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, 1998
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-25372
COTELLIGENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3173918
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 California Street, Suite 2050
San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
(415) 439-6400
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
At February 8, 1999 there were 14,561,119 shares of common stock
outstanding.
<PAGE>
COTELLIGENT, INC.
INDEX
Part I - Financial Information
<TABLE>
Item 1. Financial Statements PAGE
<S> <C>
Cotelligent, Inc.
Consolidated Balance Sheets at December 31, 1998 (Unaudited) and March 31, 1998 3
Consolidated Statements of Operations for the Three and Nine Months Ended
December 31, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Cash Flows for the Nine Months Ended
December 31, 1998 and 1997 (Unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II - Other Information
Signatures 17
</TABLE>
2
<PAGE>
COTELLIGENT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
---------------- ----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 7,753 $ 40,528
Accounts receivable, including unbilled accounts
of $5,281 and $10,120 and net of allowance for doubtful
accounts of accounts of $2,162 and $2,123, respectively... 57,524 48,982
Notes receivable from officers............................. 218 230
Deferred tax asset......................................... 294 -
Prepaid expenses and other................................. 3,812 2,292
---------------- ----------------
Total current assets..................................... 69,601 92,032
Property and equipment, net................................... 10,063 7,568
Goodwill, net of accumulated amortization of $1,066 and $359,
respectively........................................... 79,937 18,106
Other assets.................................................. 503 853
================ ================
Total assets............................................. $ 160,104 $ 118,559
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt............................................ $ 138 $ 192
Accounts payable........................................... 8,487 4,344
Accrued compensation and related payroll liabilities....... 15,747 15,268
Income taxes payable....................................... 3,417 3,171
Deferred tax liabilities................................... - 508
Other accrued liabilities.................................. 4,614 4,52O
---------------- ----------------
Total current liabilities................................ 32,403 28,003
Long-term debt................................................ 19,906 199
Other long-term liabilities................................... 10 18
---------------- ----------------
Total liabilities........................................ 52,319 28,220
---------------- ----------------
Stockholders' equity:
Preferred Stock, $0.01 par value; 500,000 shares
authorized, no shares issued or outstanding.............. - -
Common Stock, $0.01 par value; 100,000,000 shares authorized,
14,226,284 and 14,057,884 shares issued and outstanding,
respectively............................................. 147 141
Additional paid-in capital................................... 86,467 80,335
Retained earnings............................................ 21,171 9,863
---------------- ----------------
Total stockholders' equity............................... 107,785 90,339
---------------- ----------------
Total liabilities and stockholders'equity................ $ 160,104 $ 118,559
================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
COTELLIGENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended December 31, Ended December 31,
1998 1997 1998 1997
--------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Revenues........................................ $ 83,849 $ 63,111 $ 236,627 $ 175,981
Cost of services................................ 59,530 44,730 167,630 124,156
--------------- ------------- --------------- -------------
Gross profit .............................. 24,319 18,381 68,997 51,825
Selling, general and administrative expenses.... 17,602 14,759 50,664 41,593
Non-recurring transaction cost................. - 855 - 855
--------------- ------------- --------------- -------------
Operating income........................... 6,717 2,767 18,333 9,377
Other income (expense):
Interest expense .......................... (139) (172) (142) (370)
Interest income............................ 54 18 674 38
Other ..................................... (2) 17 (28) (16)
--------------- ------------- --------------- -------------
Total other income (expense)............ (87) (137) 504 (348)
--------------- ------------- --------------- -------------
Income before provision for income taxes........ 6,630 2,630 18,837 9,029
Provision for income taxes...................... 2,684 2,768 7,529 5,327
--------------- -------------- --------------- --------------
Net income...................................... $ 3,946 (138) $ 11,308 $ 3,702
=============== ============= =============== =============
Earnings per share -
Basic..................................... $ 0.28 $ (0.01) $ 0.81 $ 0.32
=============== ============= =============== =============
Diluted................................... $ 0.28 $ (0.01) $ 0.80 $ 0.32
=============== ============= =============== =============
Weighted average shares outstanding -
Basic..................................... 14,055,396 11,584,353 14,003,972 11,399,141
=============== ============= =============== =============
Diluted.................................... 14,213,639 11,756,214 14,164,902 11,503,578
=============== ============= =============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
COTELLIGENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................... $ 11,308 $ 3,702
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .............................. 2,556 1,542
Provision for doubtful accounts ............................ 729 823
Loss on sale of assets .................................... 28 --
Deferred income taxes, net ................................. (503) (222)
Changes in current assets and liabilities:
Accounts receivable .................................. (3,644) (13,091)
Prepaid expenses and other ........................... (1,135) (809)
Accounts payable and accrued expenses ................ (1,657) 6,848
Income taxes payable ................................. 131 2,691
Other liabilities..................................... (778) (11)
Changes in other assets .................................... 231 105
------------ ------------
Net cash provided by operating activities ............ 7,266 1,578
------------ ------------
Cash flows from investing activities:
Proceeds on sale of assets ................................... 206 --
Purchase of businesses, net of cash acquired ................. (45,217) (7,325)
Purchases of property and equipment .......................... (4,047) (2,194)
------------ ------------
Net cash used in investing activities ................ (49,058) (9,519)
------------ ------------
Cash flows from financing activities:
Net borrowings (repayments) on short term debt ............... -- (4,597)
Net borrowings (repayments) on long-term debt ................ 18,587 12,070
Purchase of Common Stock ..................................... (11,320) --
Net proceeds from issuance of Common Stock ................... 1,750 54
Distributions from certain Pooled Companies, prior to
acquisitions........................................... -- (1,806)
---------- -----------
Net cash provided by (used in) financing activities... 9,017 5,721
---------- -----------
Net increase (decrease) in cash and cash equivalents ......... (32,775) (2,220)
Cash and cash equivalents at beginning of period ............. 40,528 2,904
---------- -----------
Cash and cash equivalents at end of period ................... $ 7,753 $ 684
========== ===========
Supplemental disclosures of cash flow information:
Interest paid ................................................ $ 132 $ 585
Income taxes paid ............................................ $ 7,259 $ 3,818
Stock issued to acquire businesses............................ $ 15,710 $ 7,464
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
COTELLIGENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(Unaudited)
Note 1 - Business Organization and Basis of Presentation
Cotelligent, Inc. ("Cotelligent" or the "Company") was formed in
February 1993 to operate software professional services businesses specializing
in providing information technology ("IT") consultants to businesses.
Cotelligent offers services in five consulting practice groups: Professional
Services - including staff augmentation; Technology Solutions - custom
application development; Alliance Services - national partnerships with many
leading enterprise application software companies; Network Design and Management
- - intranet and internet application design and development; and Training and
Education.
During the year ended March 31, 1998 ("fiscal 1998") the Company issued
1,541,615 shares of Common Stock to acquire four businesses accounted for under
the pooling-of-interests method (the "Pooled Companies"). For the nine months
ended December 31, 1998 there were no acquisitions accounted for under the
pooling-of-interest 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.
During fiscal year 1998, the Company acquired four businesses accounted
for under the purchase method (the "Purchased Companies") for aggregate
consideration of $19,930 (362,998 shares of Common Stock issued at fair market
value of $7,464 and $11,926 of cash). In addition, during the nine months ended
December 31, 1998, the Company acquired four businesses accounted for under the
purchase method for aggregate consideration of $62,985 (875,724 shares of Common
Stock issued at fair market value of $15,710 and $46,121 of cash). The
consolidated financial statements include the operating results of these
companies subsequent to their respective acquisition dates.
All of the businesses acquired since formation have operations
substantially the same as the Company.
Note 2 - Summary of Significant Accounting Policies
Interim Financial Statement Presentation
The accompanying interim financial statements do not include all
disclosures included in the financial statements included in Cotelligent's
Annual Report on Form 10-K for the year ended March 31, 1998 ("Form 10-K"), and
therefore these Financial Statements should be read in conjunction with the
financial statements included on Form 10-K.
In the opinion of management, the interim financial statements filed as
part of this Quarterly Report on Form 10-Q reflect all adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation of the
financial position and the results of operations and of cash flows for the
interim periods presented.
Comprehensive Income
Effective April 1, 1998, the Company adopted Statement of Financial
Accounting Standards Board (SFAS) No. 130, Reporting Comprehensive Income.
Except for net income, the Company does not have any transactions or other
economic events that qualify as comprehensive income as defined under SFAS No.
130.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and for Hedging Activities. SFAS No. 133
requires derivatives to be recognized in balance sheets at fair-value. This
statement is effective for financial statements for periods beginning after June
15, 1999. The Company does not believe that adoption of SFAS No. 133 will
materially affect the Company's financial statements.
