UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-25372
COTELLIGENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3173918
(State of 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)
Cotelligent Group, Inc.
(Former name, former address and former fiscal year,
if changed since last report)
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
At November 13, 1998 there were 13,770,351 shares of common stock outstanding.
<PAGE>
COTELLIGENT, INC.
INDEX
Part I - Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements PAGE
<S> <C>
Cotelligent, Inc.
Consolidated Balance Sheets at September 30, 1998 (Unaudited)and March 31, 1998 3
Consolidated Statements of Operations for the Three and Six Months Ended
September 30, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Cash Flows for the Six Months Ended
September 30, 1998 and 1997 (Unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II - Other Information
Signatures 18
</TABLE>
<PAGE>
COTELLIGENT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
----------------- ----------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................... $ 22,371 $ 40,528
Accounts receivable, including unbilled accounts
of $5,535 and $10,120 and net of allowance for doubtful
accounts of accounts of $1,682 and $2,123,respectively .... 60,216 48,982
Notes receivable from officers .............................. 244 230
Deferred tax asset........................................... 29 --
Prepaid expenses and other .................................. 3,225 2,292
-------- --------
Total current assets ...................................... 95,946 92,032
Property and equipment, net .................................... 8,829 7,568
Goodwill, net of accumulated amortization of $580 and $359,
respectively ............................................ 28,555 18,106
Other assets ................................................... 820 853
======== ========
Total assets .............................................. $124,291 $ 118,559
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt ............................................. $ 149 $ 192
Accounts payable ............................................ 8,366 4,344
Accrued compensation and related payroll liabilities ........ 15,528 15,268
Income taxes payable ........................................ 3,056 3,171
Deferred tax liabilities .................................... -- 508
Other accrued liabilities ................................... 2,479 4,525
-------- --------
Total current liabilities ................................. 29,566 28,003
-------- --------
Long-term debt ................................................. 220 199
Other long-term liabilities .................................... 14 18
-------- --------
Total liabilities ......................................... 29,800 28,220
-------- --------
Stockholders' equity:
Preferred Stock, $0.01 par value; 500,000 shares authorized,
no shares issued or outstanding............................. -- --
Common Stock, $0.01 par value; 100,000,000 shares authorized,
13,767,182 and 14,057,884 shares issued and outstanding,
respectively................................................ 137 141
Additional paid-in capital...................................... 77,131 80,335
Retained earnings............................................... 17,223 9,863
-------- --------
Total stockholders' equity............................... 94,491 90,339
-------- --------
Total liabilities and stockholders' equity............... $124,291 $118,559
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
COTELLIGENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
--------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Revenues........................................ $ 79,728 $ 58,566 $ 152,778 $ 112,870
Cost of services................................ 55,917 41,239 108,100 79,426
------------- ------------ ------------ -----------
Gross profit .............................. 23,811 17,327 44,678 33,444
Selling, general and administrative expenses... 17,632 13,872 33,062 26,834
------------- ------------- ------------- -----------
Operating income........................... 6,179 3,455 11,616 6,610
Other income (expense):
Interest expense .......................... (1) (73) (24) (210)
Interest income............................ 287 - 619 -
Other ..................................... (3) - (3) -
------------- ------------- ------------- ------------
Total other income (expense)............ 283 (73) 590 (210)
--------------- ------------- ------------- -------------
Income before provision for income taxes....... 6,462 3,382 12,206 6,400
Provision for income taxes..................... 2,617 1,352 4,846 2,560
--------------- ------------ ------------- ------------
$ 3,845 $ 2,030 $ 7,360 $ 3,840
=============== ============= =============== =============
Earnings per share - basic and diluted......... $ 0.27 $ 0.18 $ 0.52 $ 0.34
=============== ============= =============== =============
Weighted average shares outstanding -
Basic................................... 14,055,396 11,314,751 14,077,764 11,318,660
=============== ============= ============ ==============
Diluted................................. 14,166,025 11,436,630 14,255,913 11,402,052
