SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from to
Commission file number 0-25372
COTELLIGENT GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3173918
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 California Street, Suite 2050
San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
(415) 439-6400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b)of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES__X__ NO_____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $108,547,334 based on the closing price of $14.00
of the registrant's Common Stock as reported on the NASDAQ National Market on
June 24, 1997.
The number of shares of the registrant Common Stock outstanding as of
June 24, 1997 was 9,758,428.
DOCUMENTS INCORPORATED BY REFERENCE
There is incorporated by reference portions of the registrant's Proxy Statement
for the 1997 Annual Meeting of Stockholders, expected to be filed with the
Securities and Exchange Commission within 120 days after the end of the
registrant's fiscal year, in Part III, Items 10, 11, 12 and 13 of this report.
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COTELLIGENT GROUP, INC.
TABLE OF CONTENTS
FORM 10-K
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PAGE
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Part 1
Item 1 Business....................................................................................... 3
Item 2 Properties..................................................................................... 11
Item 3 Legal Proceedings.............................................................................. 11
Item 4 Submission of Matters to a Vote of Security Holders............................................ 11
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters.......................... 12
Item 6 Selected Financial Data........................................................................ 13
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................................... 15
Item 8 Financial Statements and Supplementary Data.................................................... 20
Item 9 Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure....................................................................... 40
Part III
Item 10 Directors and Executive Officers of the Registrant............................................. 41
Item 11 Executive Compensation......................................................................... 41
Item 12 Security Ownership of Certain Beneficial Owners and Management................................. 41
Item 13 Certain Relationships and Related Transactions................................................. 41
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 42
Signatures ................................................................................................. 44
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PART I
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risk and
uncertainties. The company's actual results could differ materially from those
discussed herein.
Item 1. Business.
Cotelligent Group, Inc. ("Cotelligent" or the "Company") is a software
professional services firm providing information technology ("IT") consultants
on a contract basis and consulting and outsourcing services to businesses with
complex IT operations. The Company operates offices in 19 metropolitan areas
including Boston, Cleveland, Dallas, Denver, Minneapolis, Los Angeles, New York,
Portland, Pittsburgh, San Francisco, San Jose/Silicon Valley, Seattle and St.
Louis. The Company provides its clients with highly-qualified IT professionals
who are proficient in a wide variety of hardware and software platforms.
Cotelligent's technical consultants are primarily billed on a time and materials
basis and offer clients specialized expertise in applications design,
programming, development and maintenance, client/server design and development,
systems software design, systems engineering and integration and
intranet/internetworking. At March 31, 1997, the Company had a staff of
approximately 2,000 people of which 1,650 were technical consultants providing
services to approximately 450 clients in a broad range of industries.
Risk Factors
Investment in the Company has a degree of risk. Prospective investors
should consider the following risk factors.
Absence of Combined Operating History
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 and generated no revenue. During fiscal 1997, the Company
acquired eight businesses. There can be no assurance that the Company will be
able to integrate the operating units on an economic or operational basis. The
Company's management group has been assembled only recently, and there can be no
assurance that the management group will be able to oversee the combined entity
and effectively implement the Company's business strategy. The combined
historical financial results of the Company cover periods when the operating
units and Cotelligent were not under common control or management and as such
may not be indicative of the Company's future financial or operating results. An
inability of the Company to integrate the operating units would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Dependence on Availability of Qualified Technical Consultants
The Company is dependent upon its ability to attract, hire and retain
technical consultants who possess the skills and experience necessary to meet
the service requirements of its clients. The Company must continually identify,
screen and retain qualified technical consultants to keep pace with increasing
client demand for rapidly evolving technologies and changing client needs. In
addition, because many of the technical consultants provided by the Company to
its clients are not committed to provide their services exclusively to the
Company, the Company must compete with other companies in a variety of industry
segments seeking to engage the services of such personnel. Competition for
individuals with proven technical skills is intense. The Company competes for
such individuals with other providers of technical services, systems
integrators, providers of outsourcing services, computer systems consultants,
clients and temporary personnel agencies. In the past, the Company has
experienced difficulties in identifying and retaining qualified technical
consultants and has therefore been unable in certain instances to fill requests
for services from clients. There can be no assurance that qualified technical
consultants will be available to the Company in sufficient numbers. An inability
to locate, retain and successfully place qualified technical consultants to fill
client requests could have a material adverse effect on the Company's business,
financial condition and results of operations.
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Implementation of Business Strategy
The Company intends to expand its operations through the acquisition of
additional IT consulting services businesses. There can be no assurance that the
Company will be able to identify, acquire or profitably manage additional
businesses or successfully integrate acquired businesses, if any, into the
Company without substantial costs, delays or other operational or financial
problems. Further, the Company's ability to manage future growth, if any, will
depend significantly upon the Company's ability to integrate the operating units
and any acquired businesses and develop Company-wide systems and operating
procedures. Acquisitions may also involve a number of special risks, including
diversion of management's attention, failure to retain key acquired personnel,
risks associated with unanticipated events, circumstances or legal liabilities
and amortization of acquired intangible assets, some or all of which could have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company's growth will therefore be dependent on a
number of factors, including the hiring and training of qualified regional
management personnel, the development and recruitment of a base of qualified
technical consultants within a geographic market, the integration of new
personnel into the Company's network of operating units and the Company's
ability to initiate, develop and maintain client relationships. Further, if
competition for acquisition candidates increases, the purchase price of such
target companies may increase to the point that otherwise viable acquisitions
become cost prohibitive. Client satisfaction or performance problems at a single
acquired firm could have a material adverse impact on the reputation of the
Company as a whole. In addition, there can be no assurance that acquired
businesses, if any, will achieve anticipated revenues and earnings. The
inability of the Company to implement and manage its acquisition strategy
successfully may have an adverse effect on the future prospects of the Company.
Competition
The IT consulting services industry is highly competitive, fragmented
and subject to rapid change. There are numerous other companies engaged in the
Company's business, many of which have greater technical, financial or marketing
resources than the Company. The market includes participants in a variety of
market segments, including local, regional and national systems consulting and
integration firms, professional service divisions of applications software
firms, the professional service groups of computer equipment companies,
management information outsourcing companies, certain "Big Six" accounting firms
and general management consulting firms. Certain competitors operate in several
of the Company's markets, and others may choose to enter the Company's markets
in the future. In addition, the Company intends to enter new markets and offer
new services by acquiring companies and expects that one or more of its
competitors will have a presence in each of such new markets and are or will be
providing such new services. The majority of the Company's competitors are
smaller regional firms with a strong presence in their respective local markets.
Further, many of the larger companies which have traditionally made up a
substantial portion of the Company's target market have recently been
consolidating their vendor lists to a smaller number of preferred service
providers. To the extent the Company is unable to meet the necessary
requirements of such larger companies and become a preferred service provider,
its ability to attract and retain such clients will be adversely affected. As a
result of these factors, the Company may lose clients or have difficulty
acquiring new clients. An inability to compete successfully in its marketplace
would have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the Company competes for
qualified technical consultants and viable acquisition candidates. There can be
no assurance that the Company will be successful in attracting, hiring and
retaining such personnel or in implementing its acquisition program.
Need for Acquisition Financing
The Company currently intends to finance future acquisitions by using
cash and/or shares of its Common Stock for all or a portion of the consideration
to be paid. If the Common Stock does not maintain a sufficient value, or
potential acquisition candidates are unwilling to accept Common Stock as part or
all of the consideration for the sale of their businesses, the Company may be
required to use more of its cash resources, if available, to initiate and
maintain its acquisition program. If the Company does not have sufficient cash
resources, its growth could be limited unless it is able to obtain additional
capital through additional debt or equity financing. There can be no assurance
that the Company will be able to obtain such financing if and when it is needed
or that, if available, it will be available on terms the Company deems
acceptable. As a result, the Company might be unable to successfully implement
its acquisition strategy. The inability of the Company to implement and manage
its acquisition strategy successfully may have an adverse effect on the future
prospects of the Company. The Company will also need additional funds to
implement its acquisition and internal growth strategies.
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The Company has a line of credit facility for use for working capital and
other general corporate purposes, which may include acquisitions. There can
be no assurance, however, that the line of credit will be sufficient for the
Company's needs.
The IT Consulting Services Market
The Company competes in the IT consulting services market, which can be
divided into three categories: (i) pre-implementation services; (ii)
implementation services; and (iii) post-implementation services. The Company's
principal activities, computer consulting and contract programming, fall within
the implementation services segment of the market. According to Dataquest,
global spending for the IT services market in 1996 was $98.0 billion, of which
United States 1996 spending was $36.7 billion. INPUT, an international research
firm, reports the United States market is expected to grow at a compound annual
rate of 17% per year through 2000.
Pre-Implementation Services
Pre-implementation services include strategic planning and consulting,
requirements definition studies and systems planning and design. These services
are provided by a small number of national and international professional
services firms and normally command premium billing rates. The professional
staffs of these firms are generally salaried employees.
Implementation Services
These services, which represent the Company's primary business focus,
include project management, software applications development, systems and
network implementation, systems integration and higher-level supplemental IT
consulting services. This segment of the IT consulting services market is highly
fragmented and serviced by several thousand local and regional firms, as well as
several national firms. Historically, the barriers to entry in this market have
been low. However, as technology has become more sophisticated, the knowledge
and expertise required to enter this sector has increased. Firms in this market
segment utilize salaried employees, hourly employees and independent consultants
in providing services.
Post-Implementation Services
Services in this category include facilities management, systems
maintenance, help-desk assistance and education and training. This market is
also highly fragmented and has low barriers to entry. Firms in this market
segment utilize salaried employees, hourly employees and independent consultants
in executing their assignments.
The Company's focus market is highly fragmented and without a dominant
service provider. Service providers in the IT consulting services industry vary
by market segment and geographic area and include local, regional and niche
firms, national providers of IT consulting services, several of the "Big Six"
accounting firms, the professional service groups of computer equipment
companies and large-scale system integrators.
The IT Consulting Services Environment
The growth of the IT industry and the increasing importance of
generating timely business information has transformed the way businesses
operate. In the 1960s and 1970s, businesses utilized mainframe and
mini-computers supported by customized applications and centralized computing
environments. Given the proprietary nature of these systems and their attendant
customized applications, these organizations were forced to build significant
infrastructure to support and enhance information services capabilities,
resulting in large expenditures of capital resources and the need for a highly
trained, dedicated staff.
In the mid-to-late 1980s, computing environments began to shift from
centralized mainframes and custom applications to decentralized, scalable
architectures centered on low cost personal computers, client/server
architectures, local and wide area networks, shared databases and generally
available applications software packages. Such trends permitted individuals
greater access to business data and an enhanced ability to analyze and interact
with information. Though highly
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beneficial to end-users, the client/server migration has proved problematic
to information services managers due to increased operational challenges,
including the integration of multiple hardware and software platforms,
networking protocols, databases and operating systems, as well as the
customization of off-the-shelf applications to conform to existing
business rules and reporting standards. Despite this shift away from
the centralized mainframe model, businesses are often required to maintain and
support certain legacy mainframe systems for a variety of business functions.
At the same time, economic factors have forced large organizations to
focus on core competencies, trim workforces in the IT services area and rely
more upon third parties for a variety of IT consulting services. As a result, IT
services managers are charged with developing and supporting increasingly
complex IT systems while working under budgetary pressures within their own
organizations.
Faced with the challenges of adequately serving the needs of their
customers and employees, companies are increasingly turning to skilled and
experienced outside organizations to help them appropriately staff and manage
their IT requirements. This provides the following benefits:
o Access to Specialized Skills on an As-Needed Basis. "As-needed
access" avoids both the need to maintain a larger permanent staff
and implementation delays involved with retraining staff as
technologies and applications change.
o Reduces Costs. Fixed labor costs are converted into variable costs
by better matching staffing levels to actual needs. Moreover, the
costs of recruiting, hiring and terminating permanent employees are
reduced.
o Allows Management to Focus on Core Business Issues. Management is
able to focus on strategic business issues rather than on maintaining
or implementing changes in the IT infrastructure.
The IT consulting services industry is highly fragmented and is
experiencing consolidation. According to INPUT, an international research firm,
approximately 3,500 IT consulting services businesses with annual revenues in
excess of $1.0 million provide such services and expertise in the United States.