6
<PAGE>
COTELLIGENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Note 3 - Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional Total
---------------------------- Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
------------ ---------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1998... 14,057,884 $ 141 $ 80,335 $ 9,863 $ 90,339
Repurchase of Common Stock.. (835,600) (8) (11,312) - (11,320)
Issuance of Common Stock.... 1,004,000 14 17,444 - 17,458
Net income.................. - - - 11,308 11,308
============ ========== ============ ============= ===============
Balance at June 30, 1998 14,226,284 $ 147 $ 86,467 $ 21,171 $ 107,785
============ ========== ============ ============= ===============
</TABLE>
Note 4: Business Combinations
During fiscal 1999, Cotelligent acquired four businesses (acquired on
September 16, 1998, October 29, 1998, October 30, 1998 and November 30, 1998),
accounted for under the purchase method for aggregate consideration, including
acquisition cost, of $62,985 (875,724 shares issued at fair market value of
$15,710 and $46,121 of cash). The total assets related to these acquisitions
were $9,769 and resulted in the recognition of $62,538 of goodwill, which is
being amortized over a 30 year period. The results of these acquisitions have
been included in the Company's results from their respective 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 purchase price allocation
adjustments will be made within one year from the date of the acquisition.
Management does not believe that the final allocations of the purchase price
will have a material effect on the Company's financial position or results of
operations. The purchase agreement for one of the businesses provides for
additional consideration based on financial performance of the acquired company
subsequent to the acquisition and through March 1999. The potential earn-out
payment is due in fiscal year 2000 and will be considered additional purchase
price in the period the earn-out period ends. See Pro Forma Results (Note 5) for
consolidated statements of operations of purchased companies.
Note 5 - Pro Forma Results ("Purchased Companies and Pooled Companies")
In accordance with disclosure requirements under the Accounting Principles
Board Statement No. 16, the following Pro Forma Results ("Purchased Companies
and Pooled Companies") consolidated statements of operations for the three and
nine months ended December 31, 1998 and 1997 give effect to the acquisitions of
the Pooled Companies and Purchased Companies as if these acquisitions had
occurred on the first day of the periods presented. These Pro Forma Results
("Purchased Companies and Pooled Companies") consolidated statements reflect
adjustments for the acquisitions of the Pooled Companies and Purchased Companies
including: compensation differentials to former owners and employees,
termination of contributions to retirement plans, elimination of non-recurring
transaction costs related to the acquisition of businesses accounted for under
the pooling-of-interests method and income taxes as if the entities were
combined and subject to the effective federal and state statutory rates
throughout the periods discussed. Additionally, these Pro Forma Results for
Purchased Companies and Pooled Companies consolidated financial statements
reflect adjustments for interest expense on cash consideration and amortization
of goodwill resulting from the Purchased Companies from the beginning of the
periods presented.
7
<PAGE>
COTELLIGENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
<TABLE>
<CAPTION>
Three Months
Ended
December 31,
------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Revenues......................................... $ 89,522 $ 73,935
Cost of services................................. 63,190 51,338
---------------- ----------------
Gross profit.............................. 26,332 22,597
Selling, general and administrative expenses..... 20,103 16,999
---------------- ----------------
Operating income................................. 6,229 5,598
Other income (expense)........................... (455) (1,257)
---------------- ----------------
Income before provision for income taxes......... 5,774 4,341
Provision for income taxes ...................... 2,339 1,758
---------------- ----------------
Net income....................................... $ 3,435 $ 2,583
================ ================
Earnings per share -
Basic....................................... $ 0.23 $ 0.21
================ ================
Diluted..................................... $ 0.23 $ 0.20
================ ================
Weighted average shares outstanding -
Basic....................................... 14,931,120 12,494,717
================ ================
Diluted..................................... 15,089,363 12,646,663
================ ================
</TABLE>
<TABLE>
<CAPTION>
Nine Months
Ended
December 31,
------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Revenues......................................... $ 265,122 $ 212,634
Cost of services................................. 184,288 146,986
---------------- ----------------
Gross profit.............................. 80,834 65,648
Selling, general and administrative expenses..... 60,152 49,708
---------------- ----------------
Operating income................................. 20,682 15,940
Other income (expense)........................... (2,013) (3,584)
---------------- ----------------
Income before provision for income taxes......... 18,669 12,356
Provision for income taxes ...................... 7,561 5,004
================ ================
Net income....................................... $ 11,108 $ 7,352
================ ================
Earnings per share -
Basic....................................... $ 0.75 $ 0.59
================ ================
Diluted..................................... $ 0.75 $ 0.58
================ ================
Weighted average shares outstanding -
Basic....................................... 14,735,500 12,494,717
================ ================
Diluted..................................... 14,896,431 12,624,663
================ ================
</TABLE>
Note 6 - Pro Forma Results ("Pooled Companies")
The following "Pro Forma Results" ("Pooled Companies") reflect only
adjustments related to businesses accounted for under the pooling-of-interests
method including: compensation differentials to former owners and employees,
termination of contributions to retirement plans, elimination of non-recurring
transaction costs related to the acquisition of businesses accounted for under
the pooling-of-interests method and income taxes as if the entities were
combined and subject to the effective federal and state statutory rates
throughout the periods discussed. Since there were no pooling-of-interests
acquisitions during the three and nine months ended December 31, 1998, Pro Forma
Results are not presented for this period.
