<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 24, 1998
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
COTELLIGENT GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3173918
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
101 California Street, Suite 2050
San Francisco, California 94111
(415) 439-6400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
James R. Lavelle
Chairman of the Board and Chief Executive Officer
Cotelligent Group, Inc.
101 California Street, Suite 2050
San Francisco, California 94111
(415) 439-6400
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
Copies to:
DAVID W. POLLAK, ESQ. RICHARD A. BOEHMER, ESQ.
MORGAN, LEWIS & BOCKIUS LLP O'MELVENY & MYERS LLP
101 PARK AVENUE 400 SOUTH HOPE STREET, 15TH FLOOR
NEW YORK, NEW YORK 10178 LOS ANGELES, CALIFORNIA 90071
(212) 309-6058 (213) 669-6643
-----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
-----------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
<TABLE>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
<CAPTION>
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SHARES TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value.................. 3,450,000 shares $21.97 $75,796,500 $22,360
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes 450,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any. See "Underwriting."
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(a).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated February 24, 1998
PROSPECTUS
3,000,000 SHARES
[LOGO]
COTELLIGENT
COMMON STOCK
-------------
Of the 3,000,000 shares of Common Stock, par value $.01 per share (the
"Common Stock"), of Cotelligent Group, Inc. ("Cotelligent" or the "Company")
offered hereby (the "Offering"), 1,750,000 shares are being offered by the
Company and 1,250,000 shares are being offered by certain selling stockholders
(the "Selling Stockholders"). The Company will not receive any proceeds from
the sale of shares of the Common Stock by the Selling Stockholders. See
"Principal and Selling Stockholders" and "Underwriting."
The Common Stock is listed on the New York Stock Exchange (the "NYSE") under
the symbol "CGZ." On February 23, 1998, the last reported sales price for the
Common Stock, as reported on the NYSE, was $23.69 per share. See "Price Range
of Common Stock."
-------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share........ $ $ $ $
- ------------------------------------------------------------------------------
Total(3)......... $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses of the Offering payable by the Company of
approximately $600,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of 450,000 additional shares of Common Stock on the same terms
and conditions set forth above solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
-------------
The shares of Common Stock offered by this Prospectus are offered by the
Underwriters subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the Underwriters
and to certain further conditions. It is expected that delivery of the
certificates for the shares of Common Stock will be made at the offices of
Lehman Brothers Inc., New York, New York or through the facilities of The
Depository Trust Company on or about March , 1998.
-------------
LEHMAN BROTHERS
THE ROBINSON-HUMPHREY COMPANY
PRUDENTIAL SECURITIES INCORPORATED
March , 1998
<PAGE>
COTELLIGENT
[LOGO]
SCOPE OF IT SERVICES
. Application design, programming,
development and maintainence
. Client/server system design and
STAFF AUGMENTATION development
- -----------------------------------
. Systems engineering and integration
. Intranet/internet design and
development
. Network design and management
. Systems and business process re-
engineering/planning
. Relational data base design and
development
PROJECT MANAGEMENT
- ----------------------------------- . Hardware and software
selection/integration/implementation
. Creation and execution of system
integration plans
. Customized software development
. Application system maintainence
OUTSOURCING . Outsourcing complex IT functions
- -----------------------------------
. Custom software development/offsite
. Development centers
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE
COMPANY. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK
PRIOR TO THE PRICING OF THIS OFFERING FOR THE PURPOSE OF MAINTAINING THE PRICE
OF THE COMMON STOCK AND THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING THE
PRICING OF THIS OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON
STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK. FOR A
DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and the consolidated financial
statements and the pro forma combined financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated,
all share, per share and financial data set forth herein assume no exercise of
the Underwriters' over-allotment option. All references to years, unless
otherwise noted, refer to the Company's fiscal year, which ends on March 31 of
each year.
THE COMPANY
Cotelligent Group, Inc. ("Cotelligent" or the "Company") is a software
professional services firm providing information technology ("IT") consulting
services, including staff augmentation, project management and outsourcing
services, to businesses with complex IT operations. The Company operates
offices in 22 metropolitan areas across the United States. The Company provides
its clients with IT professionals who are proficient in a wide variety of
hardware and software platforms. Cotelligent's IT professionals are primarily
billed on a time and materials basis and offer clients specialized expertise in
implementation services including applications design, programming, development
and maintenance, client/server design and development, systems software design,
systems engineering, systems integration, intranet/internet design and
development and network design and management services. At December 31, 1997,
the Company had approximately 2,700 employees, including a technical staff of
approximately 2,200 IT professionals, providing services to approximately 550
clients across a broad spectrum of commercial industries throughout the United
States, including telecommunications, technology and financial services. The
Company's clients include AT&T Corp., AT&T Wireless Services, Bell
Communications Research, Inc., Cargill Financial Services Corporation, Frito-
Lay, Inc., JC Penney Company, Inc., Liberty Mutual Insurance Co., Lucent
Technologies, Inc., MCI Telecommunications Corp., Mercantile Bankshares
Corporation, Microsoft Corporation, Monsanto Company, Office Depot, Inc.,
Pacific Bell and U S West, Inc.
The IT consulting services industry is expected to experience continued
growth over the next several years. According to Dataquest estimates, United
States spending for IT professional services (excluding training and education)
will be approximately $68 billion in 1998 and is projected to grow at a
compound annual growth rate of 14% through 2000. This increased demand for IT
consulting services is largely fueled by: (i) increasing pressure on businesses
to generate timely, accurate business information; (ii) the proliferation of
more powerful and less expensive computer hardware/software; (iii) the trend
away from centralized mainframes and custom applications to personal computer-
driven systems employing a broad range of complex software applications; and
(iv) the emergence of the Year 2000 issue, which has caused companies to seek
out and implement more advanced IT systems and solutions. As a result,
businesses have invested, and are likely to continue to invest, significant
amounts of capital to build, support and update their IT infrastructures.
Concurrent with this increase in IT-related expenditures, competition has
pressured corporations to reduce or eliminate costs unrelated to core
operational competencies. As such, businesses are increasingly turning to IT
consulting services companies such as Cotelligent to help them appropriately
staff and manage a wide array of IT consulting and support needs. By
contracting with Cotelligent, corporations can access skilled IT professionals
on an "as-needed" basis, converting their fixed labor costs into variable costs
and reducing their costs of recruiting, hiring, training and terminating
permanent employees.
The Company's goal is to be a leading nationwide provider of IT consulting
services, including staff augmentation, project management and outsourcing
services, to businesses with complex IT operations. To accomplish this goal,
the Company has implemented a business strategy consisting of two distinct
components. First, the Company has adopted an operating strategy for internal
growth by: (i) creating an infrastructure to effectively recruit and retain
qualified IT professionals; (ii) leveraging its local client relationships in a
coordinated effort to provide services on a national scope to its larger
accounts; (iii) operating with a
3
<PAGE>
decentralized management structure to foster an environment in which "best
practices" are shared on a Company-wide basis, allowing successful strategies
to be implemented at various operating locations; (iv) leveraging the
Cotelligent brand by transitioning from the local names of the operating units
to Cotelligent's national identity; and (v) pursuing strategic alliances with
nationally established technology companies, such as Microsoft Corporation,
through which the Company will enhance its technical support capabilities and
strengthen certain of its key business relationships.
As the second part of its business strategy, the Company intends to broaden
the geographic and technical scope of its operations by acquiring established
firms that offer complementary IT consulting services in new or existing
regions and that will expand the depth and breadth of services provided to
clients. The IT consulting industry is highly fragmented. According to INPUT,
an international research firm, approximately 3,500 IT consulting services
businesses with annual revenues in excess of $1 million provide services and
expertise in the United States. As a result of this fragmentation, the IT
consulting services industry has recently experienced consolidation as smaller,
regional firms have become less able to effectively compete with larger,
national IT consulting services firms which often possess greater access to
capital and IT professionals as well as the service capabilities required to
serve large companies that are consolidating their vendor lists. To capitalize
on this industry fragmentation and trend towards consolidation, the Company has
developed an acquisition strategy based on a philosophy to: (i) purchase local
or regional IT consulting services firms with successful, proven operating
models; (ii) allow the acquired company to operate in a manner consistent with
its historical practice and as dictated by local market conditions, rather than
converting the operations to a standardized national business model; and (iii)
improve the acquired company's profitability by passing on the operating and
financial benefits associated with national firm status. The Company believes
that this philosophy differentiates Cotelligent from other potential acquirors
and is attractive to acquisition candidates who wish to preserve their
corporate culture. The Company also believes that this acquisition strategy
will allow it to secure assignments from clients seeking to do business with
national IT consulting services firms, as well as regional businesses seeking
local relationships.
In February 1996, the Company acquired, simultaneously with the closing of
its initial public offering (the "IPO"), four established providers (the
"Initially Acquired Companies") of IT consulting services to serve as a
foundation to execute its growth strategy. Since the IPO, the Company has
acquired sixteen additional IT consulting services firms (the "Subsequent
Acquisitions") which have strengthened the Company's operations by diversifying
its base of Fortune 1000 clients, expanding its national presence, broadening
its nationwide resource pool and client base and increasing the Company's
capabilities and expertise.
The Company was incorporated in February 1993 under the laws of the State of
California as TSX, a California corporation. In November 1995, the Company
changed its jurisdiction of incorporation to Delaware and its name to
Cotelligent Group, Inc. Unless the context otherwise requires, references in
this Prospectus to the "Company" and to "Cotelligent" refer to TSX, a
California corporation, and Cotelligent Group, Inc., a Delaware corporation.
The Company's executive offices are located at 101 California Street, Suite
2050, San Francisco, California 94111 and its telephone number is (415) 439-
6400.
4
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
COMMON STOCK OFFERED BY:
<C> <S>
The Company........................ 1,750,000 shares
The Selling Stockholders........... 1,250,000 shares
Total Common Stock offered....... 3,000,000 shares
Common Stock to be outstanding after
the Offering (1)................... 13,468,851 shares
Use of Proceeds..................... To repay indebtedness outstanding under
the Company's line of credit facility and
for working capital and general corporate
purposes, including future acquisitions.
At this time, the Company has not entered
into any definitive agreements to acquire
any other entity. See "Use of Proceeds."
NYSE Symbol......................... CGZ
</TABLE>
- --------
(1) Excludes 2,020,327 shares reserved for future issuance upon exercise of
outstanding options and reserved for issuance under the Company's 1995
Long-Term Incentive Plan, and 213,979 shares reserved for future issuance
under the Company's Employee Stock Purchase Plan.
5
<PAGE>
SUMMARY FINANCIAL DATA
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> <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
--------------------------
ACTUAL AS ADJUSTED(4)
----------- --------------
<S> <C> <C> <C>
BALANCE SHEET
DATA:
Working capital.. $ 22,647 $ 49,032
Total assets..... 74,531 100,916
Long-term debt,
less current
portion......... 12,296 --
Stockholders'
equity.......... 34,650 73,331
</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 (as defined herein) 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 (as defined herein). 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.
(4) Adjusted to reflect the sale by the Company of the 1,750,000 shares of
Common Stock offered hereby at an assumed public offering price of $23.69
per share, the last reported sales price of the Common Stock on the NYSE on
February 23, 1998, and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."
6
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following risk factors,
in addition to the other information contained in this Prospectus, in
evaluating an investment in the shares of Common Stock offered hereby. This
Prospectus contains certain statements of a forward-looking nature relating to
future events or the future financial performance of the Company within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and are intended to be
covered by the safe harbors created thereby. Prospective investors are
cautioned that such statements are only predictions and that actual events or
results may differ materially. In evaluating such statements, prospective
investors should specifically consider the various factors identified in this
Prospectus, including the matters set forth below, which could cause actual
results to differ materially from those indicated by such forward-looking
statements.
DEPENDENCE ON AVAILABILITY OF QUALIFIED IT PROFESSIONALS
The Company is dependent upon its ability to attract, hire and retain IT
professionals who possess the skills and experience necessary to meet the
service requirements of its clients. The Company must continually identify,
screen and retain qualified IT professionals to keep pace with increasing
client demand for rapidly evolving technologies and changing client needs.
Further, many of the IT professionals provided by the Company to its clients
are not committed to provide their services exclusively to the Company. The
Company competes with other companies in a variety of industry segments
seeking to engage the services of such personnel. Competition for individuals
with proven technical skills is intense. The Company competes for such
individuals with other providers of technical services, systems integrators,
providers of outsourcing services, computer systems consultants, clients and
temporary staffing companies. In the past, the Company has experienced
difficulties in identifying and retaining qualified IT professionals and has
therefore been unable in certain instances to fill requests for services from
clients. There can be no assurance that qualified IT professionals will be
available to the Company in sufficient numbers. An inability to locate, retain
and successfully place qualified IT professionals to fill client requests
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Recruiting."
INTEGRATION OF OPERATING UNITS
Prior to February 20, 1996, the date of the IPO, Cotelligent was a non-
operating entity and generated no revenue. Since the IPO, the Company has
acquired the Subsequent Acquisitions, eight of which were acquired in the
fiscal year ended March 31, 1997 and eight of which have been acquired to date
in the fiscal year ending March 31, 1998. There can be no assurance that the
Company will be able to successfully integrate its operating units on an
economic or operational basis or that the Company's management group will be
able to oversee the combined entity and effectively implement the Company's
business strategy. The combined historical financial results of the Company
cover periods when the operating units and Cotelligent were not under common
control or management and as such may not be indicative of the Company's
future financial or operating results.
In addition, the Company intends to expand its business through the
acquisition of additional IT consulting services businesses. There can be no
assurance that the Company will be able to successfully integrate acquired
businesses, if any, into the Company's infrastructure without substantial
costs, delays or other operational or financial problems. Further, the
Company's ability to manage future growth will depend significantly upon the
Company's ability to integrate its operating units and any acquired businesses
and develop Company-wide systems and operating procedures. An inability of the
Company to successfully integrate the operating units or any acquired
businesses would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Operating
Strategy" and "--Acquisition Strategy."
RELIANCE ON AND RETENTION OF KEY MANAGEMENT
The Company's operations are dependent on the continued efforts of its
executive officers and on the senior management of the operating units. While
the Company has entered into employment agreements with certain of these
individuals, there can be no assurance that any individual will continue in
his or her present capacity with
7
<PAGE>
the Company for any specified period. The Company also expects that in order
to pursue its operating strategy successfully, it will be required to hire
additional management personnel at regional levels to implement adequate
Company-wide systems and controls at each of the operating units. If the
Company is unable to hire, train and integrate new management personnel
effectively, or if such personnel are unable to achieve anticipated
performance levels, the Company's business, financial condition and results of
operations could be adversely affected. Furthermore, the Company will likely
be dependent on the senior management of businesses, if any, that may be
acquired in the future. If any of these people become unable to continue in
their present roles, or if the Company is unable to attract and retain other
skilled employees, the Company's business or prospects could be adversely
affected. The Company does not maintain key man life insurance covering any of
its executive officers or other members of senior management. See
"Management."
PRICING AND MARGIN PRESSURE
Many of the Company's larger clients purchase IT services primarily from a
limited number of pre-approved vendors. In order to remain on its clients'
vendor lists and to develop new client relationships, the Company must satisfy
client requirements at competitive rates. Although the Company continually
attempts to lower its costs, there are other IT consulting services
organizations and temporary placement agencies that provide the same or
similar services at equal or lower costs. Furthermore, as competition
intensifies between IT consulting services providers, there may be increased
demand for qualified IT professionals resulting in upward market pressure on
compensation rates. Additionally, certain of the Company's clients require
that their vendors reduce rates after services have commenced. There can be no
assurance that the Company will be able to compete effectively on pricing or
other requirements and, as a result, the Company could lose clients or be
unable to maintain historical gross profit levels or to operate profitably.
See "Business--Competition."
COMPETITION
The IT consulting services industry is highly competitive, fragmented and
subject to rapid change. There are numerous companies engaged in the Company's
business, many of which have greater technical, financial or marketing
resources than the Company. Competition in the IT consulting services industry
includes local, regional and national systems consulting and integration
firms, professional service divisions of applications software firms, the
professional service groups of computer equipment companies, management
information outsourcing companies, certain "Big Six" accounting firms and
general management consulting firms. The Company intends to enter new markets
and offer new services by acquiring companies and expects that one or more of
its competitors will have a presence in each of such new markets and are or
will be providing such new services. The majority of the Company's competitors
are smaller regional firms with a strong presence in their respective local
markets. Further, many of the larger companies which have traditionally made
up a substantial portion of the Company's target markets have recently been
consolidating their vendor lists to a smaller number of preferred service
providers. To the extent the Company is unable to meet the necessary
requirements of such larger companies and become a preferred service provider,
its ability to attract and retain such clients will be adversely affected. As
a result, the Company may lose its existing clients or have difficulty
acquiring new clients. There can be no assurance that the Company will be able
to compete effectively against present and future competitors or that
competitive pressures will not have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company competes for qualified IT professionals and viable acquisition
candidates. There can be no assurance that the Company will be successful in
attracting, hiring and retaining such personnel or in implementing its
acquisition program. See "--Dependence on Availability of Qualified IT
Professionals" and "Business--Competition."
RISKS RELATED TO ACQUISITIONS
The Company intends to expand its operations through the acquisition of
additional IT consulting services businesses. There can be no assurance that
the Company will be able to identify, acquire or profitably manage additional
businesses, if any, without substantial costs, delays or other operational or
financial problems.
8
<PAGE>
Acquisitions may also involve a number of special risks, including diversion
of management's attention, failure to retain key acquired personnel, risks
associated with unanticipated events, circumstances or legal liabilities and
amortization of acquired intangible assets, some or all of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Further, if competition for acquisition candidates
increases, the purchase price of such target companies may increase to the
point that otherwise viable acquisitions become cost prohibitive. Client
satisfaction or performance problems at a single acquired firm could have a
material adverse effect on the reputation of the Company as a whole. In
addition, there can be no assurance that acquired businesses, if any, will
achieve anticipated revenues and earnings. The inability of the Company to
implement and manage its acquisition strategy successfully may have an adverse
effect on the future prospects of the Company. See "Business--Operating
Strategy" and "--Acquisition Strategy."
NEED FOR ACQUISITION FINANCING
The Company currently intends to finance future acquisitions by using cash,
notes and/or shares of its Common Stock for all or a portion of the
consideration to be paid. If the Common Stock does not maintain a sufficient
value, or potential acquisition candidates are unwilling to accept Common
Stock as part or all of the consideration for the sale of their businesses,
the Company may be required to use more of its cash resources, if available,
to execute its acquisition program. If the Company does not have sufficient
cash resources, its growth could be limited unless it is able to obtain
additional capital through debt or equity financing. There can be no assurance
that the Company will be able to obtain such financing if and when it is
needed or that, if available, it will be available on terms the Company deems
acceptable. As a result, the Company might be unable to successfully implement
its acquisition strategy, which may have an adverse effect on the future
prospects of the Company. The Company has a $40.0 million syndicated revolving
line of credit facility (the "Credit Line") available for working capital and
other general corporate purposes, which may include acquisitions. There can be
no assurance, however, that the Credit Line will be sufficient for the
Company's needs. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources,"
"Business--Operating Strategy" and "--Acquisition Strategy."
ABSENCE OF LONG-TERM CONTRACTS; CLIENT CONCENTRATION
A significant amount of the Company's revenues are primarily derived from
services provided in response to client requests or on an assignment-by-
assignment basis, and the Company's engagements, generally billed on a time
and materials or arranged fee basis, are terminable at any time by clients,
generally without penalty. There can be no assurance that existing clients
will continue to use the Company's services at historical levels, if at all.
In addition, 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. There can be no assurance that these clients will continue
to engage the Company for additional projects or do so at the same revenue
levels. Loss of a major client could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Clients."
YEAR 2000 CONVERSION EFFORTS
As the Year 2000 approaches, many date sensitive computer applications will
fail because they are unable to process dates properly beyond December 31,
1999. Businesses will thus be required to devote significant resources to
converting their information systems over the next three years. In the event
that Year 2000 conversions result in a significant increase in competition for
IT professionals or the Company's clients devote substantial resources to such
conversions and decrease their expenditures on projects worked on by the
Company's IT professionals, the Company's business, financial condition and
results of operations may be materially adversely affected.
9
<PAGE>
POSSIBLE FLUCTUATION OF RESULTS AND VOLATILITY OF STOCK PRICE
The Company's revenues, gross margins and operating margins for any
particular quarter are generally affected by business mix and billing rates,
resource requirements, marketing activities, retention rates and the timing
and size of client projects. Results for any quarter are not necessarily
indicative of the results that the Company may achieve for any subsequent
fiscal quarter or for a full fiscal year and may cause the market price of the
Common Stock to fluctuate, perhaps substantially. In addition, in recent years
the stock market in general, and the shares of high growth companies in
particular, have experienced extreme price fluctuations, often for reasons
unrelated to the performance of a particular company's business. These broad
market and industry fluctuations may adversely affect the market price of the
Common Stock.
PROJECT RISKS
The Company's IT professionals are often deployed in the workplace of other
businesses. An attendant risk of such activity includes possible claims of
discrimination and harassment, employment of illegal aliens and other similar
claims. A failure to avoid these risks may result in negative publicity for
the Company and the payment by the Company of money damages or fines. Although
the Company historically has not had any significant problems in this area,
there can be no assurance that the Company will not experience such problems
in the future.
The Company is also exposed to liability with respect to actions taken by
its IT professionals while on assignment, such as damages caused by employee
errors, misuse of client-proprietary information or theft of client property.
