UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-25372
COTELLIGENT GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3173918
(State of other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
101 California Street, Suite 2050
San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
(415) 439-6400
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal
year, if changed since last report)
Indicates by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
At February 12, 1998 there were 11,718,851 shares of common stock
outstanding.
<PAGE>
COTELLIGENT GROUP, INC.
<TABLE>
<CAPTION>
INDEX
Part I - Financial Information
<S> <C>
Item 1. Financial Statements PAGE
Cotelligent Group, Inc.
Consolidated Balance Sheets at March 31, 1997 and
December 31, 1997 3
Consolidated Statements of Operations for the Three and
Nine Months Ended December 31, 1997 4
Consolidated Statements of Operations for the Three and
Nine Months Ended December 31, 1996 5
Consolidated Statements of Cash Flows for the
Nine Months Ended December 31, 1996 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II - Other Information
Signatures 18
</TABLE>
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1997
---------------- -----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 2,904 $ 684
Accounts receivable, including unbilled accounts
of $5,595 and $8,057 and net of allowance for
doubtful accounts of accounts of $632 and $1,603,
respectively........................................ 32,387 47,060
Notes receivable from officers............................. 225 229
Prepaid expenses and other................................. 1,306 2,137
---------------- -----------------
Total current assets..................................... 36,822 50,110
Property and equipment, net................................... 5,448 6,497
Deferred tax assets........................................... 54 -
Goodwill, net of accumulated amortization of $38 and $159,
respectively........................................... 2,409 17,588
Other assets.................................................. 434 336
================ =================
Total assets............................................. $ 45,167 $ 74,531
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt............................................ $ 4,409 $ 234
Accounts payable........................................... 2,590 2,331
Accrued compensation and related payroll liabilities....... 9,990 17,006
Income taxes payable....................................... 491 3,478
Deferred tax liabilities................................... 761 383
Other accrued liabilities.................................. 3,110 4,031
---------------- -----------------
Total current liabilities................................ 21,351 27,463
Long-term debt................................................ 648 12,296
Deferred tax liabilities...................................... - 102
Other long-term liabilities................................... 31 20
---------------- -----------------
Total liabilities........................................ 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, 11,272,401 and 11,713,596 shares
issued and outstanding, respectively.................... 113 117
Additional paid-in capital................................. 19,046 27,399
Retained earnings.......................................... 3,978 7,134
---------------- -----------------
Total stockholders' equity............................... 23,137 34,650
---------------- -----------------
Total liabilities and stockholders' equity............... $ 45,167 $ 74,531
================ =================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
<TABLE>
<CAPTION>
Pro Forma Pro Porma
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
1997 1997 1997 1997
--------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Revenues......................................... $ 63,111 $ 175,981 $ 63,111 $ 175,981
Cost of services................................. 44,730 124,156 44,723 124,137
-------------- ------------- ------------- ---------------
Gross profit ............................... 18,381 51,825 18,388 51,844
Selling, general and administrative expenses 14,759 41,593 13,732 39,629
Non-recurring transaction costs ................. 855 855 - -
--------------- -------------- ------------- ---------------
Operating income........................... 2,767 9,377 4,656 12,215
Other (income) expense:
Interest expense........................... 172 370 172 370
Interest income ........................... (18) (38) (18) (38)
Other ..................................... (17) 16 (17) 16
--------------- -------------- ------------- ---------------
Total other (income) expense............ 137 348 137 348
--------------- -------------- ------------- ---------------
Income before provision for income taxes ....... 2,630 9,029 4,519 11,867
Provision for income taxes...................... 2,768 5,327 1,853 4,865
--------------- -------------- ------------- ---------------
Net income (loss)................................ $ (138) $ 3,702 $ 2,666 $ 7,002
=============== ============== ============= ===============
Earnings (loss) per share - basic and diluted $ (0.01) $ 0.32 $ 0.23 $ 0.61
=============== ============== ============= ===============
Weighted average shares outstanding -
Basic.................................. 11,584,353 11,399,141 11,584,353 11,399,141