In recent years, the industry has experienced an increase in consolidation
activity. The competitive and growth environment of local and regional IT
consulting services firms has changed in a number of ways. Smaller privately
owned businesses are experiencing difficulty in locating qualified technical
consultants, have limited access to capital and lack a national presence. These
limitations have made it more difficult for such firms to provide services to
large organizations, many of which have been decreasing the number of vendors
from which they purchase services. The Company believes that by acquiring IT
consulting services businesses in diverse geographic regions, it will create a
unified entity which has the national presence, capital, human resources and
name recognition required to serve larger organizations while retaining the
local focus and management structures under which these firms have developed.
Business Strategy
The Company's objective is to be a leading nationwide provider of IT
consultants on a contract basis and consulting and outsourcing services. Key
elements for achieving this objective include the following:
Operate with Decentralized Management Structure; Share Information and
Expertise. The Company operates with a decentralized management structure to
provide quality client service and a motivating environment for its professional
staff. The Company believes that many of its national competitors that have
acquired IT consulting services firms have homogenized their operating office
and professional service operations, potentially affecting the quality of
services, focus and creativity provided to clients. The Company permits its
operating units to manage the professional services and technical aspects of
their respective businesses in a manner consistent with their historical
practices and as dictated by local market conditions. Finance, marketing,
planning and administrative support is managed or provided on a centralized
basis. The Company believes that this approach enables its operating units to
maintain a high level of client service and contact, while allowing them to draw
upon the collective resources of the Company as a whole. In addition, the
Company fosters an environment, structure and communications infrastructure to
enable its operating units to continually share knowledge, expertise, resources
and information. The Company believes such activities allow its operating units
to integrate new ideas and systems into their respective operations, enhancing
opportunities for growth through the utilization of strategies that have
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proven effective at other operating locations. Towards these ends, the
Company is currently implementing common and full-enterprise human resources,
financial and project management systems across all operating units.
Recruit and Retain Qualified Technical Consultants. The Company's goal
is to be the "employer of choice" of the local technical consultants in any
market in which it operates. The Company believes that IT consulting services
companies that are closely tied to the local and regional markets in which they
operate tend to foster good working relationships with the technical consultants
in such markets. To recruit and retain qualified technical consultants, the
Company offers its professionals training opportunities, the ability to
participate in the Company's Employee Stock Purchase Plan, as well as benefits
packages that the Company believes are competitive with those generally offered
in the consultant's region. In addition, the Company's broad client base, which
includes companies in areas such as technology and telecommunications, gives the
Company's technical consultants the opportunity to work in a diversity of
environments on a wide range of challenging projects. Finally, the Company's
decentralized management structure allows the operating units to retain the
corporate culture and autonomous operating style present prior to acquisition by
the Company and allows local management to offer its technical consultants the
particular benefits and incentives viewed as important in its regional operating
area.
Acquire Companies that Provide Complementary Services or Clients;
Expand Geographically. The Company seeks to acquire successful companies that
add to the range of services and expertise available within the Company as well
as diversify the Company's existing client base. In assessing acquisition
candidates, the Company evaluates a company's technical and industry
applications expertise and the number of national clients serviced by the target
company. The Company believes that such an evaluation will help the Company
locate attractive acquisition candidates whose addition to the Company would be
consistent with the Company's national marketing efforts and existing
infrastructure for sharing "best practices" among the operating units. In
addition to continuing to implement its growth strategy domestically, the
Company intends to pursue growth opportunities internationally. See "Item 1.
Business -Acquisition Strategy."
Focus on Clients with Recurring Needs; Maintain and Enhance
Relationships with Existing Clients. The Company has historically focused its
client marketing efforts on companies with substantial recurring needs for
supplemental applications or software development services, which tend to be
large companies. The combined resources and geographic dispersion of the
operating units enables the Company to continue to focus its marketing efforts
on clients requiring national service capabilities. To enhance these marketing
efforts, the Company intends to use a centralized national strategic marketing
team which will expand and coordinate the Company's marketing focus towards
national clients and will assist the acquired businesses in the bidding process
for projects involving national accounts. Further, the Company believes that its
commitment to consistently providing high quality services has enabled it to
establish and maintain long-term relationships with many of its clients. During
the last three fiscal years, on average approximately 88% of the Company's
revenues were derived from clients to whom services or solutions had been
provided in the preceding year. In addition, the Company believes that the
access and goodwill derived from these client relationships provide it with
significant advantages in marketing additional services and solutions to such
clients, both regionally and nationally.
Pursue Strategic Alliances. The Company seeks to form strategic
alliances with established companies where opportunities exist to jointly market
the services and capabilities of both organizations. The Company currently has
such alliances with Microsoft Corporation and Lawson Software. Through its
strategic alliance with Microsoft, for example, the Company and Microsoft
jointly provided an office automation solution to one of the Company's clients.
With the Company as project manager, Microsoft's state-of-the-art technology was
integrated into the client's desktop configuration as part of the Company's
assignment to re-engineer the client's technical infrastructure. Through the
acquisitions of ESP Software Services, Inc. and United Data Processing, Inc. the
Company gained additional operating units that are Microsoft solution provider
program partners, and one of which is a Microsoft authorized training center.
The Company intends to continue to strengthen its business relationship with
Microsoft, as well as its other strategic partners, and expects that more
operating units will participate in such alliances in the future in an effort to
enhance the Company's overall technical support capabilities and software
applications expertise.
Acquisition Strategy
The Company believes that there are many independent firms that are
attractive acquisition candidates due to (i) the highly fragmented nature of the
IT consulting services industry, (ii) the need for capital of many independent
firms and (iii) the wide geographic scope and the evolving purchasing and
outsourcing patterns of the Company's present and potential
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clients. As part of its strategic plan, the Company's acquisition program
utilizes a primary entry acquisition and tuck-in strategy for expansion
into each of its targeted metropolitan areas. A primary entry acquisition is
an acquisition which creates a significant presence for the Company in the
geographic market in which the acquisition candidate is located. The Company
intends, where possible, to make a primary entry acquisition in a targeted
area by acquiring an established, high quality local company. In most
instances involving a primary entry acquisition, the Company expects to retain
the management, sales and recruiting personnel while seeking to improve the
acquired company's profitability by implementing the Company's business
strategies, rather than converting the local operation to a standardized
national business model.
In contrast with a primary entry acquisition, a tuck-in acquisition is
one in which the candidate is located in a market in which the Company already
has a presence. A tuck-in acquisition is also generally smaller in size than a
primary entry acquisition and the target's operations will generally be
incorporated into the operating units in the target's area. The Company intends
to make tuck-in acquisitions where feasible.
The Company believes that the continued autonomy offered to acquisition
candidates as a result of the Company's decentralized management philosophy, the
access to the increased capital offered by association with a larger, publicly
traded company and the ability to affiliate with a more geographically diverse
company, will make the Company an attractive acquirer of additional businesses.
In connection with its acquisition strategy, the Company has
established a profile to evaluate the compatibility of an acquisition target
with the Company's growth and business strategies. In identifying primary entry
acquisition candidates, the Company seeks to locate companies which (i) have
experienced past success as providers of IT consulting services, (ii) possess a
strong local or regional presence, (iii) provide their technical consultants
with a corporate culture which will be compatible with the Company's culture and
(iv) have experienced and knowledgeable management that has a desire to remain
in control of the candidate's operations after the consummation of the
acquisition by the Company.
As consideration for future acquisitions, the Company intends to use
various combinations of Common Stock, cash and notes.
Recent Acquisitions
During the fiscal year ended March 31, 1997 the Company acquired eight
IT consulting services companies. These acquisitions have expanded the Company's
national presence, broadened its nationwide resource pool and client base and
increased the Company's capabilities and expertise by providing an increased
range and mix of IT consulting services. Certain information relating to these
acquisitions is summarized in the following table.
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ACQUIRED COMPANY ACQUISITION DATE LOCATIONS
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ESP Software Services, Inc. June 28, 1996 Minneapolis, MN
Innova Solutions, Inc June 28, 1996 Dallas, TX; St. Louis, MO
JasTech, Inc. and JasTech of Florida, Inc. September 30, 1996 Cleveland, OH; Ft. Lauderdale, FL
Data Processing Professionals, Inc. October 7, 1996 St. Louis, MO
Pittsburgh Business Consultants, Inc. November 27, 1996 Pittsburgh, PA; Denver, CO; Cedar
Rapids, IA; San Diego, CA;
Colorado Springs, CO
Consulting Services Division
of Daleen Technologies November 27, 1997 Boca Raton, FL
TRC Computers, Inc. February 10, 1997 San Jose, CA; Los Angeles, CA
United Data Processing, Inc. February 10, 1997 Beaverton, OR
</TABLE>
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Services
IT Consultants
The Company's primary business is to provide highly skilled and trained
IT consultants to augment the internal IT personnel and end-user groups of major
corporations. These services accounted for approximately 85% of the Company's
revenues in 1997. The Company provides its clients with highly-qualified IT
professionals who are proficient in a wide variety of hardware and software
platforms and who are available to clients for either short-term or long-term
support. Specifically, the Company's technical consultants provide ad hoc
supplemental IT support for positions requiring highly specialized computer
skills, including applications programming and development, client/server
development, systems software architecture and design, systems engineering,
systems integration and intranet/internetworking. For these types of
assignments, the Company's consultants bill primarily on a time and materials
basis and work under the direction of the client for the duration of an
engagement, which typically lasts three months to nine months.
IT Consulting and Outsourcing Services
In addition to its primary business of providing technical consultants
to assist the internal staffs of its clients, the Company also provides certain
IT consulting and outsourcing services. These services accounted for
approximately 15% of the Company's revenues in 1997. With the increasing
complexity of computer applications, many of the Company's clients find that
they are not able to manage their development projects without added assistance.
Among the services the Company provides are project management, systems and
business process re-engineering, relational database design and implementation,
hardware and software selection, creation of migration plans, development of
customized software applications and systems integration. The Company has the
resources and experience to plan and manage a project from conception through
completion, as well as the ability to enter a project midstream, assess its
status, develop a plan and successfully complete the project.
Additionally, the Company develops and implements software applications
using client/server architectures and integrating servers, mini and mainframe
systems, workstations, terminals and communication gateways into complete,
flexible networks. The Company specializes in integrating local area network
environments into single heterogeneous networks and unifying enterprise networks
into wide area network environments. In addition, the Company offers client
support programs for facilities management, permanent placement and education
and training.
Technical Consultants and Recruitment
Building and enhancing a database of skilled technical consultants is
integral to the Company's success. The Company uses traditional recruiting
methods, such as a presence at local and regional technical colleges, newspaper
and technical periodical classified advertising and participation in national
and regional job fair networks. It also employs less traditional methods,
including the use of the Internet through skill-specific user groups, World Wide
Web page advertisements, on-line and skills networks, resume referral services,
out-placement agencies and the Company's skills/resume retrieval networks. The
Company is also exploring the possibility of recruiting technical consultants
from foreign markets and anticipates that if it is successful in acquiring one
or more United States companies that have an international presence, it would
gain such international recruiting capability. The Company currently maintains a
staff of 65 full-time recruiters.
Each applicant is interviewed by the Company's recruiting personnel.
Technical applicants are also required to complete a questionnaire regarding
skill levels, past professional experience, education and availability and are
also asked to provide technical references. Once qualified, the candidate's
profile, relevant skills, and experience are scanned into a database which can
be searched based on a number of different criteria, including specific skills
and qualifications. The Company regularly updates its databases to reflect
changes in employee skills, experience or availability. To place employees in
client organizations more efficiently, the Company is currently implementing a
common client information and candidate tracking system that it expects to be
operational by December 1997. This system will give each operating unit access
to the Company's nationwide database.
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The Company maintains a database with over 100,000 technical
consultants who have a wide range of skills, including the following major
categories:
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<S> <C> <C>
Application Development Project Management Systems Administration
Business Analysis Software Engineering Systems Integration
Computer Programming Software Quality Assurance Systems Programming
Database Administration Software Testing Telecommunication Analysis
Data Analysis
</TABLE>
At March 31, 1997, the Company had a staff of approximately 2,000
people, including approximately 1,650 technical consultants. Of such technical
consultants, approximately 50% were salaried employees.
