<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-25372
COTELLIGENT GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3173918
(State of other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
101 California Street, Suite 2050
San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
(415) 439-6400
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicates by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
At February 14, 1997, there were 9,697,369 shares of common stock
outstanding.
<PAGE>
COTELLIGENT GROUP, INC.
INDEX
Part 1 - Financial Information
Item 1. Financial Statements
Cotelligent Group, Inc.
Balance Sheet at March 31, 1996 and December 31, 1996
Statement of Operations for the Three and Nine Months
Ended December 31, 1995 and 1996 (Unaudited)
Statement of Cash Flows for the Nine Months Ended
December 31, 1995 and 1996(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Part II - Other Information
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED BALANCE SHEET
(In Thousands Except Share Data)
<TABLE>
March 31, 1996 December 31, 1996
--------------------- ---------------------
<S> <C> <C>
(Unaudited)
Current Assets:
Cash and cash equivalents........................................ $ 14,574 $ 6,024
Marketable securities............................................ 26 -
Accounts receivable (billed and unbilled), net................... 18,666 24,561
Notes from stockholders.......................................... 74 38
Notes receivable................................................. 136 -
Notes receivable from related party.............................. 105 -
Prepaid expenses and other current assets........................ 770 1,181
--------------------- ---------------------
Total current assets......................................... 34,351 31,804
--------------------- ---------------------
Property and equipment, net........................................... 1,690 3,519
Deferred income taxes................................................. 247 190
Goodwill.............................................................. - 2,899
Other assets.......................................................... 160 166
===================== =====================
Total assets................................................. $ 36,448 $ 38,578
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt................................................... $ 4,863 $ 6,156
Accounts Payable.................................................. 1,428 3,071
Accrued compensation and related payroll liabilities.............. 4,737 4,969
Income taxes payable.............................................. 1,243 877
Deferred income taxes............................................. 560 420
Due to related party.............................................. 417 -
Other accrued liabilities......................................... 1,626 1,010
--------------------- --------------------
Total current liabilities..................................... 14,874 16,503
--------------------- --------------------
Long-term debt......................................................... 450 200
Other long-term liabilities............................................ 942 341
Stockholders' equity:
Common Stock, $0.01 par value;100,000,000 shares authorized;
7,917,440 and 7,953,440 shares outstanding, respectively....... 91 92
Preferred Stock, $0.01 par value; 500,000 shares authorized; none
issued and outstanding......................................... - -
Additional paid-in capital........................................ 18,430 18,357
Retained earnings ................................................ 1,661 3,112
--------------------- --------------------
Total stockholders' equity..................................... 20,182 21,561
===================== ====================
Total liabilities and stockholders' equity..................... $ 36,448 $ 38,578
===================== ====================
<FN>
The accompanying notes are an integral part of these consolideated financial
statements.
</FN>
</TABLE>
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands Except Share and Per Share Data)
(Unaudited)
<TABLE>
Three Months Pro Forma Three Pro Forma Nine
Ended Nine Months Ended Months Ended Months Ended
December 31, 1996 December 31, 1996 December 31, 1996 December 31, 1996
------------------ ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
Revenues......................................... $ 32,219 $ 99,438 $ 36,219 $ 99,438
Cost of services................................. 26,170 71,119 26,170 71,119
----------------- ------------------ ----------------- ------------------
Gross Margin............................... 10,049 28,319 10,049 28,319
Non-recurring transaction costs................. 316 1,107 - -
Selling, general and administrative expenses.... 7,572 21,765 7,395 21,005
----------------- ------------------ ----------------- ------------------
Operating income........................... 2,158 5,447 2,654 7,314
Other (income) expense:
Interest expense........................... 134 293 134 279
Interest income............................ (65) (273) (65) (273)
Other...................................... (114) (167) (114) (167)
----------------- ------------------ ----------------- ------------------
Total other.............................. (45) (147) (45) (161)
----------------- ------------------ ----------------- ------------------
Income before provision for income taxes........ 2,203 5,594 2,699 7,475
Provision for income taxes...................... 821 2,435 1,026 2,840
----------------- ------------------ ---------------- ------------------
Net income...................................... $ 1,382 $ 3,159 $ 1,673 $ 4,635
================= ================== ================ ==================