=============== ============== ============= ===============
Diluted................................ 11,756,214 11,503,578 11,756,214 11,503,578
=============== ============== ============= ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
<TABLE>
<CAPTION>
Pro Forma Pro Porma
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
1996 1996 1996 1996
--------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Revenues......................................... $ 42,534 $ 118,294 $ 42,534 $ 118,294
Cost of services................................. 30,104 82,973 30,096 82,950
-------------- ------------- ------------- ---------------
Gross profit ............................... 12,430 35,321 12,438 35,344
Selling, general and administrative expenses 9,694 28,100 9,365 26,825
Non-recurring transaction costs ................. 319 1,105 - -
--------------- -------------- ------------- ---------------
Operating income........................... 2,417 6,116 3,073 8,519
Other (income) expense:
Interest expense........................... 179 385 179 385
Interest income ........................... (70) (287) (70) (287)
Other ..................................... (120) (218) (120) (218)
--------------- -------------- ------------- ---------------
Total other (income) expense .......... (11) (120) (11) (120)
--------------- -------------- ------------- ---------------
Income before provision for income taxes ....... 2,428 6,236 3,084 8,639
Provision for income taxes...................... 841 2,745 1,265 3,542
--------------- -------------- ------------- ---------------
Net income (loss)................................ $ 1,587 $ 3,491 $ 1,819 $ 5,097
=============== ============== ============= ===============
Earnings (loss) per share - basic and diluted $ 0.14 $ 0.31 $ 0.16 $ 0.45
=============== ============== ============= ===============
Weighted average shares outstanding -
Basic.................................. 11,229,131 11,223,131 11,229,131 11,223,132
=============== ============== ============= ===============
Diluted................................ 11,393,769 11,373,930 11,393,769 11,373,930
=============== ============== ============= ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------------
December 31, 1996 December 31,
1997
------------------ -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................... $ 3,491 $ 3,702
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .......................... 494 1,542
Provision for doubtful accounts............................... 235 823
Loss on sale of assets........................................ 45
Deferred income taxes, net .................................... (105) (222)
Changes in current assets and liabilities:
Accounts receivable ..................................... (6,001) (13,091)
Prepaid expenses and other............................... (465) (809)
Accounts payable and accrued expenses.................... 2,215 6,848
Income taxes payable .................................... (292) 2,691
Other liabilities ....................................... (1,526) (11)
Changes in other assets........................................ 11 105
------------------ -----------------
Net cash provided by (used in) operating activities (1,898) 1,578
------------------ -----------------
Cash flows from investing activities:
Purchases of property and equipment .......................... (2,415) (2,194)
Acquisition of businesses, net of cash........................... (2,915) (7,325)
Net advances to related parties.................................. (105) -
------------------ -----------------
Net cash used in investing activities.................... (5,435) (9,519)
------------------ -----------------
Cash flows from financing activities:
Net borrowings (repayments) on short-term debt................... 1,229 (4,597)
Net borrowings (repayments) on long-term debt.................... (250) 12,070
Borrowings from related parties.................................. 105 -
Net proceeds from issuance of Common Stock...................... 29 54
Distributions from certain Pooled Companies, prior to
acquisition.................................................... (1,774) (1,806)
------------------ ------------------
Net cash provided by (used in) financing activities (661) 5,721
------------------ -----------------
Net decrease in cash and cash equivalents........................ (7,994) (2,220)
Cash and cash equivalents at beginning of period................ . 14,916 2,904
------------------ -----------------
Cash and cash equivalents at end of period....................... $ 6,922 $ 684
================== =================
Supplemental disclosures of cash flow information:
Interest paid.................................................... 293 585
Income taxes paid ............................................... 3,272 3,818
Stock issued to acquire business................................ - 7,464
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<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") consultants
on a contract basis and consulting and outsourcing services to businesses with
complex IT operations. On February 20, 1996, Cotelligent acquired four companies
(the "Founding Companies") simultaneously with the initial public offering of
its Common Stock (the "Offering"). Prior to this date Cotelligent was a
non-operating entity.
