UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 of other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
101 California Street, Suite 2050
San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
(415) 439-6400
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicates by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
At August 9, 1996, there were 7,308,614 shares of common stock
outstanding.
- 1 -
<PAGE>
COTELLIGENT GROUP, INC.
INDEX
Part I - Financial Information
Item 1. Financial Statements
Cotelligent Group, Inc.
Balance Sheet at March 31, 1996 and June 30, 1996
Statement of Operations for the Three Months Ended June 30, 1995 and 1996
Statement of Cash Flows for the Three Months Ended
June 30, 1995 and 1996
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II - Other Information
- 2 -
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED BALANCE SHEET
(In Thousands Except Share Data)
(Unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
1996 1996
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $14,308 $9,654
Accounts receivable, less allowance for doubtful accounts of $70 ............ 14,586 15,928
Notes from stockholders...................................................... 66 66
Notes receivable from related party.......................................... 105 108
Employee advances............................................................ - 250
Deferred income taxes........................................................ 286 318
Prepaid expenses and other current assets.................................... 668 466
---------- --------
Total current assets................................................. 30,019 26,790
---------- --------
Property and equipment, net.......................................................... 1,416 1,897
Deferred income taxes................................................................ 146 139
Other assets......................................................................... 151 145
---------- --------
Total assets......................................................... $31,732 $28,971
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt.............................................................. $3,624 $1,725
Accounts payable............................................................. 582 1,201
Accrued compensation and related payroll liabilities......................... 3,636 3,779
Income taxes payable......................................................... 1,167 977
Deferred income taxes........................................................ 846 1,041
Dividend payable to former ISI stockholder................................... - 225
Other accrued liabilities.................................................... 1,342 764
---------- ---------
Total current liabilities............................................ 11,197 9,712
---------- ---------
Long-term debt....................................................................... 445 351
Deferred income taxes................................................................ 19 19
Other long-term liabilities.......................................................... 942 367
Stockholders' equity:
Common Stock, $0.01 par value; 100,000,000 shares authorized; 7,272,614
and 7,290,614 shares outstanding, respectively....................... 73 73
Preferred Stock, $0.01 par value; 500,000 shares authorized; none issued
and outstanding...................................................... - -
Additional paid-in capital................................................... 18,235 17,952
Retained earnings............................................................ 821 497
---------- ---------
Total stockholders' equity........................................... 19,129 18,522
---------- ---------
Total liabilities and stockholders' equity........................ $31,732 $28,971
========== =========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
- 3 -
<PAGE>
<TABLE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands Except Share & Per Share Amounts)
(Unaudited)
<CAPTION>
Pro Forma Pro Forma
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
June 30, 1995 June 30, 1996 June 30, 1995 June 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues....................................... $3,552 $22,813 $18,333 $22,813
Cost of services............................... 2,284 16,612 13,607 16,612
------ ------- ------- -------
Gross margin........................... 1,268 6,201 4,726 6,201
Non-recurring transaction costs................ - 245 - -
Selling, general and administrative expenses... 1,123 4,852 3,733 4,749
------ ------- ------- ------
Operating income....................... 145 1,104 993 1,452
Other (income) expense:
Interest expense.......................... 16 78 89 64
Interest income........................... (1) (130) (16) (130)
Other..................................... (3) (3) (20) (3)
------ ------- -------- -------
Total other............................ 12 (55) 53 (69)
------ ------- -------- -------
Income before provision for income taxes....... 133 1,159 940 1,521
Provision for income taxes..................... - 1,240 377 578
------ ------- -------- -------
Net income (loss).............................. $ 133 $ (81) $ 563 $ 943
====== ======= ======== =======
Net income (loss) per share (Note 4)............................ $ (0.01) $ 0.08 $ 0.13
======= ======= =======
Pro forma net income (adjusted for income tax - Note 5)......... $ 718
=======
Pro forma net income per share (adjusted for income tax)........ $ 0.10