Net income per share (Note 4)................... $ 0.15 $ 0.34 $ .18 $ .49
================= ================== ================ ==================
Weighted average shares outstanding............ 9,442,464 9,404,603 9,442,464 9,404,603
================ ================== ================== =================
<FN>
The accompanying notes are an integral part of these consolidated financial
statements
</FN>
</TABLE>
(CONTINUED)
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
In Thousands Except Share and Per Share Data)
(Unaudited)
<TABLE>
Three Months Pro Forma Three Pro Forma Nine
Ended Nine Months Ended Months Ended Months Ended
December 31, 1995 December 31, 1995 December 31, 1995 December 31, 1995
------------------ ------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Revenues......................................... $ 10,555 $ 32,908 $ 26,165 $ 77,887
Cost of services................................. 7,286 22,918 18,808 56,914
------------------ ------------------- ------------------ -------------------
Gross Margin............................... 3,269 9,990 7,357 20,973
Non-recurring transaction costs................. - - - -
Selling, general and administrative expenses.... 2,674 8,227 5,386 15,581
------------------ ------------------- ----------------- -------------------
Operating income........................... 595 1,763 1,971 5,392
Other (income) expense:
Interest expense........................... 65 191 135 410
Interest income............................ (2) (5) (10) (42)
Other...................................... 10 (330) 7 (31)
------------------ -------------------- ---------------- -------------------
Total other.............................. 73 (144) 132 337
------------------ -------------------- ---------------- -------------------
Income before provision for income taxes........ 522 1,907 1,839 5,055
Provision for income taxes...................... (2) 45 736 2,022
================== ==================== ================ ===================
Net Income...................................... $ 524 $ 1,862 $ 1,103 $ 3,033
================== ==================== ================ ===================
Net income per share (Note 4)........................................................... $ 0.15 $ 0.42
================ ===================
Weighted average shares outstanding..................................................... 7,303,824 7,303,824
================ ===================
<FN>
The accompanying notes are an integral part of these consolidated financial
statements
</FN>
</TABLE>
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
Nine Months Ended
----------------------------------------
December 31, 1995 December 31, 1996
------------------ -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 1,862 $ 3,159
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 242 586
(Gain)loss on disposal of property and equipment....... (347) 48
Deferred income taxes, net............................. 644 (83)
Changes in current assets and liabilities:
Accounts receivable................................ (294) (5,895)
Prepaid expenses and other current assets.......... (9) (411)
Accounts payable and accrued expenses.............. (144) 1,875
Income taxes payable............................... 540 (366)
Increase (decrease) in other liabilities - (1,526)
Changes in other assets................................ (177) 10
--------------------- --------------------
Net cash provided by (used in)operating activities. 2,317 (2,603)
--------------------- --------------------
Cash flows from investing activities:
Proceeds on sale of assets................................. 394 -
Purchase of businesses, net of cash of acquired companies.. - (2,915)
Purchases of property and equipment........................ (339) (2,415)
Net repayments from (advances to) related parties.......... (669) (105)
--------------------- --------------------
Net cash used in investing activities............. (614) (5,435)
--------------------- --------------------
Cash flows from financing activities:
Repurchase of common stock................................. (123) -
Payments on long-term debt................................. (40) (250)
Net borrowings (repayments) on short-term debt............. (384) 1,293
Net borrowings (repayments) on loans with related parties.. (342) 105
Net proceeds from issuance of common stock................. 382 48
Distribution to founding Companies former stockholders..... (1,038) (1,566)
Dividends.................................................. - (142)
--------------------- --------------------
Net cash provided by (used in) financing activities (1,545) (512)
--------------------- --------------------
Net increase (decrease) in cash and cash equivalents....... 158 (8,550)
Cash and cash equivalents at beginning of period........... 492 14,574
--------------------- --------------------
Cash and cash equivalents at end of period................ $ 650 $ 6,024
===================== ====================
Supplemental disclosures of cash flow information:
Interest paid............................................. $ 436 $ 293
Income taxes paid ........................................ $ 727 $ 3,272
</TABLE>
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Data)
Note 1 - Business Organization and Basis of Presentation
Cotelligent Group, Inc. ("Cotelligent" or the "Company") was formed to
acquire, own and operate software professional services businesses
specializing in providing information technology ("IT") consultants on a
contract basis and consulting and outsourcing services to business with complex
IT operations. On February 20, 1996, Cotelligent acquired (the
"Acquisitions") four companies (the "Founding Companies"): Financial Data
Systems, Inc.("FDSI"), BFR Co., Inc.("BFR"), Data Arts & Sciences, Inc.
