===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
MARCH 18, 1997
(Date of Report)
COTELLIGENT GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-25372 94-3173918
(State or other (Commission File Number) (IRS Employer
jurisdiction of Identification
incorporation) 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)
- -------------------------------------------------------------------------------
<PAGE>
Item 5.
The Company hereby files the Report of Independent Accountants and the
related financial statements for Cotelligent Group, Inc. and its subsidiaries at
March 31, 1995 and 1996 and the results of operations and cashflows for each of
the three years in the period ended March 31, 1996. Additionally, the Company
hereby files Pro Forma Statement of Operations for the year ended March 31,
1996.
<PAGE>
COTELLIGENT GROUP, INC. FORM 8-K
INDEX
Page
Item 5 - Financial Statements and Exhibits
COTELLIGENT GROUP, INC.
Pro Forma Consolidated Statement of Operations for the Year
Ended March 31, 1996 (Unaudited)................................... 5
Notes to Pro Forma Consolidated Statements of Operations............. 6
COTELLIGENT GROUP, INC.
Report of Price Waterhouse LLP, Independent Accountants.............. 7
Consolidated Balance Sheet as of March 31, 1995 and 1996............. 8
Consolidated Statement of Operations for the Years Ended
March 31, 1994, 1995 and 1996...................................... 9
Consolidated Statement of Stockholders' Equity for the
Years Ended March 31, 1994, 1995 and 1996.......................... 10
Consolidated Statement of Cash Flows for the Years Ended
March 31, 1994, 1995 and 1996...................................... 11
Notes to Consolidated Financial Statements........................... 13
<PAGE>
COTELLIGENT GROUP, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Cotelligent Group, Inc. ("Cotelligent" or the "Company") was formed to
acquire, own and operate software professional service businesses
specializing in computer consulting and contract programming. On February 20,
1996, Cotelligent merged with four companies: Financial Data Systems, Inc.
("FDSI"), BFR Co., Inc. ("BFR"), Data Arts & Sciences, Inc. ("DASI") and
Chamberlain Associates, Inc. ("CAI"), collectively the Founding Companies.
All outstanding shares of the Founding Companies' capital stock was converted
into shares of Cotelligent's Common Stock concurrently with the consummation
of an initial public offering (the "Offering") of Cotelligent Common Stock.
On June 28, 1996 Cotelligent acquired ESP Software Services, Inc.
("ESP") and INNOVA Solutions Inc. ("ISI") and on September 30, 1996 Cotelligent
acquired JasTech, Inc. and JasTech of Florida, Inc. ("JTI") and on November 27,
1996 Cotelligent acquired Pittsburgh Business Consultants, Inc.
("PBC")(collectively the "Pooled Companies") in business combinations accounted
for under the pooling-of-interests method. Accordingly, the historical financial
statements of Cotelligent have been restated in accordance with generally
accepted accounting principles to present the financial data as if Cotelligent
and the Pooled Companies had always been members of the same operating group.
The pro forma consolidated statements of operations for the year ended
March 31, 1996 give effect to the acquisitions of the Founding Companies as if
these acquisitions were made on April 1, 1995. Additionally, the pro forma
consolidated statements reflect adjustments for the acquisitions of the Pooled
Companies and the Founding Companies including elimination of the results of
operations of a PBC consulting division ("MCS") which was discontinued,
compensation differentials to employees and former owners of the Founding
Companies and the Pooled Companies, the planned termination of contributions to
retirement plans, incremental selling, general and administrative costs of the
corporate activities of Cotelligent, and adjustments to reflect income taxes as
if the entities were combined and subject to the effective federal and state
statutory rates for the combined entity throughout the periods presented.
<PAGE>
COTELLIGENT GROUP, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1996 (In
Thousands, Except Share and Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Founding
Companies
Cotelligent April 1, 1995- Pro Forma
Group, Inc. Feb 19, 1996 Adjustments Pro Forma
--------------- --------------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Revenues....................... $ 52,786 $ 55,745 $ (2,430) (d) $ 106,101
Cost of services............... (1,631) (d)
............................... 37,227 42,361 (298) (a) 77,659
--------------- --------------------- ------------------ -----------------
Gross margin............. 15,559 13,384 (501) 28,442
Selling, general and (565) (d)
administrative expenses...... 12,962 10,374 (1,561) (b) 21,210
--------------- --------------------- ------------------ -----------------
Operating income............... 2,597 3,010 1,625 7,232
Other expense (income):
Interest expense (income), (16) (d)
net....................... 226 421 (202) (c) 429
Other (income).............. (346) (36) 339 (d) (43)
--------------- --------------------- ------------------ -----------------
Total other expense
(income)............... (120) 385 121 386
--------------- --------------------- ------------------ -----------------
Income before income taxes..... 2,717 2,625 1,504 6,846
Provision for income taxes..... 199 1,952 587 (e) 2,738
--------------- --------------------- ------------------ -----------------
Net income..................... $ 2,518 $ 673 $ 917 $ 4,108
=============== ===================== ================== =================
Earnings per share............. $.54
=================
Weighted average shares
outstanding.................. (f) 7,540,273
=================
</TABLE>
The accompanying notes are an integral part of these
financial statements.
