<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
__________
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
February 12, 1999 (November 30, 1998)
- --------------------------------------------------------------------------------
COTELLIGENT, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
AMENDMENT NO. 1
---------------
The registrant hereby amends Form 8-K dated December 14, 1998, as set forth in
the pages attached hereto. The filing of this report occurs within 60 days
after the date of application for extension of time to file.
Delaware 0-25372 94-3173918
- --------------------------------------------------------------------------------
(State of other juris- (Commission (IRS Employer
diction of incorporation) File Number) Identification No.)
101 California Street, Suite 2050, San Francisco, CA 94111
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
415-439-6400
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
-1-
<PAGE>
COTELLIGENT, INC. FORM 8-K/A
INDEX
Item 7 - Financial Statements and Exhibits
<TABLE>
<CAPTION>
COTELLIGENT, INC.:
<S> <C>
Pro Forma Balance Sheet as of September 30, 1998............................................................................. 4
Pro Forma Consolidated Statement of Operations for the Year Ended March 31, 1998
(Unaudited)................................................................................................................ 5
Pro Forma Consolidated Statement of Operations for the Year Ended March 31, 1997
(Unaudited)................................................................................................................ 6
Pro Forma Consolidated Statement of Operations for the Six Months Ended September 30, 1998
(Unaudited)................................................................................................................ 7
Pro Forma Consolidated Statement of Operations for the Six Months Ended September 30, 1997
(Unaudited)................................................................................................................ 8
Notes to Restated and Pro Forma Consolidated Statements of Operations........................................................ 9
HURST COMPANIES:
Report of Chastang, Ferrell, Sims & Eiserman, LLC, Independent Accountants................................................... 10
Combined Balance Sheets as of September 30, 1998 (Unaudited), and December 31, 1997.......................................... 11
Combined Statements of Income and Retained Earnings for the Nine Months Ended September 30, 1998
(Unaudited), and for the Year Ended December 31, 1997...................................................................... 12
Combined Statements of Cash Flows for the Nine Months Ended September 30, 1998 (Unaudited),
and for the Year Ended December 31, 1997................................................................................... 13
Notes to Combined Financial Statements....................................................................................... 14
SIGNATURES................................................................................................................... 21
</TABLE>
-2-
<PAGE>
Acquisition or Disposition of Assets.
On November 30, 1998, Cotelligent, Inc. (the "Company") completed the
acquisition of assets of four companies: Hurst Consulting, Inc., an IT
consulting firm; Hurst Processing, Inc., an applications outsourcing firm; Hurst
Institute, Inc., an applications training firm; and Optimum Administrators
Resources, Inc., a management service firm for the Hurst companies (collectively
the "Hurst Companies"); each with offices in Orlando, Florida. The Hurst
Companies are full-service information technology consulting firms specializing
in commercial banking applications. Aggregate consideration for this
acquisition was approximately $27.1 million. This acquisition will be accounted
for as a purchase.
In order to consummate this acquisition, the Company entered into a
Purchase and Sale of Assets Agreement dated as of November 30, 1998, with the
Hurst Companies (the "Sellers") and their sole shareholder, Eva Hurst. The
Sellers received 500,544 shares of the Company's common stock (valued at the
average closing price during a five-day period ended two days prior to the
closing) and approximately $17.4 million in cash as consideration in the
purchase, which was consummated on November 30, 1998.
The pro forma balance sheet as of September 30, 1998, gives effect to
the acquisition of the Hurst Companies as if the business combination was
consummated on September 30, 1998. The pro forma statement of operations gives
effect to the business combination as if the combination occurred on the first
day of the respective periods presented.