(`DASI") and Chamberlain Associates, Inc. ("CAI"). All outstanding shares
of the Founding Companies' capital stock were converted into shares of
Cotelligent Common Stock concurrently with the consummation of an initial
public offering (the "Offering") of such Common Stock.
The aggregate consideration paid by Cotelligent in these transaction
was $3,492 in cash, 3,206,875 shares of Common Stock of the Company and the
assumption of approximately $3,000 in debt, for an aggregate value of $35,304.
The aggregate consideration for each of the Founding Companies was as follows:
BFR:$11,958, consisting of $1,450 paid in cash and 1,167,587 of Common Stock;
CAI; $3,999 consisting of $300 paid in cash, 388,761 shares of Common Stock and
$200 in short-term and related-party debt; DASI: $5,606 consisting of $400 paid
in cash, 443,044 shares of Common Stock and $1,219 in short-term and
related-party debt; and FDSI: $13,740 consisting of $1,342 paid in cash,
1,207,483 shares of Common Stock and $1,531 in short-term, long-term and related
party debt. As a result of the substantial continuing interest in the Company of
the former stockholders of BFR, CAI DASI, FDSI and Cotelligent, the Acquisitions
were accounted for on a historical cost basis.
On June 28, 1996 Cotelligent acquired ESP Software Services, Inc.
("ESP") and INNOVA Solutions, Inc.("ISI"), on September 30, 1996 Cotelligent
acquired JasTech, Inc. and JasTech of Florida, Inc. ("JTI") and on November
27, 1996 Cotelligent acquired Pittsburgh Business Consultants ("PBC")
(collectively the "Pooled Companies") in business combinations accounted for
under the pooling-of-interests method.
Additionally, the Company acquired two businesses accounted for as a
purchase. The resulting goodwill of $2.9 million is being amortized over 30
years.
The accompanying consolidated financial statements include Cotelligent
Group, Inc., restated to give effect to the acquisitions of the Pooled
Companies, through the date of acquisition of the Founding Companies on
February 20, 1996, after which the financial statements also reflect the
results of the Founding Companies.
The pro forma statements of operations includes the results of the
Founding Companies and the Pooled Companies as if they had been combined since
April 1, 1995. Pro forma data also reflects adjustments for: (i) compensation
differentials to former owners of the acquired entities; (ii) termination of
contributions to retirement plans; (iii) incremental selling, general and
administrative costs associated with Cotelligent's corporate activities ; (iv)
the exclusion of non-recurring transaction costs related to the acquisition of
the Pooled Companies; and (v) income taxes as if the entities were combined
and subject to the effective federal and state statutory rates throughout
the periods presented.
Note 2 - Summary of Significant Accounting Policies
The accompanying interim financial statements do not include all
disclosures included in the financial statements for the fiscal years ended
March 31, 1994, 1995 and 1996 as included in Cotelligent's Form 10-K for the
year ended March 31, 1996, and therefore should be read in conjunction with the
financial statements included in the Form 10-K.
In the opinion of management, the interim financial statements filed as
part of this Form 10-Q reflect all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the financial position
and the results of operations and of cash flows for the interim periods
presented.
