<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Cotelligent Group, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
March 2, 1998
- --------------------------------------------------------------------------------
Date of Report (Date of earliest event reported)
Delaware 0-25372 94-3173918
- --------------------------------------------------------------------------------
(State or other juris- (Commission (I.R.S. Employer
diction of incorporation) File Number) Identification No.)
101 California Street - Suite 2050 San Francisco, CA 94111
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(415) 439-6400
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
<PAGE>
Item 5. Other Events.
------------
During the first nine months of the fiscal year ending March 31, 1998
Cotelligent Group, Inc. acquired businesses under the pooling-of-interests
method of accounting. Accordingly, updated financial information for prior
financial years and the current fiscal year through December 31, 1997 is
attached to this Current Report on Form 8-K.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
------------------------------------------------------------------
(c) Exhibits.
Exhibit No. Exhibit
- ----------- -------
99.1 Selected Financial Data
99.2 Management's Discussion and Analysis of Financial Conditions
and Results of Operations
99.3 Index to Consolidated Financial Statements
99.4 Report of Independent Public Accountants
99.5 Consolidated Balance Sheets
99.6 Consolidated Statements of Operations
99.7 Consolidated Statements of Stockholders' Equity
99.8 Consolidated Statements of Cash Flows
99.9 Notes to Consolidated Financial Statements
<PAGE>
Signature
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COTELLIGENT GROUP, INC.
(Registrant)
Dated: March 2, 1998 By: /s/ Curtis J. Parker
--------------------
Curtis J. Parker
Vice President and
Chief Accounting Officer
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No: Description Page
- ----------- ----------- ----
99.1 Selected Financial Data
99.2 Management's Discussion and Analysis of Financial
Conditions and Results of Operations
99.3 Index to Consolidated Financial Statements
99.4 Report of Independent Public Accountants
99.5 Consolidated Balance Sheets
99.6 Consolidated Statements of Operations
99.7 Consolidated Statements of Stockholders' Equity
99.8 Consolidated Statements of Cash Flows
99.9 Notes to Consolidated Financial Statements
<PAGE>
EXHIBIT 99.1
SELECTED FINANCIAL DATA
The selected financial data with respect to Cotelligent's consolidated
statements of operations for the years ended March 31, 1995, 1996 and 1997 and
the nine months ended December 31, 1997 and with respect to the consolidated
balance sheets as of March 31, 1996 and 1997 and December 31, 1997 have been
derived from Cotelligent's financial statements that have been audited by
Arthur Andersen LLP. The selected financial data with respect to Cotelligent's
consolidated statements of operations for the years ended March 31, 1993 and
1994 and for the nine months ended December 31, 1996 and with respect to
Cotelligent's consolidated balance sheets as of March 31, 1993, 1994 and 1995
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. Results for the
nine months ended December 31, 1997 are not necessarily indicative of results
for the full year. Pro forma data for the year ended March 31, 1997 and for
the nine months ended December 31, 1997 reflect adjustments for acquisitions
accounted for under the pooling-of-interests method. The unaudited pro forma
results are not necessarily indicative of the results that would have been
achieved if the companies had operated on a combined basis for 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. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
13
<PAGE>
COTELLIGENT GROUP, INC. (1)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------------------
PRO FORMA
1993 1994 1995 1996 1997 1997(2)
----------- ----------- ----------- ----------- ---------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF
OPERATIONS DATA:
Revenues......... $ 27,414 $ 34,446 $ 44,600 $ 66,433 $ 165,417 $ 165,417
Cost of services. 18,507 21,929 30,003 45,814 116,844 116,817
----------- ----------- ----------- ----------- ---------- ----------
Gross profit.... 8,907 12,517 14,597 20,619 48,573 48,600
Selling, general
and
administrative
expenses........ 7,687 10,798 13,848 17,867 39,167 37,611
Non-recurring
transaction
costs........... -- -- -- -- 1,969 --
----------- ----------- ----------- ----------- ---------- ----------
Operating
income......... 1,220 1,719 749 2,752 7,437 10,989
Other income
(expense), net.. (125) (92) (95) 108 15 15
----------- ----------- ----------- ----------- ---------- ----------
Income before
provision for
income taxes.... 1,095 1,627 654 2,860 7,452 11,004
Provision for
income taxes.... 26 218 115 248 3,742 4,512
----------- ----------- ----------- ----------- ---------- ----------
Net income........ $ 1,069 $ 1,409 $ 539 $ 2,612 $ 3,710 $ 6,492
=========== =========== =========== =========== ========== ==========
Earnings per
share(3)
Basic ........... $ 0.33 $ 0.57
========== ==========
Diluted.......... $ 0.33 $ 0.57
========== ==========
Weighted average
shares
outstanding
Basic............ 11,328,518 11,328,518
========== ==========
Diluted.......... 11,402,513 11,402,513
========== ==========
<CAPTION>
MARCH 31,
-------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET
DATA: (UNAUDITED) (UNAUDITED) (UNAUDITED)
Working capital.. $ 761 $ 2,861 $ 2,091 $ 20,491 $ 15,471
Total assets..... 4,353 7,157 10,545 39,472 45,167
Long-term debt,
less current
portion......... 262 217 304 706 648
Stockholders'
equity.......... 1,458 3,246 2,265 21,462 23,137
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
-------------------------------------
PRO FORMA
1996 1997 1997(2)
----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
STATEMENTS OF
OPERATIONS DATA:
Revenues......... $ 118,294 $ 175,981 $ 175,981
Cost of services. 82,973 124,156 124,137
----------- ------------ ------------
Gross profit.... 35,321 51,825 51,844
Selling, general
and
administrative
expenses........ 28,100 41,593 39,629
Non-recurring
transaction
costs........... 1,105 855 --
----------- ------------ ------------
Operating
income......... 6,116 9,377 12,215
Other income
(expense), net.. 120 (348) (348)
----------- ------------ ------------
Income before
provision for
income taxes.... 6,236 9,029 11,867
Provision for
income taxes.... 2,745 5,327 4,865
----------- ------------ ------------
Net income........ $ 3,491 $ 3,702 $ 7,002
=========== ============ ============
Earnings per
share(3)
Basic ........... $ 0.31 $ 0.32 $ 0.61
=========== ============ ============
Diluted.......... $ 0.31 $ 0.32 $ 0.61
=========== ============ ============
Weighted average
shares
outstanding
Basic............ 11,223,131 11,399,141 11,399,141
=========== ============ ============
Diluted.......... 11,373,930 11,503,578 11,503,578
=========== ============ ============
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
BALANCE SHEET
DATA:
Working capital.. $ 22,647
Total assets..... 74,531
Long-term debt,
less current
portion......... 12,296
Stockholders'
equity.......... 34,650
</TABLE>
- -------
(1) On February 20, 1996, Cotelligent acquired the Initially Acquired Companies
simultaneously with the IPO. Prior to that date, Cotelligent was a non-
operating entity. The operating results of the Initially Acquired Companies
have been included since the date of acquisition. During fiscal 1997 and in
the first nine months of fiscal 1998, the Company acquired the Pooled
Companies and has restated its financial statements for all periods to
present financial data as if Cotelligent and the Pooled Companies had
always been members of the same operating group. In addition, during fiscal
1997 and in the first nine months of 1998, the Company acquired the
Purchased Companies. The consolidated financial statements include the
operating results of the Purchased Companies subsequent to their respective
acquisition dates.