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands)
(Unaudited)
Note 1 - Unaudited Pro Forma Adjustments
Pro forma data reflects adjustments for the following:
(a) Reduction in compensation to former owners and employees as a result of the
renegotiation of executive compensation arrangements and the termination of
contributions to employee benefit plans made in conjunction with the
acquisition of the Founding Companies;
(b) Reduction in compensation to former owners and employees of the Founding
Companies, and the Pooled Companies as a result of the renegotiation of
executive compensation arrangements ($2,147 for the year ended March 31,
1996, termination of contributions to employee benefit plans ($117 for the
year ended March 31, 1996), offset by increased expenses for corporate
operating activities ($703 for the year ended March 31, 1996);
(c) Reduction in interest expense as a result of termination of an employee
stock ownership plan ($147 for the year ended March 31, 1996) and the
payoff of debt to a former stockholder ($55 for the year ended March 31,
1996);
(d) Adjustments to eliminate the results of operations of Pittsburgh Business
Consultants, Inc.'s MCS consulting division which was discontinued as of
December 31, 1995.
(e) Income taxes as if the entities were combined and subject to the effective
federal and state statutory rates throughout the periods presented (40% for
the year ended March 31, 1996);
(f) Pro forma weighted average shares outstanding used to determine pro forma
earnings per share were calculated based on the following: (i) shares
issued by Cotelligent prior to the Offering, shares issued to the
stockholders of the Founding Companies in connection with the Acquisitions
and shares sold in the Offering to pay the cash portion of the
consideration of the Founding Companies were considered outstanding for the
entire period, (ii) additional shares sold to the public in the Offering
from the date of issuance, (iii) shares issued to acquire the Pooled
Companies, and (iv) dilution attributable to options to purchase common
stock in applying the treasury method.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Cotelligent Group, Inc.
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Cotelligent Group, Inc. and its subsidiaries at March 31, 1995 and 1996 and the
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
April 20, 1996, except as to the pooling of interests with ESP Software
Services, Inc. and INNOVA Solutions, Inc. which are as of June 28, 1996, the
pooling of interests with JasTech, Inc. which is as of September 30, 1996, and
the pooling of interests with Pittsburgh Business Consultants Inc., which is
as of November 27, 1996
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
March 31, March 31,
ASSETS 1995 1996
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 260 $ 14,574
Marketable securities...................................... - 26
Accounts receivable, less allowance for doubtful
accounts of $0 and $235 at March 31, 1995 and 1996....... 6,021 18,666
Notes receivable, including $179 from related parties...... 36 315
Prepaid expenses and other current assets.................. 186 770
------------- -------------
Total current assets..................................... 6,503 34,351
------------- -------------
Property and equipment, net................................... 600 1,690
Deferred income taxes......................................... 165 247
Other assets.................................................. 8 160
============= =============
Total assets............................................. $7,276 $ 36,448
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt............................................ $ 1,954 $ 4,863
Accounts payable........................................... 600 771
Accrued compensation and related payroll liabilities....... 1,823 5,324
Due to related parties..................................... 473 417
Income taxes payable....................................... 56 1,243
Deferred income taxes...................................... - 560
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. 515 -
Other accrued liabilities.................................. 261 1,696
------------- -------------
Total current liabilities................................ 5,682 14,874
------------- -------------
Long-term debt................................................ 143 450
Other long-term liabilities................................... 549 942
------------- -------------
Total liabilities........................................ 6,374 16,266
------------- -------------
Commitments and contingencies................................. - -
Stockholders' equity:
Preferred stock, 500,000 authorized 0 shares outstanding.. - -
Common stock, $0.01 par value; 100,000,000 shares
authorized 3,478,271 and 9,119,914 shares
outstanding, respectively............................... 35 91
Additional paid-in capital................................. 313 18,430
Retained earnings.......................................... 554 1,661
------------- -------------
Total stockholders' equity............................... 902 20,182
------------- -------------
Total liabilities and stockholders' equity............... $ 7,276 $ 36,448
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
For the Year Ended March 31,
--------------------------------------------
1994 1995 1996
------------- ------------ -----------
<S> <C> <C> <C>
Revenues..................................$ 26,679 $ 33,264 $ 52,786
Cost of services....................... 17,042 22,621 37,227
------------- ------------ -----------
Gross margin................... 9,637 10,643 15,559
Selling, general and administrative
expenses............................. 8,204 10,451 12,962
------------- ------------ -----------
Operating income....................... 1,433 192 2,597
Other (income) expense:
Interest expense.................... 74 119 321
Interest income..................... (5) (15) (75)
Other............................... 5 (12) (366)
------------- ------------ -----------
Total other (income) expense...... 74 92 (120)
------------- ------------ -----------
Income before income taxes............. 1,359 100 2,717
Provision (benefit) for income taxes... 162 (77) 199
============= ============ ===========
Net income............................. $ 1,197 $ 177 $ 2,518
============= ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
Additional
Paid In Retained Total
-------------- ------------- -------------- ---------------- ---------------
Shares Amount Capital Earnings Equity
-------------- ------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1993................. 3,224,266 32 _ $ 1,205 $ 1,237
Dividends to certain pooled companies.. - - - (550) (550)
Issuance of common stock............... 97,124 1 91 - 92
Net income............................. - - - 1,197 1,197
-------------- ------------- -------------- ------------------- ------------
Balance at March 31, 1994................. 3,321,390 33 91 1,852 1,976
Dividends to certain pooled companies.. - - - (1,269) (1,269)
Stock redemption....................... - - - (206) (206)
Issuance of common stock............... 156,881 2 222 224
Net income............................. - - - 177 177
-------------- ------------- -------------- ------------------- -----------
Balance at March 31, 1995................. 3,478,271 35 313 554 902
Issuance of common stock prior to
Offering............................. 120,478 1 381 - 382
Redemption of common stock prior to
Offering............................. (74,140) (1) (119) - (120)
Dividends to certain pooled companies.. (1,393) (1,393)
Reclassification of Founding
Companies Equity..................... - - 4,307 - 4,307
Issuance of common stock net of cost... 5,595,305 56 16,903 16,959
Distribution to founding stockholders.. - - (3,492) - (3,492)
Adjustments to conform year-ends of
pooled companies:
Capital Contribution............. - - 137 - 137
Net income....................... - - - 270 270
Dividends........................ - - - (288) (288)
Net income............................. - - - 2,518 2,518
============== ============= ============== ================== ============
Balance at March 31, 1996................. 9,119,914 91 18,430 1,661 20,182
============== ============= ============== ================== ============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
For the Year Ended March 31,
-----------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................. $ 1,197 $ 177 $ 2,518
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities..................
