UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
(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, 1997
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 No X
At August 13, 1997 there were 9,761,190 shares of common stock
outstanding.
<PAGE>
COTELLIGENT GROUP, INC.
INDEX
Part I - Financial Information
Item 1. Financial Statements PAGE
Cotelligent Group, Inc.
Balance Sheet at March 31, 1997
and June 30, 1997 (Unaudited) 3
Statement of Operations for the Three
Months Ended June 30, 1996 and 1997 (Unaudited) 4
Statement of Cash Flows for the Three Months
Ended June 30, 1996 and 1997 (Unaudited) 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II - Other Information
Signatures 12
2
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
March 31, June 30,
ASSETS 1997 1997
--------------- ---------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 2,244 $ 589
Accounts receivable, including unbilled accounts of
$5,535 and $7,545 net................................ 29,153 34,464
Notes receivable.......................................... 75 52
Prepaid expenses and other current assets................. 1,280 1,551
--------------- ---------------
Total current assets..................................... 32,752 36,656
Property and equipment, net................................... 4,899 4,743
Deferred income taxes......................................... 61 -
Goodwill, net of accumulated amortization of $38 and $60...... 2,649 2,627
Other assets.................................................. 336 270
=============== ===============
Total assets............................................. $ 40,697 $ 44,296
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt............................................ $ 4,087 $ -
Accounts payable........................................... 2,149 3,871
Accrued compensation and related payroll liabilities....... 8,667 11,877
Income taxes payable....................................... 260 1,623
Deferred income taxes...................................... 768 510
Other accrued liabilities.................................. 2,050 1,808
--------------- ---------------
Total current liabilities................................ 17,981 19,689
Long-term debt................................................ 163 119
Other long-term liabilities................................... 289 255
--------------- ---------------
Total liabilities........................................ 18,433 20,063
--------------- ---------------
Commitments and contingencies.................................
Stockholders' equity:
Common Stock, $0.01 par value; 100,000,000 shares
authorized 9,730,786 and 9,758,428 shares
outstanding, respectively................................ 97 98
Additional paid-in capital................................. 18,765 18,959
Retained earnings.......................................... 3,402 5,176
--------------- ---------------
Total stockholders' equity............................... 22,264 24,233
--------------- ---------------
Total liabilities and stockholders' equity............... $ 40,697 $ 44,296
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands Except Share and Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Quarter
Ended Ended
June 30, 1996 June 30, 1997
----------------- ---------------
<S> <C> <C>
Revenues......................................... $ 31,963 $ 46,333
Cost of services................................. 22,943 32,712
----------------- ---------------
Gross profit ............................... 9,020 13,621
Non-recurring transaction costs............... 245 -
Selling, general and administrative expenses 7,265 10,605
----------------- ---------------
Operating income........................... 1,510 3,016
Other (income) expense:
Interest expense........................... 112 108
Interest income ........................... (130) (4)
Other ..................................... (21) 4
----------------- ---------------
Total other ............................ (39) 108
----------------- ---------------
Income before provision for income taxes .. 1,549 2,908
Provision for income taxes.................... 1,239 1,134
----------------- ---------------
Net income...................................... $ 310 $ 1,774
================= ===============
Earnings per share.............................. $ .03 $ .18
================= ===============
Weighted average shares outstanding....... 9,898,262 9,825,859
================= ===============
Pro forma net income (adjusted
for income taxes - Note 4)................. $ 960
=================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
4
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------
June 30, 1996 June 30, 1997
------------------ -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................ $ 310 $ 1,774
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization................................. 141 358
Provision for doubtful accounts............................... - 125
Deferred income taxes, net.................................... 54 (197)
Changes in current assets and liabilities:
Accounts receivable..................................... (1,927) (5,436)
Prepaid expenses and other current assets............... 174 (248)
Accounts payable and accrued expenses................... 249 4,690
Income taxes payable.................................... 63 1,363
Increase (decrease) in other liabilities................ 144 (34)
Changes in other assets....................................... (37) 66
------------------ -----------------
Net cash provided by (used in) operating activities (829) 2,461
------------------ -----------------
Cash flows from investing activities:
Purchases of property and equipment.............................. (682) (180)
Net repayments from (advances to) related parties................ (250) -
------------------ -----------------
Net cash used in investing activities.................... (932) (180)
------------------ -----------------
Cash flows from financing activities:
Proceeds on long-term debt...................................... 77 -
Payments on long-term debt...................................... (699) (44)
Net borrowings (repayments) on short-term debt.................. (1,664) (4,087)
Net proceeds from issuance of Common Stock...................... 47 195
Distribution to former Stockholders............................. (940) -
----------------- -----------------
Net cash provided by (used in) financing activities (3,179) (3,936)
------------------ -----------------
Net increase (decrease) in cash and cash equivalents............ (4,940) (1,655)
Cash and cash equivalents at beginning of period................ 14,648 2,244
----------------- -----------------
Cash and cash equivalents at end of period...................... $ 9,708 $ 589
================== =================
Supplemental disclosures of cash flow information:
Interest paid................................................... 109 94
Income taxes paid............................................... 1,160 54
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(In Thousands, Except Share and Per share Data)
(Unaudited)
Note 1 - Business Organization and Basis of Presentation
Cotelligent Group, Inc. ("Cotelligent" or the "Company") 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 four companies (the
"Founding Companies") simultaneously with the initial public offering of its
Common Stock (the "Offering"). These acquisitions were accounted for on a
historical cost basis. During fiscal 1997, the Company acquired six businesses
accounted for under the-pooling-of-interests method (the "Pooled Companies"). In
addition, during fiscal 1997, the Company acquired two businesses accounted for
under the purchase method (the "Purchased Companies"). The operating results of
theFounding and Purchased Companies are included subsequent to their
respective acquisition dates.
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, 1996 and 1997 as included on Cotelligent's Annual Report on Form
10-K for the year ended March 31, 1997 ("Form 10-K"), and therefore should be
read in conjunction with the financial statements included on Form 10-K.
In the opinion of management, the interim financial statements filed as
part of this Quarterly Report on 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.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
share". This statement establishes standards for comparing and presenting
earnings per share ("EPS"). SFAS 128 simplifies the standards for computing EPS
and makes the presentation comparable to international EPS standards by
replacing the presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and dilutive EPS on the face of the
income statement. Basic EPS excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock.
This Statement is required to be adopted by the Company during fiscal 1998.
Note 3 - Changes in Stockholder's Equity
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-In Retained Stockholders'
-----------------------------
Shares Amount Capital Earnings Equity
------------- ------------ -------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1997 9,730,786 $ 97 $ 18,765 $ 3,402 $ 22,264
Issuance of Common Stock 27,642 1 194 - 195
Net income.................... - - - 1,774 1,774
------------- ------------ -------------- ------------ -----------------
Balance at June 30, 1997..... 9,758,428 $ 98 $ 18,959 $ 5,176 $ 24,233
============= ============ ============== ============ =================
</TABLE>
6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(In Thousands, Except Share and Per share Data)
(Unaudited)
Note 4 - Unaudited Pro Forma Income Tax Information
Prior to their acquisitions in fiscal 1997, certain companies were S
corporations and accordingly, the financial statements did not reflect a
provision for income taxes, as income taxes were the responsibility of the
individual stockholders. Effective with these acquisitions, the companies
terminated their respective 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 C
corporations subject to federal and state income taxes throughout the periods
presented.
<TABLE>
<CAPTION>
(In Thousands)
Quarter Ended
June 30, 1996
-------------------------
<S> <C>
Income before provision for income taxes.................... $ 1,549
Provision for income taxes.................................. 589
-------------------------
Pro forma net income........................................ $ 960
=========================
</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 acquire, own and operate
software professional services businesses specializing in providing IT
consultants on a contract basis and consulting and outsourcing services to
businesses with complex IT operations. On February 20, 1996, Cotelligent
acquired four companies (the "Founding Companies") simultaneously with the
initial public offering of its Common Stock ( the "Offering"). Prior to this
date Cotelligent was a non-operating entity.
During fiscal 1997, the Company acquired six businesses accounted for
under the-pooling-of-interests method (the "Pooled Companies"). In addition,
during fiscal 1997, the Company acquired two businesses accounted for under the
purchase method ("Purchased Companies"). The operating results of the Founding
and Purchased Companies are included subsequent to their respective acquisition
dates.