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(In Thousands Except Share and Per Share Data)
(Unaudited)
Note 3 - Changes in Stockholders' Equity
<TABLE>
Total
Additional Paid Retained Stockholders'
Common Stock -In Capital Earnings Equity
------------------------ ----------------- ------------- -----------------
Shares Amount
------------- ----------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1996................... 9,119,914 $ 91 $ 18,430 $ 1,008 $ 19,289
Dividends................................... - - - (1,708) (385)
Distribution to former ESP stockholder...... - - (423) - (423)
Issuance of Common Stock.................... 45,853 1 168 - 169
Tax benefit on stock options................ - - 182 - 182
Net Income.................................. - - - 3,159 3,159
Balance at September 30, 1996............... ------------- ---------- ----------------- ------------- -----------------
9,165,767 $ 92 $ 18,357 $ 3,476 $ 19,562
============= ========== ================= ============= =================
</TABLE>
Note 4 - Earnings Per Share
Historical earnings per share for the quarter and six months ended
September 30, 1995 has not been presented because it is not considered
meaningful as a result of the merger of the Founding Companies and
simultaneous Offering of the Company's stock, all which occurred on February 20,
1996 (See Note 1). Earnings per share has been presented on a historical
basis for the second quarter fiscal 1997 and on a pro forma basis for all
periods presented.
Note 5 - Unaudited Pro Forma Income Tax Information
Prior to the acquisition of the Pooled Companies, ISI, ESP and JasTech
of Florida, Inc. were S corporations and, accordingly, the financial statements
of ISI, ESP and JasTech of Florida, Inc. did not reflect a provision for income
taxes, as income taxes were the responsibility of the individual stockholders.
Effective with their respective acquisitions ISI, ESP and JasTech of Florida,
Inc. terminated their S corporation status. The following unaudited pro forma
income tax information is presented in accordance with Statement of Financial
Accounting Standards No. 109 as if the companies had been a C corporation
subject to federal and state income taxes thoughout the periods presented.
<TABLE>
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
1995 1995 1996 1996
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Income before provision for income taxes....................... $ 522 $ 1,907 $ 2,203 $ 5,594
Provision for income taxes..................................... 141 525 837 2,126
------------ ------------ ------------ -----------
Pro forma net income.......................................... $ 381 $ 1,382 $ 1,366 $ 3,468
------------ ------------ ------------ -----------
</TABLE>
<PAGE>
ITEM 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Cotelligent was formed in February 1993 to acquire, own and operate
software professional services businesses specializing in providing information
technology ("IT") consultants on a contract basis and consulting and
outsourcing services to businesses with complex IT operations. On February
20, 1996, Cotelligent acquired (the "Acquisitions") four companies (the
"Founding Companies"):Financial Data Systems, Inc.("FDSI"), BFR Co., Inc.
("BFR"), Data Arts & Sciences, Inc. ("DASI") and Chamberlain Associates,
Inc. ("CAI"). The Founding Companies have operated since 1975 (DASI), 1980
(CAI), 1982 (FDSI) and 1985 (BFR).
On June 28, 1996 Cotelligent acquired two Companies which have operated
since 1987 ESP Software Services ("ESP") and 1991 Innova Solutions Inc. ("ISI").
On September 30, 1996 Cotelligent acquired JasTech (JTI) which has operated
since 1984. On November 27, 1996 Cotelligent acquired Pittsburgh Business
Consultants ("PBC") which has operated since 1983.
As a professional services organization, the Company responds to
service demands from its clients. Accordingly, the Company has limited control
over the timing and circumstances under which its services are provided.
Therefore, the Company can experience volatility in its operating results from
quarter to quarter. The operating results for any quarter are not necessarily
indicative of the results for any future period.
Pro forma data also reflects adjustments for: (i) compensation
differentials to former owners of the acquired entities; (ii) termination of
contributions to retirement plans; (iii) incremental selling, general and
administrative costs associated with Cotelligent corporate activities; (iv) the
exclusion of non-recurring transaction costs related to the acquisition of the
Pooled Companies; and (v) income taxes as if the entities were combined and
subject to the effective federal and state statutory rates throughout the
periods presented.
<PAGE>
PRO FORMA RESULTS OF OPERATIONS
Three Months Ended December 31, 1996 Compared to
Three Months Ended December 31, 1995
Revenues
Revenues on a pro forma basis increased $10.0 million, or 38.4%, to
$36.2 million in the three months ended December 31, 1996 ("third
quarter of 1997") from $26.2 million in the three months ended December 31,
1995 ("third quarter of 1996"). The increase was primarily attributable
to a 37.0% increase in total client service hours provided to 643,000
hours in the third quarter of 1997 from 470,000 hours in the third quarter
of 1996, and a 1.3% increase in the average hourly billing rate to $55.86 in
the third quarter of 1997 from $55.17 in the third quarter of 1996. These
increases were in addition to an increase in placement fee revenues generated
to $286,000 in the third quarter of 1997 from $255,000 in the third quarter
of 1996.