=============== ============= ============ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
COTELLIGENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................. $ 7,360 $ 3,840
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization............................ 2,298 597
Provision for doubtful accounts.......................... 155 471
Loss on sale of assets................................... 25 -
Deferred income taxes, net............................... (532) 216
Changes in current assets and liabilities:
Accounts receivable .................................. (10,424) (11,847)
Prepaid expenses and other............................ (927) (569)
Accounts payable and accrued expenses................. 1,227 7,636
Income taxes payable ................................. (127) 364
Other liabilities .................................... (4) -
Changes in other assets................................. 22 363
---------------- ----------------
Net cash provided by operating activities (875) 1,071
---------------- ----------------
Cash flows from investing activities:
Proceeds on sale of assets................................. 140 -
Purchase of business, net of cash acquired................. (10,847) (4,468)
Purchases of property and equipment........................ (3,319) (1,169)
---------------- ----------------
Net cash used in investing activities.............. (14,026) (5,637)
---------------- ----------------
Cash flows from financing activities:
Net borrowings (repayments) on short term debt............. (23) 4,118
Net proceeds from issuance of Common Stock................. 1,457 576
Purchase of Common Stock................................... (4,690) -
---------------- ----------------
Net cash provided by (used in) financing (3,256) 4,694
activities...... ---------------- ----------------
Net increase (decrease) in cash and cash equivalents....... (18,157) 128
Cash and cash equivalents at beginning of period........... 40,528 2,904
---------------- ----------------
Cash and cash equivalents at end of period.......... $ 22,371 $ 3,032
================ ================
Supplemental disclosures of cash flow information:
Interest paid.............................................. $ 26 $ 196
Income taxes paid.......................................... $ 3,008 $ 2,823
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
COTELLIGENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(Unaudited)
Note 1 - Business Organization and Basis of Presentation
Cotelligent, Inc. ("Cotelligent" or the "Company") was formed in February
1993 to operate software professional services businesses specializing in
providing information technology ("IT") consultants to businesses. Cotelligent's
consulting practices are: Professional Services - including staff augmentation;
Technology Solutions - custom application development; Alliance Services -
national partnerships with many leading application and operating software
companies; Network Design and Management - intranet and internet application
design and development; and Training and Education
During the years ended March 31, 1998 ("fiscal 1998") and March 31,
1997 ("fiscal 1997") the Company issued 4,976,826 shares of Common Stock to
acquire ten businesses accounted for under the pooling-of-interests method (the
"Pooled Companies"). The consolidated financial statements have been restated in
accordance with generally accepted accounting principles to present the
financial data as if Cotelligent and these companies had always been members of
the same operating group.
In addition, during fiscal years 1997, 1998 and the six months ended
September 30, 1998, the Company acquired seven businesses accounted for under
the purchase method (the "Purchased Companies") for aggregate consideration of
$30,390 (362,998 shares of Common Stock issued at fair market value of $7,464
and $22,926 of cash). The consolidated financial statements include the
operating results of these companies subsequent to their respective acquisition
dates.
All of the businesses acquired since formation have operations
substantially the same as the Company.
Note 2 - Summary of Significant Accounting Policies
Interim Financial Statement Presentation
The accompanying interim financial statements do not include all
disclosures included in the financial statements as included on Cotelligent's
Annual Report on Form 10-K for the year ended March 31, 1998 ("Form 10-K"), and
therefore these Financial Statements should be read in conjunction with the
financial statements included on Form 10-K.
In the opinion of management, the interim financial statements filed as
part of this Quarterly Report on Form 10-Q reflect all adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation of the
financial position and the results of operations and of cash flows for the
interim periods presented.
Comprehensive Income
Effective April 1, 1998, the Company adopted Statement of Financial
Accounting Standards Board (SFAS) No. 130, Reporting Comprehensive Income.
Except for net income, the Company does not have any transactions or other
economic events that qualify as comprehensive income as defined under SFAS No.