(2) Pro forma data reflect adjustments for the acquisitions of the Pooled
Companies including compensation differentials to former owners and
employees ($1,556 for the year ended March 31, 1997 and $1,964 for the nine
months ended December 31, 1997), termination of contributions to retirement
plans ($27 for the year ended March 31, 1997 and $19 for the nine months
ended December 31, 1997), removal of non-recurring transaction costs
associated with the Pooled Companies ($1,969 for the year ended March 31,
1997 and $855 for the nine months ended December 31, 1997), and income
taxes as if the entities were combined and subject to a 41% effective
federal and state statutory rate throughout the periods presented. Pro
forma results, including the Purchased Companies as if they were acquired
on April 1, 1996, as adjusted for interest expense on cash consideration
and amortization of goodwill are: Revenues $184,244 and $186,648, Net
Income $7,169 and $7,549 and Diluted Earnings Per Share $0.61 and $0.64 for
the year ended March 31, 1997 and the nine months ended December 31, 1997,
respectively. See Note 4 of Notes to Consolidated Financial Statements.
(3) Earnings per share for the years ended March 31, 1993, 1994, 1995 and 1996
has not been presented because, as discussed in footnote 1 above and Note 2
of Notes to Consolidated Financial Statements, the issuance of shares of
Common Stock sold in the IPO and the inclusion of the results of the
Initially Acquired Companies are not reflected in any period prior to
February 20, 1996.
6
<PAGE>
EXHIBIT 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Cotelligent was formed in February 1993 to acquire, own and operate IT
consulting services businesses. Cotelligent acquired the Initially Acquired
Companies simultaneously with the IPO. Prior to that date, Cotelligent was a
non-operating entity.
During fiscal 1997 and in the first nine months of fiscal 1998, the Company
acquired ten 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 and in the first nine months of fiscal 1998,
the Company acquired five businesses accounted for under the purchase method
(the "Purchased Companies"). Accordingly, the selected financial data of
Cotelligent includes the operating results of these acquisitions subsequent to
their respective acquisition date. In addition, the Company acquired one
business accounted for under the purchase method in January 1998.
Pro forma data reflect adjustments for the acquisition 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 an effective federal and state
statutory rate of 41% throughout 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 materials" billing arrangements, and revenues are recorded as services are
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 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 affected 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 affected by increased
administrative staff compensation and expenses related to growing and expanding
the Company's business, which may be incurred before revenues or economies of
scale are generated from such investments.
As part of its strategic plan, the Company intends to acquire other IT
consulting services businesses. Should the Company be successful in acquiring
such businesses, the period in which such acquisition is consummated could be
adversely affected by costs associated with such acquisition. In addition,
financial periods subsequent to the completion of an acquisition could be
adversely affected by costs and activities associated with the assimilation and
integration of the acquired company. See "Risk Factors--Risks Related to
Acquisitions."
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 margin in the first calendar quarter due to employment
related taxes. See "Risk Factors--Possible Fluctuation of Results and
Volatility of Stock Price."
15
<PAGE>
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 issue should not pose any significant operational
problems for the Company. The Company does not expect that the expenditures
related to the Year 2000 issue will have a material effect on its financial
position or results of operations in any year.
RESULTS OF OPERATIONS
The following table sets forth the percentage of net revenues represented by
items in the Company's statements of operations for the periods presented.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
-------------------------------- ------------------------------
PRO FORMA PRO FORMA
1995 1996 1997 1997 1996 1997 1997
----- ----- ----- ----------- ----------- ----- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services........ 67.3 69.0 70.6 70.6 70.1 70.6 70.5
----- ----- ----- ----- ----- ----- -----
Gross profit........... 32.7 31.0 29.4 29.4 29.9 29.4 29.5
Selling, general and
administrative
expenses............... 31.0 26.9 23.7 22.7 23.8 23.6 22.5
Non-recurring
transaction costs...... -- -- 1.2 -- 0.9 0.5 --
----- ----- ----- ----- ----- ----- -----
Operating income....... 1.7 4.1 4.5 6.7 5.2 5.3 7.0
Other income (expense),
net.................... (0.2) 0.2 -- -- 0.1 (0.2) (0.2)
----- ----- ----- ----- ----- ----- -----
Income before provision
for income taxes....... 1.5 4.3 4.5 6.7 5.3 5.1 6.8
Provision for income
taxes.................. 0.3 0.4 2.3 2.7 2.3 3.0 2.7
----- ----- ----- ----- ----- ----- -----
Net income.............. 1.2% 3.9% 2.2% 4.0% 3.0% 2.1% 4.1%
===== ===== ===== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO NINE MONTHS ENDED DECEMBER
31, 1996
Revenues. In the first nine months of fiscal 1998, revenues increased $57.7
million, or 48.8%, to $176.0 million from $118.3 million in the first nine
months of fiscal 1997. The increase was primarily due to a 33.3% increase in
client service hours to 2.8 million hours from 2.1 million hours in the first
nine months of fiscal 1997 and a 9.8% increase in the average hourly billing
rate to $62.15 from $56.60 in the comparable period of fiscal 1997. The
increase in revenues was also attributable to the inclusion of revenues of
companies acquired under the purchase method of accounting during fiscal 1998
(the "Fiscal Year 1998 Purchases").
Gross Profit. Gross profit increased $16.5 million, or 46.7%, to $51.8
million during the first nine months of fiscal 1998 from $35.3 million in the
first nine months of fiscal 1997 primarily as a result of an increase in
client service hours and the inclusion of the Fiscal Year 1998 Purchases.
Gross profit as a percentage of revenues decreased to 29.4% of revenues in the
first nine months of fiscal 1998 from 29.9% in the first nine months of fiscal
1997 primarily due to the inclusion of the Fiscal Year 1998 Purchases which
had lower gross margins and certain of the Pooled Companies engaging new
clients at lower gross margins prior to acquisition by the Company.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $13.5 million, or 48.0%, to $41.6 million in
the first nine months of fiscal 1998 from $28.1 million in the first nine
months of fiscal 1997. The increase was primarily due to increased
compensation to existing staff, 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 decreased as a
percentage of revenues to 23.6% of revenues in the first nine months of fiscal
1998 from 23.8% in the first nine months of fiscal 1997. There can be no
assurance that such efficiencies can be sustained in the future as the Company
undertakes to integrate the acquired entities, expand geographically and
acquire other companies.
Selling, general and administrative expenses on a pro forma basis were $39.6
million, or 22.5% of pro forma revenues for the first nine months of fiscal
1998, compared to historical selling, general and administrative
16
<PAGE>
expenses of $41.6 million, or 23.6%, of revenues for the first nine months of
fiscal 1997. The reduced selling, general and administrative expenses on a pro
forma basis primarily reflect a reduction in executive compensation
arrangements in connection with the Pooled Companies.
Non-Recurring Transaction Costs. Non-recurring transaction costs include
expenditures associated with the acquisition of four Pooled Companies acquired
during each period and are expensed as incurred on an historical cost basis.
Provision for Income Taxes. Provision for income taxes was $5.3 million, or
an effective tax rate of 59.0% of pre-tax income, for the first nine months of
fiscal 1998, compared to income taxes of $2.7 million, or an effective rate of
44.0% of pre-tax income, for the first nine months of fiscal 1997. The
increase in the effective tax rate is due to an increase in revenues in states
with higher tax rates and a greater amount of non-recurring transaction costs,
certain portions of which are non-deductible for tax purposes.