-3-
<PAGE>
COTELLIGENT, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Cotelligent Hurst Pro Forma Pro Forma
Group, Inc. Companies Adjustments Consolidated
-------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 22,371 $2,007 $ -- $ 24,378
Accounts receivable, net 60,216 3,688 -- 63,904
Notes receivable from stockholders -- -- -- --
Notes receivable from officers 244 -- -- 244
Deferred income taxes 29 131 -- 160
Prepaid expenses and other current assets 3,227 290 -- 3,517
----------------------------------------------------
Total current assets 86,087 6,116 -- 92,203
PROPERTY AND EQUIPMENT, net 8,829 325 -- 9,154
DEFERRED INCOME TAXES -- 393 -- 393
GOODWILL 28,555 -- 26,460/(a)/ 55,015
OTHER ASSETS 820 178 -- 998
----------------------------------------------------
Total assets $124,291 $7,012 $26,460 $157,763
----------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 149 $ 500 $ -- $ 649
Accounts payable 8,366 1,606 -- 9,972
Accrued compensation and related payroll
liabilities 15,528 859 -- 16,387
Income taxes payable 3,056 -- -- 3,056
Other accrued liabilities 2,467 2,453 -- 4,920
----------------------------------------------------
Total current liabilities 29,566 5,418 -- 34,984
LONG-TERM DEBT 220 -- 17,585/(b)/ 17,805
OTHER LONG-TERM LIABILITIES 14 770 -- 784
----------------------------------------------------
Total liabilities 29,800 6,188 17,585 53,573
----------------------------------------------------
COMMITMENT AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock 137 -- 5/(c)/ 142
Additional paid-in capital 77,131 150 9,544/(c)/ 86,825
Treasury stock -- -- --
Retained earnings 17,223 674 (674)/(d)/ 17,223
----------------------------------------------------
Total stockholders' equity 94,491 824 8,875 104,190
----------------------------------------------------
Total liabilities and stockholders' equity $124,291 $7,012 $26,460 $157,763
====================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
COTELLIGENT, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Cotelligent, Hurst Pro Forma Pro Forma
Inc. Companies Adjustments Consolidated
----------------------------------------------------------
(audited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES $ 244,683 $6,594 $ -- $ 251,277
COST OF SALES 173,537 3,393 -- 176,930
----------------------------------------------------------
Gross profit 71,146 3,201 -- 74,347
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 55,929 1,975 882/(e)/ 58,786
NONRECURRING TRANSACTION COSTS 855 -- -- 855
----------------------------------------------------------
Operating income 14,362 1,226 (882) 14,706
----------------------------------------------------------
OTHER EXPENSE:
Interest expense, net -- 31 1,495/(f)/ 1,526
Other 708 -- -- 708
----------------------------------------------------------
Total other expense 708 31 1,495 2,234
----------------------------------------------------------
Income (loss) before provision
(benefit) for income taxes 13,654 1,195 (2,377) 12,472
PROVISION (BENEFIT) FOR INCOME TAXES 7,223 -- (484)/(g)/ 6,739
----------------------------------------------------------
PRO FORMA NET INCOME (LOSS) $ 6,431 $1,195 $(1,893) $ 5,733
==========================================================
PRO FORMA EARNINGS PER SHARE:
Basic $ 0.48
Diluted $ 0.47
PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 11,958,937
Diluted 12,110,883
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
COTELLIGENT, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Cotelligent Hurst Pro Forma Pro Forma
Group, Inc. Companies Adjustments Consolidated
----------------------------------------------------------
(audited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES $ 165,417 $3,418 $ -- $ 168,835
COST OF SALES 116,844 1,601 -- 118,445
----------- ----------------------------------------
Gross profit 48,573 1,817 -- 50,390
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 39,167 1,250 882/(e)/ 41,299
NONRECURRING TRANSACTION COSTS 1,969 -- -- 1,969
----------- ----------------------------------------
Operating income 7,437 567 (882) 7,122
----------- ----------------------------------------
OTHER INCOME (EXPENSE):
Interest expense, net -- (13) (1,495)/(f)/ (1,508)
Other 15 (10) -- 5
----------- ----------------------------------------
Total other income (expense) 15 (23) (1,495) (1,503)
----------- ----------------------------------------
Income (loss) before provision
(benefit) for income taxes 7,452 544 (2,377) 5,619
PROVISION (BENEFIT) FOR INCOME TAXES 3,742 -- (752)/(g)/ 2,990
----------- ----------------------------------------
PRO FORMA NET INCOME (LOSS) $ 3,710 $ 544 $ (1,625) $ 2,629
=========== ========================================
PRO FORMA EARNINGS PER SHARE:
Basic $ 0.22
Diluted $ 0.22
PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 11,829,062
Diluted 11,903,057
</TABLE>
The accompanying notes are an integral part of these financial statements.