Depreciation and amortization......... 174 221 308
Loss (gain) on disposal of property
and equipment....................... 3 42 (325)
Provision for doubtful accounts....... - - 156
Net change in deferred income taxes... 127 - (539)
Change in current assets and liabilities:
(Increase) in accounts receivable.. (674) (2,680) (2,743)
(Increase) in prepaid expenses and
other current assets............ (12) (109) (216)
Increase in accounts payable and
accrued liabilities............. 14 2,458 128
Increase (decrease) in income taxes
payable........................... 73 (29) 307
Changes in other assets............. 34 4 19
----------- ----------- -----------
Net cash provided by (used in)
operating activities............ 936 84 (387)
Cash flows from investing activities:
Proceeds on sale of assets.............. 25 53 374
Purchases of property and equipment..... (139) (420) (652)
Advances to stockholders................ 8 - (60)
Net repayments from (advances to)
related parties....................... (45) (25) (3)
Cash and cash equivalents of Founding
Companies at date of acquisition...... - - 525
----------- ----------- -----------
Net cash provided by (used in)
investing activities............ (151) (392) 184
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these
financial statements.
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(In Thousands)
<TABLE>
<CAPTION>
For the Year Ended March 31,
----------------------------------------
1994 1995 1996
------------ ---------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Redemption of common stock............... - (206) (120)
Proceeds from long-term debt............. - 168 64
Principal payments of long-term debt..... (11) (47) (19)
Payments on capital lease obligations.... - - (49)
Net borrowings (repayments) on short-
term debt.............................. (11) 996 371
Borrowings from related parties.......... 51 10 848
Payments on loans with related parties... - - (700)
Proceeds from issuance of common stock... 92 224 18,378
Distribution to founding Companies
former stockholders.................... - - (3,492)
Dividends to certain pooled companies.... (550) (1,269) (1,303)
Net change in cash due to conforming
fiscal year-end of pooled companies.... - - 539
------------ ---------- -----------
Net cash provided by (used in)
financing activities............. (429) (124) 14,517
------------ ---------- -----------
Net increase (decrease) in cash and cash
equivalents............................... 356 (432) 14,314
Cash and cash equivalents beginning
of period................................. 336 692 260
============ ========== ===========
Cash and cash equivalents end of period..... $ 692 $ 260 $ 14,574
============ ========== ===========
Supplemental disclosures of cash flow information:
Interest paid............................ $ 57 $ 122 $ 355
Income taxes paid........................ $ 130 $ 14 $ 338
Non-cash investing and financing transactions:
Capital lease obligations incurred....... $ - $ 10 $ 158
Conversion of trade accounts receivable
to note receivable..................... $ - $ - $ 53
</TABLE>
The accompanying notes are an integral part of these
financial statements.
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
Note 1 - Business Organization and Basis of Presentation
Cotelligent Group, Inc. ("Cotelligent" or the "Company") was
formed to acquire, own and operate professional service businesses
specializing in computer consulting and contract programming. On February 20,
1996, Cotelligent acquired (the "Acquisitions") four companies (the
"Founding Companies"): Financial Data Systems, Inc. ("FDSI"), BFR Co., Inc.
("BFR"), Data Arts & Sciences, Inc. ("DASI") and Chamberlain Associates,Inc.
("CAI"). All outstanding shares of the Founding Companies' capital stock
were converted into shares of Cotelligent Common Stock concurrently with
the consummation of an initial public offering (the "Offering") of such
Common Stock.
The aggregate consideration paid by Cotelligent in these transactions
was $3,492 in cash, 3,206,875 shares of Common Stock of the Company and the
assumption of approximately $3,000 in debt, for an aggregate value of $35,304.