Provision for income taxes on a pro forma basis was $4.9 million, or an
effective tax rate of 41.0% of pro forma pre-tax income. The primary
difference between the Company's historical and pro forma effective tax rates
is related to the termination of certain Pooled Companies' respective S
corporation elections and the non-deductibility of certain non-recurring
transaction costs.
YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996
Revenues. In 1997, revenues increased $99.0 million, or 149.0%, to $165.4
million from $66.4 million in 1996. The increase was primarily due to $70.6
million of revenues from the full year impact of the Initially Acquired
Companies acquired February 20, 1996, a 33.3% increase in client service hours
provided by the Pooled Companies to 1.6 million hours from 1.2 million hours
in 1996 and a 7.6% increase in the average hourly billing rate of the Pooled
Companies to $52.17 from $48.47.
Gross Profit. Gross profit increased $28.0 million, or 135.6%, to $48.6
million in 1997 from $20.6 million in 1996, as a result of $16.2 million for
the full year impact of the Initially Acquired Companies and an increase in
hours of service provided to clients. Gross profit as a percentage of revenues
decreased to 29.4% of revenues in 1997 from 31.0% in 1996 principally due to
lower average gross margins achieved in the engagements of the Initially
Acquired Companies.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $21.3 million, or 119.2%, to $39.2 million
in 1997 from $17.9 million in 1996. The increase was primarily due to
additional selling, general and administrative costs of $12.9 million for the
full year impact of the Initially Acquired Companies, increased compensation
to existing staff, staff added to support growth, additional locations,
installation of a Company-wide network and associated costs to maintain these
systems and incremental costs of Cotelligent's corporate activities. Selling,
general and administrative expenses decreased as a percentage of revenues to
23.7% in 1997 from 26.9% in 1996, reflecting greater operating efficiencies
and a larger revenue base. There can be no assurance that such efficiencies
will be sustained in the future as the Company undertakes to integrate the
acquired entities, expand geographically and acquire other companies.
Selling, general and administrative expenses on a pro forma basis were $37.6
million, or 22.7% of pro forma revenues, compared to historical selling,
general and administrative expenses of $39.2 million, or 23.7% of revenues for
1997. The reduced selling, general and administrative expenses on a pro forma
basis reflect a reduction in executive and employee compensation arrangements
in connection with the Pooled Companies.
Non-Recurring Transaction Costs. Non-recurring transaction costs include
expenditures associated with the acquisition of six Pooled Companies in 1997
and were expensed as incurred on an historical cost basis.
17
<PAGE>
Provision for Income Taxes. Provision for income taxes was $3.7 million, or
an effective tax rate of 50.2% of pre-tax income for 1997, compared to income
taxes of $0.2 million, or an effective rate of 8.7% of pre-tax income for
1996. The increase in the effective tax rate is due to the termination of
certain Pooled Companies' respective S corporation elections and the non-
deductibility of certain non-recurring transaction costs.
Provision for income taxes on a pro forma basis was $4.5 million, or an
effective tax rate of 41.0% of pro forma pre-tax income. The primary
difference between the Companies' historical and pro forma effective tax rates
is related to the termination of certain Pooled Companies' respective S
corporation elections and the non-deductibility of certain non-recurring
transaction costs.
YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995
Revenues. In 1996, revenues increased $21.8 million, or 49.0%, to $66.4
million from $44.6 million in 1995. The increase was primarily due to a 33.3%
increase in client service hours provided by the Pooled Companies to 1.2
million hours from 0.9 million hours in 1995 and a 4.1% increase in the
average hourly billing rate of the Pooled Companies to $48.47 from $46.56 in
1995.
Gross Profit. Gross profit increased $6.0 million, or 41.3%, to $20.6
million in 1996 from $14.6 million in 1995 due to an increase in hours of
service provided to clients. Gross profit as a percentage of revenues
decreased to 31.0% of revenues in 1996 from 32.7% in 1995 principally due to
certain of the Pooled Companies engaging new clients at lower margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $4.0 million, or 29.0%, to $17.9 million in
1996 from $13.8 million in 1995. The increase was primarily due to increased
compensation to existing staff and staff added to support growth. Selling,
general and administrative expenses decreased as a percentage of revenues to
26.9% of revenues in 1996 from 31.0% in 1995, reflecting greater operating
efficiencies and a larger revenue base.
Provision for Income Taxes. Provision for income taxes was $0.2 million, or
an effective tax rate of 8.7% of pre-tax income for 1996, compared to income
taxes of $0.1 million, or an effective rate of 17.6% of pre-tax income for
1995. The decrease in the effective tax rate is due to a change in the
valuation allowance.
QUARTERLY OPERATING RESULTS
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 materials 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 years ended March 31, 1996 and 1997 and for the nine months
ended December 31, 1997, are summarized below. See "Risk Factors--Possible
Fluctuation of Results and Volatility of Stock Price."
18
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1997 DECEMBER 31, 1997
------------------------------- ------------------------------- -----------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST SECOND THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues as previously
reported............... $11,194 $11,159 $10,555 $19,878 $31,963 $35,127 $37,806 $41,876 $46,333 $49,775 $63,111
Inclusion of Pooled
Companies.............. 3,215 3,420 3,504 3,508 4,140 4,531 4,728 5,246 7,971 8,791 --
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Revenues as restated.... 14,409 14,579 14,059 23,386 36,103 39,658 42,534 47,122 54,304 58,566 63,111
Gross profit............ 3,373 3,348 3,269 5,569 9,020 10,646 10,699 11,622 13,621 14,647 18,381
Inclusion of Pooled
Companies.............. 1,131 1,274 1,284 1,371 1,520 1,706 1,731 1,629 2,496 2,680 --
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit as
restated............... 4,504 4,622 4,553 6,940 10,540 12,352 12,430 13,251 16,117 17,327 18,381
Operating income........ 540 628 595 834 1,510 1,887 2,299 1,592 3,016 3,273 2,767
Inclusion of Pooled
Companies.............. 35 60 35 25 141 160 118 (270) 139 182 --
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income as
restated............... 575 688 630 859 1,651 2,047 2,417 1,322 3,155 3,455 2,767
Net income (loss) ...... 439 899 524 656 310 1,312 1,481 533 1,774 1,959 (138)
Inclusion of Pooled
Companies.............. 26 50 9 9 105 177 106 (314) 36 71 --
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) as
restated............... $ 465 $ 949 $ 533 $ 665 $ 415 $ 1,489 $ 1,587 $ 219 $ 1,810 $ 2,030 $ (138)
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The net loss for the quarter ended December 31, 1997 was due to non-
recurring transaction costs associated with acquiring businesses under the
pooling-of-interests method and an increase in the provision for income taxes
due to the non-deductibility of certain non-recurring transaction costs and
taxes related to the termination of certain Pooled Companies' respective S
corporation elections.
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 IPO. On September 12, 1997, the Company entered into a
$40.0 million syndicated revolving line of credit facility with three banks.
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 twelve months. At February 23, 1998,
the Company had $16.0 million outstanding under the Credit Line.
The Company's primary sources of liquidity are cash, the Credit Line and the
collection of its accounts receivable. Accounts receivable have grown as the
Company's revenues have increased. Billed receivables were 64 and 59 days of
revenues at December 31, 1997 and March 31, 1997, respectively. Should the
Company be unable to bill and collect for its services on a timely basis, the
Company could draw upon available cash or the Credit Line to finance its
operations.