Marketing and Clients
The Company focuses its marketing efforts on businesses with
substantial recurring needs for applications or software development support,
which tend to be large companies. As the Company expands its operation
nationally, there is an increased focus supporting national accounts with
multiple operating sites. The development needs of such businesses can provide
opportunities for major projects that may extend for multiple years or generate
additional assignments. In addition the Company has also experienced increased
opportunity in rapidly growing mid-sized companies. With the implementation of
client/server technology, the Company believes that there is an increasing need
among mid-sized companies for technical assistance and applications support and
intends to expend this aspect of its business.
The Company markets its services through account managers located in
each operating unit. Approximately 66 people are engaged in marketing full time.
Many of the Company's operating units use an account team strategy in their
marketing efforts. Assigning a team to key accounts creates the opportunity to
service a client's needs more quickly and efficiently and provides more
marketing opportunities because Company personnel know specifically who is
responsible for the service activities and are generally more aware of a
client's technology staffing needs, methodologies and budgets. Account managers
work as members of a team, allowing them to focus on identifying and
understanding a client's needs while recruiters on the team focus on finding
qualified technical consultants to meet the needs of the client. Performance
bonuses and commissions constitute a significant portion of the total
compensation of account managers and generally are based upon the profitability
of the business generated.
The Company is expanding its marketing efforts by coordinating its
operating units' responses to requests for proposals from current clients. The
Company is pursuing new client accounts primarily in those geographic areas
presently serviced by its operating units. The Company believes that its size
will create opportunities to more effectively compete in vendor list selection,
large contract programming assignments and project engagements.
The Company believes that its decentralized structure puts it in the
advantageous position of bidding on assignments as either a national services
provider or a regional services provider, depending on the needs and desires of
a particular client. The Company believes it will be able to successfully secure
projects from both (i) clients seeking to only do business with national
providers of IT consulting services, to whom the Company will stress its size
and national presence, and (ii) clients seeking relationships with local and
regional firms, to whom the Company will highlight its established regional
presence and localized management.
As a result of the Company's broad client base, it does not rely upon
any one client for significant revenue. The Company has no clients that
accounted for more than 8% of revenue for the year ended March 31, 1997 and only
two clients accounted for between 3% and 8% in the same period.
10
<PAGE>
During the year ended March 31, 1997, approximately 27 clients each
provided the Company with more than $1 million in revenue. The following table
sets forth a selected list of such clients of the Company.
<TABLE>
<S> <C> <C>
Telecommunications Technology Financial Services
AT&T. Amdahl Liberty Mutual Insurance Co.
Bellcore Hewlett-Packard The Progressive Corporation
Lucent Technologies Microsoft Washington Mutual Savings Bank
MCI Telecommunications
Pacific Bell Consumer Other
US West Communications Frito-Lay Medtronic
Western Wireless Office Depot Monsanto
Ortho Diagnostics Systems
</TABLE>
Competition
The IT consulting services market is highly competitive, fragmented and
served by numerous firms, many of which serve only their respective local
markets. The market includes participants in a variety of market segments,
including local, regional and national systems consulting and integration firms,
professional service divisions of application software firms, the professional
service groups of computer equipment companies, management information systems
outsourcing companies, certain "Big Six" accounting firms and general management
consulting firms. The Company's competitors, which may vary depending on
geographic region and the nature of the service(s) being provided, may have
significantly greater financial, technical and marketing resources and generate
greater revenues than the Company.
The Company believes that the principal competitive factors in the IT
consulting services industry include quality of service, responsiveness to
client needs, the number and availability of qualified technical consultants,
price, project management capability, technical expertise, size and reputation.
The Company intends to remain competitive as a result of its (i) ability to
locate, place and retain technical consultants with strong performance
capabilities and experience, (ii) capability on both a regional and national
level, including its ability to market itself and secure assignments from
clients seeking to do business with national IT consulting services firms as
well as regional businesses seeking local relationships, and (iii) ability to
provide effective management of account relationships and respond to clients'
ongoing business needs.
Intense competition also exists for viable acquisition candidates. The
Company believes that its decentralized management philosophy and operating
strategies will make it an attractive acquiror of other IT consulting services
companies.
Item 2. Properties.
The Company's principal executive offices and the headquarters of its
ten subsidiaries are located in eleven facilities with an aggregate of
approximately 85,000 square feet and are leased at aggregate current monthly
rents of approximately $112,000 with no lease commitment extending past the year
2001. The Company's remaining 14 offices aggregate approximately 53,500 square
feet and are leased at aggregate current monthly rents of approximately $80,500
for various terms, with no lease commitment extending past the year 2002. The
Company believes that its properties are adequate for its needs. Furthermore,
the Company believes that suitable additional or replacement space will be
available when required on terms the Company believes will be acceptable.
Item 3. Legal Proceedings.
The Company is, from time to time, a party to litigation arising in the
normal course of its business. The Company is not presently subject to any
material litigation.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
11
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
The Company's Common Stock has traded on the NASDAQ National Market under
the symbol "COTL" since February 14, 1996, the date of the Company's initial
public offering. On March 31, 1997, the last sale price of the Common Stock was
$9.25 per share, as published in The Wall Street Journal on April 1, 1997. At
March 31, 1997, there were 94 stockholders of record of the Company's Common
Stock. The following table sets forth the range of high and low close sale
prices for the Common Stock for the period from February 14, 1996, through March
31, 1997 and the period from April 1, 1996 through June 24, 1997.
<TABLE>
High Low
<S> <C> <C>
1996 Fiscal Year
February 14, 1996 through March 31, 1996............................. $11.75 $ 8.25
====== =======
1997 Fiscal Year
April 1, 1996 through June 30, 1996.................................. $20.50 $12.00
====== ======
July 1, 1996 through September 30, 1996.............................. $17.50 $12.25
====== ======
October 1, 1996 through December 31, 1996............................ $24.50 $16.00
====== ======
January 1, 1997 through March 31, 1997............................... $24.88 $ 9.25
====== ======
1998 Fiscal Year
April 1, 1997 through June 24, 1997.................................. $14.25 $ 7.25
====== ======
</TABLE>
The Company did not pay dividends on its Common Stock during the year ended
March 31, 1997. Further, the Company intends to retain all of its earnings to
finance the expansion of its business and for general corporate purposes and
does not anticipate paying any dividends on its Common Stock for the foreseeable
future. In addition, the Company's line of credit facility prohibits the
Company's ability to pay dividends without the consent of the lender.
12
<PAGE>
Item 6. Selected Financial Data.
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. The operating results of the Founding
Companies have been included since the date of acquisition.
During fiscal 1997, the Company acquired six businesses accounted for
under the pooling-of-interests method (the "Pooled Companies"). Accordingly, the
selected financial data of Cotelligent for the years ended March 31, 1993, 1994,
1995, 1996 and 1997 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.
In addition, during fiscal 1997, the Company acquired two businesses
accounted for under the purchase method. Accordingly, the selected financial
data of Cotelligent for the year ended March 31, 1997 includes these the
operating results of acquisitions subsequent to their respective acquisition
dates.
The selected financial data with respect to Cotelligent's consolidated
statements of operations for the years ended March 31, 1994, 1995, 1996 and 1997
and with respect to the consolidated balance sheets as of March 31, 1995, 1996
and 1997 have been derived from Cotelligent's financial statements that have
been audited by Price Waterhouse LLP. The selected financial data with respect
to Cotelligent's consolidated statement of operations for the year ended March
31, 1993 and with respect to Cotelligent's consolidated balance sheets as of
March 31, 1993 and 1994 have been derived from unaudited financial statements
which, in the opinion of management, reflect all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of such data.
The pro forma statement of operations has been derived from unaudited
financial data and reflects adjustments for the acquisitions of the Pooled
Companies, including compensation differentials to employees and former owners,
the planned termination of contributions to retirement plans, one-time,
non-recurring acquisition costs related to the Pooled Companies 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.
The following selected financial data should be read in conjunction
with the financial statements, related notes and other financial information of
the Company included elsewhere herein.
13
<PAGE>
<TABLE>
SELECTED FINANCIAL DATA
Cotelligent Group, Inc. (1)
(In Thousands, Except Share and Per Share Amounts)
<CAPTION>
Year Ended March 31,
--------------------------------------------------------------------
Pro Forma
1993 1994 1995 1996 1997 1997 (2)
------------ --------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues............... $ 22,747 $26,679 $ 33,264 $ 52,786 $146,772 $ 146,772
Cost of services....... 15,697 17,042 22,621 37,227 104,785 104,785
------------ --------- ---------- --------- ---------- -----------
Gross profit......... 7,050 9,637 10,643 15,559 41,987 41,987
Selling, general and
administrative
expenses............. 6,060 8,204 10,451 12,962 32,730 31,775
Non-recurring
transaction cots..... - - - - 1,969 -
------------ --------- ---------- --------- ---------- -----------
Operating income..... 990 1,433 192 2,597 7,288 10,212
Other expense
(income), net......... 112 74 92 (120) 18 18
------------ --------- ---------- --------- ---------- -----------
Income before
provision for
for income taxes..... 878 1,359 100 2,717 7,270 10,194
Provision (benefit)
for income taxes..... 26 162 (77) 199 3,634 3,874
------------ --------- ---------- -------- ---------- -----------
Net income $ 852 $ 1,197 $ 177 $ 2,518 $ 3,636 $ 6,320
============ ========= ========== ========= ========== ===========
Earnings per share (3)... $ .37
==========
Pro forma earnings per
share (3).............. $ .64
============
Unaudited Pro Forma Data
(4):
Income before provision
(benefit) for income
taxes............. $ 878 $ 1,359 $ 100 $ 2,717 $ 7,270
Provision (benefit)
for income taxes.... 353 577 (120) 1,098 3,009
------------ --------- ---------- --------- ---------
Net income (loss)...... $ 525 $ 782 $ (20) $ 1,619 $ 4,261
============ ========= ========== ========= =========
March 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- ------- -------- -------- --------
Balance Sheet Data
Working capital........ $ 608 $1,606 $ 821 $19,477 $ 14,771
Total assets........... $ 3,663 $4,684 $ 7,276 $36,448 $ 40,697
Long-term debt, less
current portion....... $ 131 $ 56 $ 143 $ 450 $ 163
Stockholders' equity... $ 1,237 $1,976 $ 902 $20,182 $ 22,264
<FN>
(1) Prior to its acquisition of the Founding Companies on February 20, 1996,
Cotelligent was a non-operating entity. Accordingly, the above historical
information up through February 20, 1996 represents the results of
Cotelligent and the Pooled Companies. The Founding Companies and purchased
companies are included subsequent to their respective acquisition.
(2) Pro forma data reflect adjustments for the acquisitions of the Pooled
Companies including compensation differentials to former owners and
employees, termination of contributions to retirement plans, removal of
non-recurring transaction costs associated with the Pooled Companies, and
income taxes as if the entities were combined and subject to the effective
federal and state statutory rates throughout the periods presented.
(3) Weighted average shares outstanding used to determine earnings per
share and pro forma earnings per share were 9,938,399 for March 31,1997.
Earnings per share for the years ended March 31, 1993, 1994, 1995, and
1996 has not been presented because it is not considered meaningful as a
result of the acquisitions and Offering discussed in Note 1 of the
accompanying financial statements.
(4) Certain of the Pooled Companies were S Corporations prior to their merger
with Cotelligent. The unaudited pro forma information is presented for the
purpose of reflecting a provision for income taxes as if the Pooled
Companies had been subject to income taxes for all periods presented,
calculated in accordance with FAS 109, based on tax laws that were in
effect during the respective periods.
</FN>
</TABLE>
14
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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"). Accordingly,
the selected financial data of Cotelligent for the years ended March 31, 1993,
1994, 1995, 1996 and 1997 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.
In addition, during fiscal 1997, the Company acquired two businesses
accounted for under the purchase method. Accordingly, the selected financial
data of Cotelligent for the year ended March 31, 1997 includes the operating
results of these acquisitions subsequent to the respective date acquired.
Pro forma data reflect adjustments for the Pooled Companies and other
acquisitions including: (i) compensation differentials to former owners and
employees; (ii) termination of contributions to retirement plans; (iii)
elimination of one-time, non-recurring acquisition costs related to the Pooled
Companies and other acquisitions; and (iv) income taxes as if the entities were
combined and subject to the effective federal and state statutory rates
throughout the periods discussed.