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 profits (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 profits can be adversely impacted if
service activities cannot be billed, if the Company is not effective in managing
its service activities, if fixed-fee engagements (which historically have not
constituted a significant portion of total revenues) are not properly priced or
if there are high levels of unutilized time (work activities not chargeable to
clients or unrelated to client services) of full-time service professional
employees. Operating income (gross profit less selling, general and
administrative expenses) can be adversely impacted by increased administrative
staff compensation, expenses related to growing and expanding the Company's
business, which may be incurred before revenues or economics of scale are
generated from such investment.
As part of its strategic plan, the Company intends to acquire other
software professional services businesses. 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 acquisitions. 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.
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. The Company generally experiences a reduction
in gross profit in the first calendar quarter due to employment related taxes.
8
<PAGE>
HISTORICAL COMBINED RESULTS OF OPERATIONS
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
Revenues
Revenues increased $14.3 million, or 45% to $46.3 million in the first
quarter of 1998 from $32.0 million in the first quarter of 1997. The increase
was primarily attributable to a 41% increase in total client service hours
provided to 792,000 hours in the first quarter of 1998 from 561,000 hours in the
first quarter of 1997, and a 6.9% increase in the average hourly billing rate to
$59.62 in the first quarter of 1998 from $55.77 in the first quarter of 1997.
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 $446,000 in the first quarter of 1998 from $407,000 in the
first quarter 1997.
Gross Profit
Gross profit increased $4.6 million, or 51% to $13.6 million in the
first quarter of 1998 from $9.0 million in the first quarter of 1997, primarily
due an increase in hours of service provided to clients. Gross margin as a
percentage of revenues increased to 29.4% in the first quarter of 1998 from
28.2% in the first quarter of 1997, principally due to a greater increase in
billing rates compared to the increase in the cost of services rate.
Non - Recurring Transaction Costs
Non-recurring transaction costs include expenditures associated with
the acquisition of the Pooled Companies.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $3.3 million, or
45%, to $10.6 million in the first quarter of 1998 from $7.3 million in the
first quarter of 1997. The increase in absolute dollars was primarily due to
increased compensation to existing staff, staff added to support anticipated
growth, additional occupancy costs and an increased level of corporate
activities. Selling, general and administrative expenses increased as a
percentage of revenues from 22.7% in the first quarter of 1997 to 22.9% in the
first quarter of 1998.
Interest Expense, Net
Interest expense, net of interest income was $104,000 in the first
quarter of 1998. Interest income net of interest expense was $18,000 in the
first quarter of 1997, due to the cash provided from the Offering.
Provision for Income Taxes
The Company's provision for income taxes was $1.1 million in the first
quarter of 1998, which reflects a provision on pre-tax income of 39%. The
Company's provision for income taxes was $1.2 million for the first quarter 1997
at a rate of 80%, which includes a $799,000 provision related to the termination
of the S corporation status of certain acquired companies.
9
<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 61 days of revenue at June 30, 1997 from 59
days of revenue at March 31, 1997. 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 provided by operating activities was $2.5 million for the
three months ended June 30, 1997. During this period the Company utilized this
cash plus a portion of existing cash balances to acquire $180,000 of fixed
assets and pay down the credit line by $4.1 million. The average balance of such
borrowings outstanding was approximately $4.6 million and approximately $1.7
million during the first quarter of 1998 and 1997, respectively.
At June 30, 1997, the Company had $589,000 in cash and cash equivalents
as compared to $2.2 million at March 31, 1997. At June 30, 1997, the Company had
no outstanding borrowings under its bank revolving credit facilities. Long-term
obligations, consisting of capital lease obligations and equipment loans,
totaled $119,000 at June 30, 1997 compared to $163,000 at March 31, 1997.
Subsequent to the end of the first quarter of 1998 the Company received
a commitment from BankBoston, N.A. to provide a $40 million revolving credit
facility. The Company expects this transaction to be completed in the quarter
ending September 30, 1997.
10
<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.
None.
11
<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
August 14, 1997 By : /S/ CURTIS J. PARKER
------------------------
Curtis J. Parker
Vice President and Chief
Accounting Officer
12
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COTELLIGENT GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED
JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-1-1997
<PERIOD-END> JUN-30-1997
<CASH> 589
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<RECEIVABLES> 34856
<ALLOWANCES> 392
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<CURRENT-ASSETS> 36656
<PP&E> 8221
<DEPRECIATION> 3478
<TOTAL-ASSETS> 44296
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0
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</TABLE>