Cash provided by operating activities was $1.6 million for the nine months
ended December 31, 1997. The Company supplemented cash provided by operations
periodically with short-term borrowings. The average outstanding balance of
such borrowings was approximately $6.7 million during the nine months ended
December 31, 1997, and approximately $5.9 million during fiscal 1997.
At December 31, 1997, the Company had $0.7 million in cash and cash
equivalents as compared to $2.9 million at March 31, 1997. At December 31,
1997, the Company had long-term notes payable under the Credit Line, long-term
capital lease obligations and other notes outstanding in the amount of $12.3
million. The current installments of the long-term capital lease obligations
and other notes were $0.2 million at December 31, 1997.
19
<PAGE>
At March 31, 1997, the Company had short-term notes payable, current
installments of long-term capital lease obligations and other notes
outstanding in the amount of $4.4 million. At March 31, 1997, the long-term
debt of $0.6 million consisted of capital lease obligations and other notes.
The Company intends to borrow against and repay the Credit Line from time-
to-time to meet normal operating needs, finance its receivables or to effect
acquisitions in connection with its acquisition strategy.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 established standards to measure
all changes in equity that result from transactions and other economic events
other than transactions with owners. Comprehensive income is the total of net
income and all other non-owner changes in equity. This statement is effective
for financial statements for periods beginning after December 15, 1997.
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 does not believe that adoption of SFAS No. 130 and SFAS No. 131
will significantly alter its financial statement presentation.
20
<PAGE>
EXHIBIT 99.3
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
COTELLIGENT GROUP, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS
Report of Independent Public Accountants................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-8
</TABLE>
F-1
<PAGE>
EXHIBIT 99.4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cotelligent Group, Inc.:
We have audited the accompanying consolidated balance sheets of Cotelligent
Group, Inc. (a Delaware Corporation) and subsidiaries as of March 31, 1996 and
1997 and December 31, 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended March 31,
1995, 1996 and 1997 and the nine months ended December 31, 1997. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cotelligent
Group, Inc. and subsidiaries as of March 31, 1996 and 1997 and December 31,
1997, and the results of their operations and their cash flows for the years
ended March 31, 1995, 1996 and 1997 and the nine months ended December 31,
1997 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
San Francisco, California
February 20, 1998
F-2
<PAGE>
EXHIBIT 99.5
COTELLIGENT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, DECEMBER 31,
1996 1997 1997
-------- --------- ------------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents..................... $ 14,941 $ 2,904 $ 684
Accounts receivable, including unbilled
receivables of $3,851, $5,595 and $8,057 and
net of allowance for doubtful accounts of
$340, $632 and $1,603, respectively.......... 20,723 32,387 47,060
Notes receivable from officers................ 315 225 229
Prepaid expenses and other.................... 874 1,306 2,137
-------- ------- -------
Total current assets........................ 36,853 36,822 50,110
Property and equipment, net.................... 2,160 5,448 6,497
Deferred tax assets............................ 247 54 --
Goodwill, net of accumulated amortization of
$0, $38 and $159, respectively................ -- 2,409 17,588
Other assets................................... 212 434 336
-------- ------- -------
Total assets................................ $ 39,472 $45,167 $74,531
======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt and current maturities of
long-term debt............................... $ 4,937 $ 4,409 $ 234
Accounts payable.............................. 1,116 2,590 2,331
Accrued compensation and related payroll
liabilities.................................. 5,573 9,990 17,006
Income taxes payable.......................... 1,237 491 3,478
Deferred tax liabilities...................... 657 761 383
Other accrued liabilities..................... 2,842 3,110 4,031
-------- ------- -------
Total current liabilities................... 16,362 21,351 27,463
Long-term debt................................. 706 648 12,296
Deferred tax liabilities....................... -- -- 102
Other long-term liabilities.................... 942 31 20
-------- ------- -------
Total liabilities........................... 18,010 22,030 39,881
-------- ------- -------
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, 10,661,529, 11,272,401 and
11,713,596 shares issued and outstanding,
respectively................................. 107 113 117
Additional paid-in capital..................... 18,552 19,046 27,399
Retained earnings.............................. 2,803 3,978 7,134
-------- ------- -------
Total stockholders' equity.................. 21,462 23,137 34,650
-------- ------- -------
Total liabilities and stockholders' equity.. $ 39,472 $45,167 $74,531
======== ======= =======
</TABLE>
F-3
<PAGE>
EXHIBIT 99.6
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED MARCH 31, ENDED
---------------------------- DECEMBER 31,
1995 1996 1997 1997
------- ------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues............................ $44,600 $66,433 $ 165,417 $ 175,981
Cost of services.................... 30,003 45,814 116,844 124,156
------- ------- ---------- ----------
Gross profit...................... 14,597 20,619 48,573 51,825
Selling, general and administrative
expenses .......................... 13,848 17,867 39,167 41,593
Non-recurring transaction costs..... -- -- 1,969 855
------- ------- ---------- ----------
Operating income.................. 749 2,752 7,437 9,377
Other income (expense):
Interest expense.................. (134) (340) (571) (370)
Interest income................... 23 80 356 38
Other............................. 16 368 230 (16)
------- ------- ---------- ----------
Total other income (expense).... (95) 108 15 (348)
------- ------- ---------- ----------
Income before provision for income
taxes.............................. 654 2,860 7,452 9,029
Provision for income taxes.......... 115 248 3,742 5,327
------- ------- ---------- ----------
Net income.......................... $ 539 $ 2,612 $ 3,710 $ 3,702
======= ======= ========== ==========
Earnings per share-basic and dilut-
ed................................. $ 0.33 $ 0.32
========== ==========
Weighted average shares outstanding
Basic............................. 11,328,518 11,399,141
========== ==========
Diluted........................... 11,402,513 11,503,578
========== ==========
</TABLE>
F-4
<PAGE>
EXHIBIT 99.7
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
---------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1994. 4,863,005 $ 49 $ 257 $2,940 $ 3,246
Dividends of certain
Pooled Companies prior
to acquisition......... -- -- -- (1,734) (1,734)
Issuance of common
stock.................. 156,881 2 212 -- 214
Net income.............. -- -- -- 539 539
---------- ---- ------- ------ -------
Balance at March 31, 1995. 5,019,886 51 469 1,745 2,265
Issuance of common stock
prior to IPO........... 120,478 1 381 -- 382
Redemption of common
stock.................. (74,140) (1) (119) -- (120)
Dividends of certain
Pooled Companies prior
to acquisition......... -- -- -- (1,536) (1,536)
Reclassification of
Initially Acquired
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
yearends of Pooled
Companies:
Capital contribution.. -- -- 103 -- 103
Net income............ -- -- -- 270 270
Dividends............. -- -- -- (288) (288)
Net income.............. -- -- -- 2,612 2,612
---------- ---- ------- ------ -------
Balance at March 31, 1996. 10,661,529 107 18,552 2,803 21,462
Issuance of common
stock.................. 610,872 6 463 -- 469
Tax benefit on stock
options exercised...... -- -- 295 -- 295
Dividends/distributions
of certain Pooled
Companies prior to
acquisition............ -- -- (423) (2,246) (2,669)
Retained Earnings of
immaterial Pooled
Companies acquired in
fiscal 1997............ -- -- -- (187) (187)
Adjustments to conform
yearends of Pooled
Companies:
Capital contribution.. -- -- 159 -- 159
Net income............ -- -- -- (12) (12)
Dividends............. -- -- -- (90) (90)
Net income.............. -- -- -- 3,710 3,710