-6-
<PAGE>
COTELLIGENT, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Cotelligent, Hurst Pro Forma Pro Forma
Inc. Companies Adjustments Consolidated
----------------------------------------------------------
(audited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES $ 152,778 $10,960 $ -- $ 163,738
COST OF SALES 108,100 6,459 -- 114,559
----------------------------------------------------------
Gross profit 44,678 4,501 -- 49,179
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 33,062 2,871 441/(e)/ 36,374
----------------------------------------------------------
Operating income 11,616 1,630 (441) 12,805
----------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income (expense), net 595 (32) (747)/(f)/ (184)
Other (3) -- -- (3)
----------------------------------------------------------
Total other income (expense) 592 (32) (747) (187)
----------------------------------------------------------
Income (loss) before provision
for income taxes 12,208 1,598 (1,188) 12,618
PROVISION FOR INCOME TAXES 4,846 25 143/(g)/ 5,014
----------------------------------------------------------
PRO FORMA NET INCOME (LOSS) $ 7,362 $ 1,573 $(1,331) $ 7,604
==========================================================
PRO FORMA EARNINGS PER SHARE:
Basic $ 0.52
Diluted $ 0.52
PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 14,555,940
Diluted 14,666,569
</TABLE>
The accompanying notes are an integral part of these financial statements.
-7-
<PAGE>
COTELLIGENT, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Cotelligent Hurst Pro Forma Pro Forma
Group, Inc. Companies Adjustments Consolidated
----------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $ 112,870 $3,188 $ -- $ 116,058
COST OF SALES 79,426 1,464 -- 80,890
----------------------------------------------------------
Gross profit 33,444 1,724 -- 35,168
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 26,834 911 441/(e)/ 28,186
----------------------------------------------------------
Operating income 6,610 813 (441) 6,982
----------------------------------------------------------
OTHER EXPENSE:
Interest expense, net 210 5 747/(f)/ 962
Other -- -- -- --
----------------------------------------------------------
Total other expense 210 5 747 962
----------------------------------------------------------
Income (loss) before provision
(benefit) for income taxes 6,400 808 (1,188) 6,020
PROVISION (BENEFIT) FOR INCOME TAXES 2,560 -- (156)/(g)/ 2,404
----------------------------------------------------------
PRO FORMA NET INCOME (LOSS) $ 3,840 $ 808 $(1,032) $ 3,616
==========================================================
PRO FORMA EARNINGS PER SHARE:
Basic $ 0.31
Diluted $ 0.30
PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 11,815,295
Diluted 11,937,174
</TABLE>
The accompanying notes are an integral part of these financial statements.
-8-
<PAGE>
COTELLIGENT, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SEPTEMBER 30, 1998
(IN THOUSANDS)
(UNAUDITED)
1. PRO FORMA CONSOLIDATED BALANCE SHEET ADJUSTMENTS:
(a) Adjustment to record goodwill related to the acquisition.
(b) Adjustment to reflect borrowings for acquisition plus acquisition-related
costs.
(c) Adjustment to reflect issuance of the Company's stock for the acquisition.
(d) Adjustment to eliminate Hurst Companies' equity in the pro forma
consolidation.
2. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS ADJUSTMENTS:
(e) Increase in goodwill amortization created from the acquisition of the Hurst
group as if the entities were combined throughout the periods presented and
amortized over a 30-year period.
(f) Increase in interest expense as if the entities were combined throughout the
periods presented and subject to interest charges (8.5 percent p.a.)
relating to acquisition capital borrowed.
(g) Income taxes as if the entities were combined and subject to the effective
federal and state statutory rates of 41 percent throughout the periods
presented.
-9-
<PAGE>
To the Board of Directors of
The Hurst Companies, Casselberry, Florida:
We have audited the accompanying combined balance sheet of The Hurst Companies
as of December 31, 1997, and the related combined statements of income and
retained earnings and combined cash flows for the year then ended. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the combined financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the combined 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 audit provides a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of The Hurst
Companies as of December 31, 1997, and the results of its combined operations
and combined cash flows for the year then ended, in conformity with generally
accepted accounting principles.
/s/Chastang, Ferrell, Sims & Eiserman, L.L.C.