The Company derives substantially all of its revenues from professional
service activities. The majority of these activities are provided under "time
and expense" billing arrangements, and revenues are recorded as work is
performed. Revenues are directly related to the total number of hours billed to
clients and the associated hourly billing rates. Hourly billing rates are
established for each service professional and such rates are a function of the
professional's skills, experience and the type of work performed. The Company's
principal costs are professional compensation directly related to the
performance of services and related expenses. Gross Margins (revenues after
professional compensation and related expenses) are primarily a function of
hours billed to clients per professional employee or consultant, hourly billing
rates of those employees or consultants and employee or consultant compensation
relative to those billing rates. Gross 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.
From time to time, the Company has opened new operating or branch
offices, and it may open new offices in the future. Historically, a new office
requires approximately 12 months to reach break-even profitability. During such
period, a new office may lose an average of $50,000 per month. There can be no
assurance that any new office will ever become profitable.
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 acquisition. In
addition, financial periods subsequent to the completion of an acquisition could
be adversely impacted by costs and activities associated with the assimilation
and integration of the acquired company.
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.
15
<PAGE>
Results of Operations
Prior to its acquisition of the Founding Companies on February 20,
1996, Cotelligent was a non-operating entity. The historical operating results
prior to February 20, 1996 represent only the results of Cotelligent and the
results of the Pooled Companies. The operating results of the Founding Companies
are included from the date of acquisition on February 20, 1997.
Accordingly, the Company believes the comparison of pro forma results
of operations for 1997 to pro forma results of operations for 1996 to be
meaningful. Pro forma data reflects the inclusion of Cotelligent, the Pooled
Companies and the Founding Companies as if they had been members of the same
operating group for the entire periods presented. In addition, pro forma data
includes adjustments for compensation differentials to former owners and
employees, termination of contributions to retirement plans, removal of
non-recurring transaction costs associated with the Pooled Companies, and income
taxes as if the entities were combined and subject to the effective federal and
statutory rates throughout the periods presented.
The following tables set forth the percentage of net revenues
represented by items in the Company's historical and pro forma statement of
operations for the respective periods presented.
Pro Forma Statement of Operations Data:
<TABLE>
Year Ended March 31,
----------------------------------------------------
1996 1996 1997 1997
------------ ----------- ------------ -------------
<S> <C> <C> <C> <C>
Revenues........................ $ 106,101 100.0% $146,772 100.0%
Cost of services................ 77,659 73.2 104,785 71.4
------------ ----------- ------------ -------------
Gross profit.................. 28,442 26.8 41,987 28.6
Selling, general and
administrative expenses...... 21,210 20.0 31,775 21.6
------------ ----------- ------------ -------------
Operating income............. 7,232 6.8 10,212 7.0
Other expense, net.............. 386 .4 18 -
------------ ----------- ------------ -------------
Income before provision
for income taxes............. 6,846 6.4 10,194 7.0
Provision for income taxes...... 2,738 2.6 3,874 2.6
------------ ----------- ------------ -------------
Net income....................$ 4,108 3.9% $ 6,320 4.3%
============ =========== ============ =============
</TABLE>
Historical Statement of Operations Data:
<TABLE>
Year Ended March 31,
--------------------------------------------
1995 1996 1997
------------ ----------- -------------
<S> <C> <C> <C>
Revenues.................................. 100.0% 100.0% 100.0%
Cost of services.......................... 68.0 70.5 71.4
------------ ----------- -------------
Gross profit..................... 32.0 29.5 28.6
Selling, general and
administrative expense................. 31.4 24.6 22.3
Non-recurring transaction costs........... - - 1.3
------------ ----------- -------------
Operating income................. 0.6 4.9 5.0
Other expense, net........................ 0.3 (0.2) -
------------ ----------- -------------
Income before provision for
income taxes............................ 0.3 5.1 5.0
Provision for income taxes................ (0.2) 0.4 2.5
------------ ----------- -------------
Net income............................... 0.5% 4.7% 2.5%
============ =========== =============
</TABLE>
16
<PAGE>
Pro Forma Combined Results of Operations
Pro Forma 1997 Compared to Historical 1997
Revenues. Revenues were $146.8 million for 1997 on both a pro forma
and historical basis.
Gross Profit. The Gross profit was 28.6% of revenues for 1997 on a
pro forma and historical basis.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses on a pro forma basis were $31.8 million, or 21.6% of pro
forma revenues, compared to historical selling, general and administrative
expenses of $32.7 million, or 22.3% of historical revenues in 1997. The reduced
selling, general and administrative expenses on a pro forma basis reflect a
reduction in executive compensation from historical levels due to the
renegotiation of executive compensation arrangements in connection with the
Pooled Companies and other acquisitions, and elimination of retirement fund
contributions since the Company plans to make no such contributions in the
future.
Non-recurring transaction costs. Non-recurring transaction costs
include expenditures associated with the acquisition of the Pooled companies and
other acquisitions and are expended on a historical basis as a result of
accounting for the acquisitions as poolings-of-interests.
Interest expense, net. Net interest expense was $194,000, on both
a historical and pro forma basis, or .1% of revenues in 1997.
Provision for Income Taxes. Provision for income taxes on a pro forma
basis were $3.9 million, or an effective tax rate of 38.0% of pro forma pre-tax
income compared to a historical provision for income taxes of $3.6 million, or
an effective rate of 50.0% of pre-tax income in 1997. The primary difference
between the Companies historical and pro forma effective tax rates related to
the termination of certain Pooled Companies S corporation election and the
non-deductibility of certain non-recurring transaction costs.
Pro Forma 1997 Compared to Pro Forma 1996
Revenues. Pro forma revenues increased $40.7 million, or 38.33% to
$146.8 million in 1997 from $106.1 million in 1996. The increase was primarily
due to a 25.0% increase in total client service hours to 2.5 million in 1997
from 2.0 million hours in 1996 and a 5.5% increase in the average hourly billing
rate to $56.77 in 1997 from $53.79 in 1996. The increase in revenues also
reflects an increase in permanent placement fee revenues of $0.8 million.
Gross Profit. Gross profit increased $13.5 million, or 47.6% to $41.9
million in 1997 from $28.4 million in 1996, as a result of an increase in hours
of service provided to clients. Gross profit as a percentage of revenues
increased to 28.6% in 1997 from 26.8% in 1996, principally due to increases in
billing rates to clients exceeding the increased cost of service rate, and an
increase in higher value services to clients.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $10.6 million, or 49.8% to $31.8 in 1997 from
$21.2 in 1996. The increase was primarily due to increased compensation to
existing staff and staff added to support growth, additional locations,
installation of a company-wide network and associated costs to maintain these
systems as well as incremental costs of Cotelligent's corporate activities.
Selling, general and administrative expenses increased as a percentage of
revenues to 21.6 % in 1997 from 20% in 1996, principally due to increased
corporate activities and information technology infrastructure costs.
Interest expense, net. Interest expense, net of interest income,
decreased $235,000 to $194,000 in 1997, from $429,000 in 1996, primarily due to
interest income on cash provided from the Offering.
Provision for Income Taxes. The Company's provision for income taxes
increased $1.1 million to $3.9 million. The increase in the provision for income
taxes was due to an increase in pre-tax income of $3.3 million. The effective
rate of tax decreased to 38% in 1997 from 40% in 1996 reflecting a growth in
revenues in states with no state income taxes.
17
<PAGE>
Historical Combined Results of Operations
1997 Compared to 1996
Revenues. Revenues increased $94.0 million, or 178.1%, to $146.8
million in 1997 from $52.8 million in 1996. The increase was primarily due to
$70.6 million of revenues from the full year impact of the Founding Companies
acquired February 20, 1996, a 36.1% increase in total client service hours
provided by the Pooled Companies to 1.3 million hours in 1997 from 955,000 hours
in 1996, and an 8.3% increase in the average hourly billing rate of the Pooled
Companies to $49.95 in 1997 from $46.12 in 1996. The increase in revenue also
reflects an increase in permanent placement fee revenues of $0.8 million.
Gross Profit. Gross profit increased $26.4 million, or 169.9%, to $42.0
million in 1997 from $15.6 million in 1996, as a result of $16.2 million for the
full year impact of the Founding Companies and an increase in hours of service
provided to clients of the Pooled Companies. Gross profit as a percentage of
revenues decreased to 28.6% in 1997 from 29.5% in 1996, principally due to lower
Profits generally inherent in the engagements of the Founding Companies.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $19.7 million, or 152.5%, to $32.7 million in
1997 from $13.0 million in 1996. The increase was primarily due to increased
compensation to existing staff and staff added to support anticipated growth,
increased occupancy expenses and related operating costs associated with the
Pooled Companies growth, incremental costs associated with Cotelligent's
corporate activities and the full year effect of additional selling, general and
administrative costs of $12.9 million for the Founding Companies. Selling,
general and administrative expenses decreased as a percentage of revenues to
22.3% in 1997 from 24.6% in 1996, reflecting greater operating efficiencies and
a larger revenue base. The Company cannot be certain that such efficiencies can
be sustained in the near term as it undertakes to integrate the acquired
entities, expand geographically and acquire other companies.
Non-recurring transaction costs. Non-recurring transaction costs of
$2.0 million were incurred in 1997. Non-recurring transaction costs include
expenditures associated with the acquisition of the Pooled Companies and other
acquisitions. There were no similar transactions in 1996.
Interest Expense, net. Interest expense, net of interest income,
decreased $52,000 to $194,000 in 1997, from $246,000 in 1996, primarily due to
interest income on cash provided from the Offering.
Provision for Income Taxes. The Company's provision for income taxes
increased $3.4 million to $3.6 million in 1997, an effective rate of 50.0%, in
1997, from $199,000, an effective rate of 7.3%, in 1996. The increase in the
provision for income taxes was due to an increase in income before taxes to $7.3
million in 1997 from $2.7 million in 1996. The high effective tax rate for 1997
is due to the termination of S corporation status of certain Pooled Companies
and the non-deductibility of certain non-recurring transaction costs.
1996 Compared to 1995
Revenues. Revenues increased $19.5 million, or 58.7%, to $52.8 million
in 1996 from $33.3 million in 1995. The increase was primarily due to a 28.4%
increase in total client service hours provided by the Pooled Companies to
955,000 in 1996 from 744,000 in 1995, a 3.6% increase in the average billing
rate to $46.12 in 1996 from $44.53 in 1995 and the revenues of the Founding
Companies which were acquired on February 20, 1996. The increase in hourly
billing rate reflects increased demand for employees and consultants with
higher skill levels.
Gross Profit. Gross profit increased $5.0 million, or 46.2%, to $15.6
million in 1996 from $10.6 million in 1995, primarily as a result of an increase
in hours of service provided to clients by the Pooled Companies and the
acquisition of the Founding Companies on February 20, 1996. Gross profit as a
percentage of revenues decreased from 32.0% in 1995 to 29.5% in 1996, reflecting
investments in clients and activities pertaining to the development of new
service offerings by the Pooled Companies and the lower margins generally
inherent in the engagements of the Founding Companies.
18
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.5 million, or 24.0%, to $13.0 million in
1996 from $10.5 million in 1995, primarily due to increased compensation to
existing staff and staff added to support growth, increased occupancy expenses
and related operating costs associated with the Company's growth and the
acquisition of the Founding Companies on February 20, 1996. Selling, general and
administration expenses decreased as a percentage of revenues to 24.6% in 1996
from 31.4% in 1995, reflecting greater operating efficiencies and a larger
revenue base.
Interest Expense, net. Interest expense, net of interest income,
increased $142,000 to $246,000 in 1996 from $104,000 in 1995 as a result of
increased borrowings under the Company's various bank revolving credit
facilities. Such borrowings were used to support operating activities.
Provision for Income Taxes. The Company's provision for income taxes
increased $276,000 to $199,000, an effective rate of 7.3%, in 1996 from a
benefit of $77,000, an effective rate of (77.0)%. The increase in the provision
for income taxes is due to an increase in income before taxes to $2.7 million in
1996 from $0.1 million in 1995. The effective tax rate is lower than the
statutory tax rates due to S corporation elections of some of the Pooled
Companies that were in place prior to their respective dates of acquisition.
Quarterly Operating Results 1997 and 1996
The Company's results of operations may fluctuate significantly from
quarter to quarter. Revenues are generated from services provided in response to
client requests or events that occur without notice, and the Company's
engagements, generally billed on a time-and-expense basis, are terminable at any
time by clients. Revenues and operating margins for any particular quarter are
generally affected by staffing mix, resource requirements and the timing and
size of engagements, and the results for any particular quarter are not
necessarily indicative of results for any other period. Quarterly results of
operations for the last two years are summarized below.