---------- ---- ------- ------ -------
Balance at March 31, 1997. 11,272,401 113 19,046 3,978 23,137
Issuance of common
stock.................. 441,195 4 8,353 -- 8,357
Dividends of certain
Pooled Companies prior
to acquisition......... -- -- -- (546) (546)
Net income.............. -- -- -- 3,702 3,702
---------- ---- ------- ------ -------
Balance at December 31,
1997..................... 11,713,596 $117 $27,399 $7,134 $34,650
========== ==== ======= ====== =======
</TABLE>
F-5
<PAGE>
EXHIBIT 99.8
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED MARCH 31, ENDED
-------------------------- DECEMBER 31,
1995 1996 1997 1997
------- ------- -------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $ 539 $ 2,612 $ 3,710 $ 3,702
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization....... 330 310 1,146 1,280
Deferred income taxes, net.......... -- (587) 297 (222)
Gain on disposal of property and
equipment ......................... -- (325) -- --
Provision for doubtful accounts..... 72 195 472 925
Changes in current assets and
liabilities:
Accounts receivable................ (3,654) (1,769) (11,979) (13,091)
Prepaid expenses and other current
assets............................ (143) (226) (325) (809)
Accounts payable and accrued
expenses.......................... 3,159 1,333 6,023 6,848
Income taxes payable............... (36) 349 (297) 2,691
Changes in other assets............. (4) 321 (276) (61)
Changes in long-term liabilities.... -- -- (911) (11)
------- ------- -------- --------
Net cash provided by (used in)
operating activities............. 263 2,213 (2,140) 1,252
Cash flows from investing activities:
Proceeds from sale of assets.......... 53 374 -- --
Purchase of businesses, net of cash of
acquired companies................... -- -- (2,915) (8,259)
Purchases of property and equipment... (586) (867) (4,394) (2,194)
Advances to related parties........... (25) -- -- --
Cash and cash equivalents of Initially
Acquired Companies at acquisition.... -- 525 -- --
------- ------- -------- --------
Net cash provided by (used in)
investing activities............. (558) 32 (7,309) (10,453)
Cash flows from financing activities:
Redemption of common stock............ -- (120) -- --
Proceeds on long-term debt............ 168 471 (427) 12,070
Principal payments on long-term debt.. (55) (19) -- --
Payments on capital lease obligations. -- (49) (185) --
Distribution to Initially Acquired
Companies' former stockholders....... -- (3,492) -- --
Dividends and distributions........... (1,734) (1,536) (2,672) (546)
Net borrowings (repayments) on short-
term debt............................ 996 (1,140) 443 (4,597)
Borrowings on loans with former
related parties...................... 10 848 -- --
Repayments on loans with former
related parties...................... -- (700) (417) --
Net proceeds from issuance of common
stock................................ 229 17,341 469 54
Net change in cash due to conforming
fiscal year end of
Pooled Companies..................... -- 539 201 --
------- ------- -------- --------
Net cash provided by (used in)
financing activities............. (386) 12,143 (2,588) 6,981
------- ------- -------- --------
Net increase (decrease) in cash and
cash equivalents..................... (681) 14,388 (12,037) (2,220)
Cash and cash equivalents at beginning
of period............................ 1,234 553 14,941 2,904
------- ------- -------- --------
Cash and cash equivalents at end of
period............................... $ 553 $14,941 $ 2,904 $ 684
======= ======= ======== ========
</TABLE>
F-6
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
MARCH 31, ENDED
---------------- DECEMBER 31,
1995 1996 1997 1997
---- ---- ------ ------------
<S> <C> <C> <C> <C>
Supplemental disclosures of cash flow
information:
Interest paid.................................. $137 $374 $ 570 $ 545
Income taxes paid.............................. 63 530 3,460 3,818
Stock to acquire business...................... -- -- -- 7,464
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 --
</TABLE>
F-7
<PAGE>
EXHIBIT 99.9
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1--BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Cotelligent Group, Inc. ("Cotelligent" or the "Company") was formed in
February 1993 to acquire, own and operate software professional services
businesses specializing in providing information technology ("IT") consulting
services, including staff augmentation, project management and outsourcing
services, to businesses with complex IT operations. On February 20, 1996,
Cotelligent acquired four companies (the "Initially Acquired Companies")
simultaneously with an initial public offering (the "IPO") of its common stock.
The aggregate consideration paid by Cotelligent in these transactions was
$3,492 in cash, 3,206,875 shares of common stock of the Company and the
assumption of approximately $3,000 in debt, for an aggregate value of $35,304.
These acquisitions were accounted for on a historical cost basis. Prior to this
date, Cotelligent was a non-operating entity. The operating results of the
Initially Acquired Companies have been included since the date of acquisition.
During the year ended March 31, 1997 ("fiscal 1997") and in the nine month
period ended December 31, 1997 ("fiscal 1998"), 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 1997 and 1998, the Company acquired five
businesses accounted for under the purchase method (the "Purchased Companies")
for aggregate consideration of $17,990 (362,998 shares of common stock issued
at fair market value of $7,464 and $10,526 of cash). The consolidated financial
statements include the operating results of these companies subsequent to their
respective acquisition dates.
On January 6, 1998, the Company acquired a business for cash of $1,400, to be
accounted for under the purchase method of accounting. Goodwill from the
purchase is estimated to be $1,000. The purchase agreement provides for
additional earn-out consideration based on financial performance of the
acquired company subsequent to the acquisition. Potential earn-out payments are
due in fiscal years 1999 and 2000 and will be accounted for as additional
purchase price in the year the earn-out payments are distributable.
All of the businesses acquired since the IPO have operations substantially
the same as the Company.
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, the Initially Acquired Companies from their date of acquisition on
February 20, 1996, companies acquired in business combinations accounted for
under the purchase method from their respective acquisitions dates and give
retroactive effect to the results of business combinations accounted for under
the pooling-of-interests method for all periods presented. All significant
intercompany transactions and accounts have been eliminated. The Company's
fiscal year ends on March 31.
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 reported 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.
F-8
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Concentration of Credit Risk; Client Concentration
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. For the nine months ended December 31, 1997, the
Company's largest client accounted for approximately 8% of the Company's
revenues and the Company's ten largest clients accounted for approximately 31%
of the Company's revenues.
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. If the undiscounted cash flow is less than the carrying amount
of the goodwill, the goodwill will be reduced by the excess.
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; therefore, the carrying value of debt approximates its fair value.
Revenue Recognition
Revenue is recognized as services are performed. Unbilled receivables
represent revenue recognized on services performed which have not yet been
billed.
Income Taxes
The Company accounts for income taxes using an asset and liability approach
requiring 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.
F-9
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Earnings Per Share
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share", effective December 15, 1997 and has restated all
earlier periods. Basic earnings per share was calculated by dividing net
income by the weighted average number of shares of common stock outstanding
during the period. Diluted earnings per share includes the impact of common
stock options outstanding. Earnings per share for the years ended March 31,
1995 and 1996 has not been presented because the issuance of shares of common
stock sold in the IPO and the inclusion of the results of the Initially
Acquired Companies are not reflected in any period prior to February 20, 1996.