Due to the nature of the Company's assignments and the potential liability
with respect thereto, there can be no assurance that any insurance maintained
by the Company will be adequate to cover any such liability. To the extent
that such insurance is not sufficient in amount or scope to cover a loss, the
Company's business, financial condition and results of operations could be
materially adversely affected.
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
Participating Preferred Stock of the Company at an exercise price of $90.00.
Further, each Right gives the holder the right to buy one share of 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, and 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. See "Description of Capital
Stock."
10
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,750,000 shares of
Common Stock offered by the Company hereby (assuming a public offering price
of $23.69 per share), after deducting the underwriting discounts and
commissions and estimated offering expenses, are estimated to be $38.7 million
($48.8 million if the Underwriters' over-allotment option is exercised in
full). The Company intends to use a portion of the net proceeds to repay
indebtedness outstanding under the Credit Line, which was incurred by the
Company primarily to finance the cash portion of acquisitions and for working
capital purposes. At February 23, 1998, there was approximately $16.0 million
outstanding under the Credit Line, approximately $2.0 million of which bears
interest at the rate of 7.2% per annum and approximately $14.0 million of
which bears interest at the rate of 8.5% per annum. The Credit Line expires in
September 2001. Any remaining net proceeds will be used for working capital
and other general corporate purposes, including future acquisitions. See
"Business--Acquisition Strategy." Pending such use, the net proceeds to be
received by the Company will be invested in short-term, investment grade,
interest-bearing securities. The Company will not receive any proceeds from
the sale of shares of Common Stock by the Selling Stockholders.
The Company continually reviews and evaluates acquisition candidates to
complement and expand its existing business, and is currently at various
stages of evaluation and discussion with a number of such candidates. The
Company has not entered into a definitive purchase agreement with respect to
any acquisition candidate, and no portion of the net proceeds has been
allocated to specific acquisitions; however, it is possible that a substantial
portion of the net proceeds will be used for future acquisitions.
PRICE RANGE OF COMMON STOCK
Since February 20, 1998, the Common Stock has been listed on the NYSE under
the symbol "CGZ." From February 14, 1996 to February 19, 1998, the Common
Stock was quoted on the Nasdaq National Market, under the symbol "COTL." Prior
to February 14, 1996, there was no public market for the Common Stock. The
following table sets forth, for the periods indicated, the high and low sales
prices for the Common Stock as reported on the Nasdaq National Market through
February 19, 1998 and includes the high and low sales price information on the
NYSE subsequent to such date:
<TABLE>
<CAPTION>
HIGH LOW
------ -------
<S> <C> <C>
1996 FISCAL YEAR
February 14, 1996 through March 31, 1996................ $11.75 $ 8.00
1997 FISCAL YEAR
April 1, 1996 through June 30, 1996..................... $21.50 $ 11.13
July 1, 1996 through September 30, 1996................. $18.50 $ 11.75
October 1, 1996 through December 31, 1996............... $25.25 $ 15.63
January 1, 1997 through March 31, 1997.................. $26.75 $ 8.00
1998 FISCAL YEAR
April 1, 1997 through June 30, 1997..................... $14.38 $ 7.25
July 1, 1997 through September 30, 1997................. $20.63 $ 12.75
October 1, 1997 through December 31, 1997............... $22.88 $ 17.13
January 1, 1998 through February 23, 1998............... $24.00 $ 18.88
</TABLE>
On February 23, 1998, the last reported sales price of the Common Stock, as
reported on the NYSE, was $23.69 per share. On February 20, 1998, there were
118 stockholders of record of the Common Stock.
11
<PAGE>
DIVIDEND POLICY
The Company intends to retain all of its earnings, if any, to finance the
expansion of its business and for general corporate purposes and does not
anticipate declaring or paying any dividends on its Common Stock for the
foreseeable future. In addition, the Company's Credit Line includes
restrictions on the ability of the Company to pay dividends without the
consent of the lender.
CAPITALIZATION
The following table sets forth the capitalization of the Company at December
31, 1997, on an actual basis and as adjusted to reflect the issuance by the
Company of 1,750,000 shares of Common Stock offered hereby and the application
of the estimated net proceeds therefrom at an assumed public offering price of
$23.69 per share, the last reported sales price on the NYSE on February 23,
1998. See "Use of Proceeds." This table should be read in conjunction with the
consolidated financial statements, including the notes thereto, contained
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
AS
ACTUAL ADJUSTED
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................. $ 684 $ 27,069
======== ========
Short-term borrowings and current portion of long-term
debt..................................................... $ 234 $ 234
======== ========
Long-term debt, net of current portion.................... $ 12,296 $ --
Stockholders' equity:
Preferred Stock, $.01 par value per share, 500,000 shares
authorized; no shares issued or outstanding............. -- --
Common Stock, $.01 par value per share, 100,000,000
shares authorized; 11,713,596 shares issued and
outstanding (13,463,596 shares as adjusted) (1)......... 117 135
Additional paid-in capital................................ 27,399 66,062
Retained earnings......................................... 7,134 7,134
-------- --------
Total stockholders' equity............................. 34,650 73,331
-------- --------
Total capitalization................................... $ 46,946 $ 73,331
======== ========
</TABLE>
- --------
(1) Excludes 2,020,327 shares reserved for future issuance upon exercise of
outstanding options and reserved for issuance under the Company's 1995
Long-Term Incentive Plan, and 213,979 shares reserved for future issuance
under the Company's Employee Stock Purchase Plan.
12
<PAGE>
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.
14
<PAGE>
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>
BUSINESS
OVERVIEW
The Company is a software professional services firm providing IT consulting
services, including staff augmentation, project management and outsourcing
services, to businesses with complex IT operations. The Company operates
offices in 22 metropolitan areas across the United States. The Company
provides its clients with IT professionals who are proficient in a wide
variety of hardware and software platforms. Cotelligent's IT professionals are
primarily billed on a time and materials basis and offer clients specialized
expertise in implementation services including applications design,
programming, development and maintenance, client/server design and
development, systems software design, systems engineering, systems
integration, intranet/internet design and development and network design and
management services. At December 31, 1997, the Company had approximately 2,700
employees, including a technical staff of approximately 2,200 IT
professionals, providing services to approximately 550 clients across a broad
spectrum of commercial industries throughout the United States, including
telecommunications, technology and financial services. The Company's clients
include AT&T Corp., AT&T Wireless Services, Bell Communications Research,
Inc., Cargill Financial Services Corporation, Frito-Lay, Inc., JC Penney
Company, Inc., Liberty Mutual Insurance Co., Lucent Technologies, Inc., MCI
Telecommunications Corp., Mercantile Bankshares Corporation, Microsoft
Corporation, Monsanto Company, Office Depot, Inc., Pacific Bell and U S West,
Inc.
The IT consulting services industry is expected to experience continued
growth over the next several years. According to Dataquest estimates, United
States spending for IT professional services (excluding training and
education) will be approximately $68 billion in 1998 and is projected to grow
at a compound annual growth rate of 14% through 2000. This increased demand
for IT consulting services is largely fueled by: (i) increasing pressure on
businesses to generate timely, accurate business information; (ii) the
proliferation of more powerful and less expensive computer hardware/software;
(iii) the trend away from centralized mainframes and custom applications to
personal computer-driven systems employing a broad range of complex software
applications; and (iv) the emergence of the Year 2000 issue, which has caused
companies to seek out and implement more advanced IT systems and solutions. As
a result, businesses have invested, and are likely to continue to invest,
significant amounts of capital to build, support and update their IT
infrastructures. Concurrent with this increase in IT-related expenditures,
competition has pressured corporations to reduce or eliminate costs unrelated
to core operational competencies. As such, businesses are increasingly turning
to IT consulting services companies such as Cotelligent to help them
appropriately staff and manage a wide array of IT consulting and support
needs. By contracting with Cotelligent, corporations can access skilled IT
professionals on an "as-needed" basis, converting their fixed labor costs into
variable costs and reducing their costs of recruiting, hiring, training and
terminating permanent employees.
The Company's goal is to be a leading nationwide provider of IT consulting
services, including staff augmentation, project management and outsourcing
services, to businesses with complex IT operations. To accomplish this goal,
the Company has implemented a business strategy consisting of two distinct
components. First, the Company has adopted an operating strategy for internal
growth by: (i) creating an infrastructure to effectively recruit and retain
qualified IT professionals; (ii) leveraging its local client relationships in
a coordinated effort to provide services on a national scope to its larger
accounts; (iii) operating with a decentralized management structure to foster
an environment in which best practices are shared on a Company-wide basis,
allowing successful strategies to be implemented at various operating
locations; (iv) leveraging the Cotelligent brand by transitioning from the
local names of the operating units to Cotelligent's national identity; and (v)
pursuing strategic alliances with nationally established technology companies
such as Microsoft Corporation, through which the Company will enhance its
technical support capabilities and strengthen certain of its key business
relationships.
As the second part of its business strategy, the Company intends to broaden
the geographic and technical scope of its operations by acquiring established
firms that offer complementary IT consulting services in new or existing
21
<PAGE>
regions and that will expand the depth and breadth of services provided to
clients. The IT consulting industry is highly fragmented. According to INPUT,
an international research firm, approximately 3,500 IT consulting services
businesses with annual revenues in excess of $1 million provide services and
expertise in the United States. As a result of this fragmentation, the IT
consulting services industry has recently experienced consolidation as smaller,
regional firms have become less able to effectively compete with larger,
national IT consulting services firms which often possess greater access to
capital and IT professionals as well as the service capabilities required to
serve large companies that are consolidating their vendor lists. To capitalize
on this industry fragmentation and trend towards consolidation, the Company has
developed an acquisition strategy based on a philosophy to: (i) purchase local
or regional IT consulting services firms with successful, proven operating
models; (ii) allow the acquired company to operate in a manner consistent with
its historical practice and as dictated by local market conditions, rather than
converting the operations to a standardized national business model; and (iii)
improve the acquired company's profitability by passing on the operating and
financial benefits associated with national firm status. The Company believes
that this philosophy differentiates Cotelligent from other potential acquirors
and is attractive to acquisition candidates who wish to preserve their
corporate culture. The Company also believes that this acquisition strategy
will allow it to secure assignments from clients seeking to do business with
national IT consulting services firms, as well as regional businesses seeking
local relationships.
THE IT CONSULTING SERVICES INDUSTRY
IT consulting services represent a significant and rapidly expanding market
opportunity. According to Dataquest, a market research firm, United States
spending for IT professional services (excluding training and education) will
be approximately $68 billion in 1998 and is projected to grow at a compound
annual rate of 14% through 2000. The Company believes that the following are
the three key industry drivers:
Technological Evolution. Computer hardware and software technology has
shifted from centralized mainframes and custom applications to decentralized,
scalable architectures centered on low cost personal computers, client/server
architectures, local and wide area networks, shared databases,
intranet/internet applications and generally available applications software
packages. As a result, the rate of new technology introduction and spending by
corporations has accelerated and the need for a larger and more skilled
technology staff has increased.
Increase in Outsourcing Opportunities. Recent economic factors have forced
large organizations to focus on core competencies and rely more upon third
parties for a variety of IT consulting services. As a result, IT services
managers are charged with developing and supporting increasingly complex IT
systems while working under budgetary pressures within their own organizations.
Faced with the challenges of adequately serving the needs of their customers
and employees, companies are increasingly turning to skilled and experienced
outside organizations to help them appropriately staff and manage their IT
requirements. This provides the following benefits:
Access to Specialized Skills on an As-Needed Basis. "As-needed access"
avoids both the need to maintain a larger permanent staff and
implementation delays involved with retraining staff as technologies and
applications change.
Converts Fixed Costs into Variable Costs. Fixed labor costs are converted
into variable costs by better matching staffing levels to actual needs.
Moreover, the costs of recruiting, hiring and terminating permanent
employees are reduced.
Allows Management to Focus on Core Business Issues. Management is able to
focus on strategic business issues rather than on maintaining or
implementing changes in the IT infrastructure.
22
<PAGE>
Trend Toward Consolidation. The IT consulting services industry is highly
fragmented and is experiencing consolidation. According to INPUT approximately
3,500 IT consulting services businesses with annual revenues in excess of $1.0
million provide such services and expertise in the United States. In recent
years, the industry has experienced an increase in consolidation activity
driven by several factors. First, large buyers of IT consulting services are
consolidating their vendors to the few that can provide a full range of
services nationwide. Second, higher level professionals (such as network
administrators and software engineers) are attracted to larger firms that can
offer jobs across the country. Third, larger firms often achieve operational
efficiencies by providing centralized support services to their operating
units. Finally, larger firms have, in many cases, successfully accessed the
public equity markets, thereby enabling them to use their publicly traded stock
to fund acquisitions.
SERVICES OFFERED WITHIN THE IT CONSULTING SERVICES INDUSTRY
Services offered within the IT consulting services industry can be divided
into three categories based upon the lifecycle of IT projects: (i) strategic
planning services (pre-implementation services); (ii) development and
integration services (implementation services); and (iii) maintenance and
support services (post-implementation services). The Company has made a
strategic decision to focus on providing development and integration services
under the implementation services category.
Strategic Planning Services. Pre-implementation services include strategic
planning and consulting, requirements definition studies and systems planning
and design. These services are provided on a project basis by a small number of
national and international professional services firms and normally command
premium billing rates. The professional staffs of these firms are generally
salaried employees. Barriers to entry in this category are high due to the
complexity of projects and level of expertise required.
Development and Integration Services. Implementation services, which
represent the Company's primary business, are conducted on a project or staff
augmentation basis and include software applications design, programming,
development and maintenance, client/server design and development, systems
software design, systems engineering, systems integration, intranet/internet
design and development and network design and management services. This
category within the IT consulting services market is highly fragmented and is
serviced by several thousand local and regional firms, as well as several
national firms. Historically, the barriers to entry in this market have been
low. However, as technology has become more sophisticated, the knowledge and
expertise required to enter this sector has increased. Firms in this market
category utilize salaried employees, hourly employees and independent
consultants in providing services.
Maintenance and Support Services. Post-implementation services include
facilities management, systems maintenance, help-desk assistance and education.
These services are provided on a project or staff augmentation basis. This
market is also highly fragmented and has low barriers to entry. Firms in this
category utilize salaried employees, hourly employees and independent
consultants in executing their assignments.
Service providers in the IT consulting services industry vary by category and
geographic area and include local, regional and niche firms, national providers
of IT consulting services, several of the "Big Six" accounting firms, the
professional service groups of computer equipment companies and large-scale
system integrators.
OPERATING STRATEGY
The Company's goal is to be a leading nationwide provider of IT consulting
services, including staff augmentation, project management and outsourcing
services, to businesses with complex IT operations. Key elements for achieving
this objective include the following:
Recruit and Retain Qualified IT Professionals. The Company's goal is to be
the "employer of choice" of the IT professionals in the markets in which it
operates. The Company's strategy of acquiring established and reputable service
providers in local and regional markets stems from its belief that such firms
are closest to the
23
<PAGE>
pool of IT professionals servicing the clients in such markets. These firms'
strong reputations tend to attract and foster favorable working relationships
with local IT professionals, which enhances their recruiting capabilities when
new client requirements arise. To recruit and retain qualified IT
professionals, the Company offers its professionals training programs, the
ability to participate in the Company's Employee Stock Purchase Plan, 401(k)
Plan and Section 125 Plan, as well as benefits packages that the Company
believes are competitive with those generally offered in the consultant's
region. In addition, the Company's broad client base gives the Company's IT
professionals the opportunity to work on a wide range of challenging projects
and assignments across the Company's geographically dispersed network of
operating units. Finally, the Company's decentralized management structure
emphasizes the importance of its operating units retaining the corporate
culture and operating style present prior to acquisition by the Company and
encourages management of its operating units to offer its IT professionals the
particular benefits and incentives viewed as important in its regional
operating area.
Enhance Client Relationships. The Company has historically focused its
client marketing efforts on companies with substantial recurring needs for
supplemental applications or software development, systems integration and
network design and management services, which tend to be large companies. The
combined resources and geographic dispersion of the operating units enables
the Company to continue to focus its marketing efforts on clients requiring
national service capabilities. To enhance these marketing efforts, the Company
is in the process of implementing a national business development team which
will expand and coordinate the Company's marketing focus towards more
effectively serving national clients and will assist the operating units in
the bidding process for projects involving national accounts. Further, the
Company believes that its commitment to consistently providing high quality
services has enabled it to establish and maintain long-term relationships with
its clients. During the last three fiscal years, on average approximately 88%
of the Company's revenues were derived from clients to whom services or
solutions had been provided in the preceding year. In addition, the Company
believes that the access and goodwill derived from these client relationships
provide it with significant advantages in marketing additional services and
solutions to such clients, both regionally and nationally.
Operate with Decentralized Management Structure; Share Information and
Expertise. The Company fosters a communications environment centered upon a
decentralized management structure to provide quality client service, a
motivating environment for its professional staff and the ability to give each
operating unit direct access to the substantial collective resources of the
entire Cotelligent enterprise. The Company believes that many of its national
competitors that have acquired IT consulting services firms have homogenized
their operating office and professional service operations, potentially
adversely affecting the continuity and quality of service and the motivation
of its employees.
The Company's operating unit presidents and senior management have day-to-
day responsibility for management of professional services and operating and
administrative activities at the local and regional levels in a manner
consistent with their historical practice and as dictated by local market
conditions. Executive management, acquisitions, finance, IT, marketing,
planning, legal and administrative support are managed or provided centrally.
The Company believes that this approach enables its operating units to
maintain a high level of client service and contact, while allowing them to
draw upon the collective resources of the Company as a whole. This also allows
its operating units to integrate new ideas and systems into their respective
operations and facilitates the active sharing of knowledge, technical
expertise, best practices, client relationships and other resources. Through
these practices, the Company is able to integrate and leverage new ideas
resulting in enhanced systems, improved service offerings and opportunities
for growth. The execution of a coordinated Company-wide strategy across all
operating units, combined with the pursuit of a common goal, has proven
effective in management and client service activities.
Management also seeks to integrate its operating units gradually and
naturally. Over time, the Company believes that the incorporation of best
practices, combined with sharing of information and expertise through the
Company's centralized systems, will lead the operating units to integrate
synergistically. To foster further integration, the Company has established a
"Presidents' Council," which consists of Cotelligent's executive
24
<PAGE>
management and the presidents of each of the operating units. Through bi-
weekly teleconferences and quarterly meetings, the Presidents' Council shares
best practices, discusses business trends and opportunties and reviews
operating unit and Company-wide financial and operating measures.
Leverage the Cotelligent Brand. The Company is engaged in an initiative to
transition from the brand names of the local and regional companies it has
acquired, and will acquire, to the Cotelligent brand. Prior to starting this
process, the Company received the endorsement of the heads of each of its
operating units and has now engaged them in facilitating this process. In
addition to changing the names of all of the operating units to Cotelligent
within the next 12 to 18 months, the Company has retained consultants to
assist in building the Cotelligent brand. With guidance from the Company,
these consultants have developed a "Migration Plan" and an "Orientation Plan."
The Migration Plan, in a three stage process, details the steps that each
operating unit will follow in transitioning from its former brand to the
Cotelligent brand. The Migration Plan also sets forth a specific protocol for
the printing and presentation of the Cotelligent trademark and signature. The
Orientation Plan provides guidance for educating Company employees, clients
and the broader market in presenting the new, combined Cotelligent entity. The
Company expects this process to result in a combined culture based on the
values, philosophies, environment and modes of business that have successfully
evolved at the local level over many years. The Company believes this gradual
transition will help to properly plan for and execute broad changes with a
minimum of business disruption.
Pursue Strategic Alliances. The Company seeks to form strategic alliances
with established companies where opportunities exist to jointly market the
services and capabilities of both organizations. The Company currently has
such alliances with Microsoft Corporation, Lawson Software, PeopleSoft, Tandem
and others. Through its strategic alliance with Microsoft, for example, the
Company and Microsoft jointly provided an office automation solution to one of
the Company's clients. With the Company as project manager, Microsoft's state-
of-the-art technology was integrated into the client's desktop configuration
as part of the Company's assignment to re-engineer the client's technical
infrastructure. Through acquisitions, the Company gained operating units that
are Microsoft solution provider program partners, and two of which are
Microsoft authorized training centers. One of the Company's operating units, a
PeopleSoft implementation partner, presents the Company with the opportunity
to become a nationwide implementation partner of a rapidly growing enterprise-
wide software company. This operating unit's recent agreement with PeopleSoft
to become part of its "Select" program further enhances this relationship and
offers Cotelligent an entrance into middle market opportunities. The Company
intends to continue to strengthen its business relationships with these and
other strategic partners, and expects that more operating units will
participate in such alliances in the future in an effort to enhance the
Company's overall technical support capabilities and software applications
expertise.
ACQUISITION STRATEGY
The Company seeks to acquire successful companies that add to the range of
complementary implementation services and expertise available within the
Company, as well as diversify the Company's existing client base. The Company
believes that there are many independent firms that are attractive acquisition
candidates due to: (i) the highly fragmented nature of the IT consulting
services industry; (ii) the dynamic growth in spending on services offered by
the IT consulting services industry; (iii) the need for capital to fuel the
expansion of many independent firms; (iv) the wide geographic scope and the
evolving purchasing and outsourcing patterns of the Company's present and
potential clients; and (v) the trend of large corporations with recurring
needs to reduce the number of implementation services providers to the
advantage of those companies offering broad, national coverage.