=======
Weighted average shares outstanding............................. 7,519,360 7,519,360 7,519,360
========= ========= =========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
- 4 -
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ending
---------------------------------
June 30, 1995 June 30, 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................. $ 133 $ (81)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization............................... 12 141
Deferred income taxes, net.................................. - (66)
Dividend issued by ISI prior to acquisition................. - (18)
Changes in current assets and liabilities:
Accounts receivable.................................... (228) (1,342)
Prepaid expenses and other current assets.............. 7 202
Accounts payable and accrued expenses.................. (17) 184
Income taxes payable................................... - 137
Changes in other assets..................................... 4 3
------- -------
Net cash used in operating activities.................. (89) (840)
------- -------
Cash flows from investing activities:
Purchases of property and equipment............................... (173) (622)
Advances to employee.............................................. - (250)
------- -------
Net cash used in investing activities.................. (173) (872)
------- -------
Cash flows from financing activities:
Proceeds on long-term debt........................................ 131 77
Payments on long-term debt........................................ (8) (672)
Net borrowings (repayments) on short-term debt.................... 212 (1,953)
Distribution to former ESP Stockholders........................... (73) (443)
Net proceeds from issuance of common stock........................ 90 49
------- -------
Net cash provided by (used in) financing activities.... 352 (2,942)
------- -------
Net increase (decrease) in cash and cash equivalents.............. 90 (4,654)
Cash and cash equivalents at beginning of period.................. 196 14,308
------- -------
Cash and cash equivalents at end of period........................ $ 286 $ 9,654
======= =======
Supplemental disclosures of cash flow information:
Interest paid..................................................... $ 16 $ 89
Income taxes paid................................................. $ - $ 1,160
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
- 5 -
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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
simultaneously with the closing of the Company's initial public offering of
common stock (the "Offering") 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 the
Offering. The aggregate consideration paid by Cotelligent for the Founding
Companies was $3,491,951 in cash, 3,206,875 shares of Common Stock of the
Company and the assumption of approximately $3,000,000 in debt, for an aggregate
value of $35,303,905. As a result of the substantial continuing interests in the
Company of the former stockholders of BFR, CAI, DASI, FDSI and Cotelligent; the
acquisition of the Founding Companies has been accounted for on a historical
cost basis.
On June 28, 1996, Cotelligent acquired (the "Acquired Companies") all the
outstanding common stock of two additional companies in business combinations
accounted for as poolings-of-interests: ESP Software Services, Inc. ("ESP") and
INNOVA Solutions, Inc. ("ISI"). The aggregate consideration paid by Cotelligent
for the Acquired Companies was 1,056,309 shares of the Company's Common Stock
worth approximately $18,000,000. The aggregate consideration for each of the
Acquisitions were as follows: ESP: $9,000,000 consisting of 534,919 shares of
Common Stock: ISI $9,000,000 consisting of 521,390 shares of Common Stock.
The accompanying consolidated historical financial statements include
Cotelligent Group, Inc. and the Acquired Companies up to the date of the
acquisition of the Founding Companies, after which the financial statements
reflect the results of Cotelligent Group, Inc. and both the Acquired Companies
and the Founding Companies.
The pro forma statements of operations includes the results of the
Founding Companies and the Acquired Companies as if they had been combined since
April 1, 1995. Pro forma data also reflects adjustments for: (i) compensation
differentials to former owners of the acquired entities; (ii) termination of
contributions to retirement plans; (iii) incremental selling, general and
administrative costs associated with Cotelligent corporate activities ; (iv) the
exclusion of non-recurring transaction costs related to the acquisition of the
Acquired Companies; and (v) income taxes as if the entities were combined and
subject to the effective federal and state statutory rates throughout the
periods presented.
Note 2 - Summary of Significant Accounting Policies
The accompanying interim financial statements do not include all
disclosures included in the financial statements for the fiscal years ended
March 31, 1995 and 1996 as included in Cotelligent's Form 10-K for the year
ended March 31, 1996, and therefore should be read in conjunction with the
financial statements included in the Form 10-K.
In the opinion of management, the interim financial statements filed as
part of this Form 10-Q reflect all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the financial position
and the results of operations and of cash flows for the interim periods
presented.