8
<PAGE>
COTELLIGENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
December 31,1997 December 31, 1997
-------------------- ---------------------
<S> <C> <C>
Revenues ..................................... $ 63,111 $ 175,981
Cost of services ............................. 44,723 124,137
----------- ------------
Gross profit ............................ 18,388 51,844
Selling, general and administrative expenses.. 13,732 39,629
------------ ------------
Operating income ........................ 4,656 12,215
Other income (expense)........................ (137) (348)
------------ ------------
Income before provision for income taxes ..... 4,519 11,867
Provision for income taxes ................... 1,853 4,865
------------ ------------
Net income ................................... $ 2,666 $ 7,002
============ ============
Earnings per share - basic and diluted........ $ 0.23 $ 0.61
============ ============
Weighted average shares outstanding -
Basic ................................ 11,584,353 11,399,141
============ ============
Diluted .............................. 11,756,214 11,503,578
============ ============
</TABLE>
Note 7 - Earnings Per Share
<TABLE>
<CAPTION>
For the Three Months Ended December 31, 1998
---------------------------------------------------
Per Share
Income Shares Amount
----------------- -------------- -------------
<S> <C> <C> <C>
Basic earnings per share-
Net income available to common stockholders $ 3,946 14,055,396 $ 0.28
Options issued to directors and employees.......... 158,243
--------------
Diluted earnings per share-
Income available to common stockholders
plus assumed conversions....................... $ 3,946 14,213,639 $ 0.28
==============
For the Three Months Ended December 31, 1997
---------------------------------------------------
Per Share
Income Shares Amount
----------------- -------------- ------------
Basic earnings per share-
Net income available to common stockholders $ (138) 11,584,353 $ (0.01)
Options issued to directors and employees.......... 104,437
--------------
Diluted earnings per share-
Income available to common stockholders
plus assumed conversions..................... $ (138) 11,756,214 $ (0.01)
==============
</TABLE>
9
<PAGE>
COTELLIGENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
<TABLE>
<CAPTION>
For the Nine Months Ended December 31, 1998
---------------------------------------------------
Per Share
Income Shares Amount
----------------- -------------- -------------
<S> <C> <C> <C>
Basic earnings per share-
Net income available to common stockholders $ 11,307 14,003,972 $ 0.81
Options issued to directors and employees.......... 160,930
--------------
Diluted earnings per share-
Income available to common stockholders
plus assumed conversions....................... $ 11,307 14,164,902 $ 0.80
==============
For the Nine Months Ended December 31, 1997
---------------------------------------------------
Per Share
Income Shares Amount
----------------- -------------- ------------
Basic earnings per share-
Net income available to common stockholders $ 3,702 11,399,141 $ 0.32
Options issued to directors and employees.......... 171,861
--------------
Diluted earnings per share-
Income available to common stockholders
plus assumed conversions..................... $ 3,702 11,503,578 $ 0.32
==============
</TABLE>
Note 8 - Capital Stock
In March, 1998, the Company completed a public offering of its common
stock whereby 2,312,040 new shares were issued and net proceeds to the Company
were $52,359.
In September 1998, the Board of Directors authorized the repurchase of
up to 2.0 million shares of Common Stock, or 14% of the then outstanding shares.