<TABLE>
--------------------------------------------------------------------------------------------------------------
Year Ended March, 1996 Year Ended March 31, 1997
------------------------------------------ --------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------------------------------------------ --------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $11,194 $11,159 $10,555 $19,878 $31,963 $35,127 $37,806 $41,876
Gross Profit 3,373 3,348 3,269 5,569 9,020 10,646 10,699 11,622
Operating Income 540 628 595 834 1,510 1,887 2,299 1,592
Net Income 439 899 524 656 310 1,312 1,481 533
</TABLE>
Liquidity and Capital Resources
The Company has financed its growth principally through cash flows from
operations, periodic borrowings under its credit facilities and the use of the
net proceeds from the Offering.
The Company's primary sources of liquidity are cash, credit facilities
and the collection of its accounts receivable. Accounts receivable have grown as
the Company's operations have grown. Billed receivables were 59 and 51 days of
revenue at March 31, 1997 and 1996, respectively. The Company's ability to
reduce significantly the aging of its outstanding receivables is limited because
of a continuing general trend by clients to slow their payment of invoices as a
means of managing cash. Should the Company be unable to bill and collect for its
services on a timely basis, the Company could draw upon available cash or
existing credit facilities to finance its operations.
Cash used by operating activities was $2.0 million for the year ended
March 31, 1997. The Company has supplemented cash used by operations
periodically with short-term borrowings under various credit facilities with
banks. The average balance of such borrowings outstanding was approximately $5.9
million and approximately $6.1 million during 1997 and 1996, respectively.
19
<PAGE>
At March 31, 1997, the Company had $2.2 million in cash and cash
equivalents as compared to $14.6 million at March 31, 1996 reflecting the use of
net cash proceeds from the Offering to finance acquisitions during the year. At
March 31, 1997, the Company had short-term notes payable under its bank
revolving credit facilities and current installments of long-term obligations
outstanding in the amount of $4.2 million compared to $4.9 million at March 31,
1996. Long-term obligations, consisting primarily of capital lease obligations,
totaled $422,000 at March 31, 1997 compared to $450,000 at March 31, 1996.
Cotelligent and each of the Founding Companies had separate banking
relationships through May 31, 1996. Effective June 1, 1996, the Company's
separate banking relationships were consolidated into a single banking
relationship with a major bank. Operating units acquired during fiscal 1997 have
been consolidated into this banking relationship within several months of
acquisition. The single relationship provides 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. As of March 31, 1997 the Company had
consolidated all of its bank borrowings into the Facility which bears interest
at the bank's prime rate currently at 8.50%. The Company is not in default of
any credit agreement and had approximately $14.8 million available under the
Facility at March 31, 1997. 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.
The Company believes the existing sources of liquidity and funds
generated from operations, will provide adequate cash to fund its anticipated
cash needs for operations and acquisitions at least through the next year.
Recently Issued Accounting Standard
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per
Share. SFAS No. 128 establishes standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly held common
stock or potential common stock. This statement is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods; earlier application is not permitted. This statement requires
restatement of all prior-periods EPS data presented.
The Company has adopted the disclosure and provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," issued in October 1995, and as permitted by the provision of
SFAS No. 123, the Company continues to apply the provision of APB Opinion No. 25
and related interpretations in accounting for its employee stock option plans.
Item 7.A. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
Item 8. Financial Statements and Supplementary Data
The remainder of this page is left intentionally blank.
20
<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, 1996 and 1997 and the
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1997, 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 29, 1997
21
<PAGE>
<TABLE>
COTELLIGENT GROUP, INC.
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share and Per Share Amounts)
<CAPTION>
March 31, March 31,
ASSETS 1996 1997
------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 14,600 $ 2,244
Accounts receivable, including unbilled accounts of $3,851
and $5,535, net....................................... 18,666 29,153
Notes receivable including $179 and $75
from related parties................................... 315 75
Prepaid expenses and other current assets.................. 770 1,280
------------- ----------------
Total current assets..................................... 34,351 32,752
Property and equipment, net................................... 1,690 4,899
Deferred income taxes......................................... 247 61
Goodwill, net of accumulated amortization of $0 and $38 - 2,649
Other assets.................................................. 160 336
------------- ----------------
Total assets............................................. $ 36,448 $ 40,697
============= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt............................................ $ 4,863 $ 4,087
Accounts payable........................................... 771 2,149
Accrued compensation and related payroll liabilities....... 5,324 8,667
Due to related parties..................................... 417 -
Income taxes payable....................................... 1,243 260
Deferred income taxes...................................... 560 768
Other accrued liabilities.................................. 1,696 2,050
------------- ----------------
Total current liabilities................................ 14,874 17,981
Long-term debt................................................ 450 163
Other long-term liabilities................................... 942 289
------------- ----------------
Total liabilities........................................ 16,266 18,433
------------- ----------------
Commitments and contingencies.................................
Stockholders' equity:
Common stock, $0.01 par value; 100,000,000 shares
1,630,971, 7,272,614 and 7,953,440 shares
outstanding, respectively
authorized 9,119,914 and 9,730,786 shares
outstanding, respectively................................ 91 97
Additional paid-in capital................................. 18,430 18,765
Retained earnings.......................................... 1,661 3,402
------------- ----------------
Total stockholders' equity............................... 20,182 22,264
------------- ----------------
Total liabilities and stockholders' equity 36,488 40,697
============= ================
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
22
<PAGE>
<TABLE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands, Except Share and Per Share Amounts)
<CAPTION>
For the Year Ended March 31,
-----------------------------------------------------
1995 1996 1997
-------------- --------------- --------------
<S> <C> <C> <C>
Revenues............................... $ 33,264 $ 52,786 $146,772
Cost of services....................... 22,621 37,227 104,785
-------------- -------------- ---------------
Gross profit................... 10,643 15,559 41,987
Non-recurring transaction costs........ 1,969
Selling, general and administrative
expenses............................. 10,451 12,962 32,730
-------------- --------------- --------------
Operating income....................... 192 2,597 7,288
Other (income) expense:
Interest expense.................... 119 321 533
Interest income..................... (15) (75) (339)
Other............................... (12) (366) (176)
-------------- --------------- --------------
Total other (income) expense...... 92 (120) 18
-------------- --------------- --------------
Income before income taxes............. 100 2,717 7,270
Provision (benefit) for income taxes... (77) 199 3,634
============== =============== ==============
Net income............................. $ 177 $ 2,518 $3,636
============== =============== ==============
Earnings per share........................ $ .37
==============
Weighted average shares outstanding.. 9,938,399
==============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
23
<PAGE>
<TABLE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands, Except Share Amounts)
<CAPTION>
Additional
Paid In Retained Total
------------- ------------ --------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
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
Dividends to certain pooled companies.. (1,708) (1,708)
Retained Earnings of immaterial pooled
companies...................... (241) (241)
Distribution to former stockholder..... (423) (423)
Issuance of common stock............... 610,872 6 608 614
Tax benefit on stock options exercised. 295 295
Net income............................. 3,636 3,636
------------- --------------- --------------- ------------- ----------------
Balance at March 31, 1997 .............. 9,730,786 $ 97 $ 18,910 $ 3,348 $ 22,355
============= =============== =============== ============= ================
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
24
<PAGE>
<TABLE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<CAPTION>
Year Ending March 31,
---------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..............................................$ 177 $ 2,518 $ 3,636
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 221 308 1,041
Deferred income taxes, net........................... - (539) 394
Loss (gain) on disposal of property and equipment ... 42 (325) 65
Provision for doubtful accounts...................... - 156 (80)
Changes in current assets and liabilities:
Accounts receivable......................... 2,680) (2,743) (11,002)
Prepaid expenses and other current assets... (109) (190) (270)
Accounts payable and accrued expenses....... 2,458 128 5,711
Income taxes payable........................ (29) 307 (688)
Changes in other assets.............................. 4 19 (176)
Changes in long term liabilities..................... - - (653)
---------- ---------- ----------
Net cash provided by (used in) operating
activities. 84 (361) (2,002)
---------- ---------- ----------
Cash flows from investing activities:
Proceeds on sale of assets.................................... 53 374 5
Purchase of businesses, net of cash of acquired companies..... - - (2,915)
Purchases of property and equipment............................ (420) (652) (4,094)
Net repayments from (advances to) related parties.............. (25) (63) -
Cash and cash equivalents of Founding Companies at acquisition. - 525 -
---------- ---------- ----------
Net cash used in investing activities...... (392) 184 (7,004)
---------- ---------- ----------
Cash flows from financing activities:
Redemption of common stock..................................... (206) (120) -
Proceeds on long-term debt..................................... 168 64 -
Principal Payments on long-term debt........................... (47) (19) (390)
Payments on capital lease obligations.......................... - (49) (185)
Distribution to founding Companies former stockholders......... - (3,492) -
Dividends...................................................... (1,269) (1,303) (2,131)
Net borrowings (repayments) on short-term debt................. 996 371 (676)
Net borrowings (repayments) on loans with related parties...... 10 148 (417)
Net proceeds from issuance of common stock..................... 224 18,378 469
Net change in cash due to conforming fiscal year end of pooled
companies............................................... - 539 -
---------- ---------- ----------
Net cash provided by (used in) financing
activities................................ (124) 14,517 (3,330)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents........... (432) 14,340 (12,356)
Cash and cash equivalents at beginning of period............... 692 260 14,600
---------- ---------- ----------
Cash and cash equivalents at end of period..................... $ 260 $ 14,600 $ 2,244
========== ========== ==========
Supplemental disclosures of cash flow information:
Interest paid..................................................$ 122 $ 355 $ 533
Income taxes paid.............................................. 14 338 3,353
Non-cash investing and financing transactions:
Capital lease obligations incurred............................. 10 158 188
Conversion of trade accounts receivable to note receivable..... - 53 -
Net Liabilities of immaterial pooled Companies................. - - 187
Tax benefit on stock options exercised......................... - - 295
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
25
<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 was formed in February 1993 to acquired, 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 BFR Co., Inc
("BFR"), Chamberlain Associates, Inc. ("CAI"), Data Arts & Sciences, Inc.
("DASI"), Financial Data Systems, Inc. ("FDSI") (the "Founding Companies")
simultaneously with the initial public offering of its Common Stock (the
"Offering"). 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. These acquisitions were accounted for on a historical cost basis.
During fiscal 1997, the Company issued 3,435,211 shares of Common
Stock to acquire six businesses accounted for under the-pooling-of-interests
method (the "Pooled Companies"). The Pooled Companies includes ESP Software
Services, Inc. ("ESP"), Innova Solutions, Inc. ("ISI"), JasTech, Inc. ("JTI"),
Pittsburgh Business Consultants, Inc. ("PBC"), TRC Computers, Inc.("TRC") and
United Data Processing, Inc. ("UDP"). Accordingly, the financial statements
for the years ended March 31, 1995, 1996 and 1997 have been restated in
accordance with generally accepted accounting principles to present the
financial statements as if Cotelligent and the Pooled Companies had always been
members of the same operating group.
In addition, during fiscal 1997, the Company acquired two businesses
accounted for under the purchase method for $2,915. The operating results of
these acquisitions are included subsequent to their respective acquisition
dates.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts and results of
Cotelligent Group, Inc., the Founding Companies from their date of acquisition
on February 20, 1996, companies acquired in business combinations accounted for
under the purchase method (the Purchased Companies) from their respective
acquisitions dates and give retroactive effect to the results of business
combinations accounted for under the pooling-of interests method (the Pooled
Companies) for all periods presented. All significant intercompany transactions
and accounts have been eliminated.
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.
26
<PAGE>
COTELLIGENT GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
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 three 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.
Goodwill
Goodwill represents the excess of cost over fair value of net tangible
assets acquired through acquisitions. Such excess of cost over fair value of net
tangible assets acquired is being amortized on a straight-line basis over the
period of 30 years. Management periodically reviews the potential impairment of
goodwill on a non-discounted cash flow basis to assess recoverability.
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. Unbilled receivables
represent revenue recognized on services performed which have not been billed.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, short-term
accounts receivables and accounts payables for which current carrying amounts
are equal to or approximate fair market value. Additionally, interest rates on
outstanding debt are at market rates for debt with similar terms and average
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.