As part of its acquisition strategy, the Company utilizes primary entry
acquisition and tuck-in strategies for expansion into targeted metropolitan
areas. Primary entry acquisitions are acquisitions which create a significant
presence for the Company in geographic markets in which the acquisition
candidate is located. There may be more than one primary entry acquisition in
the larger metropolitan markets. The Company intends, where possible, to make
a primary entry acquisition in a targeted area by acquiring an established,
high quality local
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company. In most instances involving a primary entry acquisition, the Company
expects to retain the management, sales and recruiting personnel while seeking
to improve the acquired company's profitability by centralizing executive
management, acquisitions, finance, IT, marketing, planning, legal and
administrative functions, thereby allowing newly acquired businesses to draw
upon the collective resources of the Company as a whole. In contrast to a
primary entry acquisition, a tuck-in acquisition is one in which the acquired
company is immediately integrated into one of Cotelligent's existing operating
units. The Company intends to make tuck-in acquisitions where feasible.
The Company believes that its approach to its acquired companies retaining
day-to-day responsibility for their operations, its decentralized management
philosophy, the access to the increased capital and human resources offered by
association with a larger, publicly traded company and the ability to become
part of a more geographically diverse company, will make the Company an
attractive acquiror of additional businesses. The Company also intends to
pursue growth opportunities internationally, thereby enabling it to provide
better service to its multinational clients.
In connection with its acquisition strategy, the Company has established a
profile to evaluate the compatibility of an acquisition target with the
Company's growth and business strategies. In identifying primary entry
acquisition candidates, the Company seeks to locate companies which: (i) have
experienced past success as providers of IT consulting services; (ii) possess
a strong local or regional presence; (iii) provide their IT professionals with
a corporate culture which will be compatible with the Company's culture; (iv)
have experienced and knowledgeable management that desire to remain in control
of the candidate's local operations yet will vigorously promote Cotelligent
after the consummation of the acquisition by the Company; and (v) service a
number of national clients. The Company believes that such an evaluation will
help the Company locate attractive acquisition candidates whose addition to
the Company will be consistent with the Company's philosophy, national
marketing efforts and existing infrastructure for sharing best practices among
the operating units.
Since the IPO, the Company has acquired sixteen IT consulting services
firms, which have strengthened the Company's operations by diversifying its
base of Fortune 1000 clients, expanding its national presence, broadening its
nationwide resource pool and client base and increasing the Company's
capabilities and expertise. Eight acquisitions were consummated in the fiscal
year ended March 31, 1997 and, to date, eight acquisitions have been
consummated in the fiscal year ending March 31, 1998. As consideration for
future acquisitions, the Company intends to use various combinations of Common
Stock, cash and notes.
SERVICES
Cotelligent is a software professional services firm providing IT consulting
services, including staff augmentation and project management and outsourcing
services, to businesses with complex IT operations. For the nine months ended
December 31, 1997, staff augmentation services and project management and
outsourcing services accounted for 86% and 14%, respectively, of Cotelligent's
revenues. Within these categories, the Company's scope of implementation
services include the following:
. Applications design, programming, development and maintenance
. Client/server system design and development
. Systems software design
. Systems engineering
. Systems integration
. Intranet/internet design and development
. Network design and management services
. Systems and business process re-engineering
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. Creation and execution of IT migration plans
. Hardware and software selection
Staff Augmentation Assignments. IT staff augmentation assignments require
the Company to provide highly skilled and trained IT professionals to augment
the internal IT personnel and end-user groups of major corporations. The
Company provides its clients with IT professionals who are proficient at
providing services related to a wide variety of hardware and software
platforms and who are available to clients for either short-term or long-term
support. In these cases, the client or prospective client circulates a job
specification to the Company describing the technical qualifications of the
position to be filled. Using the resources of its account management and
recruitment organizations, the Company works to match the specified
qualifications with the technical talents and availability of employees of the
Company, or consultants known to the Company. Staff augmentation work is
performed under the direction of the client for the duration of an assignment,
which is typically three to nine months.
Project Management and Outsourcing Services. When hired on a project basis,
the Company manages the design, development, and implementation of a custom
software solution or a turnkey software system. The Company staffs these
engagements with project teams including project managers, systems and
business analysts, application system programmers, network service technicians
and other IT professionals and assumes responsibility for the project from
requirements definition to end user training. Project management engagements
typically last one to two years.
In an outsourcing engagement, a client transfers responsibility for an
entire IT function or application systems maintenance to Cotelligent. The
transfer, or outsourcing, of these functions and systems often results in the
client's employees becoming the Company's employees. In this way, the client
is relieved of the burden of retaining functional or system support personnel
as full-time equivalents and passes the contractual responsibility for the
associated maintenance activities to a third party. These services are offered
on a fixed fee basis.
As an example of Cotelligent's outsourcing services, on behalf of a major
telecommunications client, the Company has undertaken full maintenance and
support responsibility for the client's core application that provides crucial
recordkeeping and scheduling information to the client. The client has
retained a project management role and is responsible for determining the new
features to be added to the application, which are then implemented into the
application by Cotelligent. This engagement employs approximately 60 full-time
Company employees.
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RECRUITING
Recruiting skilled IT professionals is integral to the Company's success.
The Company uses traditional recruiting methods, such as a presence at local
and regional technical colleges and newspaper and technical periodical
classified advertising. The Company also has agreements with Westech ExpoCorp
and The Lendman Group which allow all of its operating units to participate in
specialized national and regional job fair networks. In addition, the Company
employs less traditional methods, including the use of the Internet through
skill-specific user groups, World Wide Web page advertisements, on-line skills
networks, resume referral services, out-placement agencies and the Company's
skills/resume retrieval networks. To date, the Company has also recruited a
small percentage of its IT professionals from such foreign markets as India,
Europe and Australia. The Company anticipates that if it is successful in
acquiring one or more United States companies that have an international
presence, it would enhance this international recruiting capability. The
Company currently maintains a staff of approximately 100 full-time recruiters.
Each applicant is interviewed by the Company's recruiting personnel.
Technical applicants are also required to complete a questionnaire regarding
skill levels, past professional experience, education and availability and are
also asked to provide technical references. The Company has entered into an
agreement with a national technical testing company that allows each operating
unit to test the technical competence of candidates prior to hiring. Once
qualified, the candidate's profile, relevant skills and experience are scanned
into a database which can be searched based on a number of different criteria,
including specific skills and qualifications. The Company regularly updates
its databases to reflect changes in employee skills, experience or
availability. To place employees in client organizations more efficiently, the
Company is currently implementing a common client information and candidate
tracking system.
The Company maintains a database with over 150,000 IT professionals with a
wide range of technical skills. At December 31, 1997, the Company had a staff
of approximately 2,200 IT professionals providing services to approximately
550 clients across a broad spectrum of commercial industries throughout the
United States, including the telecommunications, technology and financial
services industries.
TRAINING
Cotelligent believes that training plays a major role in the ability of an
IT consulting company to recruit and retain talented IT professionals. The
Company is able to leverage the skills of certain of its operating units to
provide training throughout the entire organization. For example, certain
operating units are authorized Microsoft training centers at which Cotelligent
employees, clients and IT professionals seeking to expand their skills are
instructed on Microsoft tools and applications. These units offer the full
Microsoft Official Course Curriculum. Based on this training, Cotelligent's IT
professionals can become, for example, Microsoft Certified Systems Engineers
or Microsoft Certified Solutions Developers. In addition, the Company provides
staff management that creates training programs to help consultants prepare
for official certification of competency on Microsoft applications software
systems.
MARKETING, SALES AND ACCOUNT MANAGEMENT
The Company focuses its marketing efforts on businesses with substantial
recurring needs for applications or software development support, which tend
to be large companies. As the Company has expanded its operations nationally,
there is an increasing focus on supporting national accounts with multiple
operating sites. The development needs of such businesses can provide
opportunities for major projects that may extend for multiple years or
generate additional assignments. The Company has also experienced increased
opportunity in rapidly growing mid-sized companies. With the implementation of
client/server technology, the Company believes that there is a growing need
among mid-sized companies for technical assistance and applications support
and intends to expand this aspect of its business.
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The Company markets its services through account managers located in each
operating unit. Approximately 100 people are engaged in account marketing and
management full time. Many of the Company's operating units use an account
team strategy in their marketing efforts. These account teams are comprised of
both account managers and recruiters working closely to coordinate client
services activities. Assigning a team to key accounts creates the opportunity
to service a client's needs more quickly and efficiently and provides more
marketing opportunities because Company personnel know specifically who is
responsible for the service activities. They are also generally more aware of
a client's technology staffing needs, methodologies and budgets. Account
managers work as members of the team, focusing on identifying and
understanding a client's needs while recruiters on the team focus on finding
qualified IT professionals to meet the needs of the client. Performance
bonuses and commissions constitute a significant portion of the total
compensation of account managers and generally are based upon the
profitability of the business generated.
The Company is expanding its marketing efforts by centrally coordinating its
operating units' responses to requests for proposals from current national
clients. The Company is pursuing new client accounts primarily in those
geographic areas presently serviced by its operating units. The Company
believes that the size, scale and scope of its growing operations will create
opportunities to more effectively compete in vendor list selection, large
project engagements, staff augmentation assignments and outsourcing
opportunities.
The Company believes that its decentralized structure puts it in the
advantageous position of bidding on assignments as either a national services
provider or a regional services provider, depending on the needs and desires
of a particular client. The Company believes it will be able to successfully
secure projects from clients seeking to only do business with national
providers of IT consulting services, to whom the Company will stress its size
and national presence. The Company will also secure projects and assignments
from clients seeking relationships with local and regional firms, to whom the
Company will highlight its established regional presence and localized
management.
CLIENTS
As a result of the Company's broad client base, it does not rely upon any
one client for a significant percentage of revenues. The Company has no
clients that accounted for more than 8% of the Company's revenues for the nine
months ended December 31, 1997 and the Company's ten largest clients accounted
for approximately 31% of revenues in the same period.
During the nine months ended December 31, 1997, approximately 25 clients
each provided the Company with more than $1 million in revenue. The following
table sets forth a selected list of such clients of the Company:
TELECOMMUNICATIONS
AT&T Corp.
Bell Communications Research, Inc.
Lucent Technologies, Inc.
MCI Telecommunications Corp.
US West, Inc.
Western Wireless
TECHNOLOGY
Amdahl
Hewlett-Packard
Microsoft Corporation
FINANCIAL SERVICES
Liberty Mutual Insurance Co.
The Progressive
Corporation
Mercantile Bankshares Corporation
OTHER
Medtronic
Monsanto Company
Ortho Diagnostics Systems
State of Georgia
MANAGEMENT INFORMATION SYSTEM
The Company believes in applying IT solutions to maximize productivity and
aid in the management of its own business. Consequently, the Company has
installed an enterprise-wide communications network, or intranet, and is in
the process of implementing an integrated management information system
("MIS").
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Intranet. Early in the Company's development, management realized the
importance of bringing the operating units, as well as any acquired companies,
into an enterprise-wide communications network. In April 1996, under the
supervision of a newly created Information Technology Division ("ITD"), the
Company implemented an automated communications infrastructure, or intranet,
to provide Cotelligent's employees with a way to easily communicate. This
intranet is Microsoft NT based and includes Microsoft Office 97, Exchange and
related tools. Newly acquired companies are continually integrated into the
network, which currently consists of approximately 375 employee workstations.
The ITD currently consists of 23 full-time Cotelligent employees, whose
responsibilities include the development, deployment, monitoring and
maintenance of the Company's communications network.
Management Information System. In August 1996, the Company embarked on an
initiative to define business requirements, evaluate turnkey systems meeting
these requirements and implement an enterprise-wide, fully integrated MIS. The
application systems being implemented as part of this initiative include
finance, accounting and management reporting, human resource management
reporting and client and candidate tracking. The Company selected three
application software systems which are compatible with one another and which
reside on an Oracle platform. These new systems are in the process of being
implemented.
The Company believes its investment in this MIS should help it to improve
productivity and enhance its competitive position. As a "backbone" for all
administrative and operating information, this MIS offers management at all
levels on-line access to information on a real time basis. These systems
should add consistency to back office business practices across the Company's
operating units, thereby providing management with more direct control over
the conduct of the Company's operations. In addition, the Company has begun
the process of building intranet applications to support internal practices.
As with its other MIS initiatives, the Company is implementing application
systems and tools internally that add value to its operating activities and
improve the sharing of knowledge and information at all organization levels
and across its entire geographic network.
COMPETITION
The IT consulting services market is highly competitive, fragmented and
served by numerous firms, many of which serve only their respective local
markets. The market includes participants in a variety of market segments,
including local, regional and national systems consulting and integration
firms, professional service divisions of application software firms, the
professional service groups of computer equipment companies, management
information systems outsourcing companies, certain "Big Six" accounting firms
and general management consulting firms. The Company's competitors, which may
vary depending on geographic region and the nature of the service(s) being
provided, may have significantly greater financial, technical and marketing
resources and generate greater revenues than the Company. Some of these same
companies, from time to time, retain the services of the Company's operating
units to subcontract IT professionals for their clients' requirements.
The Company believes that the principal competitive factors in the IT
consulting services industry include quality of service, reputation,
responsiveness to client needs, the number and availability of qualified IT
professionals, price, project management capability, technical expertise, size
and scale of operation. The Company intends to remain competitive as a result
of its (i) ability to locate, place and retain IT professionals with strong
performance capabilities and experience, (ii) capability on both a regional
and national level, including its ability to market itself and secure
assignments from clients seeking to do business with national IT consulting
services firms as well as regional businesses seeking local relationships, and
(iii) ability to provide effective management of account relationships and
rapidly respond to clients' ongoing business needs.
Intense competition also exists for viable acquisition candidates. The
Company believes that its decentralized management philosophy and operating
strategies will make it an attractive acquiror of other IT consulting services
companies. See "Risk Factors--Competition."
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<PAGE>
PROPERTIES
The Company's principal executive offices and the headquarters of 15 of its
operating subsidiaries are located in 17 facilities with an aggregate of
approximately 125,700 square feet and are leased at aggregate current monthly
rents of approximately $160,500 with no lease commitment extending past the
year 2002. The Company's remaining 19 offices aggregate approximately 67,500
square feet and are leased at aggregate current monthly rents of approximately
$116,000 for various terms, with no lease commitment extending past the year
2000. The Company believes that its properties are adequate for its needs.
Furthermore, the Company believes that suitable additional or replacement
space will be available when required on terms the Company believes will be
acceptable.
LITIGATION
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.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers and their ages as of January
31, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
James R. Lavelle(1)..... 46 Chairman of the Board and Chief Executive Officer
Edward E. Faber(2)(3)... 64 Vice Chairman of the Board
Michael L. Evans(1)..... 45 President and Chief Operating Officer; Director
Daniel E. Jackson....... 37 Senior Vice President Corporate Development and General Counsel
Herbert D. Montgomery... 55 Senior Vice President, Chief Financial Officer and Treasurer
Curtis J. Parker........ 43 Vice President and Chief Accounting Officer
Lorraine E. Vega........ 42 Corporate Counsel and Secretary
Daniel M. Beals(2)(3)... 47 Director
Jeffrey J. Bernardis(1). 41 Director
John E. Chamberlain..... 55 Director
Anthony M.
Frank(1)(2)(3).......... 66 Director
B. Tom Green(1)(2)...... 55 Director
Harvey L.
Poppel(1)(2)(3)......... 60 Director
Susan E. Trice.......... 44 Director
</TABLE>
- --------
(1) Member of the Executive Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
James R. Lavelle is the founder, Chairman of the Board and Chief Executive
Officer of the Company. Mr. Lavelle has served as Chief Executive Officer
since he founded the Company in 1993. From inception of the Company until
August 1995, Mr. Lavelle was also Chairman of the Board of the Company, a
position that he reassumed in April 1996. From 1985 to 1993, he was a business
consultant specializing in strategic marketing and organization development.
From 1983 to 1985, Mr. Lavelle was Senior Manager and Director of Management
Consulting Services for the San Francisco office of KMG/Main Hurdman, an
international accounting firm. Prior to that, he was Manager, Management
Consulting Services in the San Francisco office of Price Waterhouse LLP, an
international accounting firm. Mr. Lavelle has a bachelors degree from
University of California at Santa Barbara and a Master of Business
Administration degree from University of Santa Clara.
Edward E. Faber is Vice Chairman of the Board of Directors of the Company.
Mr. Faber joined the Company as a director in March 1993 and served as
Chairman from August 1995 to April 1996. From 1990 through 1992, he was Vice
Chairman, President and Chief Executive Officer of Supercuts, Inc., a company
specializing in hairstyling. Mr. Faber was founding President and Chief
Executive Officer of Computerland Corporation, a company specializing in the
sale of computer equipment and accessories, from 1976 through 1983. He retired
from that company in 1983 and returned in 1985 as Chairman of the Board and
Chief Executive Officer, serving in that capacity until 1987 when he again
retired. Mr. Faber is a director of Supercuts, Inc. and Integrated Circuit
Engineering, Inc. Mr. Faber has a bachelor of science degree from Cornell
University and served as an officer in the United States Marine Corps.
Michael L. Evans has served as President and Chief Operating Officer of the
Company since April 1996. Mr. Evans served as Senior Vice President and Chief
Operating Officer from September 1995 to April 1996 and has been a director of
the Company since October 1993. In 1982, Mr. Evans co-founded Financial Data
Systems, Inc. ("FDSI"), a wholly owned subsidiary of the Company, served as
its Vice President of Consulting and, from 1987 to 1996, served as its
President. Mr. Evans has a bachelor of science degree from Washington State
University.
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<PAGE>
Daniel E. Jackson has served as Senior Vice President Corporate Development
and General Counsel of the Company since September 1995. Mr. Jackson served as
Secretary from September 1996 to September 1997 and also as Chief Financial
Officer from November 1996 until January 1998. From 1994 to 1995, Mr. Jackson
served as Vice President and General Counsel of an affiliate of Notre Venture
Capital, Ltd., a partnership specializing in industry consolidation
transactions. Prior thereto, he was Corporate Counsel and Secretary of
Sanifill, Inc., an environmental services company, from its founding in 1990
through 1994. From 1986 until 1990, Mr. Jackson was an associate at Morgan,
Lewis & Bockius LLP in New York where he practiced law in the areas of
securities and mergers and acquisitions. Mr. Jackson is a graduate of The Ohio
State University with a bachelor of science degree in business administration
and the University of Pennsylvania Law School with a Juris Doctor degree.
Herbert D. Montgomery has served as Senior Vice President, Chief Financial
Officer and Treasurer since January 26, 1998. From June 1994 to January 23,
1998, Mr. Montgomery served as Senior Vice President, Chief Financial Officer
and Treasurer at Guy F. Atkinson Company ("Atkinson"), an international
engineering and construction company. On August 10, 1997, Atkinson filed a
petition under Chapter 11 of the federal bankruptcy law. From August 1989 to
June 1994, he served as Vice President, Chief Financial Officer and Treasurer
at Harding Lawson Associates, Inc., an international engineering consulting
firm. Mr. Montgomery holds a bachelor of science in Finance and a Master of
Science degree in Business Administration from California State University,
Northridge.
Curtis J. Parker has served as Vice President and Chief Accounting Officer
since November 14, 1996. From January 1996 until March 18, 1996 he served as a
consultant to the Company and was appointed Corporate Controller on March 18,
1996. From 1988 through 1995 Mr. Parker was employed by Burns Philp Food Inc.,
a manufacturer of food products, where he rose to the position of Vice
President Finance for the Industrial Products Division. Mr. Parker has a
Bachelor of Commerce degree from the University of British Columbia and is a
Certified Public Accountant.
Lorraine E. Vega is Corporate Counsel and Secretary of the Company. Ms. Vega
has served as Corporate Counsel since May 1997 and was appointed Secretary on
September 9, 1997. From April 1989 to April 1997, she was employed by Burns
Philp Inc., a manufacturer of food products. From 1991 through April 1997, she
served as General Counsel to the North American operations. From 1989 to 1991,
she served as Director of Taxes. Ms. Vega has a bachelor of science degree in
accounting from the University of San Diego and a Juris Doctor degree from St.
John's University School of Law. Ms. Vega is licensed to practice law in the
States of California and Connecticut.
Daniel M. Beals has been a director of the Company since October 1995. Mr.
Beals served as President of FDSI from its inception to 1987 and, from 1990
until February 1996, was the Corporate Secretary and Treasurer of FDSI. Since
February 1996, Mr. Beals has been a private investor. In addition, from August
1990 to December 1993, Mr. Beals was Vice President of Operations of FDSI.
From January 1994 to August 1994, he was Vice President of Operations of
CyberSafe Corporation, a software development company spun off from FDSI in
1994. Mr. Beals received an associate degree in business data processing from
Columbus State Community College in 1970.
Jeffrey J. Bernardis has been a director of the Company since August 1995.
Since January 1995, Mr. Bernardis has served as President of BFR Co., Inc.
("BFR"), a wholly owned subsidiary of the Company. Prior thereto, Mr.
Bernardis had served since 1985 as Vice President of Technical Services for
BFR. Mr. Bernardis received a bachelor of science degree in computer science
from Pennsylvania State University.
John E. Chamberlain has been a director of the Company since July 1994. Mr.
Chamberlain has served as President of Chamberlain Associates, Inc. ("CAI"), a
wholly-owned subsidiary of the Company, since its inception. Mr. Chamberlain
founded CAI in 1980. Mr. Chamberlain is a founder and past member of the
Executive Committee of the National Association of Computer Consultant
Businesses ("NACCB") and is a founder and past President of the NACCB's
Northern California Chapter. He is a graduate of New Jersey Institute of
Technology with bachelors and masters degrees in mechanical engineering.