The aggregate consideration for each of the Founding Companies was as follows:
BFR: $11,958, consisting of $1,450 paid in cash and 1,167,587 shares of Common
Stock; CAI: $3,999, consisting of $300 paid in cash, 388,761 shares of Common
Stock and $200 in short-term and related-party debt; DASI: $5,606 consisting of
$400 paid in cash, 443,044 shares of Common Stock and $1,219 in short-term and
related-party debt; and FDSI: $13,740 consisting of $1,342 paid in cash,
1,207,483 shares of Common Stock and $1,531 in short-term, long-term and
related-party debt. As a result of the substantial continuing interests in the
Company of the former stockholders of BFR, CAI, DASI, FDSI and Cotelligent, the
Acquisitions were accounted for on a historical cost basis.
As further discussed in Note 3, 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, Inc. ("PBC"). (collectively the "Pooled
Companies") in business combinations accounted for under the
pooling-of-interests method.
The accompanying consolidated financial statements have been restated
to give effect to the mergers of the Pooled Companies. Additionally, the
financial statements also reflect the results of these Founding Companies
subsequent to the acquistions on February 20, 1996.
The following presents the unaudited results of operations of the
Company for the fiscal years ended March 31, 1995 and 1996 as if the Founding
Companies described above had been consummated as of April 1, 1994:
<TABLE>
<CAPTION>
For the Fiscal Year
Ended March 31,
------------- -- -------------
1995 1996
------------- -------------
<S> <C> <C>
Revenues.......................................... $ 83,292 $ 108,531
Net Income........................................ 419 3,191
</TABLE>
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated in consolidation.
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
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 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.
Prior to its sale, PBC's MCS division entered into contract revenues
which were recognized on the percentage-of-completion method of accounting. The
length of these MCS contracts varied and were typically less than 1 year in
duration. Contract income was recognized based on the ratio of costs incurred to
estimated total costs.
Costs and estimated earnings in excess of billings on uncompleted
contracts (the asset) represent costs incurred plus gross profit recognized in
excess of amounts billed at March 31, 1995. Conversely, billings in excess of
costs and estimated earnings on uncompleted contracts (the liability) represent
billings in excess of costs incurred plus gross profit recognized at March 31,
1995.
Fair Value of Financial Instruments
The Company's financial instruments primarily consist of cash, accounts
receivable and payables for which current carrying amounts are equal to or
approximate fair market value. Additionally, interest rates on outstanding debt
are at rates which approximate market rates for debt with similar terms and
maturities.
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.
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
PBC previous to the merger elected to be treated as an S
corporation for federal and state income taxes. Accordingly, any tax
liabilities of the Company were the responsibility of the stockholders.
This S corporation status terminated as a result of the merger with Cotelligent.
Prior to the merger on June 28, 1996, ESP elected to be taxed as an S
corporation for federal and state income tax purposes. Accordingly, any tax
liabilities were the responsibility of the ESP stockholder. Additionally, ISI
was a C corporation until January 1, 1995, at which time it also elected to be
taxed for federal income tax purposes as an S corporation, and accordingly, any
tax liabilities were the responsibility of the ISI shareholder.
Effective June 28, 1996, ESP's and ISI's S corporation elections
terminated as a result of the mergers with Cotelligent. In connection with this
conversion, approximately $800 was recorded as income tax expense which
represents the net deferred tax liabilities of ESP and ISI. This amount will be
paid on a pro rata basis over a four-year period. See Note 7 for unaudited pro
forma income tax information and further discussion.
Effective January 1, 1996, JasTech of Florida, Inc. elected to be taxed
as an S corporation for federal and state income tax purposes. Accordingly, any
tax liabilities subsequent to this date and prior to the merger with
Cotelligent, are the responsibility of the stockholder of JasTech of Florida,
Inc.
Effective September 30, 1996, JasTech of Florida, Inc.'s S corporation
status terminated as a result of the merger with Cotelligent.
Earnings Per Share
Historical earnings per share for the three years ended March 31, 1996
have not been presented because it is not considered to be meaningful as a
result of the Acquisitions and the Offering as discussed in Note 1.
SFAS 123 "Accounting for Stock Based Compensation"
In October 1995, the Financial Accounting Standards Board issued SFAS
123, "Accounting for Stock Based Compensation." SFAS 123 establishes a fair
value based method of accounting for employee stock based compensation plans and
encourages companies to adopt that method. However, it also allows companies to
continue to apply the intrinsic value based method currently prescribed under
APB Opinion No. 25, provided certain pro forma disclosures are made. SFAS 123 is
not required to be adopted by the Company until fiscal 1997. The Company
currently intends to continue to apply the accounting method prescribed by APB
Opinion 25 and, accordingly, the adoption of SFAS 123 will not have a material
impact on the Company's operating results.
Note 3 - Business Combinations Accounted for Under the Pooling-of-Interests
Method
Effective June 28, 1996, Cotelligent acquired all of the outstanding
common stock of ESP Software Services, Inc. ("ESP") and INNOVA Solutions, Inc.
("ISI") in exchange for 534,919 shares of common stock with a market value of
$9,000 and 521,390 shares of common stock with a market value of $9,000,
respectively. On September 30, 1996 Cotelligent acquired all of the outstanding
common stock of JasTech, Inc. and JasTech of Florida, Inc. (collectively "JTI")
in exchange for 644,826 shares of common stock with a market value of $8,710.