During the three and nine months ended December 31, 1998, the Company
repurchased 484,600 shares for a total cost of $6.6 million and 835,600 shares
for $11.3 million respectively.
Note 9 - Subsequent Events
The Company acquired one business during January 1999 for a combination
of Common Stock and cash. The acquired business is substantially the same as the
Company. This transaction will be accounted for under the purchase method.
10
<PAGE>
ITEM 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Cotelligent, Inc. ("Cotelligent" or the "Company") was formed in
February 1993 to acquire, own and operate software professional services
businesses specializing in providing information technology ("IT") consultants
to businesses with complex IT operations. Cotelligent offers services in five
consulting practice groups, Professional Services - including staff
augmentation; Technology Solutions custom application development; Alliance
Services - national partnerships with many leading enterprise application
software companies; Network Design and Management - intranet and internet
application design and development; and Training and Education
During the year ended March 31, 1998 ("fiscal 1998") the
Company acquired four businesses accounted for under the pooling-of-interests
method. For the nine months ended December 31, 1998 there were no acquisitions
accounted for under the pooling-of-interest 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.
During fiscal year 1998, the Company acquired four businesses
accounted for under the purchase method for shares of Common Stock issued at
fair market value and cash. In addition, during the nine months ended December
31, 1998, the Company acquired four businesses accounted for under the purchase
method for shares of Common Stock issued at fair market value and cash. The
consolidated financial statements include the operating results of these
companies subsequent to their respective acquisition dates.
The Company derives substantially all of its revenues from professional
service activities. The majority of these activities are provided under "time
and expense" billing arrangements, and revenues are recorded as work is
performed. Revenues are directly related to the total number of hours billed to
clients and the associated hourly billing rates. Hourly billing rates are
established for each service professional and such rates are a function of the
professional's skills, experience and the type of work performed. The Company's
principal costs are professional compensation directly related to the
performance of services and related expenses. Gross profits (revenues after
professional compensation and related expenses) are primarily a function of
hours billed to clients per professional employee or consultant, hourly billing
rates of those employees or consultants and employee or consultant compensation
relative to those billing rates. Gross profits can be adversely impacted if
service activities cannot be billed, if the Company is not effective in managing
its service activities, if fixed-fee engagements (which historically have not
constituted a significant portion of total revenues) are not properly priced or
if there are high levels of unutilized time (work activities not chargeable to
clients or unrelated to client services) of full-time service professional
employees. Operating income (gross profit less selling, general and
administrative expenses) can be adversely impacted by increased administrative
staff compensation or expenses related to growing and expanding the Company's
business, which may be incurred before revenues or economies of scale are
generated from such investment.
As part of its strategic plan, the Company intends to acquire other
software professional services businesses. Should the Company be successful in
acquiring such businesses, the period in which such acquisition is consummated
could be adversely impacted by costs associated with such acquisition. In
addition, financial periods subsequent to the completion of an acquisition could
be adversely impacted by costs and activities associated with the assimilation
and integration of the acquired company.
As a professional services organization, the Company responds to
service demands from its clients. Accordingly, the Company has limited control
over the timing and circumstances under which its services are provided.
Therefore, the Company can experience volatility in its operating results from
quarter to quarter. The operating results for any quarter are not necessarily
indicative of the results for any future period.
The Company has conducted a comprehensive review of its computer
systems to identify the systems that could be affected by the "Year 2000" issue
and has concluded that the Year 2000 problem will not pose any significant
11
<PAGE>
operational issues for the Company. The Company does not expect the expenditures
related to the Year 2000 issue to have a material effect on its financial
position or results of operations in any year. With respect to its customers,
the Company is in the process of contacting its major customers and determining
that such customers are Year 2000 compliant. Additionally, the Company is in the
process of contacting its major service vendors regarding Year 2000 compliance
and anticipates that this review will be completed by June 30, 1999. If the
Company's suppliers and service vendors are not Year 2000 compliant, the Company
may have to arrange for alternative vendors.
Except for historical information contained herein, the information
contained in this report includes forward-looking statements that involve
certain risks and uncertainties that could cause actual results to vary
materially from such statements. All forward-looking statements included in this
report are based upon information available to Cotelligent as of the date
thereof, and Cotelligent assumes no obligation to update any such forward
looking statement. Please refer to the discussion of risk factors and other
factors included in Cotelligent's Annual Report on Form 10-K for the fiscal year
ended March 31, 1998 and other filings made with the Securities and Exchange
Commission.