- 6 -
<PAGE>
<TABLE>
COTELLIGENT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 3 - Changes in Stockholders' Equity
(In Thousands Except Shares)
<CAPTION>
Total
Additional Retained Stockholders'
Common Stock Paid-In Capital Earnings Equity
------------------ --------------- -------- -------------
Shares Amount
------ ------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1996.................... 7,272,614 $ 73 $ 18,235 $ 821 $ 19,129
Issuance of Common Stock under exercise
of options........................... 18,000 - 140 - 140
Distribution to former ESP stockholder....... - - (423) - (423)
Dividends (by ISI prior to acquisition)...... - - - (243) (243)
Net loss..................................... - - - (81) (81)
--------- ------- --------- ----- ----------
Balance at June 30, 1996..................... 7,290,614 $ 73 $ 17,952 $ 497 $ 18,522
========= ======= ========= ===== ==========
</TABLE>
Note 4 - Earnings Per Share
Historical earnings per share for the first quarter of fiscal 1996 has
not been presented because it is not considered meaningful as a result of
exclusion of the Founding Companies as discussed in Note 1. Earnings per share
has been presented on a historical basis for the first quarter of 1997 and on a
pro forma basis for the first quarter of fiscal 1997 and fiscal 1996.
Note 5 - Unaudited Pro Forma Income Tax Information
Prior to the acquisition of the Acquired Companies, ISI and ESP were S
corporations and accordingly, the financial statements of ISI and ESP did not
reflect a provision for income taxes, as income taxes were the responsibility of
the individual stockholders. Effective with the acquisition of the Acquired
Companies, ISI and ESP terminated their S corporation status. The following
unaudited pro forma income tax information is presented in accordance with
Statement of Financial Accounting Standards No. 109 as if the companies had been
a C corporation subject to federal and state income taxes thoughout the periods
presented.
(In Thousands)
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
June 30, 1995 June 30, 1996
------------- -------------
<S> <C> <C>
Income before provision for income taxes....... $ 133 $ 1,159
Provision for income taxes..................... 85 441
------- --------
Pro forma net income (loss).................... $ 48 $ 718
======= ========
</TABLE>
- 7 -
<PAGE>
ITEM 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview
Cotelligent was formed in February 1993 to create a nationwide software
professional services company. Cotelligent acquired, simultaneously with the
closing of the Offering, the Founding Companies which provide a wide variety of
computer consulting services in various metropolitan areas of the United States.
The Founding Companies have operated since 1975 (DASI), 1980 (CAI), 1982 (FDSI)
and 1985 (BFR).
On June 28, 1996 Cotelligent acquired the Acquired Companies which have
operated since 1987 (ESP) and 1991 (ISI).
As a professional services organization, the Company responds to
service demands from its clients. Accordingly, the Company has limited control
over the timing and circumstances under which its services are provided.
Therefore, the Company can experience volatility in its operating results from
quarter to quarter. The operating results for any quarter are not necessarily
indicative of the results for any future period.
Pro forma data also reflects adjustments for: (i) compensation
differentials to former owners of the acquired entities; (ii) termination of
contributions to retirement plans; (iii) incremental selling, general and
administrative costs associated with Cotelligent corporate activities; (iv) the
exclusion of non-recurring transaction costs related to the acquisition of the
Acquired Companies; and (v) income taxes as if the entities were combined and
subject to the effective federal and state statutory rates throughout the
periods presented.
- 8 -
<PAGE>
PRO FORMA RESULTS OF OPERATIONS
Three Months Ended June 30, 1996 Compared to Three Months Ended June 30, 1995
Revenues
Revenues increased $4.5 million, or 24.4%, to $22.8 million in the
three months ended June 30, 1996 ("first quarter of 1997") from $18.3 million in
the three months ended June 30, 1995 ("first quarter of 1996"). The increase was
primarily attributable to a 17.5% increase in total client service hours
provided to 389,000 hours in the first quarter of 1997 from 331,000 hours in the
first quarter of 1996, and a 3.0% increase in the average hourly billing rate to
$58.08 in the first quarter of 1997 from $56.38 in the first quarter of 1996.