130.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, Disclosures About Segments of an Enterprise and Related Information. SFAS
No. 131 introduces a new model for segment reporting, called the "management
approach". The management approach is based on the manner in which management
organizes segments within a company for making operating decisions and assessing
performance. The management approach replaces the notion of industry and
geographic segments. This statement is effective for financial statements for
periods beginning after December 15, 1997. The Company operates within one
business segment and therefore SFAS No. 131 does not affect the Company's
current reporting.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and for Hedging Activities. SFAS No. 133
requires derivatives to be recognized in balance sheets at fair-value. This
statement is effective for financial statements for periods beginning after June
15, 1999. The Company does not believe that adoption of SFAS No. 133 will
materially affect the Company's financial statements.
COTELLIGENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Note 3 - Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional Total
---------------------------- Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
------------ ---------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at March 31,1998..... 14,057,884 $ 141 $ 80,335 $ 9,863 $ 90,339
Repurchase of Common Stock... (351,000) (4) (4,690) - (4,694)
Issuance of Common Stock..... 60,298 - 1,486 - 1,486
Net income................... - - - 7,360 7,360
============ ========== ============ ============= ===============
Balance at September 30, 13,767,182 $ 137 $ 77,131 $ 17,223 $ 94,491
============ ========== ============ ============= ===============
</TABLE>
During fiscal 1999, Cotelligent acquired one company (acquired on
September 16, 1998) accounted for under the purchase method for aggregate
consideration of $11,000 of cash and resulted in the recognition of $10,900
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 the
acquisition date. The allocation of the purchase price to the underlying
net assets acquired is based upon preliminary estimates of the fair value
of the net assets, which may be revised at a later date. It is anticipated
that any purchase price allocation adjustments will be made within one year
from the date of the acquisition. Management does not believe that the
final allocations of the purchase price will have a material effect on the
Company's financial position or results of operations. The purchase
agreement provides for additional consideration based on financial
performance of the acquired company subsequent to the acquisition.
Potential earn-out payments are due in fiscal year 1999 and will be
considered additional purchase price in the period the earn-out period
ends. See Pro Forma Results (Note 4) for consolidated statements of
operations of purchased companies.
Note 4 - Pro Forma Results ("Purchased Companies and Pooled Companies")
In accordance with disclosure requirements under the Accounting Principles
Board Statement No. 16, the following "Pro Forma Results ("Purchased Companies
and Pooled Companies") consolidated statements of operations for the three
months ended September 30, 1998 and 1997 give effect to the acquisitions of the
Pooled Companies and Purchased Companies as if these acquisitions had occurred
on the first day of the periods presented. These Pro Forma results for Purchased
Companies and Pooled Companies consolidated statements reflect adjustments for
the acquisitions of the Pooled Companies including: compensation differentials
to former owners and employees, termination of contributions to retirement
plans, elimination of non-recurring transaction costs related to the acquisition
of businesses accounted for under the pooling-of-interests method and income
taxes as if the entities were combined and subject to the effective federal and
state statutory rates throughout the periods discussed. Additionally, these Pro
Forma for Purchased Companies and Pooled Companies consolidated financial
statements reflect adjustments for interest expense on cash consideration and
amortization of goodwill resulting from the Purchased Companies for all periods
prior to their acquisition.
<PAGE>
COTELLIGENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
<TABLE>
<CAPTION>
Three Months
Ended
September 30,
------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Revenues....................................... $ 81,455 $ 65,466
Cost of services............................... 56,933 45,616
---------------- ----------------
Gross profit............................ 24,522 19,850
Selling, general and administrative expenses... 17,918 14,933
---------------- ----------------
Operating income............................... 6,604 4,917
Other income (expense)......................... (61) (420)
---------------- ----------------
Income before provision for income taxes....... 6,543 4,498
Provision for income taxes .................... 2,650 1,844
---------------- ----------------
Net income..................................... $ 3,893 $ 2,654
================ ================
Earnings per share basic and diluted........... $ 0.27 $ 0.23
================ ================
Weighted average shares outstanding -
Basic..................................... 14,084,704 11,322,569
================ ================
Diluted................................... 14,166,025 11,367,474
================ ================
</TABLE>
<TABLE>
<CAPTION>
Six Months
Ended
September 30,
------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Revenues........................................ $ 156,624 $ 127,639
Cost of services................................ 110,356 89,454
---------------- ----------------
Gross profit............................. 46,268 38,185
Selling, general and administrative expenses.... 33,799 28,848
---------------- ----------------
Operating income................................ 12,469 9,337
Other income (expense).......................... (98) (899)
---------------- ----------------
Income before provision for income taxes........ 12,371 8,439
Provision for income taxes...................... 5,010 3,459
---------------- ----------------
Net income...................................... $ 7,361 $ 4,979
================ ================
Earnings per share basic and diluted............ $ 0.52 $ 0.45
================ ================
Weighted average shares outstanding -
Basic...................................... 14,107,764 11,345,629
================ ================
Diluted.................................... 14,255,913 11,457,362
================ ================
</TABLE>
Note 5 - Pro Forma Results ("Pooled Companies")
The following "Pro Forma Results ("Pooled Companies") reflect only
adjustments related to businesses accounted for under the pooling-of-interests
method including: compensation differentials to former owners and employees,
termination of contributions to retirement plans, elimination of non-recurring
transaction costs related to the acquisition of businesses accounted for under
the pooling-of-interests method and income taxes as if the entities were
combined and subject to the effective federal and state statutory rates
throughout the periods discussed. Since there were no pooling-of-interests
acquisitions during the quarter ended September 30, 1998, pro forma are not
presented for this period.