Certain Pooled Companies elected to be treated as an S corporation for
federal and state income taxes prior to acquisition by the Company. Accordingly,
any tax liabilities of these Companies were the responsibility of the respective
stockholders. These S corporation elections terminated upon the merger with
Cotelligent. See Note 7 for unaudited pro forma income tax information and
further discussion.
Earnings Per Share
Net income per share is calculated by dividing net income by weighted
average shares outstanding during the year, including common stock
equivalents, if delutive. Historical earnings per share for the year ended
March 31, 1996 has not been presented because it is not considered to be
meaningful as a result of the acquisitions of the Founding Companies and the
Offering as discussed in Note 1.
27
<PAGE>
COTELLIGENT GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
Reclassifications
Certain amounts have been reclassified in 1995 and 1996 to conform to
the 1997 presentation.
Recent Accounting Pronouncements
The Company adopted SFAS 123, "Accounting for Stock-Based
Compensation", during fiscal 1997. SFAS 123 encourages, but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees," and related Interpretations. Pro forma disclosures of net
income and net income per share, as if the fair value-based method of accounting
defined in SFAS 123 had been applied, are presented in Note 11.
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 ofbasic 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 - Business Combinations
Pooling-of-Interests Method
During fiscal 1997, the Company issued 3,435,211 shares of common stock
to acquire 6 companies in acquisitions accounted for under the
pooling-of-interests method, (the "Pooled Companies"). Accordingly the Company's
consolidated financial statements have been restated in accordance with
generally accepted accounting principles for all periods presented.
The results of certain of the Pooled Companies were previously reported
on December 31 year ends prior to acquisition by the Company. The accounts of
these Pooled Companies for the years ended December 31, 1994 and 1995 have been
combined with the accounts of Cotelligent for the years ended March 31, 1995 and
1996, respectively. Commencing on April 1, 1996, the year ends of these Pooled
Companies were changed to March 31, resulting in an increase to retained
earnings of $270 during fiscal 1996.
The following is a summary of the results related to the adjustments
to retained earnings for these Pooled Companies.
<TABLE>
For the
Year Ended
March 31, 1996
--------------------
<S> <C>
Revenues $ 11,823
Costs and expenses 11,553
--------------------
Net Income $ 270
====================
</TABLE>
28
<PAGE>
COTELLIGENT GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
The separate results of operations of Cotelligent Group Inc. and the
Pooled Companies for periods prior to the mergers are presented below.
<TABLE>
Pooled
For the year ended March 31, Cotelligent Companies Combined
------------- ------------- -------------
<S> <C> <C> <C>
1996
Revenue $ 8,265 $ 44,521 $ 52,786
Net income 88 2,403 2,491
1995
Revenue - 33,264 33,264
Net income (201) 378 177
</TABLE>
Purchase Method
During fiscal 1997, Cotelligent acquired two companies accounted for
under the purchase method for an aggregate cost of $2,928. The total assets
related to these acquisitions were $112 and resulted in the recognition of
$2,726 of goodwill, which is being amortized over a 30 year period. The results
of these acquisitions have been included in the Company's results from their
respective date of the acquisition.
Note 4 - Pro Forma Results
The pro forma consolidated statements of operations for the three years
ended March 31, 1997 give effect to the acquisitions of the Founding Companies
as if these acquisitions were made on April 1, 1994. Additionally, the pro forma
consolidated statement of operations for the year ended March 31, 1997 reflects
adjustments for the acquisitions of the Pooled Companies including elimination
of the results of operations of a consulting division which was discontinued,
compensation differentials to employees and former owners of the Pooled
Companies, the planned termination of contributions to retirement plans, 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.
<TABLE>
For the Year Ended March 31,
<CAPTION>
------------------------------------------------
1995 1996 1997
-------------- ------------- ------------
<S> <C> <C> <C>
Revenues $ 83,293 $ 106,101 $ 146,772
Cost of Service 61,109 77,957 104,785
-------------- ------------- ------------
Gross Profit 22,184 28,144 41,987
Selling, general and administrative 20,993 22,681 31,775
-------------- ------------- ------------
Operating Income 1,191 5,463 10,212
Other expense 271 588 18
-------------- ------------- ------------
Income before provision for income 920 4,875 10,194
taxes
Provision for income taxes 350 2,064 3,874
Loss from discontinued business (184) 557 -
============== ============= ============
Net Income $ 386 $ 3,368 $ 6,320
============== ============= ============
</TABLE>
29
<PAGE>
COTELLIGENT GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
Note 5 - Allowance for Doubtful Accounts
<TABLE>
<CAPTION>
Allowance for doubtful accounts activity is as follows.
<S> <C>
Balance, March 31, 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
Charges to costs and expenses............................................................. 80
Write-offs................................................................................ (48)
-------------
Balance at March 31, 1997................................................................. $ 267
=============
</TABLE>
Note 6 - Property and Equipment
Property and equipment is comprised of the following.
<TABLE>
<CAPTION>
March 31,
-----------------------------
1996 1997
-------------- -----------
<S> <C> <C>
Computer and office equipment........................... $ 2,063 $ 4,978
Furniture and fixtures.................................. 1,427 2,675
Leasehold improvements.................................. 326 366
-------------- -----------
3,816 8,019
Less: Accumulated depreciation......................... 2,126 3,120
============== ===========
$ 1,690 $ 4,899
============== ===========
</TABLE>
Depreciation and amortization expense for the years ended March 31, 1996 and
1997 was $308 and $1,003 respectively.
Note 7 - Credit Facilities
Cotelligent and each of the Founding Companies had separate banking
relationships through May 31, 1996. Effective June 1, 1996, the Company's
separate banking relationships were consolidated into a single banking
relationship with a major bank. Operating units acquired during fiscal 1997 have
been consolidated into this banking relationship within several months of
acquisition. This credit facility (the "Facility") provides for borrowings up to
80% of billable accounts receivable or $20.0 million for the Company, secured
by accounts receivable and other assets of the Company, and bears interest at
the bank's prime rate which was 8.50% at March 31, 1997. The Facility secured
by accounts receivable and other assets of Cotelligent contains covenants which,
among other things, requires the Company to maintain minimum net worth and
working capital levels.The Company was in compliance with these covenants at
March 31, 1997. Approximately $14.8 million was available under the Facility
at March 31, 1997.
30
<PAGE>
COTELLIGENT GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
Credit facilities consist of the following:
Short-Term Debt
<TABLE>
<CAPTION>
March 31,
----------------------------
1996 1997
----------- -------------
<S> <C> <C>
Bank line of credit with borrowings up to 80% of the Company's eligible $ $3,926
accounts receivable or $20,000, secured by the accounts receivable and -
other assets of the Company, interest at prime (8.5% at March 31, 1997).....
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 1.75% (9.25% at March 31, 1996)................ 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
base lending rate (9.5% at March 31, 1996)................................ 809 -
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% at March 31, 1996)................................................... 195 -
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 1.25% (9.50% at March 31, 1996).................. 408 -
Related party loans, due on demand, interest rates from 8.0% to 12.5%....... 84
Current portion of long-term debt........................................... 263 161
----------- -------------
Total short-term debt....................................................... $ 4,863 $ 4,087
=========== =============
</TABLE>
31
<PAGE>
COTELLIGENT GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
Long-Term Debt
March 31,
----------------------------
1996 1997
------------- -------- --
<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 -
Other notes payable.......................................................... 0 11
Capital lease obligations.................................................... 390 313
------------- --------
713 324
Less: Current maturities.................................................... 263 161
------------- --------
Total long-term debt......................................................... $ 450 163
============= ========
</TABLE>
<TABLE>
Total maturities of long-term debt, at March 31, 1997 are as follows.
<S> <C>
1998.......................................................................... $ 161
1999.......................................................................... 128
2000.......................................................................... 34
2001.......................................................................... 1
2002.......................................................................... -
Thereafter.................................................................... -
----------------
Total......................................................................... $ 324
================
</TABLE>
32
<PAGE>
COTELLIGENT GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
Note 8 - Income Taxes
Cotelligent files a consolidated federal income tax return for all of
its subsidiaries.
The provision (benefit) for income taxes is as follows.
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------
1995 1996 1997
--------- ---------- -----------
<S> <C> <C> <C>
Current:
Federal.................................................. $ 64 $ 742 $2,409
State.................................................... 2 134 962
--------- ---------- ---------
66 876 3,371
--------- ---------- ---------
Deferred:
Federal.................................................. (211) (530) 343
State.................................................... (12) (107) 50
--------- ---------- ---------
(223) (637) 393
Valuation allowance........................................ 80 (40) (130)
--------- ---------- ---------
Total provision (benefit) for income taxes................. $ (77) $ 199 $3,634
========= ========== =========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following.
<TABLE>
<CAPTION>
March 31,
----------------------------------------
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
Allowance for doubtful accounts............................................ $ - $ 16 104
Accrued liabilities........................................................ 165 406 380
Cash to accrual............................................................ - (846) (1,164)
Operating loss carry forward............................................... 147 317
-
Depreciation............................................................... - (19)
(27)
---------- ---------- ------------
Deferred tax asset (liability)........................................ 312 (126) (707)
Valuation allowance........................................................ (147) (187) -
========== ========== ============
Net deferred tax assets (liabilities)................................. $ 165 $ (313) (707)
========== ========== ============
</TABLE>
33
<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,
-----------------------------------------
1995 1996 1997
----------- ---------- -----------
<S> <C> <C> <C>
U.S. federal statutory rate....................... 34.0% 34.0% 34.0%
State income tax, net of federal benefit.......... - - 7.9
Income of S corporation.......................... (160.0) (28.2) (7.6)
Conversion to C corporation....................... (34.0) - 9.2
Non deductible acquisition costs................. - 7.8 -
Change in valuation allowance..................... 80.0 1.5 (1.8)
Other............................................. - - 0.5
=========== ========== ===========
Effective tax rate........................... (80.0)% 7.3% 50.0%
=========== ========== ===========
</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. In 1997, the Company reversed this valuation allowance as a result of
utilization of the operating losses against taxable income.
Certain Pooled Companies elected to be treated as an S corporation for
federal and state income taxes prior to their merger with Cotelligent.
Accordingly, any tax liabilities prior to acquisition by the Company were the
responsibility of the former stockholders. These S corporation elections
terminated as a result of the merger with Cotelligent and accordingly the net
difference between book and tax basis was immediately recognized. This net
deferred tax liability was approximately $700, the majority of which will be
paid on a pro rata basis over a four-year period.
The following unaudited pro forma income tax information is presented
in accordance with Statement of Financial Accounting Standards No. 109 as if the
businesses acquired under the pooling-of-interests method had been C
corporations subject to federal and state income taxes for all periods
presented.
<TABLE>
<CAPTION>
For the Year Ended
March 31,
---------------------------------------
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Income before provision for
income taxes........................ $ 100 $ 2,717 $ 7,276
Provision (benefit) for income taxes.. (120) 1,098 3,009
=========== ============ ============
Pro forma net income (loss)........... $ (20) $ 1,619 $ 4,269
=========== ============ ============
</TABLE>
34
<PAGE>
COTELLIGENT GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
Note 9 - Lease Commitments
Cotelligent leases various office space and certain equipment under
noncancelable lease agreements which expire at various dates.
Future minimum rental payments as of March 31, 1997 under such leases are
as follows.
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------------- -------------
<S> <C> <C>
1998..................................... $ 170 $ 1,514
1999..................................... 112 1,442
2000..................................... 31 1,199
2001..................................... - 725
2002..................................... - 251
Thereafter............................... - -
-------------- =============
Total minimum lease payments............. 313 $ 5,131
=============
Less: Amounts representing interest..... (27)
==============
Present value of net minimum lease
payments................................. $ 286
==============
<FN>
Rental expense under these leases was, $489, $640 and $1,477 for the
years ended March 31, 1995, 1996 and 1997.
</FN>
</TABLE>
Note 10 - Related Parties
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 1997
-------------- --------------
<S> <C> <C>
Due to Electronic Systems Personnel, Inc..................... $ 6 $ -
Administrative expense....................................... 164 26
Placement fee expense........................................ 527 20
</TABLE>
Note 11 - Employee Benefit Plans
35
<PAGE>
COTELLIGENT GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
Long-Term Incentive Plan
In September 1995, Cotelligent's Board of Directors and stockholders
approved the Cotelligent 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, stock-based awards are granted at
terms and prices determined by the Plan Committee as defined in the Plan. A
summary of option transactions is described in the table below. All options
described below are non-qualified and were granted with exercise prices no
less than the fair market value on the date of the grant.