Gross Margin
The pro forma gross margin increased $2.6 million, or 36.6 %, to $10.0
million in the third quarter of 1997 from $7.4 million in the third quarter of
1996, primarily as a result of an increase in hours of service provided to
clients. Gross margin as a percentage of revenues decreased to 27.7% in the
third quarter of 1997 from 28.1% in the third quarter of 1996, principally due
to a decrease in placement fee revenues as a percentage of total revenues and
an increase of low margin ancillary services provided to a key client.
Selling, General and Administrative Expenses
Selling, general and administrative expenses on a pro forma basis
increased $2.0 million, or 37.9%, to $7.4 million in the third quarter of 1997
from $5.4 million in the third 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 20.4% for the third
quarter of 1997 as compared to 20.5% for the third quarter of 1996.
Interest Expense, Net
Interest expense, net of interest income on a pro forma basis was
$125,000 in the third quarter of 1996 and $69,000 in the third quarter of 1997.
Provision for Income Taxes
Provision for income taxes on a pro forma basis were $1.0 million, an
effective tax rate of 38.0% of pro forma income before provision for income
taxes for the third quarter of 1997, compared to $736,000, an effective tax rate
of 40.0% of pro forma income before provision for income taxes for the third
quarter of 1996. The reduced tax rate reflects an expansion of operations in
states which do not have state income taxes.
<PAGE>
HISTORICAL COMBINED RESULTS OF OPERATIONS
Three Months Ended December 31, 1996 Compared to Three
Months Ended December 31, 1995
Revenues
Revenues increased $25.6 million, or 243.1%, to $36.2 million in the
third quarter of 1997 from $10.6 million in the third quarter of 1996. The
increase was primarily attributable to the inclusion of $20.2 million of
revenues of the Founding Companies in the third quarter of 1997 coupled with a
47.8% increase in total client service hours provided by the Pooled Companies to
331,000 hours in the third quarter of 1997 from 224,000 hours in the third
quarter of 1996, and an 3.1% increase in the average hourly billing rate of the
Pooled Companies to $47.88 in the third quarter of 1997 from $46.44 in the third
quarter of 1996. The increase in hourly billing rate reflects increased demand
for employees and consultants with higher skill levels and a more favorable
economic climate. The increases discussed above were in addition to an increase
in placement fee revenues of the Pooled Companies.
Gross Margin
Gross margin increased $6.7 million, or 207.4%, to $10.0 million in the
third quarter of 1997 from $3.3 million in the third quarter of 1996, primarily
due to the inclusion of the $5.4 million in gross margin of the Founding
Companies in the third quarter of 1997 together with an increase in hours of
service provided to clients. Gross margin as a percentage of revenues decreased
to 27.7% in the third quarter of 1997 from 31.0% in the third quarter of 1996,
primarily due to lower margins achieved by the Founding Companies.
Non - Recurring Transaction Costs
Non-recurring transaction costs include expenditures associated with
the acquisition of the Pooled Companies and are expended as a result of
accounting for the acquisitions as poolings-of-interests.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $4.9 million, or
183.2%, to $7.6 million in the third quarter of 1997 from $2.7 million in the
third quarter of 1996. The increase in absolute dollars was primarily due to the
inclusion of the $4.4 million in selling, general and administrative expenses of
the Founding Companies in the third quarter of 1997 together with increased
compensation to existing staff and staff added to support anticipated growth.
Selling, general and administrative expenses decreased as a percentage of
revenues from 25.3% in the third quarter of 1996 to 20.9% in the third 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 $63,000 in the third
quarter of 1996 and $69,000 in the third quarter of 1997.
Provision for Income Taxes
The Company's provision for income taxes increased to $925,000 in the
third quarter of 1997, which reflects an adjustment to bring the year-to-date-
provision on pre-tax income to 42%. The Company expects that its effective
statutory tax rate for the year ending March 31, 1997 will approximate 40%.