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<PAGE>
Anthony M. Frank has been a director of the Company since March 1993. In
September of 1994 Mr. Frank became Co-founding General Partner and Chairman of
Belvedere Capital Partners, the general partner of the California Community
Financial Institutions Fund whose primary purpose is investing in California
community banks. From 1992 to 1994, Mr. Frank was an independent financial
consultant and venture capitalist. From March 1988 to March 1992, Mr. Frank
served as the Postmaster General of the United States. From 1971 until 1988,
he served as Chairman and Chief Executive Officer of First Nationwide Bank.
Mr. Frank is a graduate of Dartmouth College and is an overseer of the Tuck
School of Business. He is also a director of several companies, including The
Charles Schwab Corporation, Bedford Property Investors, Inc., Irvine Apartment
Communities, Crescent Real Estate Equities Ltd. and Temple Inland Corporation.
B. Tom Green has been a director of the Company since March 1993. Since
1988, Mr. Green has been President of Sovus Partners, a firm that creates and
operates American-Russian businesses in Russia. From 1982 to 1988, he worked
on a voluntary basis with the United States government to improve diplomatic
relations with the Soviet Union. Prior to 1982, Mr. Green's positions included
General Manager of Transamerica's Southern California Title Insurance division
and President of General Mills' first restaurant division. Mr. Green is a
graduate of Stanford University with a bachelors degree in civil engineering
and received his Master of Business Administration degree from the Stanford
Graduate School of Business.
Harvey L. Poppel has been a director of the Company since October 1995. From
1985 to December 1996, Mr. Poppel was Managing Director of Broadview
Associates, L.P., a firm specializing in mergers and acquisitions in the
information technology field. Mr. Poppel retired from Broadview Associates
effective December 31, 1996. Prior to joining Broadview Associates, L.P., Mr.
Poppel spent 18 years at Booz, Allen & Hamilton, during which time he held a
number of positions, including Senior Vice President and Managing Officer of
the Information Industry Practice and as a member of its board of directors.
Mr. Poppel is a certified Management Consultant and received a bachelors
degree and a Master of Science degree from Rensselaer Polytechnic Institute
Susan E. Trice has been a director of the Company since September 1997. Ms.
Trice is President of INNOVA Solutions, Inc. ("ISI"), a wholly-owned
subsidiary of the Company. Ms. Trice founded ISI in 1991. Prior to 1991 Ms.
Trice managed two information technology consulting firms, was Vice President
of Information Technology at Citicorp, a commercial bank, and Senior Vice
President of Information Systems for North American Mortgage Company. Ms.
Trice is a director of ATWork!, a software training company based in Dallas.
Ms. Trice has a bachelor of science degree from the University of Houston.
Pursuant to the Company's Certificate of Incorporation and By-laws, the
Board of Directors is divided into three classes serving staggered three-year
terms. Class I, whose terms expire at the annual meeting to be held in
calendar 1999, is comprised of Messrs. Beals, Faber and Poppel; Class II,
whose terms expire at the annual meeting to be held in calendar 2000, is
comprised of Messrs. Frank, Lavelle and Ms. Trice; and Class III, whose terms
expire at the annual meeting to be held in calendar 1998, is comprised of
Messrs. Bernardis, Chamberlain, Evans and Green. At each annual meeting of
stockholders, directors will be elected for a full term of three years to
succeed those directors whose terms are expiring. All officers serve at the
discretion of the Board of Directors.
EMPLOYMENT AGREEMENTS; COVENANTS-NOT-TO-COMPETE
Each of Messrs. Lavelle, Evans and Jackson has entered into an employment
agreement with the Company which commenced on February 20, 1996, the date of
the consummation of the IPO. In addition, Mr. Montgomery entered into an
employment agreement with the Company effective as of January 26, 1998.
Pursuant to such agreements, Messrs. Lavelle, Evans, Jackson and Montgomery
receive annual base salaries of $275,000, $225,000, $200,000 and $200,000,
respectively. In addition, each of them is eligible for additional bonus
compensation based upon, among other factors, the achievement by the Company
of agreed upon yearly goals as well as, in the case of Messrs. Lavelle, Evans
and Jackson, the number and size of acquired companies during the fiscal year
then ended. Each employment agreement is for a term of three years and, unless
terminated or not renewed by the employee, shall continue thereafter on a
year-to-year basis on the same terms and conditions.
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Each of the employment agreements provides that, in the event of a
termination of employment by the Company or a subsidiary, as the case may be,
without cause, such employee shall be entitled to receive from the Company or
such subsidiary, as the case may be, such employee's then current salary for
the remaining term of the agreement or for one year, whichever amount is
greater, without regard to whether the employee obtains subsequent employment.
In the event of a pending change in control where the employee and the Company
have not received at least five days' written notice prior to the anticipated
closing date of the transaction giving rise to the change in control, such
change in control shall be deemed to be a termination without cause with the
result set forth above. In the event of a change in control of the Company,
the employee may, at his sole discretion, elect to terminate his employment by
providing written notice to the Company at least two business days prior to
the anticipated closing of the transaction giving rise to the change in
control and shall be entitled to receive a minimum of two years' current base
salary as compensation.
Each employment agreement contains a covenant-not-to-compete with the
Company for a period equivalent to the longer of two years immediately
following the termination of his employment or, in the case of a termination
without cause, for a period of one year following the termination of his
employment. If any court of competent jurisdiction determines that the scope,
time or territorial restrictions contained in the covenant are unreasonable,
the covenant-not-to-compete shall be reduced to the maximum period permitted
by such court. The compensation to which such employee is entitled shall
nonetheless be paid to the employee.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth as of January 31, 1998 information regarding
the beneficial ownership of the Common Stock of the Company by: (i) each
person known by the Company to beneficially own more than 5% of the
outstanding shares of Common Stock; (ii) each of the Company's directors and
executive officers; (iii) each of the Selling Stockholders; and (iv) all
executive officers and directors as a group. All persons listed have an
address c/o the Company's principal executive offices and have sole voting and
investment power with respect to their shares unless otherwise indicated.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING OFFERING
----------------------- -----------------------
SHARES
BEING
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
---- ------------ ---------- ------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Thomas Fallat (1)........ 962,350 8.2% 100,000 862,350 6.4%
Kennedy Capital
Management, Inc. (2)..... 832,775 7.1 0 832,775 6.2
Wellington Management Co.
(3)...................... 659,000 5.6 0 659,000 4.9
James R. Lavelle (4)..... 363,732 3.1 80,000 283,732 2.1
Edward E. Faber (5)...... 54,656 * 0 54,656 *
Michael L. Evans (6)..... 429,281 3.6 90,000 339,281 2.5
Daniel E. Jackson (7).... 124,167 1.1 0 124,167 *
Herbert D. Montgomery
(8)...................... 33,333 * 0 33,333 *
Curtis J. Parker (9)..... 21,137 * 0 21,137 *
Lorraine E. Vega......... 0 * 0 0 *
Daniel M. Beals (5)...... 346,949 3.0 65,000 281,949 2.1
Jeffrey J. Bernardis
(10)..................... 196,020 1.7 70,000 126,020 *
John E. Chamberlain (11). 274,029 2.3 0 274,029 2.0
Anthony M. Frank (5)..... 54,656 * 0 54,656 *
B. Tom Green (5)......... 82,847 * 0 82,847 *
Harvey L. Poppel (5)..... 39,828 * 14,500 25,328 *
Susan E. Trice........... 138,816 1.2 0 138,816 1.0
Jeremy Reed.............. 405,634 3.5 200,000 205,634 1.5
S. Larry Parker.......... 216,803 1.9 175,000 41,803 *
Bernard Ruddock (12)..... 197,000 1.7 140,000 57,000 *
Charles Fowler (12)...... 145,573 1.2 50,000 95,573 *
Christy Cooper........... 30,062 * 15,000 15,062 *
Other Stockholders....... -- -- 250,500 -- --
All executive officers
and directors as a group
(14 persons) (13)....... 2,159,451 17.6 319,500 1,839,951 13.1
</TABLE>
- --------
* less than 1.0%
(1) Information regarding this stockholder was obtained from such
stockholder's Schedule 13D/A, dated June 6, 1997. Includes 33,000 shares
gifted to the Fallat Family Charitable Foundation, of which Mr. Fallat
serves as co-trustee. The address of Mr. Fallat is 3115 Deerfield Lane,
Murrayville, PA 15668.
(2) Information regarding this stockholder was obtained from such
stockholder's Schedule 13G, dated February 13, 1998. The address of this
stockholder is 10829 Olive Blvd., St. Louis, MO 63141.
(3) Information regarding this stockholder was obtained from such
stockholder's Schedule 13G, dated January 13, 1998. The address of this
stockholder is 75 State Street, Boston, MA 02109.
(4) Includes 125,000 shares issuable upon exercise of options immediately
exercisable or exercisable within 60 days.
(5) Includes 15,000 shares issuable upon exercise of options immediately
exercisable or exercisable within 60 days.
(6) Includes 75,000 shares issuable upon exercise of options immediately
exercisable or exercisable within 60 days.
(7) Includes 68,606 shares issuable upon exercise of options immediately
exercisable or exercisable within 60 days.
(8) Includes 33,333 shares issuable upon exercise of options immediately
exercisable or exercisable within 60 days.
(9) Includes 20,625 shares issuable upon exercise of options immediately
exercisable or exercisable within 60 days.
(10) Includes 4,000 shares issuable upon exercise of options immediately
exercisable or exercisable within 60 days.
(11) Includes 2,500 shares issuable upon exercise of options immediately
exercisable or exercisable within 60 days but does not include 135,767
shares owned by Mr. Chamberlain's wife, as to which shares Mr.
Chamberlain disclaims beneficial ownership.
(12) Includes 3,500 shares issuable upon exercise of options immediately
exercisable or exercisable within 60 days.
(13) Includes 404,064 shares issuable upon exercise of options immediately
exercisable or exercisable within 60 days.
36
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 100,000,000 shares of
Common Stock, par value $0.01 per share, and 500,000 shares of preferred
stock, par value $0.01 per share (the "Preferred Stock"). As of February 20,
1998, the Company had outstanding 11,718,851 shares of Common Stock and no
shares of Preferred Stock. As of February 20, 1998, there were 118 record
holders of Common Stock. The following summary is qualified in its entirety by
reference to the Company's Certificate of Incorporation, as amended, copies of
which are available upon request to the Company.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors.
Subject to the rights of any then-outstanding shares of Preferred Stock, the
holders of the Common Stock are entitled to such dividends as may be declared
in the discretion of the Board of Directors out of funds legally available
therefor. See "Dividend Policy." Holders of Common Stock are entitled to share
ratably in the net assets of the Company upon liquidation after payment or
provision for all liabilities and any preferential liquidation rights of any
Preferred Stock then outstanding. The holders of Common Stock have no
preemptive rights to purchase shares of stock of the Company. Shares of Common
Stock are not subject to any redemption provisions and are not convertible
into any other securities of the Company. All outstanding shares of Common
Stock are, and the shares of Common Stock to be issued pursuant to this
Prospectus will be, upon payment therefor, fully paid and non-assessable.
PREFERRED STOCK
Preferred Stock may be issued from time to time by the Board of Directors as
shares of one or more classes or series. Subject to the provisions of the
Company's Certificate of Incorporation, as amended, and limitations prescribed
by law, the Board of Directors is expressly authorized to adopt resolutions to
issue the shares, to fix the number of shares and to 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 (including whether dividends are cumulative),
dividend rates, terms of redemption (including sinking fund provisions),
redemption prices, conversion rights and liquidation preferences of the shares
constituting any class or series of the Preferred Stock, in each case without
any further action or vote by the stockholders. The Company has no current
plans to issue any shares of Preferred Stock of any class or series.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest,
merger or otherwise, and thereby to protect the continuity of the Company's
management. The issuance of shares of the Preferred Stock pursuant to the
Board of Directors' authority described above may adversely affect the rights
of the holders of Common Stock. For example, Preferred Stock issued by the
Company may rank prior to the Common Stock as to dividend rights, liquidation
preference or both, may have full or limited voting rights and may be
convertible into shares of Common Stock. Accordingly, the issuance of shares
of Preferred Stock may discourage bids for the Common Stock or may otherwise
adversely affect the market price of the Common Stock.
STOCKHOLDER RIGHTS PLAN
On September 9, 1997, the Board of Directors declared a dividend
distribution of one right (each, a "Right") for each outstanding share of
Common Stock of the Company to stockholders of record at the close of business
on September 24, 1997. Each Right entitles the registered holder to purchase
from the Company a unit
37
<PAGE>
consisting of one one-ten thousandth of a share (a "Unit") of the Series A
Junior Participating Preferred Stock, par value $0.01 per share, of the
Company (the "Preferred Shares"), or a combination of securities and assets of
equivalent value, at a Purchase Price of $90.00 per Unit, subject to
adjustment. The description and terms of the Rights are set forth in a Rights
Plan (the "Rights Plan") between the Company and BankBoston, N.A., as Rights
Agent.
Initially, ownership of the Rights is evidenced by the Common Stock
certificates representing shares then outstanding, and no separate Rights
Certificates will be distributed. The Rights will separate from the Common
Stock and a Distribution Date will occur upon the earlier of (i) 10 days
following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired, or obtained the right
to acquire, beneficial ownership of 20% or more of the outstanding shares of
Common Stock (the "Stock Acquisition Date"), or (ii) the close of business on
such date as may be fixed by the Board of Directors, which date shall not be
more than 65 days following the commencement of a tender offer or exchange
offer that would result in a person or group beneficially owning 20% or more
of the outstanding shares or Common Stock. Until the Distribution Date, (i)
the Rights will be evidenced by the Common Stock certificates and will be
transferred with and only with such Common Stock certificates, (ii) new Common
Stock certificates issued after September 24, 1997 will contain a notation
incorporating the Rights Plan by reference and (iii) the surrender for
transfer of any certificates for Common Stock outstanding will also constitute
the transfer of the Rights associated with the Common Stock represented by
such certificate.
Except in the circumstances described below, after the Distribution Date
each Right will be exercisable into one one-ten thousandth of a Preferred
Share (a "Preferred Share Fraction"). Each Preferred Share Fraction carries
voting and dividend rights that are intended to produce the equivalent of one
share of Common Stock. The voting and dividend rights of the Preferred Shares
are subject to adjustment in the event of dividends, subdivisions and
combinations with respect to the Common Stock of the Company. In lieu of
issuing certificates for Preferred Share Fractions which are less than an
integral multiple of one Preferred Share (i.e. 10,000 Preferred Share
Fractions), the Company may pay cash representing the current market value of
the Preferred Share Fractions.
In the event that at any time following the Stock Acquisition Date, (i) the
Company is the surviving corporation in a merger with an Acquiring Person and
its Common Stock remain outstanding, (ii) a Person becomes the beneficial
owner of more than 20% of the then outstanding Common Stock other than
pursuant to a tender offer that provides fair value to all stockholders, (iii)
an Acquiring Person engages in one or more "self-dealing" transactions as set
forth in the Rights Plan, or (iv) during such time as there is an Acquiring
Person an event occurs that results in such Acquiring Person's ownership
interest being increased by more than 1% (e.g., a reverse stock split), each
holder of a Right will thereafter have the right to receive, upon exercise,
Common Stock (or, in certain circumstances, cash, property or other securities
of the Company) having a value equal to two times the exercise price of the
Right. In lieu of requiring payment of the Purchase Price upon exercise of the
Rights following any such event, the Company may permit the holders simply to
surrender the Rights, in which event they will be entitled to receive Common
Stock (and other property, as the case may be) with a value of 50% of what
could be purchased by payment of the full Purchase Price. Notwithstanding any
of the foregoing, following the occurrence of any of the events set forth in
clauses (i), (ii), (iii) or (iv) of this paragraph, all Rights that are, or
(under certain circumstances specified in the Rights Plan) were, beneficially
owned by any Acquiring Person who was involved in the transaction giving rise
to any such event will be null and void. However, Rights are not exercisable
following the occurrence of any of the events set forth above until such time
as the Rights are no longer redeemable by the Company as set forth below.
In the event that, at any time following the Stock Acquisition Date, (i) the
Company is acquired in a merger or other business combination transaction in
which the Company is not the surviving corporation (other than a merger that
is described in, or that follows a tender offer or exchange offer described
in, the second preceding paragraph), or (ii) 50% or more of the Company's
assets or earning power is sold or transferred, each holder of a Right (except
Rights that previously have been voided as set forth above) shall thereafter
have the right to
38
<PAGE>
receive, upon exercise, common shares of the acquiring company having a value
equal to two times the exercise price of the Right. Again, provision is made
to permit surrender of the Rights in exchange for one-half of the value
otherwise purchasable. The events set forth in this paragraph and in the
second preceding paragraph are referred to as the "Triggering Events."
At any time until ten days following the Stock Acquisition Date, the Company
may redeem the Rights in whole, but not in part, at a price of $0.01 per
Right. That ten day redemption period may be extended by the Board of
Directors so long as the Rights are still redeemable. Under certain
circumstances set forth in the Rights Plan, the decision to redeem will
require the concurrence of a majority of the Continuing Directors (as defined
in the Rights Plan). Immediately upon the action of the Board of Directors
ordering redemption of the Rights, with, where required, the concurrence of
the Continuing Directors, the Rights will terminate and the only right of the
holders of Rights will be to receive the $0.01 redemption price.
This summary description of the Rights does not purport to be complete and
is qualified in its entirety by reference to the Rights Plan, which has been
filed with the Securities and Exchange Commission (the "Commission") and is
incorporated herein by reference.
39
<PAGE>
UNDERWRITING
Subject to certain terms and conditions contained in the Underwriting
Agreement, a syndicate of underwriters named below (the "Underwriters"), for
which Lehman Brothers Inc., The Robinson-Humphrey Company, LLC and Prudential
Securities Incorporated are acting as representatives (the "Representatives"),
have severally agreed, to purchase from the Company and the Selling
Stockholders, and the Company and the Selling Stockholders have agreed to sell
to each of the Underwriters the number of shares of Common Stock set forth
opposite their respective names below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Lehman Brothers Inc. ...........................................
The Robinson-Humphrey Company, LLC .............................
Prudential Securities Incorporated..............................
---------
Total....................................................... 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
thereunder are subject to various conditions. The nature of the Underwriters'
obligations are such that they are committed to take and pay for all of the
shares offered hereby if any are purchased.
The Company and the Selling Stockholders have been advised by the
Representatives that they propose to offer the shares of Common Stock to the
public at the public offering price set forth on the cover page hereof and to
certain selected dealers (who may include the Underwriters) at such price less
a concession not in excess of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
certain other dealers. After the initial offering, the public offering price,
the concession to selected dealers and the reallowance to other dealers may be
changed by the Underwriters.
The Company has granted to the Underwriters an option to purchase up to an
additional 450,000 shares of Common Stock, at the public offering price less
the underwriting discounts and commissions shown on the cover page of this
Prospectus, solely to cover over-allotments, if any. Such option may be
exercised at any time up to 30 days after the date of this Prospectus. To the
extent that the Underwriters exercise such option, each of the Underwriters
will be committed, subject to certain conditions, to purchase a number of
additional shares that is proportional to such Underwriter's initial
commitment.
The Company, each of its directors and executive officers and each Selling
Stockholder has agreed that it will not, without the prior written consent of
Lehman Brothers Inc., during the 90 days following the date of this
Prospectus, directly or indirectly, (1) offer for sale, sell, pledge or
otherwise dispose of (or enter into any transaction or device which is
designed to, or could be expected to, result in the disposition by any person
at any time in the future of) any shares of Common Stock or securities
convertible into or exchangeable for Common Stock (other than, in the case of
the Company, (i) shares issued pursuant to employee benefit plans, qualified
stock option plans or other employee compensation plans existing on the date
hereof or pursuant to currently outstanding options, warrants or rights and
(ii) shares issued in future acquisitions), or, in the case of the Company,
sell or grant options, rights or warrants with respect to any shares of Common
Stock or securities convertible into or exchangeable for Common Stock or (2)
enter into any swap or other derivatives transaction that transfers to
another, in whole or in part, any of the economic benefits or risks of
ownership of such shares of Common Stock, whether any such transaction
described in clause (1) or (2) above is to be settled by delivery of Common
Stock or other securities, in cash or otherwise (other than, in the case of
the Company, the grant of options pursuant to option plans existing on the
date hereof).
40
<PAGE>
Until the distribution of the shares of Common Stock is completed, rules of
the Commission may limit the ability of the Underwriters and certain selling
group members to bid for and purchase shares of Common Stock. As an exception
to these rules, the Representatives are permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
may consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Stock.
In addition, if the Representatives over-allot (i.e., if they sell more
shares of Common Stock than are set forth on the cover page of this
Prospectus), and thereby create a short position in the Common Stock in
connection with the Offering, the Representatives may reduce that short
position by purchasing Common Stock in the open market. The Representatives
also may elect to reduce any short position by exercising all or part of the
over-allotment option described herein.
The Representatives also may impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
the Offering.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
The Company and each of the Selling Stockholders have agreed to indemnify
the Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered by this
Prospectus will be passed upon for the Company by Morgan, Lewis & Bockius LLP,
New York, New York. Certain legal matters relating to this Offering will be
passed upon for the Underwriters by O'Melveny & Myers LLP, Los Angeles,
California.
41
<PAGE>
EXPERTS
The Financial Statements included in this Prospectus and elsewhere in the
Registration Statement, to the extent and for the periods indicated in their
reports, have been audited by Arthur Andersen LLP, independent public
accountants, and are included in this Prospectus in reliance upon the
authority of said firm as experts in giving said reports.