12
<PAGE>
CONSOLIDATED RESULTS OF OPERATIONS
Three Months Ended December 31, 1998 Compared to
Three Months Ended December 31, 1997
Revenues
In the three months ended December 31, 1998, revenues increased $20.7
million, or 32.9%, to $83.8 million from $63.1 million in the three months ended
December 31, 1997. The increase was primarily attributable to a 24.3% increase
in total client service hours to 1,237,000 from 995,000 in the three months
ended December 31, 1998, and a 7.1% increase in the average hourly billing rate
to $66.79 from $62.39 in the comparable period of the prior year. The increase
in client service hours was due to increased demand for services and the
inclusion of the Purchased Companies. The increase in hourly billing rate
reflects increased demand for employees and consultants with higher skill levels
and a more favorable economic climate.
Gross Profit
Gross profit increased $5.9 million, or 32.1%, to $24.3 million in the
three months ended December 31, 1998 from $18.4 million in the three months
ended December 31, 1997, primarily due to an increase in hours of service
provided to clients and the inclusion of the Purchased Companies. Gross margin
as a percentage of revenues decreased to 29.0% in the third quarter of 1999 from
29.1% in the third quarter of 1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $2.8 million, or
19.3%, to $17.6 million in the three months ended December 31, 1998 from $14.8
million in the three months ended December 31, 1997. The increase was primarily
due to increased compensation to existing staff, staff added to support growth
and additional locations and the inclusion of the Purchased Companies. Selling,
general and administrative expenses decreased as a percentage of revenues to
21.0% in the three months ended December 31, 1998 from 23.4% in the three months
ended December 31, 1997 because of increased efficiencies over a larger revenue
base. There can be no assurance that such efficiencies can be sustained in the
future as the Company expands geographically and incurs expenses to acquire
other companies.
Compared to the pro forma basis, as described in footnote 6 of the
accompanying financial statements, selling, general and administrative expenses
increased $3.9 million, or 28.2%, to $17.6 million in fiscal 1999 from $13.7
million in 1998. The increase was primarily due to increased staff from
Purchased Companies and increased compensation to existing staff, plus staff
added to support anticipated growth, additional occupancy costs and an increased
level of corporate activities. Selling, general and administrative expenses
decreased as a percentage of revenues to 21.0% in fiscal 1999 from 21.8% in 1998
reflecting greater operating efficiencies and a larger revenue base. The Company
cannot be certain that such efficiencies can be sustained in the near term as it
integrates 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 companies acquired during the prior fiscal year and
accounted for under the pooling-of-interest method. Accordingly, these amounts
are expensed as incurred on an historical cost basis.
Interest Income/Expense, Net
Interest expense, net of interest income was $85,000 for the three
months ended December 31, 1998 compared to interest expense, net of interest
income of $154,000 for the three months ended December 31, 1997. The average
debt level was lower during the current fiscal year due to the proceeds from a
public offering completed in March of 1998.
13
<PAGE>
Provision for Income Taxes
Provision for income taxes was $2.7 million for the three months ended
December 31, 1998, which reflects a provision on pre-tax income of 40.5%. The
provision for income taxes was $2.8 million for the three months ended December
31, 1997, which reflects a provision on pre-tax income of 105%. The higher tax
rate in the previous fiscal year is due to termination of S Corporation status
of certain acquisitions accounted for under the pooling-of-interest method
and/or 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.
Nine Months Ended December 31, 1998 Compared
to Nine Months Ended December 31, 1997
Revenues
In the nine months ended December 31, 1998, revenues increased $60.6
million, or 34.4%, to $236.6 million from $176.0 million in the nine months
ended December 31, 1997. The increase was primarily attributable to a 22.8%
increase in total client service hours to 3,468,000 from 2,823,000 in the first
nine months of 1998, and a 8.9% increase in the average hourly billing rate to
$66.84 from $61.39 in the comparable period of the prior year. The increase in
hourly billing rate reflects increased demand for employees and consultants with
higher skill levels and a more favorable economic climate.