The increase in hourly billing rate reflects increased demand for employees and
consultants with higher skill levels and a more favorable economic climate. The
increases discussed above were in addition to an increase in placement fee
revenues generated to $228,000 in the first quarter of 1997 from $89,000 in the
first quarter of 1996.
Gross Margin
The pro forma gross margin increased $1.5 million, or 31.2%, to $6.2
million in the first quarter of 1997 from $4.7 million in the first quarter of
1996, primarily as a result of an increase in hours of service provided to
clients. Gross margin as a percentage of revenues increased to 27.2% in the
first quarter of 1997 from 25.8% in the first quarter of 1996, principally due
to an increase in project management engagements.
Selling, General and Administrative Expenses
Selling, general and administrative expenses on a pro forma basis
increased $1.0 million or 27.2%, to $4.7 million in the first quarter of 1997
from $3.7 million in the first quarter of 1996. The increase in absolute dollars
was primarily due to increased compensation to existing staff and staff added to
support current and anticipated future growth, increased occupancy expenses and
related operating costs associated with the Company's growth. Selling, general
and administrative expenses as a percentage of revenues were 20.8% for the first
quarter of 1997 as compared to 20.4% for the first quarter of 1996.
Interest Expense, Net
Interest expense, net of interest income on a pro forma basis was
$73,000 in the first quarter of 1996. Interest income, net of interest expense
of $66,000 in the first quarter of 1997, resulted from interest income on cash
provided from the Offering and consolidation of banking facilities of the
Founding Companies.
Provision for Income Taxes
Provision for income taxes on a pro forma basis were $578,000 an
effective tax rate of 38.0% of pro forma income before provision for income
taxes for the first quarter of 1997, compared to $377,000, an effective tax rate
of 40.0% of pro forma income before provision for income taxes. The reduced rate
reflects an expansion of operations in states which do not have state income
taxes.
- 9 -
<PAGE>
HISTORICAL COMBINED RESULTS OF OPERATIONS
Three Months Ended June 30, 1996 Compared to Three Months Ended June 30, 1995
Revenues
Revenues increased $19.2 million, or 542.3%, to $22.8 million in the
first quarter of 1997 from $3.6 million in the first quarter of 1996. The
increase was primarily attributable to the inclusion of $17.6 million in
revenues of the Founding Companies in the first quarter of 1997 coupled with a
22.2% increase in total client service hours provided by the Acquired Companies
to 99,000 hours in the first quarter of 1997 from 81,000 hours in the first
quarter of 1996, and a 2.6% increase in the average hourly billing rate of the
Acquired Companies to $60.36 in the first quarter of 1997 from $58.83 in the
first quarter of 1996. The increase in hourly billing rate reflects increased
demand for employees and consultants with higher skill levels and a more
favorable economic climate. The increases discussed above were in addition to an
increase in placement fee revenues of the Acquired Companies.
Gross Margin
Gross margin increased $4.9 million, or 389.0%, to $6.2 million in the
first quarter of 1997 from $1.3 million in the first quarter of 1996, primarily
due to the inclusion of the $4.3 million in gross margin of the Founding
Companies in the first quarter of 1997 together with an increase in hours of
service provided to clients. Gross margin as a percentage of revenues decreased
to 27.2% in the first quarter of 1997 from 35.7% in the first quarter of 1996,
primarily due to lower gross margins inherent in the client contracts of the
Founding Companies.
Non - Recurring Transaction Costs
Non-recurring transaction costs include expenditures associated with
the acquisition of the Acquired Companies and are expended as a result of
accounting for the acquisitions as poolings-of-interests.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $3.8 million, or
332.1%, to $4.9 million in the first quarter of 1997 from $1.1 million in the
first quarter of 1996. The increase in absolute dollars was primarily due to the
inclusion of the $4.3 million in selling, general and administrative expenses
for the Founding Companies in the first quarter of 1997 together with increased
compensation to existing staff and staff added to support anticipated growth.
Selling, general and administrative expenses decreased as a percentage of
revenues from 31.6% in the first quarter of 1996 to 21.3% in the first quarter
of 1997, primarily due to the spreading of corporate overhead over a larger
revenue base.