AVAILABLE INFORMATION
The Company is subject to the periodic reporting and other informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). As long as the Company is subject to such periodic reporting and
information requirements, it will file with the Commission all reports, proxy
statements and other information required thereby, which may be inspected at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional
offices located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material may be obtained by mail from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. In addition, electronically filed
documents, including reports, proxy statements and other information filed by
the Company, can be obtained from the Commission's Web site at
http://www.sec.gov. The Common Stock is listed on the New York Stock Exchange,
and reports and other information concerning the Company may also be inspected
and copied at the office of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005.
The Company has filed a Registration Statement on Form S-3 under the
Securities Act of 1933, as amended, with the Commission, Washington, D.C.,
with respect to the Common Stock offered by this Prospectus. This Prospectus,
filed as part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
For further information regarding the Company and the shares offered hereby,
reference is made to the Registration Statement and any amendments, exhibits
and schedules thereto, which may be inspected without charge and copied at
prescribed rates at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. Such
information may also be available on the Web site maintained by the Commission
at http://www.sec.gov. Statements contained in this Prospectus as to the
contents of any contract or other document referred to herein are not
necessarily complete and in each instance reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in its entirety by such reference.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commission pursuant to
the Exchange Act (File No. 0-25372) are incorporated herein by reference as of
their respective dates:
(1) Annual Report on Form 10-K for the fiscal year ended March 31, 1997.
(2) Quarterly Reports on Form 10-Q for the quarters ended June 30, 1997 (as
amended on Form 10-Q/A), September 30, 1997 and December 31, 1997.
(3) Current Reports on Form 8-K dated September 24, 1997, October 28, 1997,
January 16, 1998 (as amended on January 23, 1998) and February 4, 1998.
(4) Description of Registrant's Securities to be Registered contained in a
Registration Statement on Form 8-A/A dated February 18, 1998.
42
<PAGE>
All reports and other documents filed by the Company pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the Common Stock
shall be deemed to be incorporated by reference herein. Any statement
contained in a document incorporated or deemed to be incorporated by reference
shall be deemed to be modified or superseded for purposes of this Prospectus
to the extent that a statement contained herein or in any other subsequently
filed document which is also incorporated or deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a Prospectus
is delivered, upon the written or oral request of such person, a copy of any
or all of the information incorporated by reference in this Prospectus, other
than exhibits to such information (unless such exhibits are specifically
incorporated by reference into the information that this Prospectus
incorporates). Requests for such copies should be directed to Daniel E.
Jackson, Senior Vice President, Corporate Development and General Counsel,
Cotelligent Group, Inc., 101 California Street, Suite 2050, San Francisco,
California 94111, telephone (415) 439-6400.
43
<PAGE>
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>
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>
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
======== ======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
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>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
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>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
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>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
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>
The accompanying notes are an integral part of these consolidated financial
statements.
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>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
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
==============
<CAPTION>
FOR THE NINE MONTHS
ENDED
DECEMBER 31, 1997
---------------------------------------
PER SHARE
INCOME SHARES AMOUNT
---------- -------------- -------------
<S> <C> <C> <C>
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
<PAGE>
MAP OF THE UNITED STATES SHOWING THE CITIES IN WHICH COTELLIGENT HAS AN OFFICE
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations in connection with this offering
other than those contained or incorporated by reference in this Prospectus,
and, if given or made, such other information or representations must not be
relied on as having been authorized by the Company, the Selling Stockholders or
the Underwriters. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the registered
securities to which it relates in any state to any person to whom it is
unlawful to make such offer or solicitation in such state. Neither the delivery
of this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that there has been no change in the affairs of the
Company since the date hereof or that the information contained or incorporated
by reference herein is correct as of any time subsequent to its date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 11
Price Range of Common Stock............................................... 11
Dividend Policy........................................................... 12
Capitalization............................................................ 12
Selected Financial Data................................................... 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 15
Business.................................................................. 21
Management................................................................ 32
Principal and Selling Stockholders........................................ 36
Description of Capital Stock.............................................. 37
Underwriting.............................................................. 40
Legal Matters............................................................. 41
Experts................................................................... 42
Available Information..................................................... 42
Incorporation of Certain Information by Reference......................... 42
Index to Consolidated Financial Statements................................ F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,000,000 SHARES
LOGO
COTELLIGENT
COMMON STOCK
------------------
PROSPECTUS
, 1998
------------------
LEHMAN BROTHERS
THE ROBINSON-HUMPHREY COMPANY
PRUDENTIAL SECURITIES INCORPORATED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses (other than underwriting
compensation expected to be incurred) in connection with the offering
described in this Registration Statement. All of such amounts (except the SEC
Registration Fee) are estimated.
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 22,360
NASD Filing Fee................................................... 8,080
New York Stock Exchange Filing Fee................................ 135,000
Blue Sky Fees and Expenses........................................ 7,000
Printing and Engraving Costs...................................... 100,000
Legal Fees and Expenses........................................... 125,000
Accounting Fees and Expenses...................................... 180,000
Transfer Agent and Registrar Fees and Expenses.................... 3,500
Miscellaneous..................................................... 19,060
--------
Total........................................................... $600,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's By-laws provide that the Company shall, to the fullest extent
permitted by Section 145 of the General Corporation Law of the State of
Delaware, as amended from time to time, indemnify all persons whom it may
indemnify pursuant thereto.
Section 145 of the General Corporation Law of the State of Delaware permits
a corporation, under specified circumstances, to indemnify its directors,
officers, employees or agents against expenses (including attorney's fees),
judgments, fines and amounts paid in settlements actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
third parties by reason of the fact that they were or are directors, officers,
employees or agents of the corporation, if such directors, officers, employees
or agents acted in good faith and in a manner they reasonably believed to be
in or not opposed to the best interests of the corporation and, with respect
to any criminal action or proceeding, had no reason to believe their conduct
was unlawful. In a derivative action, i.e., one by or in the right of the
corporation, indemnification may be made only for expenses actually and
reasonably incurred by directors, officers, employees or agents in connection
with the defense or settlement of an action or suit, and only with respect to
a matter as to which they shall have acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person shall
have been adjudged liable to the corporation, unless and only to the extent
that the court in which the action or suit was brought shall determine upon
application that the defendant directors, officers, employees or agents are
fairly and reasonably entitled to indemnity for such expenses despite such
adjudication of liability.
Article Seven of the Company's Certificate of Incorporation provides that
the Company's directors will not be personally liable to the Company or its
stockholders for monetary damages resulting from breaches of their fiduciary
duty as directors except (a) for any breach of the duty of loyalty to the
Company or its stockholders, (b) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (c) under
Section 174 of the General Corporation Law of the State of Delaware, which
makes directors liable for unlawful dividends or unlawful stock repurchases or
redemptions or (d) for transactions from which directors derive improper
personal benefit.
In accordance with Delaware law, the Company has entered into
indemnification agreements with its directors, pursuant to which it has agreed
to pay certain expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement incurred by such directors in connection with
certain actions, suits or proceedings. These agreements require directors to
repay the amount of any expenses advanced if it shall be determined that they
shall not have been entitled to indemnification.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement*
4.1 Form of certificate evidencing ownership of Common Stock of
Cotelligent (Exhibit 4.1 of the Registration Statement on Form S-1
(File No. 33-80267)) is hereby incorporated by reference
4.2 Form of Rights Certificate (Exhibit B to Exhibit 4.1 to the Form
8-K filed September 24, 1997), is hereby incorporated by
reference
5.1 Opinion of Morgan, Lewis & Bockius LLP*
23.1 Consent of Arthur Andersen LLP*
23.2 Consent of Morgan, Lewis & Bockius LLP (contained in Exhibit
5.1)*
24 Power of Attorney (included with the signature page hereof)*
27.1 Financial Data Schedule*
</TABLE>
- --------
*Filed herewith
(b) Financial Statement Schedules
Not applicable.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in such
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance on Rule 430A and
contained in a form of prospectus filed by the registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall
be deemed to be part of this registration statement as of the time
it is declared effective.
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be the
initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of San Francisco, state of California, on this 24th day
of February 1998.
COTELLIGENT GROUP, INC.
By /s/ James R. Lavelle
-----------------------------------
James R. Lavelle
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
Pursuant to the requirement of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
Each person whose signature appears below hereby authorizes and constitutes
James R. Lavelle, Michael L. Evans and Daniel E. Jackson, and each of them
singly, his true and lawful attorneys-in-fact with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities (including his capacity as a director and/or officer of Cotelligent
Group, Inc.) to sign and file any and all amendments (including post-effective
amendments) to this Registration Statement, and to sign any registration
statement for the same offering covered by this Registration Statement that is
to be effective upon filing pursuant to Rule 462(b) promulgated under the
Securities Act of 1933, and all post-effective amendments thereto, and to file
the same, with all exhibits thereto, and other documents in connection
therewith with the Securities and Exchange Commission, and he hereby ratifies
and confirms all that said attorneys-in-fact or any of them, or his
substitutes, may lawfully do or cause to be done by virtue hereof.
SIGNATURE CAPACITY IN WHICH SIGNED DATE
/s/ James R. Lavelle Chairman of the Board February 24, 1998
_____________________________ and Chief Executive
JAMES R. LAVELLE Officer (Principal
Executive Officer)
February , 1998
_____________________________ Vice Chairman of the
EDWARD E. FABER Board
/s/ Herbert D. Montgomery Senior Vice President, February 24, 1998
_____________________________ Chief Financial Officer
HERBERT D. MONTGOMERY and Treasurer
(Principal Financial
Officer)
/s/ Curtis J. Parker Vice President, Chief February 24, 1998
_____________________________ Accounting Officer
CURTIS J. PARKER (Principal Accounting
Officer)
/s/ Michael L. Evans February 24, 1998
_____________________________ Director
MICHAEL L. EVANS
/s/ Daniel M. Beals Director February 24, 1998
_____________________________
DANIEL M. BEALS
S-1
<PAGE>
/s/ Jeffrey J. Bernardis February 24, 1998
_____________________________ Director
JEFFREY J. BERNARDIS
/s/ John E. Chamberlain February 24, 1998
_____________________________ Director
JOHN E. CHAMBERLAIN
/s/ Anthony M. Frank February 24, 1998
_____________________________
ANTHONY M. FRANK Director
February , 1998
_____________________________ Director
B. TOM GREEN
/s/ Harvey L. Poppel February 24, 1998
_____________________________ Director
HARVEY L. POPPEL
/s/ Susan E. Trice February 24, 1998
_____________________________ Director
SUSAN E. TRICE
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement*
4.1 Form of certificate evidencing ownership of Common Stock of
Cotelligent (Exhibit 4.1 of the Registration Statement on Form S-1
(File No. 33-80267)) is hereby incorporated by reference
4.2 Form of Rights Certificate (Exhibit B to Exhibit 4.1 to the Form
8-K filed September 24, 1997), is hereby incorporated by
reference
5.1 Opinion of Morgan, Lewis & Bockius LLP*
23.1 Consent of Arthur Andersen LLP*
23.2 Consent of Morgan, Lewis & Bockius LLP (contained in Exhibit
5.1)*
24 Power of Attorney (included with the signature page hereof)*
27.1 Financial Data Schedule*
</TABLE>
- --------
* Filed herewith
<PAGE>
EXHIBIT 1.1
3,000,000 Shares
COTELLIGENT GROUP, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
_____ __, 1998
Lehman Brothers Inc.
The Robertson-Humphrey Company, LLC
Prudential Securities Incorporated
As Representatives of the several
Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
Cotelligent Group, Inc., a Delaware corporation (the "Company"), and
certain stockholders of the Company named in Schedule 2 hereto (the "Selling
Stockholders"), propose to sell an aggregate of 3,000,000 shares (the "Firm
Stock") of the Company's common stock, par value $.01 per share (the "Common
Stock"). Of the 3,000,000 shares of the Firm Stock, 1,750,000 are being sold by
the Company and 1,250,000 by the Selling Stockholders. In addition, the Company
proposes to grant to the Underwriters named in Schedule 1 hereto (the
"Underwriters") an option to purchase up to an additional 450,000 shares of the
Common Stock on the terms and for the purposes set forth in Section 3 (the
"Option Stock"). The Firm Stock and the Option Stock, if purchased, are
hereinafter collectively called the "Stock." This is to confirm the agreement
concerning the purchase of the Stock from the Company and the Selling
Stockholders by the Underwriters named in Schedule 1 hereto (the
"Underwriters").
1. Representations, Warranties and Agreements of the Company. The
Company represents, warrants and agrees that:
<PAGE>
(a) A registration statement on Form S-3[, and an amendment
thereto,] with respect to the Stock has (i) been prepared by the Company in
conformity with the requirements of the United States Securities Act of
1933, as amended (the "Securities Act"), and the rules and regulations (the
"Rules and Regulations") of the United States Securities and Exchange
Commission (the "Commission") thereunder, (ii) been filed with the
Commission under the Securities Act and (iii) become effective under the
Securities Act. Copies of such registration statement [and the amendment
thereto] have been delivered by the Company to you as the representatives
(the "Representatives") of the Underwriters. As used in this Agreement,
"Effective Time" means the date and the time as of which such registration
statement, or the most recent post-effective amendment thereto, if any, was
declared effective by the Commission; "Effective Date" means the date of
the Effective Time; "Preliminary Prospectus" means each prospectus included
in such registration statement, or amendments thereof, before it became
effective under the Securities Act and any prospectus filed with the
Commission by the Company with the consent of the Representatives pursuant
to Rule 424(a) of the Rules and Regulations; "Registration Statement" means
such registration statement, as amended at the Effective Time, including
any documents incorporated by reference therein at such time and all
information contained in the final prospectus filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations in accordance with
Section 6(a) hereof and deemed to be a part of the registration statement
as of the Effective Time pursuant to paragraph (b) of Rule 430A of the
Rules and Regulations; and "Prospectus" means such final prospectus, as
first filed with the Commission pursuant to paragraph (1) or (4) of Rule
424(b) of the Rules and Regulations. Reference made herein to any
Preliminary Prospectus or to the Prospectus shall be deemed to refer to and
include any documents incorporated by reference therein pursuant to Item 12
of Form S-3 under the Securities Act, as of the date of such Preliminary
Prospectus or the Prospectus, as the case may be, and any reference to any
amendment or supplement to any Preliminary Prospectus or the Prospectus
shall be deemed to refer to and include any document filed under the United
States Securities Exchange Act of 1934, as amended (the "Exchange Act"),
after the date of such Preliminary Prospectus or the Prospectus, as the
case may be, and incorporated by reference in such Preliminary Prospectus
or the Prospectus, as the case may be, and any reference to any amendment
to the Registration Statement shall be deemed to include any annual report
of the Company filed with the Commission pursuant to Section 13(a) or 15(d)
of the Exchange Act after the Effective Time that is incorporated by
reference in the Registration Statement. The Commission has not issued any
order preventing or suspending the use of any Preliminary Prospectus.
(b) The Registration Statement conforms, and the Prospectus and
any further amendments or supplements to the Registration Statement or the
Prospectus will, when they become effective or are filed with the
Commission, as the case may be, conform in all material respects to the
requirements of the Securities Act and the Rules and Regulations and do not
and will not, as of the applicable effective date (as to the Registration
Statement and any amendment thereto) and as of the applicable filing date
(as to the Prospectus and any amendment or supplement thereto) contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading; provided that no representation or
2
<PAGE>
warranty is made as to information contained in or omitted from the
Registration Statement or the Prospectus in reliance upon and in conformity
with written information furnished to the Company through the
Representatives by or on behalf of any Underwriter specifically for
inclusion therein.
(c) The documents incorporated by reference in the Prospectus,
when they were filed with the Commission (or as amended to date), conformed
in all material respects to the requirements of the Exchange Act and the
rules and regulations of the Commission thereunder, and none of such
documents contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading; and any further documents so filed
and incorporated by reference in the Prospectus, when such documents are
filed with the Commission will conform in all material respects to the
requirements of the Exchange Act and the rules and regulations of the
Commission thereunder and will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading.
(d) The Company and each of its subsidiaries (as defined in
Section 17) have been duly incorporated and are validly existing as
corporations in good standing under the laws of their respective
jurisdictions of incorporation, are duly qualified to do business and are
in good standing as foreign corporations in each jurisdiction in which
their respective ownership or lease of property or the conduct of their
respective businesses requires such qualification, except where the failure
to be in good standing or to be so qualified, individually or in the
aggregate, would not have a material adverse effect on the consolidated
financial position, stockholders' equity, results of operations, business
or prospects of the Company and its subsidiaries (a "Material Adverse
Effect"), and have all power and authority necessary to own or hold their
respective properties and to conduct the businesses in which they are
engaged.
(e) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued, are fully paid
and non-assessable and conform to the description thereof contained in the
Prospectus; and all of the issued shares of capital stock of each
subsidiary of the Company have been duly and validly authorized and issued
and are fully paid and non-assessable and, except as set forth in the
Prospectus, are owned directly or indirectly by the Company, free and clear
of all liens, encumbrances, equities or claims.
(f) The unissued shares of the Stock to be issued and sold by the
Company to the Underwriters hereunder have been duly and validly authorized
and, when issued and delivered against payment therefor as provided herein,
will be duly and validly issued, fully paid and non-assessable and will
conform to the description thereof contained in the Prospectus.
(g) This Agreement has been duly authorized, executed and
delivered by the Company.
3
<PAGE>
(h) The execution, delivery and performance of this Agreement by
the Company and the consummation of the transactions contemplated hereby
will not conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any material
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries is bound or to which any of
the property or assets of the Company or any of its subsidiaries is
subject, nor will such actions result in any violation of the provisions of
the charter or by-laws of the Company or any of its subsidiaries or any
statute or any order, rule or regulation of any court or governmental
agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their properties or assets; and except for the
registration of the Stock under the Securities Act and such consents,
approvals, authorizations, registrations or qualifications as may be
required under the Exchange Act and applicable state securities laws in
connection with the purchase and distribution of the Stock by the
Underwriters, no consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or body is
required for the execution, delivery and performance of this Agreement by
the Company and the consummation of the transactions contemplated hereby.
(i) There are no contracts, agreements or understandings between
the Company and any person granting such person the right (other than
rights which have been waived or satisfied) to require the Company to file
a registration statement under the Securities Act with respect to any
securities of the Company owned or to be owned by such person or to require
the Company to include such securities in the securities registered
pursuant to the Registration Statement or in any securities being
registered pursuant to any other registration statement filed by the
Company under the Securities Act.
(j) Except as described in the Prospectus, the Company has not
sold or issued any shares of Common Stock during the six-month period
preceding the date of the Prospectus, including any sales pursuant to Rule
144A under, or Regulations D or S of, the Securities Act, other than shares
issued pursuant to employee benefit plans, qualified stock options plans or
other employee compensation plans or pursuant to outstanding options,
rights or warrants.
(k) Neither the Company nor any of its subsidiaries has
sustained, since the date of the latest audited financial statements
included in the Prospectus, any loss or interference with its business from
fire, explosion, flood or other calamity, whether or not covered by
insurance, which individually or in the aggregate would have a Material
Adverse Effect or from any labor dispute or court or governmental action,
order or decree, otherwise than as set forth or contemplated in the
Prospectus or which, individually or in the aggregate, would not result in
a Material Adverse Effect; and, since such date, there has not been any
change in the capital stock or long-term debt of the Company or any of its
subsidiaries or any change, or any development involving a prospective
material adverse change, in or affecting the general affairs, management,
financial position, stockholders' equity or results of operations of the
Company and its
4
<PAGE>
subsidiaries, otherwise than as set forth or contemplated in the Prospectus
or which, individually or in the aggregate, would not have a Material
Adverse Effect.
(l) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statement or
included or incorporated by reference in the Prospectus present fairly the
financial condition and results of operations of the entities purported to
be shown thereby, at the dates and for the periods indicated, and have been
prepared in conformity with generally accepted accounting principles
applied on a consistent basis throughout the periods involved.
(m) Arthur Andersen LLP, who have certified certain financial
statements of the Company and its subsidiaries, whose reports appear in the
Prospectus and who have delivered the initial letter referred to in Section
9(g) hereof, are independent public accountants as required by the
Securities Act and the Rules and Regulations.
(n) The Company and each of its subsidiaries have good title to
all real property and good title to all personal property owned by them, in
each case free and clear of all liens, encumbrances and defects except such
as are described in the Prospectus or such as do not materially affect the
value of such property and do not materially interfere with the use made
and proposed to be made of such property by the Company and its
subsidiaries; and all real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases, with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries.
(o) The Company and each of its subsidiaries carry, or are
covered by, insurance in such amounts and covering such risks as is
adequate for the conduct of their respective businesses and the value of
their respective properties.
(p) The Company and each of its subsidiaries own or possess
adequate rights to use all material patents, patent applications,
trademarks, service marks, trade names, trademark registrations, service
mark registrations, copyrights and licenses necessary for the conduct of
their respective businesses and have no reason to believe that the conduct
of their respective businesses will conflict with, and have not received
any notice of any claim of conflict with, any such rights of others.
(q) There are no legal or governmental proceedings pending to
which the Company or any of its subsidiaries is a party or of which any
property or assets of the Company or any of its subsidiaries is the subject
which, if determined adversely to the Company or any of its subsidiaries,
might have a Material Adverse Effect; and to the best of the Company's
knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others.
(r) The conditions for use of Form S-3, as set forth in the
General
5
<PAGE>
Instructions thereto, have been satisfied.
(s) There are no contracts or other documents which are required
to be described in the Prospectus or filed as exhibits to the Registration
Statement by the Securities Act or by the Rules and Regulations which have
not been described in the Prospectus or filed as exhibits to the
Registration Statement or incorporated therein by reference as permitted by
the Rules and Regulations.