During the year ended March 31, 1997 ("fiscal 1997") and in the first 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.
Pro forma data on the consolidated statements of operations reflects
adjustments for the Pooled Companies including compensation differentials to
former owners and employees, termination of contributions to retirement plans,
elimination of non-recurring transaction costs related to the Pooled Companies
and income taxes as if the entities were combined and subject to the effective
federal and state statutory rates throughout the periods discussed.
Note 2 - Summary of Significant Accounting Policies
Interim Financial Statement Presentation
The accompanying interim financial statements do not include all
disclosures included in the financial statements for the fiscal years ended
March 31, 1995, 1996 and 1997 as included on Cotelligent's Annual Report on Form
10-K for the year ended March 31, 1997 ("Form 10-K"), and therefore should be
read in conjunction with the financial statements included on Form 10-K.
In the opinion of management, the interim financial statements filed as
part of this Quarterly Report on Form 10-Q reflect all adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation of the
financial position and the results of operations and of cash flows for the
interim periods presented.
7
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share". This
statement establishes standards for presenting earnings per share ("EPS"). The
SFAS No. 128 requires dual presentation of basic and dilutive EPS on the face of
the income statement. Basic EPS is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. The Company adopted this statement in the quarter ended
December 31, 1997 and has restated all prior-period EPS data presented. The
difference between basic and diluted shares results from the inclusion of
dilutive stock options.
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 nonowner 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.
8
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(In thousands, except share data)
Note 3 - Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional Total
---------------------------- Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
------------ ---------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1997... 11,272,401 $ 113 $ 19,046 $ 3,978 $ 23,137
Issuance of Common Stock.... 441,195 4 8,353 - 8,357
Dividends from 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>
Note 4 - Pro Forma Results
The following pro forma consolidated statements of operations for the three
months ended December 31, 1996 and 1997 and the nine months ended December 31,
1996 and 1997 give effect to the acquisitions of the Founding Companies, Pooled
Companies and Purchased Companies as if these acquisitions had always been
members of the same operating group. These pro forma consolidated statements
reflect adjustments for the acquisitions of the Pooled Companies including
elimination of non-recurring transaction costs, 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, these pro forma
consolidated financial statements reflect adjustments for interest expense on
cash consideration and amortization of goodwill resulting from the Purchased
Companies for all periods prior to their acquisition.
<TABLE>
<CAPTION>
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
1996 1996 1997 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues....................................... $ 47,057 $ 132,131 $ 64,476 $ 186,648
Cost of services.............................. 33,478 93,089 45,571 131,370
--------------- --------------- --------------- ---------------
Gross profit.............................. 13,579 39,042 18,905 55,278
Selling, general and administrative........... 10,451 29,539 14,011 41,779
--------------- --------------- --------------- ---------------
Operating income............................ 3,128 9,503 4,894 13,499
Other expense................................. 152 373 218 704
--------------- --------------- --------------- ---------------
Income before provision for income taxes 2,976 9,130 4,676 12,795
Provision for income taxes................. 1,220 3,743 1,918 5,246
--------------- --------------- --------------- ---------------
Net income................................... $ 1,756 $ 5,387 $ 2,758 $ 7,549
=============== =============== =============== ===============
Earnings per share -
Basic..................................... $ 0.15 $ 0.46 $ 0.24 $ 0.65
=============== =============== =============== ===============
Diluted................................... $ 0.15 $ 0.46 $ 0.23 $ 0.64
=============== =============== =============== ===============
Weighted average shares outstanding -
Basic..................................... 11,592,129 11,586,129 11,702,728 11,680,299
=============== =============== =============== ===============
Diluted................................... 11,756,767 11,736,928 11,874,583 11,784,736
=============== =============== =============== ===============
</TABLE>
9
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(In thousands, except share data)
Note 5 - Supplemental Pro Forma Income Tax Information
Prior to their acquisitions in fiscal 1997 and 1998, certain Pooled
Companies were S corporations and accordingly, these companies did not reflect a
provision for federal or certain state income taxes. In connection with these
acquisitions by Cotelligent, the acquired companies terminated their respective
S corporation status. The following pro forma income tax information is
presented in accordance with SFAS No. 109 as if these companies had been C
corporations subject to federal and state income taxes throughout the periods
presented.