Gross Profit
Gross profit increased $17.2 million, or 33.1%, to $69.0 million in the
first nine months of 1999 from $51.8 million in the nine months ended December
31, 1998, primarily due to an increase in hours of service provided to clients
and the inclusion of the Purchased Companies. Gross margin as a percentage of
revenues decreased to 29.2% in the nine months ended December 31, 1998 from
29.5% in the nine months ended December 31, 1997 primarily due to the inclusion
of the Purchased Companies with lower gross margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $9.1 million, or
21.8%, to $50.7 million in the nine months ended December 31, 1998 from $41.6
million in the nine months ended December 31, 1998. The increase was primarily
due to increased compensation to existing staff, staff added to support growth
and additional locations. Selling, general and administrative expenses decreased
as a percentage of revenues to 21.4% in the nine months ended December 31, 1998
from 23.6% in the nine months ended December 31, 1997 because of increased
efficiencies over a larger revenue base. There can be no assurance that such
efficiencies can be sustained in the future as the Company expands
geographically and incurs expense to acquire other companies.
Compared to the pro forma basis, as described in footnote 6 of
the accompanying financial statements, selling, general and administrative
expenses increased $11.1 million, or 27.8%, to $50.7 million in fiscal 1999 from
$39.6 million in 1998. The increase was primarily due to increased staff from
Purchased Companies and increased compensation to existing staff, plus staff
added to support anticipated growth and additional occupancy costs. Selling,
general and administrative expenses decreased as a percentage of revenues to
21.4% in fiscal 1999 from 22.5% in 1998 reflecting greater operating
efficiencies and a larger revenue base. The Company cannot be certain that such
efficiencies can be sustained in the near term as it integrates 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 companies acquired during the prior fiscal year and
accounted for under the pooling-of-interest method. Accordingly, these amounts
are expensed as incurred on an historical cost basis.
14
<PAGE>
Interest Income/Expense, Net
Interest income, net of interest expense was $531,000 for the nine
months ended December 31, 1998 compared to interest expense, net of interest
income of $332,000 in the nine months ended December 31, 1997. The net interest
income earned in the first nine months of 1999 was due to earnings from
investment of the proceeds from a public offering completed in March of 1998.
Provision for Income Taxes
Provision for income taxes was $7.5 million for the nine months ended
December 31, 1998, which reflects a provision on pre-tax income of 40.0%. The
provision for income taxes was $5.3 million for the nine months ended December
31, 1997 at a rate of 59.0%. The decrease in the effective tax rate was
primarily due to the investment in tax free instruments from the proceeds of a
public offering, completed in March of 1998, in tax preferred instruments and
the termination of S Corporation status of certain acquisitions accounted for
under the pooling-of-interest method and/or 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.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth principally through cash flows from
operations, periodic borrowing under its credit facilities and the use of the
net proceeds from its public offerings. On September 12, 1997, the Company
entered into a four year $40 million revolving line of credit facility (the
"Credit Line"). Interest rate options include base borrowings at the lead
lender's prime rate and term loans at LIBOR plus an applicable margin. The
Company believes the existing sources of liquidity and funds generated from
operations will provide adequate cash to fund its anticipated cash needs for
operations and acquisitions at least through the next year.
The Company's primary sources of liquidity are cash balances, the Credit
Line and the collection of its accounts receivable. Accounts receivable have
increased as the Company's operations have grown. Total receivables were 65 and
72 days of revenue at December 31, 1998 and March 31, 1998, respectively. The
Company could draw upon available cash or existing credit facilities to finance
its operations should the Company be unable to bill and collect for its services
on a timely basis.
Operating activities provided $7.3 million for the nine months ended
December 31, 1998. Cash provided in operating activities was primarily generated
from net income offset by increased working capital.
During the nine months ended December 31, 1998, Cotelligent acquired four
companies (acquired on September 16, 1998, October 29, 1998, October 30, 1998
and November 30, 1998), for aggregate consideration and associated cost of
$62,985 (875,724 shares issued at fair market value of $15,710 and $46,121 of
cash). The Company used its own cash and borrowings under the Credit Line to
finance the acquisitions.
During the nine months ended December 31, 1998, Cotelligent repurchased
835,600 shares of Common Stock, at a cost of $11.3 million, on the open market
under the Stock Repurchase Program approved by the Board of Directors.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COTELLIGENT, INC
Date: February 12, 1999 /S/ Herbert D. Montgomery
-------------------------
Herbert D. Montgomery
Senior Vice President,
Chief Financial Officer and
Treasurer
17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COTELLIGENT GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED
DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
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<NAME> COTELLIGENT GROUP, INC.
<MULTIPLIER> 1000
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