(t) No relationship, direct or indirect, exists between or among
the Company on the one hand, and the directors, officers, stockholders,
customers or suppliers of the Company on the other hand, which is required
to be described in the Prospectus which is not so described.
(u) No labor disturbance by the employees of the Company exists
or, to the knowledge of the Company, is imminent which might be expected to
have a material adverse effect on the consolidated financial position,
stockholders' equity, results of operations, business or prospects of the
Company and its subsidiaries.
(v) The Company is in compliance in all material respects with
all presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of ERISA
with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"Code"); and each "pension plan" for which the Company would have any
liability that is intended to be qualified under Section 401(a) of the Code
is so qualified in all material respects and nothing has occurred, whether
by action or by failure to act, which would cause the loss of such
qualification.
(w) The Company has filed all federal, state and local income and
franchise tax returns required to be filed through the date hereof and has
paid all taxes due thereon, and no tax deficiency has been determined
adversely to the Company or any of its subsidiaries which has had (nor does
the Company have any knowledge of any tax deficiency which, if determined
adversely to the Company or any of its subsidiaries, might have) a
material adverse effect on the consolidated financial position,
stockholders' equity, results of operations, business or prospects of the
Company and its subsidiaries.
(x) Since the date as of which information is given in the
Prospectus through the date hereof, and except as may otherwise be
disclosed in the Prospectus, the Company has not (i) issued or granted any
securities other than options granted under the Company's 1995 Long-Term
Incentive Plan or shares of Common Stock issued under the Company's
Employee Stock Purchase Plan, (ii) incurred any liability or obligation,
direct
6
<PAGE>
or contingent, other than liabilities and obligations which were incurred
in the ordinary course of business, (iii) entered into any transaction not
in the ordinary course of business or (iv) declared or paid any dividend on
its capital stock.
(y) The Company and each of its subsidiaries (i) makes and keeps
accurate books and records and (ii) maintains internal accounting controls
which provide reasonable assurance that (A) transactions are executed in
accordance with management's authorization, (B) transactions are recorded
as necessary to permit preparation of its financial statements and to
maintain accountability for its assets, (C) access to its assets is
permitted only in accordance with management's authorization and (D) the
reported accountability for its assets is compared with existing assets at
reasonable intervals.
(z) Neither the Company nor any of its subsidiaries (i) is in
violation of its charter or by-laws, (ii) is in default in any material
respect, and no event has occurred which, with notice or lapse of time or
both, would constitute such a default, in the due performance or observance
of any term, covenant or condition contained in any material indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument to
which it is a party or by which it is bound or to which any of its
properties or assets is subject, other than defaults which, individually or
in the aggregate, would not have a Material Adverse Effect or (iii) is in
violation of any law, ordinance, governmental rule, regulation or court
decree to which it or its property or assets may be subject or has failed
to obtain any license, permit, certificate, franchise or other governmental
authorization or permit necessary to the ownership of its property or to
the conduct of its business, other than violations or failures which,
individually or in the aggregate, would not have a Material Adverse Effect.
(aa) Neither the Company nor any of its subsidiaries, nor any
director, officer, agent, employee or other person associated with or
acting on behalf of the Company or any of its subsidiaries, has used any
corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expense relating to political activity; made any direct or
indirect unlawful payment to any foreign or domestic government official or
employee from corporate funds; violated or is in violation of any provision
of the Foreign Corrupt Practices Act of 1977; or made any bribe, rebate,
payoff, influence payment, kickback or other unlawful payment.
(bb) There has been no storage, disposal, generation,
manufacture, refinement, transportation, handling or treatment of toxic
wastes, medical wastes, hazardous wastes or hazardous substances by the
Company or any of its subsidiaries (or, to the knowledge of the Company,
any of their predecessors in interest) at, upon or from any of the property
now or previously owned or leased by the Company or its subsidiaries in
violation of any applicable law, ordinance, rule, regulation, order,
judgment, decree or permit or which would require remedial action under any
applicable law, ordinance, rule, regulation, order, judgment, decree or
permit, except for any violation or remedial action which would not have,
or could not be reasonably likely to have, singularly or in the aggregate
with all such violations and remedial actions, a material adverse effect on
the general affairs, management, financial position,
7
<PAGE>
stockholders' equity or results of operations of the Company and its
subsidiaries; there has been no material spill, discharge, leak, emission,
injection, escape, dumping or release of any kind onto such property or
into the environment surrounding such property of any toxic wastes, medical
wastes, solid wastes, hazardous wastes or hazardous substances due to or
caused by the Company or any of its subsidiaries or with respect to which
the Company or any of its subsidiaries have knowledge, except for any such
spill, discharge, leak, emission, injection, escape, dumping or release
which would not have or would not be reasonably likely to have, singularly
or in the aggregate with all such spills, discharges, leaks, emissions,
injections, escapes, dumpings and releases, a material adverse effect on
the general affairs, management, financial position, stockholders' equity
or results of operations of the Company and its subsidiaries; and the terms
"hazardous wastes", "toxic wastes", "hazardous substances" and "medical
wastes" shall have the meanings specified in any applicable local, state,
federal and foreign laws or regulations with respect to environmental
protection.
(cc) Neither the Company nor any subsidiary is an "investment
company" within the meaning of such term under the Investment Company Act
of 1940 and the rules and regulations of the Commission thereunder.
2. Representations, Warranties and Agreements of the Selling
Stockholders. Each Selling Stockholder (other than with respect to clause (c)
below, which is made only by the Selling Stockholders listed on Schedule 3)
severally represents, warrants and agrees that:
(a) The Selling Stockholder has, and immediately prior to the
First Delivery Date (as defined in Section 5 hereof) the Selling
Stockholder will have good and valid title to the shares of Stock to be
sold by the Selling Stockholder hereunder on such date, free and clear of
all liens, encumbrances, equities or claims; and upon delivery of such
shares and payment therefor pursuant hereto, good and valid title to such
shares, free and clear of all liens, encumbrances, equities or claims, will
pass to the several Underwriters.
(b) The Selling Stockholder has placed in custody under a custody
agreement (the "Custody Agreement" and, together with all other similar
agreements executed by the other Selling Stockholders, the "Custody
Agreements") with [First National Bank of Boston], as custodian (the
"Custodian"), for delivery under this Agreement, certificates in negotiable
form (with signature guaranteed by a commercial bank or trust company
having an office or correspondent in the United States or a member firm of
the New York or American Stock Exchanges) representing the shares of Stock
to be sold by the Selling Stockholder hereunder.
(c) The Selling Stockholder has duly and irrevocably executed and
delivered a power of attorney (the "Power of Attorney" and, together with
all other similar agreements executed by the other Selling Stockholders,
the "Powers of Attorney") appointing _____________, as attorneys-in-fact,
with full power of substitution, and with full authority (exercisable by
any one or more of them) to execute and deliver this Agreement and to take
such other action as may be necessary or desirable to carry out the
8
<PAGE>
provisions hereof on behalf of the Selling Stockholder.
(d) The Selling Stockholder has full right, power and authority
to enter into this Agreement, the Power of Attorney and the Custody
Agreement; the execution, delivery and performance of this Agreement, the
Power of Attorney and the Custody Agreement by the Selling Stockholder and
the consummation by the Selling Stockholder of the transactions
contemplated hereby and thereby will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument to which the Selling Stockholder is a party
or by which the Selling Stockholder is bound or to which any of the
property or assets of the Selling Stockholder is subject, nor will such
actions result in any violation of any statute or any order, rule or
regulation of any court or governmental agency or body having jurisdiction
over the Selling Stockholder or the property or assets of the Selling
Stockholder; and, except for the registration of the Stock under the
Securities Act and such consents, approvals, authorizations, registrations
or qualifications as may be required under the Exchange Act and applicable
state securities laws in connection with the purchase and distribution of
the Stock by the Underwriters, no consent, approval, authorization or order
of, or filing or registration with, any such court or governmental agency
or body is required for the execution, delivery and performance of this
Agreement, the Power of Attorney or the Custody Agreement by the Selling
Stockholder and the consummation by the Selling Stockholder of the
transactions contemplated hereby and thereby.
(e) The Registration Statement does not, and the Prospectus and
any further amendments or supplements to the Registration Statement or the
Prospectus will not, as of the applicable effective date (as to the
Registration Statement and any amendment thereto) and as of the applicable
filing date (as to the Prospectus and any amendment or supplement thereto)
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading; provided that no representation or warranty is made
as to information contained in or omitted from the Registration Statement
or the Prospectus in reliance upon and in conformity with written
information furnished to the Company through the Representatives by or on
behalf of any Underwriter specifically for inclusion therein.
(f) The Selling Stockholder has no reason to believe that the
representations and warranties of the Company contained in Section 1 hereof
are not materially true and correct, is familiar with the Registration
Statement and the Prospectus (as amended or supplemented) and has no
knowledge of any material fact, condition or information not disclosed in
the Registration Statement, as of the effective date, or the Prospectus (or
any amendment or supplement thereto), as of the applicable filing date,
which has adversely affected or may adversely affect the business of the
Company and is not prompted to sell shares of Common Stock by any
information concerning the Company which is not set forth in the
Registration Statement and the Prospectus.
(g) The Selling Stockholder has not taken and will not take,
directly or
9
<PAGE>
indirectly, any action which is designed to or which has constituted or
which might reasonably be expected to cause or result in the stabilization
or manipulation of the price of any security of the Company to facilitate
the sale or resale of the shares of the Stock.
3. Purchase of the Stock by the Underwriters. On the basis of the
representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Company agrees to sell 1,750,000 shares of
the Firm Stock and each Selling Stockholder hereby agrees to sell the number of
shares of the Firm Stock set opposite his or her name in Schedule 2 hereto,
severally and not jointly, to the several Underwriters and each of the
Underwriters, severally and not jointly, agrees to purchase the number of shares
of the Firm Stock set opposite that Underwriter's name in Schedule 1 hereto.
Each Underwriter shall be obligated to purchase from the Company, and from each
Selling Stockholder, that number of shares of the Firm Stock which represents
the same proportion of the number of shares of the Firm Stock to be sold by the
Company, and by each Selling Stockholder, as the number of shares of the Firm
Stock set forth opposite the name of such Underwriter in Schedule 1 represents
of the total number of shares of the Firm Stock to be purchased by all of the
Underwriters pursuant to this Agreement. The respective purchase obligations of
the Underwriters with respect to the Firm Stock shall be rounded among the
Underwriters to avoid fractional shares, as the Representatives may determine.
In addition, the Company grants to the Underwriters an option to
purchase up to 450,000 shares of Option Stock. Such option is granted solely
for the purpose of covering over-allotments in the sale of Firm Stock and is
exercisable as provided in Section 5 hereof. Shares of Option Stock shall be
purchased severally for the account of the Underwriters in proportion to the
number of shares of Firm Stock set opposite the name of such Underwriters in
Schedule 1 hereto. The respective purchase obligations of each Underwriter with
respect to the Option Stock shall be adjusted by the Representatives so that no
Underwriter shall be obligated to purchase Option Stock other than in 100 share
amounts. The price of both the Firm Stock and any Option Stock shall be $_____
per share.
The Company and the Selling Stockholders shall not be obligated to
deliver any of the Stock to be delivered on the First Delivery Date or the
Second Delivery Date (as hereinafter defined), as the case may be, except upon
payment for all the Stock to be purchased on such Delivery Date as provided
herein.
4. Offering of Stock by the Underwriters.
Upon authorization by the Representatives of the release of the Firm
Stock, the several Underwriters propose to offer the Firm Stock for sale upon
the terms and conditions set forth in the Prospectus.
5. Delivery of and Payment for the Stock. Delivery of and payment
for the Firm Stock shall be made at the office of ____________________,
________________________, ________, ________ _____, at 10:00 A.M., New York City
time, on the [third] [fourth] full business day following the date of this
Agreement or at such other date or place as shall be determined by agreement
between the Representatives and the
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Company. This date and time are referred to as the "First Delivery Date." On the
First Delivery Date, the Company and the Selling Stockholders shall deliver or
cause to be delivered certificates representing the Firm Stock to the
Representatives for the account of each Underwriter against payment to or upon
the order of the Company and the Selling Stockholders of the purchase price by
wire transfer of same-day funds. Time shall be of the essence, and delivery at
the time and place specified pursuant to this Agreement is a further condition
of the obligation of each Underwriter hereunder. Upon delivery, the Firm Stock
shall be registered in such names and in such denominations as the
Representatives shall request in writing not less than two full business days
prior to the First Delivery Date. For the purpose of expediting the checking and
packaging of the certificates for the Firm Stock, the Company and the Selling
Stockholders shall make the certificates representing the Firm Stock available
for inspection by the Representatives in New York, New York, not later than 2:00
P.M., New York City time, on the business day prior to the First Delivery Date.
At any time on or before the thirtieth day after the date of this
Agreement, the option granted in Section 3 may be exercised by written notice
being given to the Company by the Representatives. Such notice shall set forth
the aggregate number of shares of Option Stock as to which the option is being
exercised, the names in which the shares of Option Stock are to be registered,
the denominations in which the shares of Option Stock are to be issued and the
date and time, as determined by the Representatives, when the shares of Option
Stock are to be delivered; provided, however, that this date and time shall not
be earlier than the First Delivery Date nor earlier than the second business day
after the date on which the option shall have been exercised nor later than the
fifth business day after the date on which the option shall have been exercised.
The date and time the shares of Option Stock are delivered are sometimes
referred to as the "Second Delivery Date" and the First Delivery Date and the
Second Delivery Date are sometimes each referred to as a "Delivery Date".
Delivery of and payment for the Option Stock shall be made at the
place specified in the first sentence of the first paragraph of this Section 5
(or at such other place as shall be determined by agreement between the
Representatives and the Company) at 10:00 A.M., New York City time, on the
Second Delivery Date. On the Second Delivery Date, the Company shall deliver or
cause to be delivered the certificates representing the Option Stock to the
Representatives for the account of each Underwriter against payment to or upon
the order of the Company of the purchase price by wire transfer of same-day
funds. Time shall be of the essence, and delivery at the time and place
specified pursuant to this Agreement is a further condition of the obligation of
each Underwriter hereunder. Upon delivery, the Option Stock shall be registered
in such names and in such denominations as the Representatives shall request in
the aforesaid written notice. For the purpose of expediting the checking and
packaging of the certificates for the Option Stock, the Company shall make the
certificates representing the Option Stock available for inspection by the
Representatives in New York, New York, not later than 2:00 P.M., New York City
time, on the business day prior to the Second Delivery Date.
6. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the
Representatives and to file such Prospectus pursuant to Rule 424(b) under
the Securities
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Act not later than Commission's close of business on the second business
day following the execution and delivery of this Agreement or, if
applicable, such earlier time as may be required by Rule 430A(a)(3) under
the Securities Act; to make no further amendment or any supplement to the
Registration Statement or to the Prospectus prior to the last Delivery Date
except as permitted herein; to advise the Representatives, promptly after
it receives notice thereof, of the time when any amendment to the
Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been filed and
to furnish the Representatives with copies thereof; to file promptly all
reports and any definitive proxy or information statements required to be
filed by the Company with the Commission pursuant to Section 13(a), 13(c),
14 or 15 of the Exchange Act subsequent to the date of the Prospectus and
for so long as the delivery of a prospectus is required in connection with
the offering of the Stock; to advise the Representatives, promptly after it
receives notice thereof, of the issuance by the Commission of any stop
order or of any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus, of the suspension of the qualification of the
Stock for offering or sale in any jurisdiction, of the initiation or
threatening of any proceeding for any such purpose, or of any request by
the Commission for the amending or supplementing of the Registration
Statement or the Prospectus or for additional information; and, in the
event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or the Prospectus or
suspending any such qualification, to use promptly its best efforts to
obtain its withdrawal;
(b) To furnish promptly to each of the Representatives and to
counsel for the Underwriters a signed copy of the Registration Statement as
originally filed with the Commission, and each amendment thereto filed with
the Commission, including all consents and exhibits filed therewith;
(c) To deliver promptly to the Representatives such number of the
following documents as the Representatives shall reasonably request: (i)
conformed copies of the Registration Statement as originally filed with the
Commission and each amendment thereto (in each case excluding exhibits
other than this Agreement and the computation of per share earnings), (ii)
each Preliminary Prospectus, the Prospectus and any amended or supplemented
Prospectus and (iii) any document incorporated by reference in the
Prospectus (excluding exhibits thereto); and, if the delivery of a
prospectus is required at any time after the Effective Time in connection
with the offering or sale of the Stock or any other securities relating
thereto and if at such time any events shall have occurred as a result of
which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such Prospectus is delivered,
not misleading, or, if for any other reason it shall be necessary to amend
or supplement the Prospectus or to file under the Exchange Act any document
incorporated by reference in the Prospectus in order to comply with the
Securities Act or the Exchange Act, to notify the Representatives and, upon
their reasonable request, to file such document and prepare and furnish
without charge to each Underwriter and to any dealer in securities as many
copies as the
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Representatives may from time to time reasonably request of an amended or
supplemented Prospectus which will correct such statement or omission or
effect such compliance.
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the
Prospectus that may, in the judgment of the Company or the Representatives,
be required by the Securities Act or requested by the Commission;
(e) Prior to filing with the Commission any amendment to the
Registra tion Statement or supplement to the Prospectus, any document
incorporated by reference in the Prospectus or any Prospectus pursuant to
Rule 424 of the Rules and Regulations, to furnish a copy thereof to the
Representatives and counsel for the Underwriters and not make any such
filing to which the Representatives reasonably object;
(f) As soon as practicable after the Effective Date to make
generally available to the Company's security holders and to deliver to the
Representatives an earning statement of the Company and its subsidiaries
(which need not be audited) complying with Section 11(a) of the Securities
Act and the Rules and Regulations (including, at the option of the Company,
Rule 158);
(g) For a period of five years following the Effective Date, to
furnish to the Representatives copies of all materials furnished by the
Company to its stockholders and all public reports and all reports and
financial statements furnished by the Company to the principal national
securities exchange upon which the Common Stock may be listed pursuant to
requirements of or agreements with such exchange or to the Commission
pursuant to the Exchange Act or any rule or regulation of the Commission
thereunder;
(h) Promptly from time to time to take such action as the
Representa tives may reasonably request to qualify the Stock for offering
and sale under the securities laws of such jurisdictions as the
Representatives may request and to comply with such laws so as to permit
the continuance of sales and dealings therein in such jurisdictions for as
long as may be necessary to complete the distribution of the Stock;
provided that in connection therewith the Company shall not be required to
qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction or be subject to taxation as a foreign
corporation;
(i) For a period of 90 days from the date of the Prospectus, not
to, directly or indirectly, (1) offer for sale, sell, pledge or otherwise
dispose of (or enter into any transaction or device which is designed to,
or could be expected to, result in the disposition by any person at any
time in the future of) any shares of Common Stock or securities convertible
into or exchangeable for Common Stock (other than (i) the Stock, (ii)
shares issued pursuant to employee benefit plans, qualified stock option
plans or other employee compensation plans existing on the date hereof or
pursuant to currently
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outstanding options, warrants or rights and (iii) shares issued in future
acquisitions), or sell or grant options, rights or warrants with respect to
any shares of Common Stock or securities convertible into or exchangeable
for Common Stock or (2) enter into any swap or other derivatives
transaction that transfers to another, in whole or in part, any of the
economic benefits or risks of ownership of such shares of Common Stock,
whether any such transaction described in clause (1) or (2) above is to be
settled by delivery of Common Stock or other securities, in cash or
otherwise, in each case (other than the grant of options pursuant to option
plans existing on the date hereof), without the prior written consent of
Lehman Brothers Inc.; and to cause each officer and director of the Company
to furnish to the Representatives, prior to the First Delivery Date, a
letter or letters, in form and substance satisfactory to counsel for the
Underwriters, pursuant to which each such person shall agree not to,
directly or indirectly, (1) offer for sale, sell, pledge or otherwise
dispose of (or enter into any transaction or device which is designed to,
or could be expected to, result in the disposition by any person at any
time in the future of) any shares of Common Stock or securities convertible
into or exchangeable for Common Stock or (2) enter into any swap or other
derivatives transaction that transfers to another, in whole or in part, any
of the economic benefits or risks of ownership of such shares of Common
Stock, whether any such transaction described in clause (1) or (2) above is
to be settled by delivery of Common Stock or other securities, in cash or
otherwise, in each case for a period of 90 days from the date of the
Prospectus, without the prior written consent of Lehman Brothers Inc.;
(j) Prior to the Effective Date, to apply for the inclusion of
the Stock on the New York Stock Exchange, Inc. and to use its best efforts
to complete that listing, subject only to official notice of issuance,
prior to the First Delivery Date;
(k) To apply the net proceeds from the sale of the Stock being
sold by the Company as set forth in the Prospectus; and
(l) To take such steps as shall be necessary to ensure that
neither the Company nor any subsidiary shall become an "investment company"
within the meaning of such term under the Investment Company Act of 1940
and the rules and regulations of the Commission thereunder.
7. Further Agreements of the Selling Stockholders. Each Selling
Stockholder agrees:
(a) For a period of 90 days from the date of the Prospectus, not
to, directly or indirectly, (1) offer for sale, sell or otherwise dispose
of (or enter into any transaction or device which is designed to, or could
be expected to, result in the disposition by any person at any time in the
future of) any shares of Common Stock (other than the Stock), or (2) enter
into any swap or other derivatives transaction that transfers to another,
in whole or in part, any of the economic benefits or risks of ownership of
such shares of Common Stock, whether any such transaction described in
clause (1) or (2) above is to be settled by delivery of Common Stock or
other securities, in cash or otherwise, in each case without the prior
written consent of Lehman Brothers
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Inc., except for bona fide gifts if the donee agrees to be bound by the
same limitation as set forth in this Section 7(a).