Additionally, on November 26, 1996 Cotelligent acquired all of the outstanding
stock of Pittsburgh Business Consultants, Inc. ("PBC") in exchange for 1,202,474
shares of common stock with a market value of $21,000. ESP, ISI and JTI and PBC
are herein referred to as the "Pooled Companies.". These business combinations
were accounted for as poolings-of-interests and accordingly, the Company's
financial statements give retroactive effect to the acquisitions of the Pooled
Companies for all periods presented.
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
The results of these Pooled Companies were previously reported on December 31
year ends. The accounts of these companies for the years ended December 31,
1993, 1994 and 1995 have been combined with the accounts of Cotelligent for the
years ended March 31, 1994, 1995 and 1996, respectively. Commencing on April 1,
1996, the year ends of these Companies were changed to March 31, resulting in an
increase to retained earnings of $270 during fiscal year ending March 31, 1996.
Following is a summary of the results related to the adjustments to retained
earnings:
<TABLE>
<CAPTION>
ESP ISI JTI PBC Total
------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues................... $ 2,757 $ 2,034 $ 2,598 $ 4,434 $ 11,823
Costs and expenses......... 2,824 1,724 2,501 4,504 11,553
============ ============= ============ ============ ============
$ (67) $ 310 $ 97 $ (70) $ 270
============ ============= ============ ============ ============
</TABLE>
The separate results of Cotelligent and the Pooled Companies prior to the
acquisitions are as follows:
<TABLE>
<CAPTION>
For the Year Ended March 31,
------------ -- ------------- - -------------
1994 1995 1996
------------ ------------- -------------
<S> <C> <C> <C>
Cotelligent:
Revenues..................... $ - $ - $ 8,265
Net income (loss)............ (167) (201) 88
ESP:
Revenues..................... 4,936 6,950 10,274
Net income (loss)............ 282 (219) 205
ISI:
Revenues..................... 4,304 2,860 5,867
Net income (loss)............ 284 (79) 668
JasTech:
Revenues..................... 6,674 7,670 8,698
Net income................... 24 30 131
PBC:
Revenues 10,765 15,784 19,682
Net income 774 646 1,426
Combined:
Revenues..................... 26,679 33,264 52,786
Net income................... 1,197 177 2,518
</TABLE>
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
Note 4 - Allowance for Doubtful Accounts
Allowance for doubtful accounts activity is as follows:
<TABLE>
<S> <C>
Balance, March 31, 1994 and 1995.......................................................... $ 60
Balance of Founding Companies allowance for doubtful accounts at acquisition.............. 40
Charges to costs and expenses............................................................. 156
Write-offs................................................................................ (21)
=============
Balance at March 31, 1996................................................................. $ 235
=============
</TABLE>
Note 5 - Property and Equipment
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
-----------------------------
March 31,
-----------------------------
1995 1996
-------------- -----------
<S> <C> <C>
Automobiles............................................. $ 52 $ 102
Computer and office equipment........................... 300 2,063
Furniture and fixtures.................................. 956 1,325
Leasehold improvements.................................. - 326
-------------- -----------
1,308 3,816
Less: Accumulated depreciation......................... 708 2,126
============== ===========
$ 600 $ 1,690
============== ===========
</TABLE>
Depreciation and amortization expense for the years ended March 31, 1994, 1995
and 1996 was $174, $221, and $308, respectively.
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
Note 6 - Credit Facilities
Credit facilities consist of the following:
Short-Term Debt
<TABLE>
<CAPTION>
---------------------------
March 31,
---------------------------
1995 1996
----------- ------------
<S> <C> <C>
Bank line of credit, with borrowings up to 80% of PBC's eligible accounts
receivable or $1,900, secured by accounts receivable and equipment of PBC,
interest at prime plus 1 3/4% (9.5% at March 31, 1995) and 9.25% at
March 31, 1996............................................................ $ 1,136 $ 883
Bank line of credit, with maximum borrowings of $1,250 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)................................................. - 1,097
Bank line of credit, for borrowings up to the lesser of $1,300 or 70% of the
DASI's eligible accounts receivable, secured by all assets of DASI, as
well
as the personal guarantees of two Cotelligent stockholders who are also
officers of DASI, due May 31, 1996. Interest at 1.25% above the bank's - 809
base lending rate (9.5% at March 31, 1996)................................
Bank line of credit, for borrowings of up to $1,500 secured by all of BFR's
assets, due May 31, 1996. Interest at bank's prime rate of 8.25%
at March 31, 1996......................................................... - 300
Bank line of credit, for borrowing up to $250, secured by accounts
receivable and property and equipment and personally guaranteed by
stockholder who is an officer of ISI. Interest at prime plus 2.0%
(10.25% - 195
at March 31, 1996)........................................................
Bank line of credit, for borrowings up to $1,000 in combination with an
affiliated organization, personally guaranteed by ESP stockholder who is an
officer of ESP, secured by accounts receivable and general tangible assets of
combined companies. Interest at bank's base rate plus 1.25%
(9.5% at March 31, 1996).................................................. - 824
Bank line of credit, with two separate banks for borrowing up to $900 and
$300, secured by accounts receivable and fixed assets of JasTech.