<TABLE>
<CAPTION>
Three Nine Months Three Months Nine Months
Months Ended Ended Ended
Ended December 31, December December
December 31, 1996 31, 1997 31, 1997
1996
------------ -------------- ------------- -------------
<S> <C> <C> <C> <C>
Income before provision for income taxes.. $ 2,428 $ 6,236 $ 2,630 $ 9,029
Pro forma provision for income taxes 889 2,901 2,758 5,130
------------ -------------- ------------- --------------
Pro forma net income.......................... $ 1,539 $ 3,335 $ (128) $ 3,899
============= ============== ============= ==============
</TABLE>
Note 6 - Subsequent Event
On January 2, 1998, the Company acqurired a business for cash of $1.4
million, to be accounted for under the purchase method of accounting. Goodwill
from the purchase is estimated to be $1.0 million. The purchase agreement
provides for additional consideration based on financial performance of the
acquired company subsequent to the acquisition. Potential earn-out payments are
due in fiscal years 1999 and 2000 and will be considered additional purchase
price in the year the earn-out periods end.
10
<PAGE>
ITEM 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
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") consultants
on a contract basis and consulting and outsourcing services to businesses with
complex IT operations. On February 20, 1996, Cotelligent acquired four companies
(the "Founding Companies") simultaneously with the initial public offering of
its Common Stock (the "Offering"). Prior to this date Cotelligent was a
non-operating entity.
During the year ended March 31, 1997 ("fiscal 1997") and in the first nine
month period ended December 31, 1997 ("fiscal 1998") the Company acquired ten
businesses accounted for under the pooling-of-interests method. The consolidated
financial statements have been restated in accordance with generally accepted
accounting principles to present the financial data as if Cotelligent and these
companies had always been members of the same operating group.
In addition, during fiscal 1997 and 1998, the Company acquired five
businesses accounted for under the purchase method. The consolidated financial
statements include the operating results of these companies subsequent to their
respective acquisition dates.
Pro forma data on the consolidated statements of operations reflects
adjustments related to businesses accounted for under the pooling-of-interests
method including: compensation differentials to former owners and employees,
termination of contributions to retirement plans, elimination of non-recurring
transaction costs related to the acquisition of businesses accounted for under
the pooling-of-interests method and income taxes as if the entities were
combined and subject to the effective federal and state statutory rates
throughout the periods discussed.
The Company derives substantially all of its revenues from professional
service activities. The majority of these activities are provided under "time
and expense" billing arrangements, and revenues are recorded as work is
performed. Revenues are directly related to the total number of hours billed to
clients and the associated hourly billing rates. Hourly billing rates are
established for each service professional and such rates are a function of the
professional's skills, experience and the type of work performed. The Company's
principal costs are professional compensation directly related to the
performance of services and related expenses. Gross profits (revenues after
professional compensation and related expenses) are primarily a function of
hours billed to clients per professional employee or consultant, hourly billing
rates of those employees or consultants and employee or consultant compensation
relative to those billing rates. Gross profits can be adversely impacted if
service activities cannot be billed, if the Company is not effective in managing
its service activities, if fixed-fee engagements (which historically have not
constituted a significant portion of total revenues) are not properly priced or
if there are high levels of unutilized time (work activities not chargeable to
clients or unrelated to client services) of full-time service professional
employees. Operating income (gross profit less selling, general and
administrative expenses) can be adversely impacted by increased administrative
staff compensation or expenses related to growing and expanding the Company's
business, which may be incurred before revenues or economies of scale are
generated from such investment.