(b) That the Stock to be sold by the Selling Stockholder
hereunder, which is represented by the certificates held in custody for the
Selling Stockholder, is subject to the interest of the Underwriters and the
other Selling Stockholders thereunder, that the arrangements made by the
Selling Stockholder for such custody are to that extent irrevocable, and
that the obligations of the Selling Stockholder hereunder shall not be
terminated by any act of the Selling Stockholder, by operation of law, by
the death or incapacity of any individual Selling Stockholder or, in the
case of a trust, by the death or incapacity of any executor or trustee or
the termination of such trust, or the occurrence of any other event.
(c) To deliver to the Representatives prior to the First Delivery
Date a properly completed and executed United States Treasury Department
Form W-8 (if the Selling Stockholder is a non-United States person) or Form
W-9 (if the Selling Stockholder is a United States person.)
8. Expenses. The Company agrees to pay (a) the costs incident to
the authorization, issuance, sale and delivery of the Stock and any taxes
payable in that connection; (b) the costs incident to the preparation, printing
and filing under the Securities Act of the Registration Statement and any
amendments and exhibits thereto; (c) the costs of distributing the Registration
Statement as originally filed and each amendment thereto and any post-effective
amendments thereof (including, in each case, exhibits), any Preliminary
Prospectus, the Prospectus and any amendment or supplement to the Prospectus or
any document incorporated by reference therein, all as provided in this
Agreement; (d) the costs of distributing this Agreement and any other related
documents in connection with the offering, purchase, sale and delivery of the
Stock; (e) the costs of delivering and distributing the Custody Agreements and
the Powers of Attorney; (f) the filing fees incident to securing any required
review by the National Association of Securities Dealers, Inc. of the terms of
sale of the Stock; (g) any applicable listing or other fees; (h) the fees and
expenses of qualifying the Stock under the securities laws of the several
jurisdictions as provided in Section 6; (i) the costs of preparing, printing and
distributing a Blue Sky Memorandum (including related reasonable fees and
expenses of counsel to the Underwriters); and (j) all other costs and expenses
incident to the performance of the obligations of the Company and the Selling
Stockholders under this Agreement; provided that, except as provided in this
Section 8 and in Section 14 the Underwriters shall pay their own costs and
expenses, including the costs and expenses of their counsel, any transfer taxes
on the Stock which they may sell and the expenses of advertising any offering of
the Stock made by the Underwriters, [and the Selling Stockholders shall pay the
fees and expenses of his counsel, the Custodian (and any other attorney-in-
fact), and any transfer taxes payable in connection with his respective sales of
Stock to the Underwriters and reimburse the Company for his pro rata share of
the fees and expenses paid by the Company in connection with the offering of the
Stock.]
9. Conditions of Underwriters' Obligations. The respective
obligations of the Underwriters hereunder are subject to the accuracy, when made
and on each Delivery Date, of the representations and warranties of the Company
and the Selling Stockholders contained
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herein, to the performance by the Company and the Selling Stockholders of their
respective obligations hereunder, and to each of the following additional terms
and conditions:
(a) The Prospectus shall have been timely filed with the
Commission in accordance with Section 6(a); no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and any request of the Commission for
inclusion of additional information in the Registration Statement or the
Prospectus or otherwise shall have been complied with.
(b) No Underwriter shall have discovered and disclosed to the
Company on or prior to such Delivery Date that the Registration Statement
or the Prospectus or any amendment or supplement thereto contains an untrue
statement of a fact which, in the opinion of O'Melveny & Myers LLP, counsel
for the Underwriters, is material or omits to state a fact which, in the
opinion of such counsel, is material and is required to be stated therein
or is necessary to make the statements therein not misleading.
(c) All corporate proceedings and other legal matters incident to
the authorization, form and validity of this Agreement, the Custody
Agreements, the Powers of Attorney, the Stock, the Registration Statement
and the Prospectus, and all other legal matters relating to this Agreement
and the transactions contemplated hereby, shall be reasonably satisfactory
in all material respects to counsel for the Underwriters, and the Company
and the Selling Stockholders shall have furnished to such counsel all
documents and information that they may reasonably request to enable them
to pass upon such matters.
(d) Morgan, Lewis & Bockius LLP shall have furnished to the
Representatives its written opinion, as counsel to the Company, addressed
to the Underwriters and dated such Delivery Date, in form and substance
reasonably satisfactory to the Representatives, to the effect that:
(i) The Company and each of the Principal Subsidiaries (as
defined in Section 10(a)) have been duly incorporated and are validly
existing as corporations in good standing under the laws of their
respective jurisdictions of incorporation, are duly qualified to do
business and are in good standing as foreign corporations in each
jurisdiction listed in an Officers' Certificate signed by two
executive officers of the Company (a copy of which will be provided to
the Representatives) as jurisdictions in which the Company's or any of
its subsidiaries' respective ownership or lease of property or the
conduct of their respective businesses requires such qualification;
and have all corporate power and authority necessary to own or hold
their respective properties and conduct the businesses in which they
are engaged;
(ii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital stock
of the Company
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(including the shares of Stock being delivered on such Delivery Date)
have been duly and validly authorized and issued, are fully paid and
non-assessable and conform to the description thereof contained in the
Prospectus; and all of the issued shares of capital stock of each
subsidiary of the Company have been duly and validly authorized and
issued and are fully paid, non-assessable and, except as set forth in
the Prospectus, are owned directly or indirectly by the Company, free
and clear of all liens, encumbrances, equities or claims;
(iii) There are no preemptive or other rights to subscribe
for or to purchase, nor any restriction upon the voting or transfer
of, any shares of the Stock pursuant to the Company's charter or by-
laws or any agreement or other instrument known to such counsel;
(iv) To the best of such counsel's knowledge and other than
as set forth in the Prospectus, there are no legal or governmental
proceedings pending to which the Company or any of its subsidiaries is
a party or of which any property or assets of the Company or any of
its subsidiaries is the subject which, if determined adversely to the
Company or any of its subsidiaries, might have a Material Adverse
Effect; and, to the best of such counsel's knowledge, no such
proceedings are threatened or contemplated by governmental
authorities or threatened by others;
(v) The Registration Statement was declared effective under
the Securities Act as of the date and time specified in such opinion,
the Prospectus was filed with the Commission pursuant to the
subparagraph of Rule 424(b) of the Rules and Regulations specified in
such opinion on the date specified therein and no stop order
suspending the effectiveness of the Registration Statement has been
issued and, to the knowledge of such counsel, no proceeding for that
purpose is pending or threatened by the Commission;
(vi) The Registration Statement and the Prospectus and any
further amendments or supplements thereto made by the Company prior to
such Delivery Date (other than the financial statements and related
schedules therein, as to which such counsel need express no opinion)
comply as to form in all material respects with the requirements of
the Securities Act and the Rules and Regulations, and the documents
incorporated by reference in the Prospectus (other than the financial
statements and related schedules therein, as to which such counsel
need express no opinion), when they were filed with the Commission,
complied as to form in all material respects with the requirements of
the Exchange Act and the rules and regulations of the Commission
thereunder;
(vii) To the best of such counsel's knowledge, there are no
contracts or other documents which are required to be described in the
Prospectus or filed as exhibits to the Registration Statement by the
Securities Act or by the Rules and Regulations which have not been
described or filed as exhibits to the Registration Statement or
incorporated therein by reference as permitted by the
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Rules and Regulations;
(viii) This Agreement has been duly authorized, executed
and delivered by the Company;
(ix) The issue and sale of the shares of Stock being
delivered on such Delivery Date by the Company and the compliance by
the Company with all of the provisions of this Agreement will not
conflict with or result in a breach or violation of any of the terms
or provisions of, or constitute a default under, any material
indenture, mortgage, deed of trust, loan agreement or other agreement
or instrument known to such counsel to which the Company or any of
its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of the
Company or any of its subsidiaries is subject, nor will such actions
result in any violation of the provisions of the charter or by-laws of
the Company or any of its subsidiaries or any statute or any order,
rule or regulation known to such counsel of any court or governmental
agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their properties or assets; and, except for the
registration of the Stock under the Securities Act and such consents,
approvals, authorizations, registrations or qualifications as may be
required under the Exchange Act and applicable state securities laws
in connection with the purchase and distribution of the Stock by the
Underwriters, no consent, approval, authorization or order of, or
filing or registration with, any such court or governmental agency or
body is required for the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated
hereby; and
(x) To the best of such counsel's knowledge, there are no
contracts, agreements or understandings between the Company and any
person granting such person the right (other than rights which have
been waived or satisfied) to require the Company to file a
registration statement under the Securities Act with respect to any
securities of the Company owned or to be owned by such person or to
require the Company to include such securities in the securities
registered pursuant to the Registration Statement or in any securities
being registered pursuant to any other registration statement filed by
the Company under the Securities Act.
In rendering such opinion, such counsel may state that its opinion is
limited to matters governed by the Federal laws of the United States of
America, the laws of the State of New York and the General Corporation Laws
of the State of Delaware and, as to the opinion referenced in clause (ii)
above, such counsel may rely upon the opinion of Daniel E. Jackson, General
Counsel of the Company, as to the shares of the Company's Common Stock
issued after the Company's initial public offering, other than the Stock.
Such counsel shall also have furnished to the Representatives a written
statement, addressed to the Underwriters and dated such Delivery Date, in
form and substance satisfactory to the Representatives to the effect that
(x) such counsel has acted as counsel to the Company in connection with the
Company's initial public offering and has acted as
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counsel to the Company in connection with the preparation of the
Registration Statement, and (y) based on the foregoing, no facts have come
to the attention of such counsel which lead it to believe that the
Registration Statement, as of the Effective Date, contained any untrue
statement of a material fact or omitted to state a material fact required
to be stated therein or necessary in order to make the statements therein
not misleading, or that the Prospectus contains any untrue statement of a
material fact or omits to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The foregoing
opinion and statement may be qualified by a statement to the effect that
such counsel does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or the Prospectus except for the statements made in the
Prospectus under the caption "Description of Capital Stock," insofar as
such statements relate to the Stock and concern legal matters, and except
that such counsel need express no opinion regarding the financial
statements and related schedules included or incorporated by reference in
the Registration Statement or the Prospectus.
(e) The respective counsel for each of the Selling Stockholders
shall each have furnished to the Representatives their written opinion, as
counsel to each of the Selling Stockholders for whom they are acting as
counsel, addressed to the Underwriters and dated the First Delivery Date,
in form and substance reasonably satisfactory to the Representatives, to
the effect that:
(i) Such Selling Stockholder has full right, power and
authority to enter into this Agreement, the Power of Attorney and the
Custody Agreement; the execution, delivery and performance of this
Agreement, the Power of Attorney and the Custody Agreement by such
Selling Stockholder and the consummation by such Selling Stockholder
of the transactions contemplated hereby and thereby will not conflict
with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any statute, any
indenture, mortgage, deed of trust, loan agreement or other agreement
or instrument known to such counsel to which such Selling Stockholder
is a party or by which such Selling Stockholder is bound or to which
any of the property or assets of such Selling Stockholder is subject,
nor will such actions result in any violation of any statute or any
order, rule or regulation known to such counsel of any court or
governmental agency or body having jurisdiction over such Selling
Stockholder or the property or assets of such Selling Stockholder;
and, except for the registration of the Stock under the Securities Act
and such consents, approvals, authorizations, registrations or
qualifications as may be required under the Exchange Act and
applicable state securities laws in connection with the purchase and
distribution of the Stock by the Underwriters, no consent, approval,
authorization or order of, or filing or registration with, any such
court or governmental agency or body is required for the execution,
delivery and performance of this Agreement, the Power of Attorney or
the Custody Agreement by such Selling Stockholder and the consummation
by such Selling Stockholder of the transactions contemplated hereby
and thereby;
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(ii) This Agreement has been duly executed and delivered by
or on behalf of such Selling Stockholder;
(iii) A Power-of-Attorney and a Custody Agreement have been
duly executed and delivered by such Selling Stockholder and constitute
valid and binding agreements of such Selling Stockholder, enforceable
in accordance with their respective terms, subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting creditors'
rights generally, general equitable principles (whether considered in
a proceeding in equity or at law) or any implied covenant of good
faith and fair dealing;
(iv) Immediately prior to the First Delivery Date, such
Selling Stockholder had good title to the shares of Stock to be sold
by such Selling Stockholder under this Agreement, free and clear of
all liens, encumbrances, equities or claims, and full right, power and
authority to sell, assign, transfer and deliver such shares to be sold
by such Selling Stockholder hereunder; and
(v) Good title to the shares of Stock to be sold by such
Selling Stockholder under this Agreement, free and clear of all liens,
encumbrances, equities or claims, has been transferred to each of the
several Underwriters.
In rendering such opinion, such counsel may state that its opinion is
limited to matters governed by the Federal laws of the United States of
America, the laws of ______________________. Such counsel shall also have
furnished to the Representatives a written statement, addressed to the
Underwriters and dated the First Delivery Date, in form and substance
satisfactory to the Representatives, to the effect that (y) such counsel
has acted as counsel to each Selling Stockholder in connection with the
preparation of the Registration Statement, and (z) based on the foregoing,
no facts have come to the attention of such counsel which lead it to
believe that the Registration Statement, as of the Effective Date,
contained any untrue statement of a material fact relating to any Selling
Stockholder or omitted to state such a material fact required to be stated
therein or necessary in order to make the statements therein not
misleading, or that the Prospectus contains any untrue statement of a
material fact relating to any Selling Stockholder or omits to state such a
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The foregoing opinion and statement may be qualified
by a statement to the effect that such counsel does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus.
(f) The Representatives shall have received from O'Melveny &
Myers LLP, counsel for the Underwriters, such opinion or opinions, dated
such Delivery Date, with respect to the issuance and sale of the Stock, the
Registration Statement, the Prospectus and other related matters as the
Representatives may reasonably require, and the Company shall have
furnished to such counsel such documents as they reasonably
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request for the purpose of enabling them to pass upon such matters.
(g) At the time of execution of this Agreement, the
Representatives shall have received from Arthur Andersen LLP a letter, in
form and substance satisfactory to the Representatives, addressed to the
Underwriters and dated the date hereof (i) confirming that they are
independent public accountants within the meaning of the Securities Act and
are in compliance with the applicable requirements relating to the
qualification of accountants under Rule 2-01 of Regulation S-X of the
Commission, (ii) stating, as of the date hereof (or, with respect to
matters involving changes or developments since the respective dates as of
which specified financial information is given in the Prospectus, as of a
date not more than five days prior to the date hereof), the conclusions and
findings of such firm with respect to the financial information and other
matters ordinarily covered by accountants' "comfort letters" to
underwriters in connection with registered public offerings.
(h) With respect to the letter of Arthur Andersen LLP referred to
in the preceding paragraph and delivered to the Representatives
concurrently with the execution of this Agreement (the "initial letter"),
the Company shall have furnished to the Representatives a letter (the
"bring-down letter") of such accountants, addressed to the Underwriters and
dated such Delivery Date (i) confirming that they are independent public
accountants within the meaning of the Securities Act and are in compliance
with the applicable requirements relating to the qualification of
accountants under Rule 2-01 of Regulation S-X of the Commission, (ii)
stating, as of the date of the bring-down letter (or, with respect to
matters involving changes or developments since the respective dates as of
which specified financial information is given in the Prospectus, as of a
date not more than five days prior to the date of the bring-down letter),
the conclusions and findings of such firm with respect to the financial
information and other matters covered by the initial letter and (iii)
confirming in all material respects the conclusions and findings set forth
in the initial letter.
(i) The Company shall have furnished to the Representatives a
certificate, dated such Delivery Date, of its Chairman of the Board, its
President or a Vice President and its chief financial officer stating that:
(i) The representations, warranties and agreements of the
Company in Section 1 are true and correct as of such Delivery Date;
the Company has complied with all its agreements contained herein; and
the conditions set forth in Sections 9(a) and 9(m) have been
fulfilled; and
(ii) They have carefully examined the Registration Statement
and the Prospectus and (A) as of the Effective Date, the Registration
Statement and Prospectus did not include any untrue statement of a
material fact and did not omit to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading, and (B) to the best of their knowledge, since the
Effective Date no event has occurred which should have been set forth
in a supplement or amendment to the Registration Statement or the
Prospectus.
21
<PAGE>
(j) Each Selling Stockholder (or the Custodian or one or more
attorneys-in-fact on behalf of the Selling Stockholders) shall have
furnished to the Representatives on the First Delivery Date a certificate,
dated the First Delivery Date, signed by, or on behalf of, the Selling
Stockholder (or the Custodian or one or more attorneys-in-fact) stating
that the representations, warranties and agreements of the Selling
Stockholder contained herein are true and correct as of the First Delivery
Date and that the Selling Stockholder has complied with all agreements
contained herein to be performed by the Selling Stockholder at or prior to
the First Delivery Date.
(k) (i) Neither the Company nor any of its subsidiaries shall
have sustained since the date of the latest audited financial statements
included or incorporated by reference in the Prospectus any loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as set forth
or contemplated in the Prospectus or (ii) since such date there shall not
have been any change in the capital stock or long-term debt of the Company
or any of its subsidiaries or any change, or any development involving a
prospective change, in or affecting the general affairs, management,
financial position, stockholders' equity or results of operations of the
Company and its subsidiaries, otherwise than as set forth or contemplated
in the Prospectus, the effect of which, in any such case described in
clause (i) or (ii), is, in the judgment of the Representatives, so material
and adverse as to make it impracticable or inadvisable to proceed with the
public offering or the delivery of the Stock being delivered on such
Delivery Date on the terms and in the manner contemplated in the
Prospectus.
(l) Subsequent to the execution and delivery of this Agreement
there shall not have occurred any of the following: (i) trading in
securities generally on the New York Stock Exchange or the American Stock
Exchange or in the over-the-counter market, or trading in any securities of
the Company on any exchange or in the over-the-counter market, shall have
been suspended or minimum prices shall have been established on any such
exchange or such market by the Commission, by such exchange or by any other
regulatory body or governmental authority having jurisdiction, (ii) a
banking moratorium shall have been declared by Federal or state
authorities, (iii) the United States shall have become engaged in
hostilities, there shall have been an escalation in hostilities involving
the United States or there shall have been a declaration of a national
emergency or war by the United States or (iv) there shall have occurred
such a material adverse change in general economic, political or financial
conditions (or the effect of international conditions on the financial
markets in the United States shall be such) as to make it, in the judgment
of a majority in interest of the several Underwriters, impracticable or
inadvisable to proceed with the public offering or delivery of the Stock
being delivered on such Delivery Date on the terms and in the manner
contemplated in the Prospectus.
(m) The New York Stock Exchange, Inc. shall have approved the
Stock for inclusion, subject only to official notice of issuance.
22
<PAGE>
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably
satisfactory to counsel for the Underwriters.
10. Indemnification and Contribution.
(a) The Company and [BFR Systems, Chamberlain Associates, Data
Arts & Sciences, FDSI Consulting, INNOVA Solutions Inc. and Pittsburg
Business Consultants], its principal operating subsidiaries (the "Principal
Subsidiaries") jointly and severally, shall indemnify and hold harmless
each Underwriter, its officers and employees and each person, if any, who
controls any Underwriter within the meaning of the Securities Act, from and
against any loss, claim, damage or liability, joint or several, or any
action in respect thereof (including, but not limited to, any loss, claim,
damage, liability or action relating to purchases and sales of Stock), to
which that Underwriter, officer, employee or controlling person may become
subject, under the Securities Act or otherwise, insofar as such loss,
claim, damage, liability or action arises out of, or is based upon, (i) any
untrue statement or alleged untrue statement of a material fact contained
(A) in any Preliminary Prospectus, the Registration Statement or the
Prospectus or in any amendment or supplement thereto or (B) in any blue sky
application or other document prepared or executed by the Company (or based
upon any written information furnished by the Company) specifically for the
purpose of qualifying any or all of the Stock under the securities laws of
any state or other jurisdiction (any such application, document or
information being hereinafter called a "Blue Sky Application"), (ii) the
omission or alleged omission to state in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or in any amendment or supplement
thereto, or in any Blue Sky Application any material fact required to be
stated therein or necessary to make the statements therein not misleading,
or (iii) any act or failure to act or any alleged act or failure to act by
any Underwriter in connection with, or relating in any manner to, the Stock
or the offering contemplated hereby, and which is included as part of or
referred to in any loss, claim, damage, liability or action arising out of
or based upon matters covered by clause (i) or (ii) above (provided that
the Company and the Principal Subsidiaries shall not be liable under this
clause (iii) to the extent that it is determined in a final judgment by a
court of competent jurisdiction that such loss, claim, damage, liability or
action resulted directly from any such acts or failures to act undertaken
or omitted to be taken by such Underwriter through its gross negligence or
willful misconduct), and shall reimburse each Underwriter and each such
officer, employee or controlling person promptly upon demand for any legal
or other expenses reasonably incurred by that Underwriter, officer,
employee or controlling person in connection with investigating or
defending or preparing to defend against any such loss, claim, damage,
liability or action as such expenses are incurred; provided, however, that
the Company and the Principal Subsidiaries shall not be liable in any such
case to the extent that any such loss, claim, damage, liability or action
arises out of, or is based upon, any untrue statement or alleged untrue
statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or in any such
amendment or supplement, or in any Blue Sky Application, in reliance upon
and in conformity with written information concerning such Underwriter
furnished to the
23
<PAGE>
Company through the Representatives by or on behalf of any Underwriter
specifically for inclusion therein, and further, provided, however, that
the Company and the Principal Subsidiaries shall not be liable to an
Underwriter in respect of any Preliminary Prospectus, or any amendment or
supplement thereto, to the extent that both (i) all of the untrue
statements or alleged untrue statements or omissions or alleged omissions
of a material fact contained in any Preliminary Prospectus or any amendment
or supplement thereto were fully corrected in the Prospectus or in an
amendment or supplement thereto and (ii) the Prospectus, together with such
amendment or supplement, if any, was provided to such Underwriter by the
Company prior to the time the written confirmation of the sale of Stock to
such person was sent and was not sent or given to the purchaser of the
stock in question by such Underwriter at or prior to the written
confirmation of the sale of Stock to such person. The foregoing indemnity
agreement is in addition to any liability which the Company or the
Principal Subsidiaries may otherwise have to any Underwriter or to any
officer, employee or controlling person of that Underwriter.