<PAGE>
PRO FORMA RESULTS OF OPERATIONS
Nine Months Ended December 31, 1996 Compared to
Nine Months Ended December 31, 1995
Revenues
Revenues on a pro forma basis increased $21.5 million, or 27.7%, to
$99.4 million in the nine months ended December 31, 1996 ("first three
quarters of 1997") from $77.9 million in the nine months ended December 31,
1995 ("first three quarters of 1996"). The increase was primarily
attributable to a 21.1% increase in total client service hours provided to
1,751,000 hours in the first three quarters of 1997 from 1,446,000 hours in
the first three quarters of 1996, and a 5.1% increase in the average
hourly billing rate to $56.17 in the first three quarters of 1997 from
$53.47 in the first three quarters 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. These increases were in
addition to an increase in placement fee revenues generated to $1.1 million
in the first three quarters of 1997 from $566,000 in the first three quarters
of 1996.
Gross Margin
The pro forma gross margin increased $7.3 million, or 35.0%, to $28.3
million in the first three quarters of 1997 from $21.0 million in the first
three quarters 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 28.5%
in the first three quarters of 1997 from 26.9% in the first three quarters of
1996, principally due to an increase in project management engagements, which
generally have higher gross margins and an increase in placement fee revenues as
a percentage of total revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses on a pro forma basis increased
$5.4 million, or 35.5%, to $21.0 million in the first three quarters of 1997
from $15.6 million in the first three quarters of 1996. The increase in absolute
dollars was primarily due to increased compensation to existing staff and staff
added to support current and anticipated future growth, increased occupancy
expenses and related operating costs associated with the Company's growth.
Selling, general and administrative expenses as a percentage of revenues were
21.1% for the first three quarters of 1997 as compared to 20.0% for the first
three quarters of 1996.
Interest Expense, Net
Interest expense, net of interest income on a pro forma basis was
$368,000 in the first three quarters of 1996 and $6,000 in the first three
quarters of 1997.
Provision for Income Taxes
Provision for income taxes on a pro forma basis were $2.8 million an
effective tax rate of 38.0% of pro forma income before provision for income
taxes for the first three quarters of 1997, compared to $2.0 million an
effective tax rate of 40.0% of pro forma income before provision for income
taxes for the first three quarters of 1996. The reduced tax rate reflects
an expansion of operations in states which do not have state income taxes.
<PAGE>
HISTORICAL COMBINED RESULTS OF OPERATIONS
Nine Months Ended December 31, 1996 Compared to Nine
Months Ended December 31, 1995
Revenues
Revenues increased $66.5 million, or 202.2%, to $99.4 million in the first
three quarters of 1997 from $32.9 million in the first three quarters of 1996.
The increase was primarily attributable to the inclusion of $57.0 million in
revenues of the Founding Companies in the first three quarters of 1997 coupled
with a 18.0% increase in total client service hours provided by the Pooled
Companies to 907,000 hours in the first three quarters of 1997 from 769,000
hours in the first three quarters of 1996, and a 9.1% increase in the average
hourly billing rate of the Pooled Companies to $49.52 in the first three
quarters of 1997 from $45.41 in the first three quarters of 1996. The increase
in hourly billing rate reflects increased demand for employees and consultants
with higher skill levels and a more favorable economic climate.
Gross Margin
Gross margin increased $18.3 million, or 183.5%, to $28.3 million in the
first three quarters of 1997 from $10.0 million in the first three quarters of
1996, primarily due to the inclusion of the $9.5 million in gross margin of the
Founding Companies in the first three quarters of 1997 together with an increase
in hours of service provided to clients by the Pooled Companies. Gross margin as
a percentage of revenues decreased to 28.5% in the first three quarters of 1997
from 30.4% in the first three quarters of 1996, primarily due to lower gross
margins achieved by the Founding Companies.