Interest
at prime rate plus 0.50% and 1.25% (8.75% and 9.50% at March 31, 1996).... 590 408
Note payable for consulting services performed, which bears interest at
the rate of 10% from June 1995, paid on completion of the Offering........ 52 -
Related party loans, due on demand, interest rates from 8.0% to 12.5%....... 159 84
Capital lease obligations................................................... 3 142
Current portion of long-term debt........................................... 14 121
----------- ------------
Total short-term debt................................................ $ 1,954 $ 4,863
=========== ============
</TABLE>
The lines of credit were executed pursuant to agreements that contain
various covenants that include, among other things, restrictions on additional
debt and distributions, and maintenance of certain financial ratios and net
worth requirements. The Subsidiaries were in compliance with or obtained waivers
for all covenants as of March 31, 1996.
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
Long-Term Debt:
<TABLE>
<CAPTION>
March 31,
----------------------------
1995 1996
----------- ------------
<S> <C> <C>
Note payable to bank, monthly payments of $6, including interest at the bank's
prime rate plus 2.25% (10.50% at March 31,1996) per annum; maturing March 30,
1998 and secured by FDSI's assets and the personal guarantee of several
Cotelligent stockholders who are also officers of
FDSI....................................................................... - $ 131
Note payable to bank, monthly payments of $2, including interest at the bank's
prime rate plus 2.25% (10.50% at March 31, 1996) per annum; maturing May 29,
1998 and secured by FDSI's assets and the personal guarantees of several
Cotelligent stockholders who are also officers of
FDSI....................................................................... - 56
Note payable to related party, quarterly installments of $7 plus interest at
2% over bank index rate, due December 2001................................. 150 136
Capital lease obligations.................................................... 10 390
----------- ------------
160 713
Less: Current maturities.................................................... 17 263
----------- ------------
Total long-term debt................................................. $ 143 $ 450
=========== ============
</TABLE>
Total maturities of long-term debt are as follows:
------------------
Year Ending
March 31,
1996
------------------
1997.................................................... $ 263
1998.................................................... 262
1999.................................................... 77
2000.................................................... 47
2001.................................................... 32
Thereafter.............................................. 32
------------------
Total................................................... $ 713
==================
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
Note 7 - Income Taxes
Cotelligent will file a consolidated federal income tax return for
periods subsequent to the Acquisitions described in Note 2.
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
Year Ended March 31
----------------------------------
1994 1995 1996
--------- ---------- ---------
<S> <C> <C> <C>
Current:
Federal.................................................. $ 21 $ 64 $ 742
State.................................................... 2 2 134
--------- ---------- ---------
23 66 876
--------- ---------- ---------
Deferred:
Federal.................................................. 82 (211) (530)
State.................................................... (10) (12) (107)
--------- ---------- ---------
72 (223) (637)
Valuation allowance........................................ 67 80 (40)
--------- ---------- ---------
Total provision (benefit) for income taxes................. $ 162 $ (77) $ 199
========= ========== =========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following.
<TABLE>
<CAPTION>
March 31,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Allowance for doubtful accounts............................................ $ - $ 16
Accrued liabilities........................................................ 165 406
Cash to accrual............................................................ - (846)
Operating loss carry forward............................................... 147 317
Depreciation............................................................... - (19)
---------- ----------
Deferred tax asset (liability)........................................ 312 (126)
Valuation allowance........................................................ (147) (187)
========== ==========
Net deferred tax assets (liabilities)................................. $ 165 $ (313)
========== ==========
</TABLE>
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
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%
Income of S corporation............................. (27.0) (160.0) (28.2)
Conversion to S corporation........................ - (34.0) -
Valuation allowance against net operating loss... 4.9 80.0 1.5
=========== =========== ==========
Effective tax rate............................. 11.9% (80.0)% 7.3%
=========== =========== ==========
</TABLE>
Prior to the Acquisitions, Cotelligent Group, Inc. had established a
valuation allowance against the tax assets associated with the net operating
losses of previous years due to the uncertainty of realization through future
income. Subsequent to the Acquisitions, the Company reversed a portion of the
valuation allowance as a result of the estimated utilization of the operating
losses against future taxable income.
As discussed in Note 2, ISI was a C corporation until December 31, 1994
at which time ISI elected to be taxed as an S corporation, and therefore, any
tax liabilities subsequent to this date were the responsibility of ISI's
shareholder. Accordingly, net deferred tax liabilities of approximately $117 as
of December 31, 1994 were recognized in income upon the conversion in 1994.
As a result of the merger with Cotelligent on June 28, 1996, ISI's and
ESP's S corporation elections terminated. Approximately $800 of deferred tax
liabilities were recorded at this time and these federal and state taxes will be
paid ratably over the next four years.
Effective January 1, 1996, JasTech of Florida, Inc. also elected to be
taxed as an S corporation and therefore any tax liabilities subsequent to this
date and prior to the merger date with Cotelligent are the responsibility of the
stockholder of JasTech of Florida, Inc.
Prior to the merger, PBC was also an S corporation for federal and
state income tax purposes, and accordingly any tax liabilities were the
responsibility of the PBC stockholders.
The following unaudited pro forma income tax information is presented
in accordance with Statement of Financial Accounting Standards No. 109 as if
ESP, ISI, JTI and PBC had been C corporations subject to federal and state
income taxes for all periods presented.