<TABLE>
<CAPTION>
Weighted
Number of Option Price Average Expiration
Shares Range per Share Exercise Price Date
------------ ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Outstanding at March 31, 1995 - - - -
Granted 479,102 $ 2.70 - 10.25 $ 6.74 2003
Exercised - - - -
Canceled 2,400 9.00 9.00 2003
------------ ----------------- ----------------- -----------------
Outstanding at March 31, 1996 476,702 2.70 - 10.25 6.73 2003
Exercisable at March 31, 1996 87,072 2.70 - 10.00 6.89 2003
Granted 850,713 8.88 - 24.88 18.08 2004
Exercised 59,099 2.70 - 9.00 3.08 2003
Canceled 136,064 2.70 - 24.25 6.66 2003 - 2004
------------ ----------------- ----------------- -----------------
Outstanding at March 31, 1997 1,132,252 2.70 - 24.88 15.46 2003 - 2004
Exercisable at March 31, 1997 249,040 $2.70 - 19.00 $15.25 2003 - 2004
</TABLE>
The Plan provides for stock-base awards in an aggregate amount of up to
15% of the number of Cotelligent's outstanding stock at the time of grant. Of
the non-qualified options granted to date, a majority are generally exercisable
beginning one year from the date of the grant in cumulative yearly amounts of
25% of the shares under option and generally expire seven years from the date of
the grant.
The Company has adopted the disclosure only provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based Compensation," issued in October 1995, and as permitted by the
provisions of SFAS No. 123, the Company continues to apply the provision of
APB Opinion 25 and related interpretations in accounting for its employee
stock option plans. If the Company had elected to recognize compensation expense
for options granted in 1996 and 1997, based on the fair value as described in
SFAS No. 123 as prescribed by SFAS No. 123, net income and earnings per share
would have been reduced to the pro forma amounts indicated below. The fair
value of these options was estimated at the date of grant using a Black-Scholes
option pricing ("Black-Scholes") model with the following weighted average
assumptions for 1996 and 1997, respectively: (i) risk-free interest rates of
5.97 and 6.12, (ii) a dividend yield of 0%, (iii) volatility factors of the
expected market price of the Company's common stock of 40%, and (iv) a weighted
average expected life of 3.5 years and 4.2 years.
The Black-Scholes model was developed for use in estimating the fair
value of traded options that have no vesting restriction and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected volatility of the Company's
Common Stock. In management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options because the Company's employee stock options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimated.
36
<PAGE>
COTELLIGENT GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
For purposes of pro forma disclosure, the estimated fair value of
options is amortized to expense over the options' vesting period. Had
compensation for the Company's stock-based compensation plan been determined
based on the fair value at the grant dates for awards under the Plan consistent
with method of SFAS 123, the Company's net income and earnings per share would
have been adjusted to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
March 31,
-------------------------------------------------------------------
1996 1997
--------------------------------- ------------------------------
As Reported Pro As Reported Pro
Forma Forma
---------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net income .......... $ 2,518 $ 2,327 $ 3,636 $ 2,834
Earnings per share... $ .37 $ .29
</TABLE>
Earnings per share for the year ended March 31, 1996 has not
been presented because it is not considered to be meaningful as a result of the
acquisitions of the Founding Companies and the Offering as discussed in Note 1.
The weighted average fair values of options granted during 1997 and
1996 were $18.59 and $8.63 per share, respectively. The fair value of each
option grant is estimated on the date of grant using the Black Scholes
option-pricing model.
Employee Stock Purchase Plan
During fiscal year 1997, the Company implemented an employee stock
purchase plan whereby eligible employees may purchase shares of the Company's
common stock at a price equal to 85 percent of the lower of the closing market
price on the first or last trading day of the Plan's quarter. A total of 300,000
shares of common stock have been reserved for issuance under the plan. During
1997, employees purchased 20,171 shares for aggregate proceeds to the Company of
$284.
401(k) Plan
During fiscal 1997, the Company initiated the Cotelligent Group, Inc.,
401(k) Retirement Saving Plan, (the "Plan") effective March 1, 1997, for the
benefit of all employees upon date of hire. The Plan is funded by employee
payroll deduction. In addition, the Company has the option to contribute to the
plan on the employee's behalf. The company did not make any contributions to the
Plan for the year ended March 31, 1997.
Subsidiary Plans
Prior to their acquisition certain subsidiaries had various defined
contribution plans which allowed employees to participate upon meeting
specified service requirements. Additionally, these plans also provided
for discretionary contributions by the respective entities. The
subsidiaries' contributions to these plans for the fiscal years ended March 31,
1995, 1996 and 1997 were $27, $70 and $47, respectively.
Note 12- Commitments and Contingencies
Employment Agreements
Certain executive officers 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.
37
<PAGE>
COTELLIGENT GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
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 acquisition of ESP by the Company, 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,
1996 was $548.
In conjunction with the acquisition of ESP by the Company,
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.
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 of management, these matters are not anticipated to
have a material adverse effect on the financial position or results of
operations or cash flows of the Company.
Note 13- Disposition of MCS Practice
PBC ceased the operations of its MCS consulting division in two
transactions as described below.
38
<PAGE>
COTELLIGENT GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
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 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.
Note 14- Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Year Ended March 31, 1997
-------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Revenues................. $ 31,963 $ 35,127 $ 37,806 $ 41,876
Gross profit ............ 9,020 10,646 10,699 11,622
Operating income......... 1,510 1,887 2,299 1,592
------------ ------------ ------------ ==============
Net income............... $ 310 $ 1,312 $ 1,481 $ 533
============ ============ ============ ==============
$ .03 $ .13 $ .15 $ .05
============ ============ ============ ==============
</TABLE>
<TABLE>
<CAPTION>
Year Ended March 31, 1996
------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Revenues................. $ 11,194 $ 11,159 $ 10,555 $ 19,878
Gross profit ............ 3,373 3,348 3,269 5,569
Operating income......... 540 628 569 834
------------ ------------ ------------ ==============
Net income............... $ 439 $ 899 $ 524 $ 656
============ ============ ============ ==============
<FN>
Historical earnings per share for the quarterly data for fiscal year
1996 have not been presented as it is not considered meaningful given the four
Founding Companies are not included prior to the date of the Company's initial
public offering.
</FN>
</TABLE>
39
<PAGE>
Item 9. Changes in and Disagreement With Accountants on Accounting and
Financial Disclosure.
None.
40
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information called for by Item 10 with respect to identification of
directors and executive officers of the Company is incorporated herein by
reference to the material under the captions "Election of Directors" and "Other
Executive Officers of the Registrant" in the Company's Proxy Statement for its
1997 Annual Meeting of stockholders which will be filed with the Securities and
Exchange Commission within 120 days after the end of the Company's fiscal year
(the "Proxy Statement").
Item 11. Executive Compensation.
The information called for by Item 11 with respect to executive
compensation is incorporated herein by reference to the material under the
caption "Executive Compensation" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information called for by Item 12 with respect to security
ownership of certain beneficial owner and management is incorporated herein by
reference to the material under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information called for by Item 13 with respect certain
relationships and related transactions is incorporated herein by reference to
the material under the caption "Certain Transactions" in the Proxy Statement.
41
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of the Annual Report
on Form 10-K:
1. Financial Statements required by Item 14 are included and
indexed in Part II, Item 8.
2. Financial Statement Schedule is included in Part IV of this
report. Schedule II is omitted because the information is included in
the Notes to Consolidated Financial Statements.
3. EXHIBITS
1. The following is a list of all Exhibits filed as part of this
report.
EXHIBIT NO. DESCRIPTION
2.1 Agreement and Plan of Reorganization dated as of December
8, 1995, by and among Cotelligent Group, Inc., James R.
Lavelle, BFR Co., Inc., BFR Acquisition Corporation, and
the Stockholders named therein (Exhibit 2.1 of the
Registration Statement of Form S-1 (File No. 33-80267)
effective February 16, 1996, is hereby incorporated by
reference)
2.2 Agreement and Plan of Reorganization dated as of December
8, 1995, by and among Cotelligent Group, Inc., James R.
Lavelle, Chamberlain Associates, Inc., Chamberlain
Acquisition Corporation, and the Stockholders named therein
(Exhibit 2.2 of the Registration Statement of Form S-1
(File No. 33-80267) effective February 16, 1996, is hereby
incorporated by reference)
2.3 Agreement and Plan of Reorganization dated as of December
8, 1995, by and among Cotelligent Group, Inc., James R.
Lavelle, BFR Co., Inc., Data Arts & Sciences, Inc., DASI
Acquisition Corporation, and the Stockholders named therein
(Exhibit 2.3 of the Registration Statement of Form S-1
(File No. 33-80267) effective February 16, 1996, is hereby
incorporated by reference)
2.4 Agreement and Plan of Reorganization dated as of December
8, 1995, by and among Cotelligent Group, Inc., James R.
Lavelle, Financial Data Systems, Inc., FDSI Acquisition
Corporation, and the Stockholders named therein (Exhibit
2.4 of the Registration Statement of Form S-1 (File No.
33-80267) effective February 16, 1996, is hereby
incorporated by reference)
3.1 Certificate of Incorporation of Cotelligent (Exhibit 3.1
of the Registration Statement on Form S-1 (File No.
33-80267) effective February 16, 1996, is hereby
incorporated by reference)
3.2 By-laws of Cotelligent (Exhibit 3.2 of the Registration
Statement on Form S-1 (File No. 33-80267)effective
February 16, 1996, is hereby incorporated by reference)
4.1 Form of certificate evidencing ownership of Common
Stock of Cotelligent (Exhibit 4.1 of the Registration
Statement on Form S-1 (File No. 33-80267) effective
February 16, 1996, is hereby incorporated by reference)
10.1 Employment Agreement between Cotelligent and
James R. Lavelle (Exhibit 10.1 of the Registration
Statement on Form S-4 (File No. 333-6086) is hereby
incorporated by reference)*
10.2 Employment Agreement between Cotelligent and Michael L.
Evans (Exhibit 10.2 of the Registration Statement on
Form S-4 (File No. 333-6086) is hereby incorporated by
reference)*
42
<PAGE>
10.3 Employment Agreement between Cotelligent and
Daniel E. Jackson (Exhibit 10.4 of the Registration
Statement on Form S-4 (File No. 333-6086) is
hereby incorporated by reference)*
10.4 Employment Agreement between BFR, Cotelligent and
Jeffrey J. Bernardis (contained in Exhibit 2.1)
(Exhibit 10.5 of the Registration Statement on
Form S-4 (File No. 333-6086) is hereby incorporated by
reference)*
10.5 Employment Agreement between CAI, Cotelligent and
John E. Chamberlain (contained in Exhibit 2.2) (Exhibit
10.6 of the Registration Statement on Form S-4
(File No.333-6086) is hereby incorporated by reference)*
10.6 Employment Agreement between CAI, Cotelligent and
Linda M. Cassell (contained in Exhibit 2.2) (Exhibit 10.7
of the Registration Statement on Form S-4
(File No. 333-6086) is hereby incorporated by reference)*
10.7 Employment Agreement between DASI, Cotelligent and
John C. Travers (contained in Exhibit 2.3) (Exhibit 10.6
of the Registration Statement on Form S-4
(File No. 333-6068) is hereby incorporated by reference).
10.8 Cotelligent 1995 Long-Term Incentive Plan
(Exhibit 10.9 of the Registration Statement on Form S-1
(File No.33-6086) is hereby incorporated by reference)*
10.9 Lease Agreement between BFR Properties and BFR Co., Inc.
effective April 1, 1995, at 7 Clyde Road included
with Company's annual report filed on Form 10-K on
June 28, 1997 is hereby incorporated by reference.
10.10 Lease Agreement between BFR Properties and BFR Co., Inc.
effective April 1, 1995, at 31 Clyde Road.
10.11 Sublease Agreement between San Francisco Satellite Center
and Cotelligent Group, Inc. effective March 1, 1996.