(b) The Selling Stockholders, severally in proportion to the
number of shares of Stock to be sold by them hereunder, shall indemnify and
hold harmless each Underwriter, its officers and employees, and each
person, if any, who controls any Underwriter within the meaning of the
Securities Act, from and against any loss, claim, damage or liability,
joint or several, or any action in respect thereof (including, but not
limited to, any loss, claim, damage, liability or action relating to
purchases and sales of Stock), to which that Underwriter, officer, employee
or controlling person may become subject, under the Securities Act or
otherwise, insofar as such loss, claim, damage, liability or action arises
out of, or is based upon, (i) any untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any amendment or supplement
thereto or (ii) the omission or alleged omission to state in any
Preliminary Prospectus, Registration Statement or the Prospectus, or in any
amendment or supplement thereto, any material fact required to be stated
therein or necessary to make the statements therein not misleading, but in
the case of the Selling Stockholders not listed on Schedule 3, only to the
extent that such untrue statement or alleged untrue statement or omission
or alleged omission was made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any amendment or supplement
thereto in reliance upon and in conformity with written information
concerning such Selling Stockholder furnished by such Selling Stockholder
to the Company specifically for inclusion therein, and shall reimburse each
Underwriter, its officers and employees and each such controlling person
for any legal or other expenses reasonably incurred by that Underwriter,
its officers and employees or controlling person in connection with
investigating or defending or preparing to defend against any such loss,
claim, damage, liability or action as such expenses are incurred; provided,
however, that the Selling Stockholders shall not be liable in any such case
to the extent that any such loss, claim, damage, liability or action arises
out of, or is based upon, any untrue statement or alleged untrue statement
or omission or alleged omission made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any such amendment or
supplement in reliance upon and in conformity with written information
concerning such Underwriter furnished to the Company through the
Representatives by or on behalf of any Underwriter specifically for
inclusion therein;
24
<PAGE>
and, provided, further, however, that the Selling Stockholders shall not be
liable to an Underwriter in respect of any Preliminary Prospectus, or any
amendment or supplement thereto, to the extent that both (i) all of the
untrue statements or alleged untrue statements or omissions or alleged
omissions of a material fact contained in any Preliminary Prospectus or any
amendment or supplement thereto were fully corrected in the Prospectus or
in an amendment or supplement thereto and (ii) the Prospectus, together
with such amendment or supplement, if any, was provided to such Underwriter
by the Company prior to the time of written confirmation of the sale of
Stock to such person was sent and was not sent or given to the purchaser of
the stock in question by such Underwriter at or prior to the written
confirmation of the sale of Stock to such person. The foregoing indemnity
agreement is in addition to any liability which the Selling Stockholders
may otherwise have to any Underwriter or any officer, employee or
controlling person of that Underwriter.
(c) Each Underwriter, severally and not jointly, shall indemnify
and hold harmless the Company, its officers and employees, each of its
directors, and each person, if any, who controls the Company within the
meaning of the Securities Act, from and against any loss, claim, damage or
liability, joint or several, or any action in respect thereof, to which the
Company or any such director, officer or controlling person may become
subject, under the Securities Act or otherwise, insofar as such loss,
claim, damage, liability or action arises out of, or is based upon, (i) any
untrue statement or alleged untrue statement of a material fact contained
(A) in any Preliminary Prospectus, the Registration Statement or the
Prospectus or in any amendment or supplement thereto, or (B) in any Blue
Sky Application or (ii) the omission or alleged omission to state in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or in
any amendment or supplement thereto, or in any Blue Sky Application any
material fact required to be stated therein or necessary to make the
statements therein not misleading, but in each case only to the extent that
the untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written
information concerning such Underwriter furnished to the Company through
the Representatives by or on behalf of that Underwriter specifically for
inclusion therein, and shall reimburse the Company and any such director,
officer or controlling person for any legal or other expenses reasonably
incurred by the Company or any such director, officer or controlling person
in connection with investigating or defending or preparing to defend
against any such loss, claim, damage, liability or action as such expenses
are incurred. The foregoing indemnity agreement is in addition to any
liability which any Underwriter may otherwise have to the Company or any
such director, officer, employee or controlling person.
(d) Promptly after receipt by an indemnified party under this
Section 10 of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under this Section 10, notify the
indemnifying party in writing of the claim or the commencement of that
action; provided, however, that the failure to
25
<PAGE>
notify the indemnifying party shall not relieve it from any liability which
it may have under this Section 10 except to the extent it has been
materially prejudiced by such failure and, provided further, that the
failure to notify the indemnifying party shall not relieve it from any
liability which it may have to an indemnified party otherwise than under
this Section 10. If any such claim or action shall be brought against an
indemnified party, and it shall notify the indemnifying party thereof, the
indemnifying party shall be entitled to participate therein and, to the
extent that it wishes, jointly with any other similarly notified
indemnifying party, to assume the defense thereof with counsel reasonably
satisfactory to the indemnified party. After notice from the indemnifying
party to the indemnified party of its election to assume the defense of
such claim or action, the indemnifying party shall not be liable to the
indemnified party under this Section 10 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the
defense thereof other than reasonable costs of investigation; provided,
however, that the Representatives shall have the right to employ counsel to
represent jointly the Representatives and those other Underwriters and
their respective officers, employees and controlling persons who may be
subject to liability arising out of any claim in respect of which indemnity
may be sought by the Underwriters against the Company or the Principal
Subsidiaries or any Selling Stockholder under this Section 10 if, in the
reasonable judgment of the Representatives, it is advisable for the
Representatives and those Underwriters, officers, employees and controlling
persons to be jointly represented by separate counsel, and in that event
the fees and expenses of such separate counsel shall be paid by the Company
or the Principal Subsidiaries or Selling Stockholders. No indemnifying
party shall (i) without the prior written consent of the indemnified
parties (which consent shall not be unreasonably withheld), settle or
compromise or consent to the entry of any judgment with respect to any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim or
action) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising
out of such claim, action, suit or proceeding, or (ii) be liable for any
settlement of any such action effected without its written consent (which
consent shall not be unreasonably withheld), but if settled with the
consent of the indemnifying party or if there be a final judgment of the
plaintiff in any such action, the indemnifying party agrees to indemnify
and hold harmless any indemnified party from and against any loss or
liability by reason of such settlement or judgment.
(e) If the indemnification provided for in this Section 10 shall
for any reason be unavailable to or insufficient to hold harmless an
indemnified party under Section 10(a), 10(b) or 10(c) in respect of any
loss, claim, damage or liability, or any action in respect thereof,
referred to therein, then each indemnifying party shall, in lieu of
indemnifying such indemnified party, contribute to the amount paid or
payable by such indemnified party as a result of such loss, claim, damage
or liability, or action in respect thereof, (i) in such proportion as shall
be appropriate to reflect the relative benefits received by the Company,
the Principal Subsidiaries and the Selling Stockholders on the one hand and
the Underwriters on the other from the offering of the Stock or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
Company, the Principal Subsidiaries, and the Selling Stockholders on the
one hand and the Underwriters on the other with respect to
26
<PAGE>
the statements or omissions which resulted in such loss, claim, damage or
liability, or action in respect thereof, as well as any other relevant
equitable considerations. The relative benefits received by the Company,
the Principal Subsidiaries and the Selling Stockholders on the one hand and
the Underwriters on the other with respect to such offering shall be deemed
to be in the same proportion as the total net proceeds from the offering of
the Stock purchased under this Agreement (before deducting expenses)
received by the Company, the Principal Subsidiaries and the Selling
Stockholders, on the one hand, and the total underwriting discounts and
commissions received by the Underwriters with respect to the shares of the
Stock purchased under this Agreement, on the other hand, bear to the total
gross proceeds from the offering of the shares of the Stock under this
Agreement, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to whether
the untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied
by the Company, the Principal Subsidiaries, the Selling Stockholders or the
Underwriters, the intent of the parties and their relative knowledge,
access to information and opportunity to correct or prevent such statement
or omission. For purposes of the preceding two sentences, the net proceeds
deemed to be received by the Company shall be deemed to be also for the
benefit of the Principal Subsidiaries and information supplied by the
Company shall also be deemed to have been supplied by the Principal
Subsidiaries. The Company, the Principal Subsidiaries, the Selling
Stockholders and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section were to be determined
by pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation which does not take
into account the equitable considerations referred to herein. The amount
paid or payable by an indemnified party as a result of the loss, claim,
damage or liability, or action in respect thereof, referred to above in
this Section shall be deemed to include, for purposes of this Section
10(e), any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or
claim. Notwithstanding the provisions of this Section 10(e), no Underwriter
shall be required to contribute any amount in excess of the amount by which
the total price at which the Stock underwritten by it and distributed to
the public was offered to the public exceeds the amount of any damages
which such Underwriter has otherwise paid or become liable to pay by reason
of any untrue or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute as provided in this Section 10(e)
are several in proportion to their respective underwriting obligations and
not joint.
(f) The Underwriters severally confirm and the Company and the
Selling Stockholders acknowledge that the statements with respect to the
public offering of the Stock by the Underwriters set forth on the cover
page of, the legend concerning over-allotments on the inside front cover
page of and the concession and reallowance figures appearing under the
caption "Underwriting" in, the Prospectus are correct and constitute the
only information concerning such Underwriters furnished in writing to the
27
<PAGE>
Company by or on behalf of the Underwriters specifically for inclusion in
the Registration Statement and the Prospectus.
(g) Notwithstanding the provisions of this Section 10, no Selling
Stockholder shall be liable to the Underwriters pursuant to Section 10(b)
or for contribution pursuant to Section 10(e) in an amount in excess of the
net proceeds to such Selling Stockholder from the sale of Stock by such
Selling Stockholder.
11. Defaulting Underwriters.
If, on either Delivery Date, any Underwriter defaults in the
performance of its obligations under this Agreement, the remaining non-
defaulting Underwriters shall be obligated to purchase the Stock which the
defaulting Underwriter agreed but failed to purchase on such Delivery Date in
the respective proportions which the number of shares of the Firm Stock set
opposite the name of each remaining non-defaulting Underwriter in Schedule 1
hereto bears to the total number of shares of the Firm Stock set opposite the
names of all the remaining non-defaulting Underwriters in Schedule 1 hereto;
provided, however, that the remaining non-defaulting Underwriters shall not be
obligated to purchase any of the Stock on such Delivery Date if the total number
of shares of the Stock which the defaulting Underwriter or Underwriters agreed
but failed to purchase on such date exceeds 9.09% of the total number of shares
of the Stock to be purchased on such Delivery Date, and any remaining non-
defaulting Underwriter shall not be obligated to purchase more than 110% of the
number of shares of the Stock which it agreed to purchase on such Delivery Date
pursuant to the terms of Section 3. If the foregoing maximums are exceeded, the
remaining non-defaulting Underwriters, or those other underwriters satisfactory
to the Representatives who so agree, shall have the right, but shall not be
obligated, to purchase, in such proportion as may be agreed upon among them, all
the Stock to be purchased on such Delivery Date. If the remaining Underwriters
or other underwriters satisfactory to the Representatives do not elect to
purchase the shares which the defaulting Underwriter or Underwriters agreed but
failed to purchase on such Delivery Date, this Agreement (or, with respect to
the Second Delivery Date, the obligation of the Underwriters to purchase, and of
the Company to sell, the Option Stock) shall terminate without liability on the
part of any non-defaulting Underwriter or the Company or the Selling
Stockholders, except that the Company will continue to be liable for the payment
of expenses to the extent set forth in Sections 8 and 13. As used in this
Agreement, the term "Underwriter" includes, for all purposes of this Agreement
unless the context requires otherwise, any party not listed in Schedule 1 hereto
who, pursuant to this Section 11, purchases Firm Stock which a defaulting
Underwriter agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting Underwriter of any
liability it may have to the Company and the Selling Stockholders for damages
caused by its default. If other underwriters are obligated or agree to purchase
the Stock of a defaulting or withdrawing Underwriter, either the Representatives
or the Company may postpone the Delivery Date for up to seven full business days
in order to effect any changes that in the opinion of counsel for the Company or
counsel for the Underwriters may be necessary in the Registration Statement, the
Prospectus or in any other document or arrangement.
28
<PAGE>
12. Termination. The obligations of the Underwriters hereunder may
be terminated by the Representatives by notice given to and received by the
Company and the Selling Stockholders prior to delivery of and payment for the
Firm Stock if, prior to that time, any of the events described in Sections 9(k)
or 9(l), shall have occurred or if the Underwriters shall decline to purchase
the Stock for any reason permitted under this Agreement.
13. Reimbursement of Underwriters' Expenses. If (a) the Company or
any Selling Stockholder shall fail to tender the Stock for delivery to the
Underwriters by reason of any failure, refusal or inability on the part of the
Company or the Selling Stockholders to perform any agreement on its part to be
performed, or because any other condition of the Underwriters' obligations
hereunder required to be fulfilled by the Company or the Selling Stockholders is
not fulfilled, the Company and the Selling Stockholders will reimburse the
Underwriters for all reasonable out-of-pocket expenses (including reasonable
fees and disbursements of counsel) incurred by the Underwriters in connection
with this Agreement and the proposed purchase of the Stock, and upon demand the
Company and the Selling Stockholders shall pay the full amount thereof to the
Representatives. If this Agreement is terminated pursuant to Section 11 by
reason of the default of one or more Underwriters, neither the Company nor any
Selling Stockholder shall be obligated to reimburse any defaulting Underwriter
on account of those expenses.
14. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by mail,
telex or facsimile transmission to Lehman Brothers Inc., Three World
Financial Center, New York, New York 10285, Attention: Syndicate
Department (Fax: 212-526-6588), with a copy, in the case of any notice
pursuant to Section 11(d), to the Director of Litigation, Office of the
General Counsel, Lehman Brothers Inc., 3 World Financial Center, 10th
Floor, New York, NY 10285;
(b) if to the Company or to the Principal Subsidiaries, shall be
delivered or sent by mail, telex or facsimile transmission to the address
of the Company set forth in the Registration Statement, Attention: James R.
Lavelle, Chairman and Chief Executive Officer (Fax: (415) 439-6888); with a
copy to David W. Pollak, Esq., Morgan, Lewis & Bockius LLP, 101 Park
Avenue, New York, New York 10178 (Fax: (212) 309-6273).
(c) if to any Selling Stockholder, shall be delivered or sent by
mail, telex or facsimile transmission to such Selling Stockholder at the
address set forth on Schedule 2 hereto;
provided, however, that any notice to an Underwriter pursuant to Section 10(d)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company and
the Selling Stockholders shall be
29
<PAGE>
entitled to act and rely upon any request, consent, notice or agreement given or
made on behalf of the Underwriters by Lehman Brothers Inc. on behalf of the
Representatives and the Company and the Underwriters shall be entitled to act
and rely upon any request, consent, notice or agreement given or made on behalf
of the Selling Stockholders by the Custodian.
15. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the Underwriters, the Company, the
Selling Stockholders and their respective personal representatives and
successors. This Agreement and the terms and provisions hereof are for the sole
benefit of only those persons, except that (A) the representations, warranties,
indemnities and agreements of the Company and the Selling Stockholders contained
in this Agreement shall also be deemed to be for the benefit of the person or
persons, if any, who control any Underwriter within the meaning of Section 15 of
the Securities Act and (B) the indemnity agreement of the Underwriters contained
in Section 10(c) of this Agreement shall be deemed to be for the benefit of
directors of the Company, officers of the Company who have signed the
Registration Statement and any person controlling the Company within the meaning
of Section 15 of the Securities Act. Nothing in this Agreement is intended or
shall be construed to give any person, other than the persons referred to in
this Section 15, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision contained herein.
16. Survival. The respective indemnities, representations,
warranties and agreements of the Company, the Principal Subsidiaries, the
Selling Stockholders and the Underwriters contained in this Agreement or made by
or on behalf on them, respectively, pursuant to this Agreement, shall survive
the delivery of and payment for the Stock and shall remain in full force and
effect, regardless of any investigation made by or on behalf of any of them or
any person controlling any of them.
17. Definition of the Terms "Business Day" and "Subsidiary". For
purposes of this Agreement, (a) "business day" means any day on which the New
York Stock Exchange, Inc. is open for trading and (b) "subsidiary" has the
meaning set forth in Rule 405 of the Rules and Regulations.
18. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF NEW YORK.
19. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
20. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
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<PAGE>
If the foregoing correctly sets forth the agreement among the Company,
the Principal Subsidiaries, the Selling Stockholders and the Underwriters,
please indicate your acceptance in the space provided for that purpose below.
Very truly yours,
COTELLIGENT GROUP, INC.
By
---------------------------------
[Insert title of person executing
agreement]
[The Principal Subsidiaries]
By
---------------------------------
[Insert title of person executing
agreement]
The Selling Stockholders named in Schedule 2 to
this Agreement
By
---------------------------------
Attorney-in-Fact
Accepted:
Lehman Brothers Inc.
The Robertson-Humphrey Company, LLC
Prudential Securities Incorporated
For themselves and as Representatives
of the several Underwriters named
in Schedule 1 hereto
By: Lehman Brothers Inc.
-------------------------
Authorized Representative
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<PAGE>
SCHEDULE 1
Number of
Underwriters Shares
------------ ---------
Lehman Brothers Inc................................
The Robertson-Humphrey Company, LLC................
Prudential Securities Incorporated.................
---------
Total........................................... 3,000,000
=========
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<PAGE>
SCHEDULE 2
Number of Shares
Name of Selling Stockholders of Firm Stock
- ---------------------------- ----------------
Michael Evans........................................
James Lavelle........................................
Jeffrey Bernardis....................................
Daniel Beals.........................................
Harvey Poppel........................................
Jeremy Reed..........................................
Bernard Ruddock......................................
S. Larry Parker......................................
Thomas Fallat........................................
Charles Fowler.......................................
Christy Cooper.......................................
Total...........................................
==============
33
<PAGE>
SCHEDULE 3
Name of Selling Stockholders
----------------------------
Michael Evans
James Lavelle
Jeffrey Bernardis
Daniel Beals
Harvey Poppel
34
<PAGE>
EXHIBIT 5.1
[Letterhead of Morgan, Lewis & Bockius LLP]
February 24, 1998
Cotelligent Group, Inc.
101 California Street, Suite 2050
San Francisco, California 94111
Re: Issuance of Shares Pursuant to
Registration Statement on Form S-3
----------------------------------
Ladies and Gentlemen:
We have acted as counsel to Cotelligent Group, Inc., a Delaware corporation
(the "Company"), in connection with the preparation and filing with the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Act"), of a Registration Statement on Form S-3 (the "Registration
Statement") relating to the public offering by the Company of an aggregate of
3,450,000 shares (including 1,250,000 shares to be sold by certain selling
stockholders and 450,000 shares subject to an over-allotment option) (the
"Shares") of the Company's Common Stock, par value $.01 per share.
In so acting, we have examined originals, or copies certified or otherwise
identified to our satisfaction, of the Certificate of Incorporation and By-Laws
of the Company, each as amended to date, and such other documents, records,
certificates and other instruments as in our judgment are necessary or
appropriate for purposes of this opinion.
Based on the foregoing, we are of the opinion that, upon approval of the
sale price for the Shares by the authorized Pricing Committee of the Company's
Board of Directors, the Shares will have been duly authorized by the Company
and, when issued and paid for as contemplated by the Registration Statement,
will be duly and validly issued and fully paid and non-assessable.
We render this opinion as members of the Bar of the State of New York and
express no opinion as to any law other than the General Corporation Law of the
State of Delaware.
<PAGE>
Cotelligent Group, Inc.
February 24, 1998
Page 2
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the use of our name under the caption "Legal Matters" in the
Registration Statement. In giving this consent, we do not admit that we are
acting within the category of persons whose consent is required under Section 7
of the Act.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
Registration Statement.
Arthur Andersen LLP
San Francisco, California
February 24, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 684
<SECURITIES> 0
<RECEIVABLES> 48,663
<ALLOWANCES> 1,603
<INVENTORY> 0
<CURRENT-ASSETS> 50,110
<PP&E> 11,669
<DEPRECIATION> 5,172
<TOTAL-ASSETS> 74,531
<CURRENT-LIABILITIES> 27,463
<BONDS> 0
0
0
<COMMON> 117
<OTHER-SE> 34,533
<TOTAL-LIABILITY-AND-EQUITY> 74,531
<SALES> 175,981
<TOTAL-REVENUES> 175,981
<CGS> 124,156
<TOTAL-COSTS> 166,604
<OTHER-EXPENSES> (22)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 370
<INCOME-PRETAX> 9,029
<INCOME-TAX> 5,327
<INCOME-CONTINUING> 3,702
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,702
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
</TABLE>