<TABLE>
<CAPTION>
For the Year Ended
March 31,
--------------------------------------
1994 1995 1996
------------ ------------ -----------
<S> <C> <C> <C>
Income (loss) before provision for
income taxes........................ $ 1,359 $ 100 $ 2,717
Pro forma provision for income taxes.. 585 126 1,077
============ ============ ===========
Pro forma net income (loss)........... $ 774 $ (26) $ 1,640
============ ============ ===========
</TABLE>
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
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>
Years Ending
March 31,
------------------------------------
Capital Operating
Leases Leases
-------------- ---------------
<S> <C> <C>
1997.......................................................... $ 192 $ 1,334
1998.......................................................... 163 1,285
1999.......................................................... 89 997
2000.......................................................... 32 783
2001.......................................................... - 312
Thereafter.................................................... - 32
-------------- --------------
Total minimum lease payments.................................. 476 $ 4,743
==============
Less: Amounts representing interest.......................... (86)
--------------
Present value of net minimum lease payments................... $ 390
==============
</TABLE>
Rental expense under these leases was $389, $489 and $640 for the
years ended March 31, 1994, 1995 and 1996.
Note 9 - Related Parties
The Company recognized $5 in revenue for providing computer consulting
services to CyberSAFE (an entity owned in part by a few Cotelligent stockholders
who are also officers of FDSI) for the period subsequent to the Acquisitions
through March 31, 1996, all of which was included in accounts receivable at
March 31, 1996.
In May 1994, one of the Founding Companies 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, one of the Founding Companies 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 $105. Included in interest income is $2 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 $20 for the period subsequent to the Acquisitions
through March 31, 1996. In addition, the Company leases certain office equipment
under capital leases from the same entity. Payments under these capital leases
for the period subsequent to the Acquisitions through March 31, 1996, were $6.
The Company leases office space, occupied by DASI, from the Strathmore
Realty Trust. Two Cotelligent stockholders, one of whom is an officer of DASI
and a Director of the Company, are the sole trustees and beneficiaries of the
Strathmore Realty Trust. Rental expense recorded for this office space was $12
for the period subsequent to the Acquisitions through March 31, 1996.
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
Prior to its acquisition by Cotelligent, ESP was related to Electronic
Systems Personnel, Inc. through common ownership. ESP shares office space as
well as various administrative resources with Electronic Systems Personnel, Inc.
Additionally, certain ESP employees are hired through Electronic Systems
Personnel, Inc., a placement firm. Below is a summary of significant
transactions and account balances for the two companies:
<TABLE>
<CAPTION>
1996 1995
-------------- ---------------
<S> <C> <C>
Due to Electronic Systems Personnel, Inc..................................... $ 6 $ 209
Administrative expense....................................................... 164 73
Placement fee expense........................................................ 527 526
</TABLE>
At March 31, 1996, ESP had a $94 note receivable from its principal
stockholder due in five equal principal installments of $19 beginning January 1,
1997. Interest at 8% is due quarterly with the first payment on April 1, 1996.
JTI currently leases office space in Boca Raton, Florida from a
shareholder of the Company. JTI leases the space on a month to month basis. Rent
expense associated with this lease amounted to $22 for each of the two years
ended March 31, 1995 and 1996.
In January 1996, PBC entered into an agreement with Manutech Services,
Inc. an affiliated entity which provides for the Company to borrow from or lend
to the affiliate up to $500,000 at a rate of 9.25%. As of September 30, 1996 the
Company had $165 of outstanding borrowings on this agreement. The Company also
provides accounting and administrative services for Manutech Service, Inc. The
Company charges $2 per month for these services which is deemed to be the cost
of providing these services.
Note 10 - Employee Benefit Plans
Certain subsidiaries of the Company have various defined contribution
plans which allow employees to participate upon meeting specified service
requirements. Additionally, these plans also provide for discretionary
contributions by the respective entities. The subsidiaries' contribtions to
these plans for the fiscal years ended March 31, 1994, 1995 and 1996 were $0,
$27 and $70, respectively.
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.
Under the provisions of the Plan, non-qualified stock options and
other stock awards are granted at prices not less than fair market value at
the date of grant. A summary of option transactions follows:
<TABLE>
<CAPTION>
Option Price
Number Range per Expiration
of Shares Share Date
--------------- ------------- --------------
<S> <C> <C> <C>
Outstanding at March 31, 1995.................. 0 - -
Granted.................................... 479,102 2.70 - 10.25 2003
Exercised.................................. 0 - -
Canceled................................... 2,400 9.00 2003
--------------- ------------- --------------
Outstanding at March 31, 1996................. 476,702 2.70 - 10.25 2003
Exercisable at March 31, 1996................. 87,072 2.70 - 10.00 2003
</TABLE>
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
The Plan has a provision to grant a total of 932,445 non-qualified
options. Non-qualified options are generally exercisable beginning one year from
the date of grant in cumulative yearly amounts of 25% of the shares under option
and generally expire seven years from the date of grant.