10.12 Business Loan Agreement between Cotelligent Group, Inc.
and U.S. Bank of Washington, Agreement and National
Association effective May 1, 1996
11.1 Statement re: computation of per share earnings.
21.1 Subsidiaries of the registrant **
23.1 Consent of Price Waterhouse LLP **
24.1 Power of Attorney**
27.1 Financial Data Schedule **
* Management contracts and compensatory plans or arrangements
required to be filed as Exhibits to this Form 10-K.
** Filed herewith
(b) The following reports on Form 8-K were filed by the registrant during the
last quarter ended March 31, 1997. Report of Independent Accountants and
the related financial statements of Cotelligent Group, Inc. as at March 31,
1995 and 1996, including the results of operations and cash flows for each
of the three years in the period ended March 31, 1996, and pro forma
statement of operations for the year ended March 31, 1996, as filed on
March 18, 1997.
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of San
Francisco, state of California on the 30 day of June, 1997.
COTELLIGENT GROUP, INC.
By: /s/ James R. Lavelle
--------------------
James R. Lavelle
Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated. Each person whose signature
appears below hereby authorizes and constitutes James R. Lavelle, Michael L.
Evans and Daniel E. Jackson, and each of them singly, his true and lawful
attorneys-in-fact with full power of substitution and resubstitution for him and
in his name, place and stead, in any and all capacities (including his capacity
as a director and/or officer of Cotelligent Group, Inc.) to sign and file any
and all amendments to this report with all exhibits thereto, and other documents
in connection therewith with the Securities and Exchange Commission, and he
hereby ratifies and confirm as all that said attorneys-in-fact or any of them,
or this or his substitutes, may lawfully do or cause to be done by virtue
hereof.
<TABLE>
Signature Capacity Date
<S> <C> <C>
/s/ James R. Lavelle
- ------------------------------
James R. Lavelle Chairman of the Board of Directors and Chief June 30 , 1997
Executive Officer (Principal Executive Officer) --
- ------------------------------
Edward E. Faber Vice Chairman of the Board of Directors June 30 , 1997
--
/s/ Michael L. Evans
- ------------------------------
Michael L. Evans President and Chief Operating Officer and Director June 30 , 1997
--
/s/ Daniel E. Jackson
- ------------------------------
Daniel E. Jackson Senior Vice President, Corporate Development June 30 , 1997
General Counsel and Secretary (Principal --
Financial Officer)
/s/ Curtis J. Parker
- ------------------------------
Curtis J. Parker Vice President, Chief Accounting Officer June 30 , 1997
(Principal Accounting Officer) --
/s/ Daniel M. Beals
- ------------------------------
Daniel M. Beals Director June 30 , 1997
--
/s/ Jeffrey J. Bernardis
- ------------------------------
Jeffrey J. Bernardis Director June 30 , 1997
--
/s/ Linda M. Cassell
- ------------------------------
Linda M. Cassell Director June 30 , 1997
--
</TABLE>
44
<PAGE>
<TABLE>
Signature Capacity Date
<S> <C> <C>
/s/ John E. Chamberlain
- ------------------------------
John E. Chamberlain Director June 30 , 1997
--
/s/ Anthony M. Frank
- ------------------------------
Anthony M. Frank Director June 30 , 1997
--
- ------------------------------
B. Tom Green Director June 30 , 1997
--
/s/ John C. Travers
- ------------------------------
John C. Travers Director June 30 , 1997
--
/s/ Harvey L. Poppel
- ------------------------------
Harvey L. Poppel Director June 30 , 1997
--
</TABLE>
45
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
2.1 Agreement and Plan of Reorganization dated as of December
8, 1995, by and among Cotelligent Group, Inc., James R.
Lavelle, BFR Co., Inc., BFR Acquisition Corporation, and
the Stockholders named therein (Exhibit 2.1 of the
Registration Statement of Form S-1 (File No. 33-80267)
effective February 16, 1996, is hereby incorporated by
reference)
2.2 Agreement and Plan of Reorganization dated as of December
8, 1995, by and among Cotelligent Group, Inc., James R.
Lavelle, Chamberlain Associates, Inc., Chamberlain
Acquisition Corporation, and the Stockholders named therein
(Exhibit 2.2 of the Registration Statement of Form S-1
(File No. 33-80267) effective February 16, 1996, is hereby
incorporated by reference)
2.3 Agreement and Plan of Reorganization dated as of December
8, 1995, by and among Cotelligent Group, Inc., James R.
Lavelle, BFR Co., Inc., Data Arts & Sciences, Inc., DASI
Acquisition Corporation, and the Stockholders named therein
(Exhibit 2.3 of the Registration Statement of Form S-1
(File No. 33-80267) effective February 16, 1996, is hereby
incorporated by reference)
2.4 Agreement and Plan of Reorganization dated as of December
8, 1995, by and among Cotelligent Group, Inc., James R.
Lavelle, Financial Data Systems, Inc., FDSI Acquisition
Corporation, and the Stockholders named therein (Exhibit
2.4 of the Registration Statement of Form S-1 (File No.
33-80267) effective February 16, 1996, is hereby
incorporated by reference)
3.1 Certificate of Incorporation of Cotelligent (Exhibit 3.1
of the Registration Statement on Form S-1 (File No.
33-80267) effective February 16, 1996, is hereby
incorporated by reference)
3.2 By-laws of Cotelligent (Exhibit 3.2 of the Registration
Statement on Form S-1 (File No. 33-80267)effective
February 16, 1996, is hereby incorporated by reference)
4.1 Form of certificate evidencing ownership of Common
Stock of Cotelligent (Exhibit 4.1 of the Registration
Statement on Form S-1 (File No. 33-80267) effective
February 16, 1996, is hereby incorporated by reference)
10.1 Employment Agreement between Cotelligent and
James R. Lavelle (Exhibit 10.1 of the Registration
Statement on Form S-4 (File No. 333-6086) is hereby
incorporated by reference)*
10.2 Employment Agreement between Cotelligent and Michael L.
Evans (Exhibit 10.2 of the Registration Statement on
Form S-4 (File No. 333-6086) is hereby incorporated by
reference)*
10.3 Employment Agreement between Cotelligent and
Daniel E. Jackson (Exhibit 10.4 of the Registration
Statement on Form S-4 (File No. 333-6086) is
hereby incorporated by reference)*
10.4 Employment Agreement between BFR, Cotelligent and
Jeffrey J. Bernardis (contained in Exhibit 2.1)
(Exhibit 10.5 of the Registration Statement on
Form S-4 (File No. 333-6086) is hereby incorporated by
reference)*
10.5 Employment Agreement between CAI, Cotelligent and
John E. Chamberlain (contained in Exhibit 2.2) (Exhibit
10.6 of the Registration Statement on Form S-4
(File No.333-6086) is hereby incorporated by reference)*
10.6 Employment Agreement between CAI, Cotelligent and
Linda M. Cassell (contained in Exhibit 2.2) (Exhibit 10.7
of the Registration Statement on Form S-4
(File No. 333-6086) is hereby incorporated by reference)*
46
<PAGE>
10.7 Employment Agreement between DASI, Cotelligent and
John C. Travers (contained in Exhibit 2.3) (Exhibit 10.6
of the Registration Statement on Form S-4
(File No. 333-6068) is hereby incorporated by reference).
10.8 Cotelligent 1995 Long-Term Incentive Plan
(Exhibit 10.9 of the Registration Statement on Form S-1
(File No.33-6086) is hereby incorporated by reference)*
10.9 Lease Agreement between BFR Properties and BFR Co., Inc.
effective April 1, 1995, at 7 Clyde Road included
with Company's annual report filed on Form 10-K on
June 28, 1997 is hereby incorporated by reference.
10.10 Lease Agreement between BFR Properties and BFR Co., Inc.
effective April 1, 1995, at 31 Clyde Road.
10.11 Sublease Agreement between San Francisco Satellite Center
and Cotelligent Group, Inc. effective March 1, 1996.
10.12 Business Loan Agreement between Cotelligent Group, Inc.
and U.S. Bank of Washington, Agreement and National
Association effective May 1, 1996
11.1 Statement re: computation of per share earnings.
21.1 Subsidiaries of the registrant **
23.1 Consent of Price Waterhouse LLP **
24.1 Power of Attorney**
27.1 Financial Data Schedule **
* Management contracts and compensatory plans or arrangements
required to be filed as Exhibits to this Form 10-K.
** Filed herewith
(b) The following reports on Form 8-K were filed by the registrant during the
last quarter ended March 31, 1997. Report of Independent Accountants and
the related financial statements of Cotelligent Group, Inc. as at March 31,
1995 and 1996, including the results of operations and cash flows for each
of the three years in the period ended March 31, 1996, and pro forma
statement of operations for the year ended March 31, 1996, as filed on
March 18, 1997.
47
<PAGE>
<TABLE>
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS - EXHIBIT 11.1
(In Thousands, Except Share and Per Share Amounts)
<CAPTION>
Fiscal Year Ended
---------------------------------
<S> <C> <C>
1996 1997
---------------- -------------
Primary:
Net Income..........................................................* $ 3,636
=============
Weighted average common shares outstanding......................... * 9,687,419
Common stock equivalents: (stock options and warrants)..............* 249,980
-------------
Weighted average number of common shares and common
share equivalents outstanding.....................................* 9,938,399
=============
Earnings per share..................................................* $ 0.37
=============
</TABLE>
*Earnings per share has not been presented for fiscal 1996 because it is not
considered to be meaningful as a result of the acquisition of the Founding
Companies as discussed in the financial statements included on this Form 10-K
The Company's common stock has traded on the NASDAQ National Stock Market under
the symbol "COTL" since February 14, 1996. Prior to that date there was no
public market for the Company's common stock.
The calculation of fully diluted earnings per share is the same as the primary
calculation.
48
<PAGE>
<TABLE>
SUBSIDIARIES OF THE COMPANY-EXHIBIT 21.1
<CAPTION>
State or Other Jurisdiction of
Subsidiary (1) Incorporation of Organization
- ------------------------------------ ----------------------------------
<S> <C>
BFR Co., Inc. New Jersey
Chamberlain Associates, Inc. California
Data Arts & Sciences, Inc. Massachusetts
Data Processing Professionals, Inc Missouri
ESP Software Services, Inc. Minnesota
Financial Data Systems, Inc Washington
Innova Solutions, Inc. Texas
Jastech, Inc. Ohio
Pittsburgh Business Consultants, Inc. Pennsylvania
TRC Computers, Inc. California
United Data Processing, Inc. Oregon
<FN>
(1) All subsidiaries operate under the names listed. In addition, BFR Co., Inc. conducts business as
BFR Systems, and Financial Data Systems, Inc. conducts business as FDSI Consulting, United Data
Processing, Inc. conducts business as UDP Consulting Services.
</FN>
</TABLE>
49
<PAGE>
Consent of Price Waterhouse LLP - Exhibit 23.1
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-3388 and 333-10253) and in the Registration
Statement on Form S-4 (333-6086) of Cotelligent Group, Inc. of our report dated
April 29, 1997, appearing on page 21 of Cotelligent Group, Inc,'s Annual Report
on Form 10-K for the year ended March 31, 1997. We also consent to the
reference to us under the heading "Selected Financial Data". However, it
should be noted that Price Waterhouse LLP has not prepared or certified such
"Selected Financial Data".
(Signature of Price Waterhouse Appears Here)
Price Waterhouse
Minneapolis, Minnesota
June 30, 1997
50
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COTELLIGENT GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR
ENDED MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Mar-31-1997
<PERIOD-START> Apr-01-1996
<PERIOD-END> Mar-31-1997
<CASH> 2244
<SECURITIES> 0
<RECEIVABLES> 29420
<ALLOWANCES> 267
<INVENTORY> 0
<CURRENT-ASSETS> 32752
<PP&E> 8019
<DEPRECIATION> 3120
<TOTAL-ASSETS> 40697
<CURRENT-LIABILITIES> 17981
<BONDS> 0
0
0
<COMMON> 97
<OTHER-SE> 22264
<TOTAL-LIABILITY-AND-EQUITY> 40697
<SALES> 146772
<TOTAL-REVENUES> 146772
<CGS> 104785
<TOTAL-COSTS> 32730
<OTHER-EXPENSES> (177)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 194
<INCOME-PRETAX> 7270
<INCOME-TAX> 3634
<INCOME-CONTINUING> 3636
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3636
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0