<PAGE>
COTELLIGENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
September 30,1997 September 30, 1997
-------------------- -------------------
<S> <C> <C>
Revenues............................................................ $ 58,566 $ 112,870
Cost of services.................................................... 41,239 79,426
------------------- ----------------
Gross profit................................................... 17,327 33,454
Selling, general and administrative expenses........................ 13,367 25,895
------------------- ----------------
Operating income............................................... 3,960 7,559
Other income (expense).............................................. (73) (210)
------------------- ----------------
Income before provision for income taxes ........................... 3,887 7,349
Provision for income taxes ......................................... 1,594 3,013
------------------- ----------------
Net income.......................................................... $ 2,293 $ 4,336
=================== =================
Earnings per share - basic and diluted.............................. $ 0.20 $ 0.38
=================== =================
Weighted average shares outstanding -
Basic....................................................... 11,318,660 11,231,384
=================== ==================
Diluted..................................................... 11,331,355 11,315,699
=================== ==================
</TABLE>
Note 6 - Earnings Per Share
Earnings per share were as follows:
<TABLE>
<CAPTION>
For the Quarter Ended September 30, 1998
------------------------------------------------------
Per Share
Income Shares Amount
----------------- -------------- ------------
<S> <C> <C> <C>
Basic earnings per share-
Net income available to common stockholders $ 3,845 14,084,703 $ 0.27
Options issued to directors and employees... 81,322
--------------
Diluted earnings per share-
Income available to common stockholders
plus assumed conversions................ $ 3,845 14,166,025 $ 0.27
==============
</TABLE>
<TABLE>
<CAPTION>
For the Quarter Ended September 30, 1997
------------------------------------------------------
Per Share
Income Shares Amount
----------------- -------------- ------------
<S> <C> <C> <C>
Basic earnings per share-
Net income available to common stockholders $ 2,030 11,314,751 $ 0.18
Options issued to directors and employees..... 121,879
--------------
Diluted earnings per share-
Income available to common stockholders
plus assumed conversions.................. $ 2,030 11,436,630 $ 0.18
==============
</TABLE>
<PAGE>
COTELLIGENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
<TABLE>
<CAPTION>
For the Six Months Ended September 30, 1998
------------------------------------------------------
Per Share
Income Shares Amount
<S> <C> <C> <C>
Basic earnings per share-
Net income available to common stockholders $ 7,360 14,077,764 $ 0.27
Options issued to directors and employees..... 178,149
--------------
Diluted earnings per share-
Income available to common stockholders
plus assumed conversions.................. $ 2,030 14,255,913 $ 0.27
==============
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended September 30, 1997
------------------------------------------------------
Per Share
Income Shares Amount
----------------- -------------- ------------
<S> <C> <C> <C>
Basic earnings per share-
Net income available to common stockholders $ 2,030 11,318,660 $ 0.18
Options issued to directors and employees..... 83,392
--------------
Diluted earnings per share-
Income available to common stockholders
plus assumed conversions................... $ 2,030 11,436,630 $ 0.18
==============
</TABLE>
Note 7 - Capital Stock
In September 1998, the Board of Directors authorized the repurchase of
up to 2.0 million shares of Common Stock, or 14% of the then outstanding shares.