Interest Expense, Net
Interest expense, net of interest income, was $15,000 in the first
quarter of 1996. Interest income, net of interest expense of $52,000 in the
first quarter of 1997, resulted from interest income on cash provided from the
Offering and consolidation of banking facilities of the Founding Companies.
Provision for Income Taxes
The Company's provision for income taxes increased to $1.2 million in
the first quarter of 1997, which includes a $799,000 provision related to the
termination of the S corporation status of the Acquired Companies together with
a 38% provision on pre-tax income. The Company expects that its effective
statutory tax rate for the year ending March 31, 1997 will approximate 38%.
- 10 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth principally through cash flows from
operations, periodic borrowings under its credit facilities, related party
borrowings and sales of shares of common stock.
The Company's primary source of liquidity is the collection of its
accounts receivable. Accounts receivable have grown as the Company's operations
have grown. Receivables decreased to 61 days of revenue at June 30, 1996 from 67
days of revenue at March 31, 1996. The Company's ability to reduce significantly
the aging of its outstanding receivables is limited because of a continuing
general trend by clients to slow their payment of invoices as a means of
managing cash. Should the Company not be able to bill and collect for its
services on a timely basis, the Company could use the proceeds from the Offering
or draw upon available credit facilities to finance its operations.
Cash flow used by operating activities was $840,000 for the three
months ended June 30, 1996. The Company has used cash generated from the
Offering for operating activities and to reduce short term borrowings. The
average balance of such borrowings outstanding was approximately $1.9 million
and approximately $1.8 million during the first three months of 1997 and 1996,
respectively.
At June 30, 1996, the Company had $9.7 million in cash and cash
equivalents as compared to $14.3 million at March 31, 1996. At June 30, 1996,
the Company had short-term notes payable under its bank revolving credit
facilities and current installments of long-term obligations outstanding in the
amount of $1.7 million. Long-term obligations, consisting of capital lease
obligations and equipment loans, totaled $351,000 at June 30, 1996 compared to
$609,000 at June 30, 1995.
Cotelligent and each of the Founding Companies had separate banking
relationships through May 31, 1996. Effective June 1, 1996, these separate
banking relationships were consolidated into a single banking relationship with
a major bank. The single relationship will provide for a more effective means of
managing operating capital. The new relationship provides a credit facility (the
"Facility") in the amount of $10.0 million for the Company, secured by accounts
receivable and other assets of the Company. Borrowings on the Facility bear
interest at the bank's prime rate. The Company intends to borrow from
time-to-time to meet normal operating needs, finance its receivables or to
effect acquisitions in connection with its acquisition strategy. At June 30,
1996, the Acquired Companies were not able to make use of the Facility and
continued to maintain their existing banking relationships. The Company had
approximately $10.0 million available under bank credit facilities at June 30,
1996. The bank facilities bear interest at rates ranging from 8.25% - 9.75% and
are secured by accounts receivable and various assets of the Company and its
wholly-owned subsidiaries. The Company is not in default under any of its credit
agreements. The Company expects that the Acquired Companies will be able to
avail themselves to the Facility in the near term.
As of April 1, 1995, BFR terminated its S corporation status. As a
result, federal and state income taxes of approximately $463,000 are expected to
be paid ratably over the next two years. ESP and ISI terminated their respective
S corporation elections on June 28, 1996. The termination of these elections
will result in federal and state income taxes of approximately $799,000 being
paid ratably over the next four years.
The Company believes the net proceeds from the sale of Common Stock in
the Offering, together with existing sources of liquidity and funds generated
from operations, will provide adequate cash to fund its anticipated cash needs
at least through the next six months.
- 11 -
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is, from time to time, a party to litigation arising in
the normal course of its business. The Company is not presently
subject to any material litigation.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibits.
(b) Reports on Form 8-K.
None.
- 12 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COTELLIGENT GROUP, INC
Date: August 13, 1996 By : /s/ Duane W. Bell
------------------- --------------------
Duane W. Bell
Senior Vice President and
Chief Financial Officer
- 13 -
<PAGE>
EXHIBIT INDEX
NUMBER EXHIBIT PAGE
None