Reclassifications
Certain amounts have been reclassified in 1995, 1996 and 1997 to conform to
the December 31, 1997 presentation.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 established standards to measure all changes in equity that
result from transactions and other economic events other than transactions
with owners. Comprehensive income is the total of net income and all other
non-owner changes in equity. This statement is effective for financial
statements for periods beginning after December 15, 1997.
In June 1997, the FASB 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 does not believe that adoption of SFAS No. 130 and SFAS No. 131
will significantly alter its financial statement presentation.
NOTE 3--BUSINESS COMBINATIONS
Pooling-of-Interests Method
During fiscal 1997 and 1998, the Company issued 3,435,211 shares of common
stock to acquire six companies and 1,541,615 shares of common stock to acquire
four companies, respectively, in acquisitions accounted for under the pooling-
of-interests method. Accordingly, the Company's consolidated financial
statements have been restated in accordance with generally accepted accounting
principles for all periods presented. Commencing on April 1, 1996, the
yearends of these Pooled Companies were changed to March 31, resulting in an
increase to retained earnings of $270 during fiscal 1996 as follows:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, 1996
--------------
<S> <C>
Revenues................................................... $11,823
Costs and expenses......................................... 11,553
-------
Net income................................................. $ 270
=======
</TABLE>
F-10
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
The results of certain of the Pooled Companies acquired during the nine
months ended December 31, 1997, were previously reported on December 31 and
June 30 year ends prior to acquisition by the Company. The accounts of these
Pooled Companies for the years ended December 31, 1995 and 1996 and June 30,
1995 and 1996 have been combined with the accounts of Cotelligent for the
years ended March 31, 1996 and 1997, respectively. Commencing on April 1,
1997, the yearends of these Pooled Companies were changed to March 31,
resulting in a decrease to retained earnings of $12 during fiscal 1997 as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, 1997
--------------
<S> <C>
Revenues................................................... $ 8,624
Costs and expenses......................................... 8,636
-------
Net income................................................. $ (12)
=======
</TABLE>
The previously reported results of operations of Cotelligent and the results
of the Pooled Companies acquired in fiscal 1998 for the periods prior to the
mergers are presented below:
<TABLE>
<CAPTION>
POOLED
FOR THE YEAR ENDED MARCH 31, COTELLIGENT COMPANIES COMBINED
---------------------------- ----------- --------- --------
<S> <C> <C> <C>
1997
Revenue................................. $146,772 $18,645 $165,417
Net income.............................. 3,636 74 3,710
1996
Revenue................................. 52,786 13,647 66,433
Net income.............................. 2,518 94 2,612
1995
Revenue................................. 33,264 11,336 44,600
Net income.............................. 177 362 539
</TABLE>
During the nine months ended December 31, 1997, businesses acquired as
poolings recognized revenues of $23,222 and net income of $354 in the period
prior to acquisition by the Company.
Purchase Method
During fiscal 1997, Cotelligent acquired two companies (on October 7, 1996
and November 27, 1996) accounted for under the purchase method for an
aggregate consideration 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 operating results from their
respective acquisition dates.
During the nine months ended December 31, 1997, Cotelligent acquired three
companies (on August 27, 1997, October 31, 1997 and November 6, 1997)
accounted for under the purchase method for aggregate consideration of $15,190
(362,998 shares issued at fair market value of $7,464 and $7,726 of cash). The
fair value of the tangible assets acquired related to these acquisitions were
$3,399 and resulted in the recognition of $14,573 of goodwill, which is being
amortized over a 30 year period. The results of these acquisitions have been
included in the Company's operating results from their respective acquisition
dates.
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
F-11
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
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.
NOTE 4--PRO FORMA RESULTS (UNAUDITED)
The pro forma consolidated statements of operations for the years ended
March 31, 1995, 1996 and 1997 and the nine months ended December 31, 1997,
give effect to the acquisitions of the Initially Acquired Companies and
Purchased Companies as if these acquisitions were made on April 1, 1994. The
pro forma consolidated statements of operations also reflect adjustments for
the acquisitions of the Pooled Companies including 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. Additionally, the
pro forma consolidated financial statements reflect adjustments for interest
expense on cash consideration and amortization of goodwill for the Purchased
Companies.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED MARCH 31, ENDED
-------------------------------- DECEMBER 31,
1995 1996 1997 1997
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues......................... $ 103,228 $ 135,443 $ 184,244 $ 186,648
Cost of service.................. 74,605 98,325 130,479 131,370
---------- ---------- ---------- ----------
Gross profit................... 28,623 37,118 53,765 55,278
Selling, general and
administrative.................. 26,140 29,291 41,080 41,779
---------- ---------- ---------- ----------
Operating income................. 2,483 7,827 12,685 13,499
Other expense.................... 877 1,203 534 704
---------- ---------- ---------- ----------
Income before provision for
income taxes.................... 1,606 6,624 12,151 12,795
Provision for income taxes....... 659 2,716 4,982 5,246
---------- ---------- ---------- ----------
Net income....................... $ 947 $ 3,908 $ 7,169 $ 7,549
========== ========== ========== ==========
Earnings per share
Basic........................... $ 0.08 $ 0.33 $ 0.61 $ 0.65
========== ========== ========== ==========
Diluted......................... $ 0.08 $ 0.33 $ 0.61 $ 0.64
========== ========== ========== ==========
Weighted average shares
outstanding
Basic........................... 11,680,299 11,680,299 11,680,299 11,680,299
========== ========== ========== ==========
Diluted......................... 11,784,736 11,784,736 11,784,736 11,784,736
========== ========== ========== ==========
</TABLE>
F-12
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 5--ALLOWANCE FOR DOUBTFUL ACCOUNTS
Allowance for doubtful accounts activity is as follows:
<TABLE>
<S> <C>
Balance, March 31, 1994........................................... $ 58
Charges to cost and expenses..................................... 72
------
Balance, March 31, 1995........................................... 130
Balance of Initially Acquired Companies at acquisition........... 40
Charges to costs and expenses.................................... 195
Write-offs....................................................... (25)
------
Balance, March 31, 1996........................................... 340
Charges to costs and expenses.................................... 472
Write-offs....................................................... (180)
------
Balance, March 31, 1997........................................... 632
Balance of acquired companies at acquisition..................... 175
Charges to costs and expenses.................................... 925
Write-offs....................................................... (129)
------
Balance, December 31, 1997........................................ $1,603
======
</TABLE>
NOTE 6--PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
MARCH 31,
-------------- DECEMBER 31,
1996 1997 1997
------- ------ ----
<S> <C> <C> <C>
Land and building.............................. $ 457 $ 440 $ 355
Computer and office equipment.................. 2,753 5,859 8,554
Furniture and fixtures......................... 1,520 2,796 2,190
Leasehold improvements......................... 335 366 570
------- ------ -------
5,065 9,461 11,669
Less: accumulated depreciation................. 2,905 4,013 5,172
------- ------ -------
$ 2,160 $5,448 $ 6,497
======= ====== =======
</TABLE>
Depreciation and amortization expense for the years ended March 31, 1995,
1996 and 1997 and the nine months ended December 31, 1997 was $330, $310,
$1,108 and $1,159, respectively.
