Net increase (decrease)
in cash and cash
equivalents............ 961 2,662 (15) 42,870 27,651
Cash and cash
equivalents at
beginning of period.... -- 961 3,623 3,623 3,608
-------- --------- --------- --------- ----------
Cash and cash
equivalents at end of
period................. $ 961 $ 3,623 $ 3,608 $ 46,498 $ 31,259
======== ========= ========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-75
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--BUSINESS ORGANIZATION
Cotelligent Group, Inc. (Cotelligent or the Company), was formed to create a
nationwide professional services firm that provides computer consulting and
contract programming services.
The Company intends to enter into definitive agreements to acquire four
operating businesses; BFR, Co. Inc. (BFR), Financial Data Systems, Inc.
(FDSI), Data Arts & Sciences, Inc. (DASI) and Chamberlain Associates, Inc.
(CAI), (the acquired companies) pursuant to which the acquired companies will
merge with Cotelligent (the Mergers). All outstanding shares of the acquired
companies will be 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. The Company has not had any operating business activity
for any of the periods presented.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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.
As a result of the inability to determine the future realizability of the
Company's net operating loss carryforwards, no income tax benefit or deferred
tax asset has been reflected in the financial statements.
Deferred Transaction Costs
Deferred transaction costs consist of costs related to the Offering and will
be recorded as a reduction of equity when the offering is completed.
Unaudited Interim Financial Statements
In the opinion of management, the Company has made adjustments, consisting
of only normal recurring accruals, necessary for a fair presentation of the
Company's financial position as of December 31, 1995 and its results of
operations and cash flows for the nine months ended December 31, 1994 and
1995, as presented in the accompanying unaudited interim financial statements.
NOTE 3--CREDIT FACILITIES
Short-Term Debt
Short-term debt at March 31, 1994 and 1995 consists of a note payable for
consulting services performed, which bears interest at a rate of 10% from June
1995, and is due upon completion of the Offering.
NOTE 4--LONG-TERM INCENTIVE PLAN
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.
F-76
<PAGE>
COTELLIGENT GROUP, INC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Effective as of September 8, 1995, the Company 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: 18,535 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.
NOTE 5--SUBSEQUENT EVENTS
In October 1995, Cotelligent repurchased 37,070 shares of its common stock
for $60,000, sold 37,070 shares of its common stock to a director of the
Company for $2.70 per share and sold an aggregate of 37,070 shares of its
common stock to three directors of the Company for $4.72 per share.
In November 1995, Cotelligent reincorporated in Delaware and increased the
number of authorized shares of its 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 6--SUBSEQUENT MERGERS AND INITIAL PUBLIC OFFERING
On February 20, 1996 Cotelligent acquired by merger, simultaneously with the
closing of an initial public offering of its common stock, all of the issued
and outstanding stock of FDSI, BFR, DASI and CAI for a combination of its
common stock and cash. Net proceeds from the initial public offering were
approximately $14,325,000. Additionally, on February 28, 1996, net proceeds of
approximately $2,975,000 were received for the issuance of an additional
355,500 shares as a result of the exercise of the underwriters' over-allotment
option.
F-77
<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 OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 5
The Company......................... 10
Price Range of Common Stock......... 11
Dividend Policy..................... 11
Selected Combined Financial Data.... 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 15
Business............................ 21
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Management............................ 29
Certain Transactions.................. 34
Principal Stockholders................ 37
Description of Capital Stock.......... 38
Shares Eligible for Future Sale....... 40
Legal Matters......................... 40
Experts............................... 40
Additional Information................ 41
Index to Financial Statements.........F-1
</TABLE>
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