As part of its strategic plan, the Company intends to acquire other
software professional services businesses. Should the Company be successful in
acquiring such businesses, the period in which such acquisition is consummated
could be adversely impacted by costs associated with such acquisition. In
addition, financial periods subsequent to the completion of an acquisition could
be adversely impacted by costs and activities associated with the assimilation
and integration of the acquired company.
11
<PAGE>
As a professional services organization, the Company responds to
service demands from its clients. Accordingly, the Company has limited control
over the timing and circumstances under which its services are provided.
Therefore, the Company can experience volatility in its operating results from
quarter to quarter. The operating results for any quarter are not necessarily
indicative of the results for any future period. The Company generally
experiences a reduction in gross profit in the first calendar quarter due to
the impositon of employment related taxes.
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and has
concluded that the Year 2000 problem will not pose any significant operational
issue for the Company. The Company does not expect the expenditures related to
the Year 2000 issue to have a material effect on its financial position or
results of operations in any year.
12
<PAGE>
CONSOLIDATED RESULTS OF OPERATIONS
Three Months Ended December 31, 1997 Compared to Three Months
Ended December 31, 1996
Revenues
In the third quarter of fiscal 1998 revenues increased $20.6 million, or
48.4% to $63.1 million from $42.5 million in the third quarter of fiscal 1997.
The increase was primarily attributable to a 28.9% increase in total client
service hours to 964,000 from 748,000 in the third quarter of 1997, and a 15.6%
increase in the average hourly billing rate to $64.62 from $55.91 in the
comparable quarter of 1997. The increase in hourly billing rate reflects
increased demand for employees and consultants with higher skill levels and a
more favorable economic climate. The increase in revenues was also attributable
to the inclusion of revenues of the companies acquired under the purchase method
of accounting during fiscal 1998 ("FY 1998 Purchases").
Gross Profit
Gross profit increased $6.0 million, or 47.9% to $18.4 million in the third
quarter of 1998 from $12.4 million in the third quarter of 1997, primarily due
to an increase in hours of service provided to clients and the inclusion of the
FY 1998 Purchases. Gross margin as a percentage of revenues decreased to 29.1%
in the third quarter of 1998 from 29.2% in the third quarter of 1997 primarily
due to the inclusion of the FY 1998 Purchases with lower gross margins and
certain of the Pooled Companies engaging new clients at lower gross margins
prior to the acquisition by the Company.
Non - Recurring Transaction Costs
Non-recurring transaction costs include expenditures associated with
the acquisition of four Pooled Companies acquired during the period and are
expensed as incurred on an historical basis.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $5.1 million, or
52.2% to $14.8 million in the third quarter of 1998 from $9.7 million in the
third quarter of 1997. The increase was primarily due to increased compensation
to existing staff, staff added to support anticipated growth, additional
occupancy costs and an increased level of corporate activities. Selling, general
and administrative expenses increased as a percentage of revenues to 23.4% in
the third quarter of 1998 from 22.8% in the third quarter of 1997.
Selling, general and administrative espenses on a pro forma basis were
$13.7 million or 21.8% of pro forma revenues for the third quarter of 1998,
compared to historical selling, general and administration expenses of $14.8
million, or 23.4% of historical revenues. 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.
On a pro forma basis, selling, general and administrative expenses
increased $4.4 million, or 46.6% to $13.7 million in the third quarter of 1998.
The increase was primarily due to increased compensation to existing staff,
staff added to support anticipated growth, additional occupancy costs and an
increased level of corporate activities. Pro forma selling, general and
administrative expenses decreased as a percentage of revenues to 21.8% in the
third quarter of 1998 from 22.0% in the third quarter of 1997 reflecting greater
operating efficiencies and a larger revenue base. The Company cannot be certain
that such efficiencies can be sustained in the near term as is undertakes to
integrate the acquired entities, expand geographically and acquire other
companies.