During September 1998, the Company repurchased 351,000 shares for a total cost
of $4.7 million.
Note 8 - Subsequent Events
The Company acquired two businesses during October in line with the
Companies IT consulting practices for a combination of Common Stock and cash
which will be accounted for under the purchase method.
<PAGE>
ITEM 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
Cotelligent, Inc. ("Cotelligent" or the "Company") was formed in February
1993 to acquire, own and operate software professional services businesses
specializing in providing information technology ("IT") consultants on a
contract basis and consulting and outsourcing services to businesses with
complex IT operations. Cotelligent's consulting practices are: Professional
Services - including staff augmentation; Technology Solutions - custom
application development; Alliance Services - national partnerships with many
leading application and operating software companies; Network Design and
Management - intranet and internet application design and development; and
Training and Education
During the year ended March 31, 1997 ("fiscal 1997") and March
31, 1998 ("fiscal 1998") the Company acquired ten businesses accounted for under
the pooling-of-interests method. The consolidated financial statements have been
restated in accordance with generally accepted accounting principles to present
the financial data as if Cotelligent and these companies had always been members
of the same operating group.
In addition, during fiscal 1997, 1998 and six months ended
September 30, 1998, the Company acquired seven businesses accounted for under
the purchase method. The consolidated financial statements include the operating
results of these companies subsequent to their respective acquisition dates.
Comparisons to Pro Forma results for the same period of the prior year
as presented on Note 5 of the accompanying financial statements include
adjustments related to businesses accounted for under the pooling-of-interests
method including: compensation differentials to former owners and employees,
termination of contributions to retirement plans, elimination of non-recurring
transaction costs related to the acquisition of businesses accounted for under
the pooling-of-interests method and income taxes as if the entities were
combined and subject to the effective federal and state statutory rates
throughout the periods discussed. Comparisons to Pro Forma results for the same
period of the prior year as presented on Note 4 of the accompanying financial
statements include the pooled companies referred to above, in addition to those
companies purchased during the periods presented.
The Company derives substantially all of its revenues from professional
service activities. The majority of these activities are provided under "time
and expense" billing arrangements, and revenues are recorded as work is
performed. Revenues are directly related to the total number of hours billed to
clients and the associated hourly billing rates. Hourly billing rates are
established for each service professional and such rates are a function of the
professional's skills, experience and the type of work performed. The Company's
principal costs are professional compensation directly related to the
performance of services and related expenses. Gross profits (revenues after
professional compensation and related expenses) are primarily a function of
hours billed to clients per professional employee or consultant, hourly billing
rates of those employees or consultants and employee or consultant compensation
relative to those billing rates. Gross profits can be adversely impacted if
service activities cannot be billed, if the Company is not effective in managing
its service activities, if fixed-fee engagements (which historically have not
constituted a significant portion of total revenues) are not properly priced or
if there are high levels of unutilized time (work activities not chargeable to
clients or unrelated to client services) of full-time service professional
employees. Operating income (gross profit less selling, general and
administrative expenses) can be adversely impacted by increased administrative
staff compensation or expenses related to growing and expanding the Company's
business, which may be incurred before revenues or economies of scale are
generated from such investment.
As part of its strategic plan, the Company intends to acquire other
software professional services businesses. Should the Company be successful in
acquiring such businesses, the period in which such acquisition is consummated
could be adversely impacted by costs associated with such 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 has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and has
concluded that the Year 2000 problem will not pose any significant operational
issues for the Company. The Company does not expect the expenditures related to
the Year 2000 issue to have a material effect on its financial position or
results of operations in any year. With respect to its customers, the Company is
in the process of contacting its major customers and determining that such
customers are Year 2000 compliant. Additionally, the Company is in the process
of contacting its major service vendors regarding Year 2000 compliance and
anticipates that this review will be completed by March 31, 1998, the end of
fiscal 1999. If the Company's suppliers and service vendors are not Year 2000
compliant, the Company may have to arrange for alternative vendors
Except for historical information contained herein, the information
contained in this report includes forward-looking statements that involve
certain risks and uncertainties that could cause actual results to vary
materially from such statements. All forward-looking statements included in this
report are based upon information available to Cotelligent as of the date
thereof, and Cotelligent assumes no obligation to update any such forward
looking statement. Please refer to the discussion of risk factors and other
factors included in Cotelligent's Annual Report on Form 10-K for the fiscal year
ended March 31, 1998 and other filings made with the Securities and Exchange
Commission.