Non-Recurring Transaction Costs
Non-recurring transaction costs include expenditures associated with the
acquisition of the Pooled Companies as a result of accounting for the
acquisitions as poolings-of-interests.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $13.6 million, or
164.6%, to $21.8 million in the first three quarters of 1997 from $8.2 million
in the three quarters first of 1996. The increase in absolute dollars was
primarily due to the inclusion of the $12.9 million in selling, general and
administrative expenses for the Founding Companies in the first three quarters
of 1997 together with increased compensation to existing staff and staff added
to support anticipated growth. Selling, general and administrative expenses
decreased as a percentage of revenues from 25.0% in the first three quarters of
1996 to 21.9% in the first three quarters 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 $186,000 in the first
three quarters of 1996 and $20,000 in the first three quarters of 1997.
Provision for Income Taxes
The Company's provision for income taxes increased to $3.1 million in the
first three quarters of 1997, which includes an $799,000 provision related to
the termination of the S corporation status of the Pooled Companies together
with a 42% provision on pre-tax income. The Company expects that its effective
statutory tax rate for the year ending March 31, 1997 will approximate 40%.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth principally through cash flows from
operations, periodic borrowings under its credit facilities and cash generated
from the February 20, 1996 Offering to the public.
The Company's primary source of liquidity is the collection of its
accounts receivable. Accounts receivable have grown as the Company's operations
have grown. Receivables increased to 68 days of revenue at December 31, 1996
from 63 days of revenue at March 31, 1996. The increase in days of revenue is
due to 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 utilize existing cash
on hand or draw upon available credit facilities to finance its operations.
Cash flow used by operating activities was $2.6 million for the nine
months ended December 31, 1996, which includes $1.1 million used to pay
non-recurring cost to acquire the Pooled Companies. During this period the
Company utilized this cash plus a portion of existing cash balances to acquire
fixed assets ($2.4 million) and purchase the operations of two companies ($2.9
million). The average balance of such borrowings outstanding was
approximately $4.1 million and approximately $1.8 million during the first nine
months of 1997 and 1996, respectively.
At December 31, 1996, the Company had $6.0 million in cash and cash
equivalents as compared to $14.6 million at March 31, 1996. At December 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 $6.2 million. Long-term obligations, consisting of capital lease
obligations and equipment loans, totaled $314,000 at December 31, 1996 compared
to $942,000 at March 31, 1996.
Cotelligent and each of the Founding Companies had separate banking
relationships through May 31, 1996. Effective June 1, 1996, these separate
banking relationships were consolidated into a single banking relationship with
a major bank. The single relationship provides for a more effective means of
managing operating capital. The new relationship provides a credit facility (the
"Facility") in the amount of $20.0 million for the Company, secured by accounts
receivable and other assets of the Company. ESP and ISI terminated their
separate banking relationship in September 1996 and are now included in the
consolidated credit facility JTI and PBC will begin using the Company's banking
relationship in the near term. Borrowings on the Facility bear interest at the
bank's prime rate. The Company intends to borrow from time-to-time to meet
normal operating needs, finance its receivables or to effect acquisitions in
connection with its acquisition strategy.
As of April 1, 1995, BFR terminated its S corporation status. As a
result, federal and state income taxes of approximately $463,000 are expected to
be paid ratably over the next two years. ESP and ISI terminated their respective
S corporation elections on June 28, 1996. The termination of these elections
will result in federal and state income taxes of approximately $800,000 being
paid ratably over the next four years.
The Company believes the net proceeds from the sale of Common Stock in
the Offering, together with existing sources of liquidity and funds generated
from operations, provides adequate cash to fund its anticipated cash needs
at least through the next six months.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is, from time to time, a party to litigation arising in
the normal course of its business. The Company is not presently
subject to any material litigation.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibits.
(b) Reports on Form 8-K.
The following reports on Form 8-K have been filed during the
quarter ended December 31, 1996:
(1) Cotelligent Group, Inc. acquisition of Pittsburgh
Business Consultants. - December 11, 1996
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
COTELLIGENT GROUP, INC
Date: February 14, 1997 By : /s/ Curtis J. Parker
----------------- ---------------------
Curtis J. Parker
Vice President and Chief
Accounting Officer
<PAGE>
EXHIBIT INDEX
NUMBER EXHIBIT PAGE
None
<PAGE>