13
<PAGE>
Interest Expense, Net
Interest expense, net of interest income was $0.2 million in the third
quarter of 1998 and $0.1 million in the third quarter of 1997.
Provision for Income Taxes
Provision for income taxes was $2.8 million in the third quarter of 1998,
which reflects a provision on pre-tax income of 105%. The provision for income
taxes was $0.8 million in the third quarter of 1997 at a rate of 35%. The
increase in the effective tax rate is due to the termination of S Corporation
status of certain Pooled Companies, the requirement to change from the cash
basis to the accrual basis of accounting for tax purposes at the date of
acquisition and the non-deductibility of certain non-recurring transaction
costs.
The primary difference between the Company's historical and pro forma
effective tax rates related to the termination of certain Pooled Companies' S
corporation election and the non-deductibility of certain non-recurring
transaction costs.
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 from 2.1 million hours in the first nine months of
fiscal 1997 and a 9.8% increase in the average 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 the FY1998 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 FY 1998 Purchases. Gross profit as a percentage of revenues
decreased to 29.4% of revenues for 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 FY 1998 Purchases with 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.
14
<PAGE>
Selling, general and administration expenses on a pro forma basis were
$39.6 million, or 22,5% of pro forma revenues for the nine months ended December
31, 1997, compared to historical selling, general and administrative expenses of
$41.6 million, or 23.6% of historical revenues. The reduction of 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.
On a pro forma basis, selling, general and administrative expenses
increased $12.8 million, or 47.7% to $39.6 million in the first nine months of
1998. The increase was primarily due to increased compensation to existing
staff, staff added to support anticipated growth, additional occupancy costs and
an increased level of corporate activities. Pro forma selling, general and
administrative expenses decreased as a percentage of revenues to 22.5% in the
first nine months of 1998 from 22.7% in the first nine months of 1997 reflecting
greater operating efficiencies and a larger revenue base. The Company cannot be
certain that such efficiencies can be sustained in the near term as is
undertakes to integrate the acquired entities, expand geographically and acquire
other companies.
Non-Recurring Transaction Costs
Non-recurring transaction costs include expenditures associated with
the acquisition of four Pooled Companies acquired during the period and are
expensed as incurred on an historical cost basis.
Interest Expense, Net
Interest expense, net of interest income increased $0.2 million to $0.3
million in the first nine months of fiscal 1998 from $0.1 million in the first
nine months of fiscal 1997, primarily due to a reduction in invested cash
balances to fund growth and acquisition activity.
Provision for Income Taxes
Provision for income taxes was $5.3 million, or an effective tax rate
of 59% 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% 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.
The primary difference between the Company's historical and pro forma
effective tax rates related to the termination of certain Pooled Companies' S
corporation election and the non-deductibility of certain non-recurring
transaction costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth principally through cash flows from
operations, periodic borrowing under its credit facilities and the use of the
net proceeds from the Offering. On September 12, 1997, the Company entered into
a $40 million revolving line of credit facility (the "Credit Line") with a lead
lender bank and two other 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 year. At
February 12, 1998 the Company had $10.3 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 receivables have grown
as the Company's operations have grown. Billed receivables were 64 and 59 days
of revenue 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 existing credit facilities to finance
its operations.
15
<PAGE>
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 balance of such borrowings
outstanding 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.
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 and re-pay against 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.
16
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information.
None.
Item 6 Exhibits and Reports on Form 8-K.
(A.) Exhibits.
(B) Reports on Form 8-K.
During the quarter ended December 31, 1997, the Company
filed a Current Report on form 8-K on October 28, 1997.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COTELLIGENT GROUP, INC
Date: February 17, 1998 By: /s/ Curtis J. Parker
----------------------
Curtis J. Parker
Vice President,
Chief Accounting Officer
18
<PAGE>
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