F-13
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 7--CREDIT FACILITIES
Cotelligent maintains a syndicated revolving line of credit facility
("Credit Line") with three banks, which provides a borrowing capacity of
amounts derived from specific covenant ratios, up to $40,000. The Company
generally pays off the outstanding debt of acquired companies. The Credit Line
requires the Company to maintain certain financial covenants and restricts the
payment of dividends. At December 31, 1997, the Company had a borrowing
capacity of approximately $34,000 under the facility and was in compliance
with all covenants. Debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, DECEMBER 31,
1996 1997 1997
--------- --------- ------------
<S> <C> <C> <C>
Bank line of credit with borrowings derived
from covenant ratios, up to
$40,000, secured by accounts receivable and
other assets of
the Company, interest at the bank's lending
rate (approximately 8% at December 31,
1997)....................................... $ -- $ -- $ 12,070
Bank line of credit with borrowings up to 80%
of the Company's eligible accounts
receivable or $20,000, secured by accounts
receivable and other assets of the Company,
interest at prime (8.5% at March 31, 1997).. -- 3,926 --
Various Pooled Companies' bank lines of
credit, secured by various assets of the
Pooled Companies, with interest rates up to
prime plus 2.0%............................. 4,516 160 --
Pooled Companies' other notes payable,
including payables to related parties, with
interest rates from 8.0% to 11.0%, secured
by various assets of the Pooled Companies,
with due dates through December 2000........ 653 659 283
Capital lease obligations.................... 390 312 177
Related party loans, due on demand, with in-
terest rates from 8.0% to 12.5%............. 84 -- --
Less: current maturities..................... (4,937) (4,409) (234)
------ ------ --------
Total long-term debt......................... $ 706 $ 648 $ 12,296
====== ====== ========
</TABLE>
Maturities of long-term debt, at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998................................................................. $ 234
1999................................................................. 142
2000................................................................. 84
2001................................................................. 12,070
2002................................................................. --
Thereafter........................................................... --
-------
Total................................................................ $12,530
=======
</TABLE>
F-14
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 8--INCOME TAXES
The income tax provision consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH NINE MONTHS
31, ENDED
------------------- DECEMBER 31,
1995 1996 1997 1997
---- ----- ------ ------------
<S> <C> <C> <C> <C>
Current:
Federal................................ $207 $763 $2,577 $4,542
State.................................. 51 162 868 1,007
---- ----- ------ ------
258 925 3,445 5,549
---- ----- ------ ------
Deferred:
Federal ............................... (131) (570) 268 (24)
State ................................. (12) (107) 29 (198)
---- ----- ------ ------
(143) (677) 297 (222)
---- ----- ------ ------
Total provision for income taxes........ $115 $ 248 $3,742 $5,327
==== ===== ====== ======
</TABLE>
The tax benefits associated with nonqualified stock options reduce taxes
currently payable as shown above by $295 for fiscal 1997. No tax benefits
associated with nonqualified stock options were realized in fiscal 1996. Such
tax benefits are credited to stockholders' equity when realized.
Significant components of deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
MARCH 31,
------------- DECEMBER 31,
1996 1997 1997
----- ------ ------------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts................ $ 16 $ 159 $ 470
Accrued vacation............................... -- 189 302
Operating loss carry forward................... 317 -- --
Other.......................................... 406 148 173
Valuation allowance............................ (187) -- --
----- ------ ------
Total deferred tax assets..................... 552 496 945
----- ------ ------
Deferred tax liabilities:
Cash to accrual................................ (943) (1,164) (1,271)
Other.......................................... (19) (39) (159)
----- ------ ------
Total deferred tax liabilities................ (962) (1,203) (1,430)
----- ------ ------
Net deferred tax liabilities.................. $(410) $ (707) $ (485)
===== ====== ======
</TABLE>
F-15
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
MARCH 31, ENDED
---------------------- DECEMBER 31,
1995 1996 1997 1997
------ ------ ------ ------------
<S> <C> <C> <C> <C>
U.S. federal statutory rate......... 34.0% 34.0% 34.0% 35.0%
State income tax, net of federal
benefit............................ 3.9 1.0 7.9 5.8
(Income) loss of S corporation...... (27.3) (27.8) (7.4) 2.2
Conversion to C corporation......... (5.2) -- 8.9 10.5
Non-deductible acquisition costs.... -- -- 7.6 3.3
Change in valuation allowance....... 12.2 1.4 (1.7) --
Other............................... -- -- 0.9 2.2
------ ------ ------ ----
Effective tax rate.................. 17.6% 8.6% 50.2% 59.0%
====== ====== ====== ====
</TABLE>
Prior to the IPO, Cotelligent 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 S corporations 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 of net assets was immediately
recognized. This net deferred tax liability was approximately $670 and $950 in
fiscal 1997 and in the nine months ended December 31, 1997, respectively,
which will be paid on a pro rata basis over a four-year period.
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 under such leases at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Three months ending March 31, 1998...................... $ 52 $ 877
1999.................................................... 116 2,844
2000.................................................... 18 2,654
2001.................................................... -- 1,823
2002.................................................... -- 1,130
Thereafter.............................................. -- 410
---- ------
Total minimum lease payments............................ 186 $9,738
======
Less: Amounts representing interest..................... 9
----
Present value of net minimum lease payments............. $177
====
</TABLE>
Rental expense under these leases for the years ended March 31, 1995, 1996
and 1997 and the nine months ended December 31, 1997 was $696, $783, $1,620
and $2,322, respectively.
F-16
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 10--EMPLOYEE BENEFIT PLANS
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
OPTION PRICE AVERAGE
NUMBER OF RANGE PER EXERCISE EXPIRATION
SHARES SHARE 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............................ 852,113 8.88-24.88 18.08 2004
Exercised.......................... 59,099 2.70-9.00 3.08 2003
Canceled........................... 136,589 2.70-24.25 6.66 2003-2004
---------
Outstanding at March 31, 1997........ 1,133,127 2.70-24.88 15.46 2003-2004
Exercisable at March 31, 1997........ 249,040 2.70-19.00 15.25 2003-2004
Granted............................ 294,775 7.25-22.44 16.37 2005
Exercised.......................... 12,358 8.88-15.75 10.80 2003
Canceled........................... 90,291 8.88-24.88 15.87 2003-2004
---------
Outstanding at December 31, 1997..... 1,325,253 2.70-24.88 15.67 2003 2005
Exercisable at December 31, 1997..... 393,684 2.70-22.00 15.53 2003-2004
</TABLE>
The Plan provides for stock-based 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 provisions of 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 provisions 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 fiscal 1996 and 1997 and the nine
months ended December 31, 1997, based on the fair value as described in 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 and
the nine months ended December 31, 1997, respectively: (i) risk-free interest
rates of 5.97%, 6.12% and 5.88%; (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, 4.2 and 4.2 years.
F-17
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
The Black-Scholes model was developed for use in estimating the fair value
of traded options that have no vesting restrictions 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.
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 No. 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, NINE MONTHS ENDED
------------------------------- DECEMBER 31,
1996 1997 1997
--------------- --------------- ------------------
AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA
-------- ------ -------- ------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Net income................... $2,612 $2,304 $3,710 $2,416 $3,702 $1,748
Diluted earnings per share... -- -- 0.33 0.21 0.32 0.15
</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 Initially Acquired Companies and the IPO as discussed in Note 1.