<PAGE>
CONSOLIDATED RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 Compared to
Three Months Ended September 30, 1997
Revenues
In the second quarter of fiscal 1999 revenues increased $21.2 million,
or 36.1%, to $79.0 million from $58.6 million in the second quarter of fiscal
1998. The increase was primarily attributable to a 23.9% increase in total
client service hours to 1,158,000 from 935,000 in the second quarter of 1998,
and a 9.8% increase in the average hourly billing rate to $67.70 from $61.68 in
the comparable quarter of 1998. The increase in hourly billing rate reflects
increased demand for employees and consultants with higher skill levels and a
more favorable economic climate.
Gross Profit
Gross profit increased $6.5 million, or 37.4%, to $23.8 million in the
second quarter of 1999 from $17.3 million in the second quarter of 1998,
primarily due to an increase in hours of service provided to clients. Gross
margin as a percentage of revenues increased to 29.9% in the second quarter of
1999 from 29.6% in the second quarter of 1998 primarily due to change in the mix
of services.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $3.8 million, or
27.1%, to $17.6 million in the second quarter of 1999 from $13.9 million in the
second quarter of 1998. The increase was primarily due to increased compensation
to existing staff, staff added to support growth and additional locations, as
well as incremental costs of Cotelligent's corporate activities. Selling,
general and administrative expenses decreased as a percentage of revenues to
22.1% in the second quarter of 1999 from 23.7% in the second quarter of 1998
because of increased efficiencies over a larger revenue base. There can be no
assurance that such efficiencies can be sustained in the future as the Company
expands geographically and incurs expenses to acquire other companies.
Interest Income/Expense, Net
Interest income was $0.3 million in the second quarter of 1999 compared
to interest expense, net of interest income of $0.1 million in the second
quarter of 1998. Net interest income was earned in the second quarter of 1999
due to earnings from investment of the proceeds from a secondary offering
completed in March of 1998.
Provision for Income Taxes
Provision for income taxes was $2.6 million in the second quarter of
1999, which reflects a provision on pre-tax income of 40.5%. The provision for
income taxes was $1.4 million in the second quarter of 1998 at a rate of 40.0%.
The increase in the effective tax rate was primarily due to increased revenue
growth in states with higher tax rates.
<PAGE>
CONSOLIDATED RESULTS OF OPERATIONS
Six Months Ended September 30, 1998 Compared to
Six Months Ended September 30, 1997
Revenues
In the first half of fiscal 1999 revenues increased $40.0 million, or
35.4%, to $152.8 million from $112.9 million in the first half of fiscal 1998.
The increase was primarily attributable to a 23.0% increase in total client
service hours to 2,249,000 from 1,828,000 in the first half of 1998, and a 9.7%
increase in the average hourly billing rate to $66.75 from $60.85 in the
comparable period of 1998. The increase in hourly billing rate reflects
increased demand for employees and consultants with higher skill levels and a
more favorable economic climate.
Gross Profit
Gross profit increased $11.2 million, or 33.6%, to $44.7 million in the
first half of 1999 from $33.4 million in the first half of 1998, primarily due
to an increase in hours of service provided to clients and the inclusion of the
FY 1998 purchases. Gross margin as a percentage of revenues decreased to 29.2%
in the first half of 1999 from 29.6% in the first quarter of 1998 primarily due
to the inclusion of the FY 1998 Purchases with lower gross margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $6.2 million, or
23.2%, to $33.1 million in the first half of 1999 from $26.8 million in the
first half of 1998. The increase was primarily due to increased compensation to
existing staff, staff added to support growth and additional locations, as well
as incremental costs of Cotelligent's corporate activities. Selling, general and
administrative expenses decreased as a percentage of revenues to 21.6% in the
first half of 1999 from 23.8% in the first half of 1998 because of increased
efficiencies over a larger revenue base. There can be no assurance that such
efficiencies can be sustained in the future as the Company expands
geographically and incurs expense to acquire other companies.