Note 11 - Commitments and Contingencies
Employment Agreements
Each executive officer and certain principals of the Company's
subsidiaries have entered into employment agreements with the Company which
contain provisions for compensation upon termination without cause or changes in
control.. Pursuant to such employment agreements, each such officer is eligible
to earn bonus compensation payable out of a bonus pool determined by the Board
of Directors or its Compensation Committee. Bonuses will be determined by
measuring, among other objective and subjective measures, such officer's
performance, the performance of the local operation for which such officer has
primary responsibility and the Company's performance against targets.
ESP Stock Redemption
On May 5, 1994, ESP entered into an agreement with a stockholder owning
a 47% interest in the Company to redeem all of the 953 shares held for him for
$206, of which $41 was paid at closing and the balance of $165 payable quarterly
over an eight year period with interest accruing at the rate of 2% in excess of
the index rate established by National City Bank. In addition, the agreement
provided for an additional payment for the stock in the event of a subsequent
sale of ESP. The balance outstanding on this obligation at March 31, 1995 and
1996 was $150 and $136 respectively.
In conjunction with the agreement and plan of reorganization and
merger, the remaining principal balance of the note payable above was paid in
full on June 28, 1996. Additionally, $552 was paid as a distribution to the
former stockholder in accordance with the terms of the stock redemption
agreement.
ESP Deferred Compensation Plan
In connection with the stock redemption agreement discussed above, ESP
entered into a salary continuation agreement with the former stockholder in
recognition of his contributions to the growth, management and success of ESP.
The salary continuation agreement provided that the stockholder be paid an
annual sum of $45 for each of the years 1994 through 1997, and an annual sum of
$93 for each of the years 1998 through 2005. The agreement provides for a
discount rate of 8% to arrive at the present value of the unpaid salary
continuation payments. The unpaid present value of this obligation at March 31,
1995 and 1996 was $548.
In conjunction with the agreement and plan of reorganization and
merger, the remaining principal balance of the deferred compensation was paid in
full on June 28, 1996.
JTI Separation Agreement
JTI was paying a former employee termination benefits amounts of $3 per
month starting in January 1992 continuing through June 2002 in accordance with a
separation agreement. During July 1996 the Company cashed out the agreement for
the present value resulting in the payments of $235.
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
BFR Consulting Contract
The Company entered into a consulting contract with a former employee
of BFR effective February 19, 1996, whereby the former employee is required to
perform certain management advisory services as required by and at the request
of the Company. Payments under the contract are $8 per month, continue through
December 2000 and have been fully recorded as an obligation of the Company as of
March 31, 1996.
Legal Matters
The Company is involved in various legal matters in the normal course
of business. In the opinion management, these matters are not anticipated to
have a material adverse effect on the financial position or results of
operations or cash flows of the Company.
Note 12 - Disposition of MCS Practice
PBC ceased the operations of its MCS consulting division in two
transactions as described below.
Under the terms of a purchase and sale agreement (the Agreement), dated
June 9, 1995 PBC sold, to an unrelated third party, certain furniture and
equipment with a net book value of $49, seven employment contracts with
professional consulting staff, the right to enter into contracts with certain
customers in the health care industry that were in process, the trade name of
its MCS division, and related goodwill for an adjusted cash sales price of $388.
The sale resulted in a gain of $325 which is included in other income in the
statement of operations. The Agreement also provides, among other things, that
PBC cannot own or have an equity interest in any data center which processes
transactions for the health care industry, and competes with the purchaser for a
period of 5 years.
Additionally, pursuant to the terms of a sales agreement (the Sales
Agreement) effective January 1, 1996, PBC sold its right, title and interest to
a consulting contract with a customer, to Manutech Services, Inc. (Manutech), an
entity incorporated on February 12, 1996, and owned by the stockholders of PBC
and the three children of its majority stockholder who are presently employed by
PBC. PBC received a promissory note in the amount of $25 to be paid in monthly
installments of $2 including interest at 6.4 percent through March 1, 1997.
Additionally, PBC sold, at net book value, furniture and equipment to
Manutech for a $73 promissory note to be paid in monthly installments of $6
including interest at 9.25% through March 1, 1997.
During the year ended December 31, 1995, contract income, from the
customer associated with the contract sold to Manutech accounted for 7% of PBC's
sales.
The Sales Agreement and the agreements referred to in the preceding
paragraph violated the covenant in the PBC's Loan Agreement with respect to
the transfer of assets or conducting business with any affiliate. A waiver
was obtained from the lending bank for this violation.
Note 13 - Subsequent Events
Cotelligent and each of the Founding Companies had separate banking
relationships through May 31, 1996. Effective June 1, 1996, the separate banking
relationships were consolidated into a single banking relationship with a major
bank, providing a more efficient means of managing operating capital. The new
relationship provided a credit facility in the amount of $10.0 million, secured
by accounts receivable and other assets of the company. Borrowings on the
facility bear interest at the bank's prime rate. In October 1996, the amount of
the credit facility was increased to $20.0 million. The Pooled Companies have
subsequently terminated their separate banking relationships and have begun
participating in the Cotelligent banking relationship.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly cused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COTELLIGENT GROUP, INC.
-----------------------
(Registrant)
/s/ Curtis J. Parker
------------------------
(Signature)
Curtis J. Parker
Vice President, Chief Accounting
Officer
Date: March 18, 1997
<PAGE>