The weighted average fair values of options granted during the years ended
March 31, 1996, 1997 and the nine months ended December 31, 1997 were $4.03,
$6.16 and $8.04 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% 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 fiscal
1997, employees purchased 20,171 shares for aggregate proceeds to the Company
of $284. During the nine months ended December 31, 1997, employees purchased
65,839 shares for aggregate proceeds to the Company of $561.
401(k) Plan
During fiscal 1997, the Company initiated the Cotelligent Group, Inc. 401(k)
Retirement Saving Plan (the "401(k) Plan") effective March 1, 1997, for the
benefit of all employees upon date of hire. The 401(k)Plan is funded by
employee payroll deductions. In addition, the Company has the option to
contribute to the 401(k) Plan on the employee's behalf. The Company did not
make any contributions to the 401(k) Plan for the year ended March 31, 1997,
or the nine months ended December 31, 1997.
Subsidiary Plans
Prior to their acquisition certain of the Company's 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 and the nine months ended December 31, 1997 were $27, $70, $47 and
$27, respectively.
F-18
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 11--STOCKHOLDERS' EQUITY
Common Stock
The Company has one class of $0.01 par value common stock with 100,000,000
authorized shares. The holders of common stock are entitled to one vote for
each share on all matters voted upon by stockholders, including the election
of the directors. At March 31, 1996 and 1997 and December 31, 1997, there were
10,661,529, 11,272,401 and 11,713,596 shares of common stock outstanding,
respectively.
Preferred Stock
The Company has one class of $0.01 par value preferred stock with 500,000
authorized shares of which the Board of Directors has designated a series of
2,500 shares as Series A Junior Participating Preferred Stock with par value
of $0.01 per share in connection with the implementation of a Stockholder
Rights Plan. The Board of Directors has authority, without further vote or
action by stockholders, to issue the shares, fix the number of shares and
change the number of shares constituting any series, and to provide for or
change the voting powers, designations, preferences and relative,
participating, optional or other special rights, qualifications, limitations
or restrictions thereof, including dividend rights (and whether dividends are
cumulative), dividend rates, terms of redemption (including sinking fund
provisions), a redemption price or prices, conversion rights and liquidation
preferences of the shares constituting any class or series of the preferred
stock. No preferred stock was outstanding at March 31, 1996 and 1997 and
December 31, 1997. The Company has no current plans to issue any shares of
preferred stock of any class or series.
Anti-takeover Provisions
The Company has a stockholder rights plan in effect (the "Rights Plan").
Under the terms of the Rights Plan, the holders of the common stock received
one preferred share purchase right (each, a "Right"), as a dividend for each
share of common stock held as of the close of business on September 24, 1997.
Each Right entitles the holder to buy 1/10,000 of a share of Series A Junior
Preferred Stock of the Company at an exercise price of $90.00. Further, each
Right gives the holder the right to buy common stock of the Company having
twice the value of the exercise price of the Rights if a person or group
acquires beneficial ownership of 20% or more of the common stock or commences
a tender or exchange offer that would result in such a person or group owning
20% or more of the common stock. In addition, the Board of Directors of the
Company is empowered to issue up to 500,000 shares of preferred stock, and to
determine the price, rights, preferences and privileges of such shares,
without any further stockholder action. The existence of the Rights Plan and
this "blank-check" preferred stock may have the effect of delaying,
discouraging, inhibiting, preventing or rendering more difficult an attempt to
obtain control of the Company by means of a tender offer, merger, proxy
contest or otherwise. In addition, this "blank-check" preferred stock, any
issuance thereof, may have an adverse effect on the market price of the common
stock. The Company's Certificate of Incorporation provides for a "staggered"
Board of Directors, which may also have the effect of inhibiting a change of
control of the Company and may have an adverse effect on the market price of
the common stock.
F-19
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 12--EARNINGS PER SHARE
Earnings per share is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31, 1997
---------------------------------------
PER SHARE
INCOME SHARES AMOUNT
---------- -------------- -------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net income available to common
stockholders...................... $ 3,710 11,235,449 $ 0.33
Options issued to directors and em-
ployees........................... 167,064
--------------
DILUTED EARNINGS PER SHARE
Income available to common
stockholders plus assumed
conversions....................... $ 3,710 11,402,513 $ 0.33
==============
FOR THE NINE MONTHS
ENDED
DECEMBER 31, 1997
---------------------------------------
PER SHARE
INCOME SHARES AMOUNT
---------- -------------- -------------
BASIC EARNINGS PER SHARE
Net income available to common
stockholders...................... $ 3,702 11,399,141 $ 0.32
Options issued to directors and em-
ployees........................... 104,437
--------------
DILUTED EARNINGS PER SHARE
Income available to common
stockholders plus assumed
conversions....................... $ 3,702 11,503,578 $ 0.32
==============
</TABLE>
Options to purchase common shares of 800,000 and 700,000 were excluded from
the computation of diluted earnings per share for the year ended March 31,
1997 and the nine months ended December 31, 1997, respectively, as the
options' exercise price was greater than the market price of the common shares
for the respective periods.
NOTE 13--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.
F-20
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
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.
Additional Purchase Price under Acquisition Contracts
In connection with the agreements to acquire one of the Purchased Companies
during fiscal 1998, the Company agreed to additional consideration based on
the financial performance of the acquired company subsequent to the
acquisition (the "earn-out"). Potential earn-out payments, if required, are
payable in the fiscal years 1999 and 2000. Earn-out payments, if made, will be
accounted for as additional purchase price in the period the earn-out payments
are distributable. No accrual has been made for any earn-out payments.
NOTE 14--QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31, 1997
-----------------------------------
FIRST SECOND THIRD
QUARTER QUARTER QUARTER
----------- ----------- -----------
<S> <C> <C> <C>
Revenues................................... $ 54,304 $ 58,566 $ 63,111
Gross profit............................... 16,117 17,327 18,381
Operating income........................... 3,155 3,455 2,767
Net income (loss).......................... 1,810 2,030 (138)
Earnings (loss) per share
Basic and diluted........................ $ 0.16 $ 0.18 $ (0.01)
=========== =========== ===========
Weighted average shares
Basic.................................... 11,322,569 11,314,751 11,584,359
=========== =========== ===========
Diluted.................................. 11,367,474 11,436,630 11,584,359
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1997
-------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues............................ $ 36,103 $ 39,658 $ 42,534 $ 47,122
Gross profit........................ 10,540 12,352 12,430 13,251
Operating income.................... 1,651 2,047 2,417 1,322
Net income.......................... 415 1,489 1,587 219
Earnings per share
Basic and diluted................. $ 0.04 $ 0.13 $ 0.14 $ 0.02
========== ========== ========== ==========
Weighted average shares
Basic............................. 11,211,131 11,229,131 11,229,131 11,342,977
========== ========== ========== ==========
Diluted........................... 11,365,573 11,364,115 11,393,769 11,486,595
========== ========== ========== ==========
</TABLE>
F-21
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1996
-------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues........................................ $14,409 $14,579 $14,059 $23,386
Gross profit.................................... 4,504 4,622 4,553 6,940
Operating income................................ 575 688 630 859
Net income...................................... 465 949 533 665
</TABLE>
Earnings per share for the year ended March 31, 1996 has not been presented
because, as discussed in Note 2, the issuance of shares of common stock sold
in the IPO and the inclusion of the results of the Initially Acquired
Companies are not reflected in any period prior to February 20, 1996.
F-22