Interest Income/Expense, Net
Interest income was $0.6 million in the first half of 1999 compared to
interest expense, net of interest expense of $0.2 million in the first half of
1998. Net interest income was earned in the first half of 1999 due to earnings
from investment of the proceeds from a secondary offering completed in March of
1998.
Provision for Income Taxes
Provision for income taxes was $4.8 million in the first half of 1999,
which reflects a provision on pre-tax income of 39.8%. The provision for income
taxes was $2.6 million in the first quarter of 1998 at a rate of 40.0%. The
decrease in the effective tax rate was primarily due to the investment in tax
free instruments from the proceeds of the secondary offering in tax preferred
instruments.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth principally through cash flows from
operations, periodic borrowing under its credit facilities and the use of the
net proceeds from its public offerings. On September 12, 1997, the Company
entered into a four year $40 million revolving line of credit facility (the
"Credit Line"). Interest rate options include base borrowings at the lead
lender's prime rate and term loans at LIBOR plus an applicable margin. 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.
The Company's primary sources of liquidity are cash balances, the Credit
Line and the collection of its accounts receivable. Accounts receivable have
increased as the Company's operations have grown. Total receivables were 63 and
72 days of revenue at September 30, 1998 and March 31, 1998, respectively. The
Company could draw upon available cash or existing credit facilities to finance
its operations should the Company be unable to bill and collect for its services
on a timely basis.
Cash used in operating activities was $0.9 million for the six months
ended September 30, 1998. At September 30, 1998 the Company had no balance
outstanding under the Credit Line.
At September 30, 1998, the Company had $22.4 million in cash and cash
equivalents as compared to $40.5 million at March 31, 1998. The decrease in cash
and cash equivalents is related to the purchase of one business during the
period, in addition to funds used to repurchase the Cotelligent's Common Stock.
At September 30, 1998, the Company had long-term capital lease obligations and
other notes outstanding in the amount of $0.4 million. The current installments
of the long-term capital lease obligations and other notes were $0.2 million at
September 30, 1998.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is, from time to time, a party to litigation arising in the
normal course of its business. The Company is not presently subject to any
material litigation.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its annual meeting of stockholders on September 9,
1998.
The following is a brief description of each matter voted upon at the
annual meeting:
1. Elections of three directors to serve for a three-year term expiring at
the annual meeting in 2001.
For Authority Withheld
Michael L. Evans 10,912,157 741,704
Jeffrey J. Bernardis 10,912,257 741,604
B. Tom Green 10,912,157 741,704
2. Approve the amendment of the Certificate of Incorporation to effect
the change of the Company's name from Cotelligent Group, Inc. to
Cotelligent,Inc.
For 11,316,332
Against 19,679
Abstain 317,850
3. Approve the adoption of the 1998 Long-Term Incentive Plan.
For 7,833,645
Against 2,738,195
Abstain 33,773
Broker
Non-Vote 1,048,248
4. Approve the appointment of Arthur Andersen, LLP as the Company's
independent certified public accountants.
For 11,260,235
Against 367,288
Abstain 26,338
Item 5. Other Information.
None.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
(b) Reports on Form 8-K.
The following report on Form 8-K was filed during the
quarter ended September 30, 1998.
Cotelligent, Inc. filed a copy of the press release
dated September 3, 1998 announcing the Board of Directors
Authorization to repurchase up to two million
shares of common stock or 14% of outstanding shares.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COTELLIGENT, INC
Date: November 16, 1998 /s/ Herbert D. Montgomery
Herbert D. Montgomery
Senior Vice President,
Chief Financial Officer and
Treasurer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COTELLIGENT, INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENED
SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATMENTS
</LEGEND>
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<NAME> COTELLIGENT, INC
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