Winter Park, Florida,
April 20, 1998 (except for Note 9, as to
which the date is November 30, 1998)
-10-
<PAGE>
THE HURST COMPANIES
COMBINED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 (UNAUDITED), AND DECEMBER 31, 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
-------------- -------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents (Notes 2, 6 and 7) $ 355,008 $ 243,522
Certificate of deposit (Notes 2 and 4) 25,000 25,000
Accounts receivable (Notes 2 and 5) 890,660 22,851
Advanced billings (Note 2) 1,461,536 941,917
Employee advances 32,073 5,185
Prepaid expenses 19,499 12,354
Stockholder advances (Note 3) 705,784 859,889
Due from related entity (Note 3) 898,749 0
------------- ------------
Total current assets 4,388,309 2,110,718
------------- ------------
PROPERTY AND EQUIPMENT (Notes 2 and 5):
Furniture and fixtures 112,176 97,013
Computer equipment 55,912 51,720
Vehicle 20,674 11,279
Office equipment 28,698 20,674
Software 37,252 0
------------- ------------
254,712 180,686
Less: Accumulated depreciation (94,381) (64,611)
------------- ------------
Total property and equipment 160,331 116,075
------------- ------------
OTHER ASSETS:
Deposits 71,035 23,631
Customer list, net (Note 2) 63,750 0
Goodwill, net (Note 2) 120,335 218,922
------------- ------------
Total other assets 255,120 242,553
------------- ------------
Total assets $ 4,803,760 $ 2,469,346
============= ============
LIABILITIES AND STOCKHOLDER'S EQUITY
1998 1997
-------------- -------------
(unaudited)
CURRENT LIABILITIES:
Accounts payable $ 830,048 $ 253,231
Accrued payroll and payroll taxes 884,024 326,764
Other accrued expenses 228,548 190,157
Deferred revenue (Note 2) 1,461,536 1,036,465
Line of credit (Note 5) 495,000 243,000
Treasury stock note payable (Note 5) 77,930 73,955
Other notes payable (Note 5) 7,080 7,070
Billings in excess of costs (Note 6) 186,470 0
------------- ------------
Total current liabilities 4,170,636 2,130,642
------------- ------------
LONG-TERM LIABILITIES:
Treasury stock note payable 252,767 311,722
Other notes payable 1,858 8,520
------------- ------------
Total long-term liabilities 254,625 320,242
------------- ------------
Total liabilities 4,425,261 2,450,884
------------- ------------
COMMITMENTS AND CONTINGENCIES (Notes 4, 7, 8 and 9) 0 0
STOCKHOLDER'S EQUITY:
Capital stock (Note 2) 201 201
Paid-in capital 149,999 149,999
Retained earnings 643,299 283,262
------------- ------------
793,499 433,462
Less: Treasury stock, at cost, 20 shares (Note 5) (415,000) (415,000)
------------- ------------
Total stockholder's equity 378,499 18,462
============= ============
Total liabilities and stockholder's equity $ 4,803,760 $ 2,469,346
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
THE HURST COMPANIES
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED),
AND FOR THE YEAR ENDED DECEMBER 31, 1997
1998 1997
--------------------------
(unaudited)
REVENUES $14,029,787 $ 6,594,339
COST OF SALES 8,351,007 3,392,852
--------------------------
Gross profit 5,678,780 3,201,487
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,666,358 1,975,081
--------------------------
Operating income (loss) 2,012,422 1,226,406
OTHER EXPENSE (69,271) (31,753)
--------------------------
Net income 1,943,151 1,194,653
RETAINED EARNINGS, beginning of period 283,263 94,062
Less: Stockholder distributions (1,583,115) (1,005,453)
--------------------------
RETAINED EARNINGS, end of period $ 643,299 $ 283,262
==========================
The accompanying notes are an integral part of these financial statements.
-12-
<PAGE>
THE HURST COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED),
AND FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1998 1997
--------------------------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,943,151 $ 1,194,653
Adjustments to reconcile net income to net cash provided by operating
activities, net of effects of noncash transactions:
Depreciation 29,370 38,664
Amortization 71,315 0
Changes in noncash current assets and current liabilities:
Decrease (increase) in accounts receivable (828,885) 41,799
Increase in advanced billings (519,619) (941,917)
Increase in employee advances (26,888) (4,985)
Increase in prepaid expenses (7,145) (12,354)
Increase in due from stockholder 0 (510,818)
Increase in deposits (47,404) (15,000)
Increase in customer lists (75,000) 0
Decrease in stockholder advances 154,104 0
Increase in due from related entity (898,749) 0
Increase in accounts payable 576,817 181,943
Increase in accrued payroll and payroll taxes 557,260 259,884
Increase in other accrued expenses 38,391 138,403
Increase in deferred revenue 425,071 1,036,465
Increase in billings in excess of costs 186,470 0
--------------------------
Net cash provided by operating activities 1,578,259 1,406,737
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (74,026) (85,492)
Purchase of certificate of deposit 0 (25,000)
--------------------------
Net cash used in investing activities (74,026) (110,492)
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from line of credit 252,000 193,000
Principal payments on treasury stock note payable (54,980) (29,323)
Principal payments on other notes payable (6,652) (164,228)
Proceeds from issuance of common stock 0 100
Stockholder distributions (1,583,115) (1,005,453)
--------------------------
Net cash used in financing activities (1,392,747) (1,005,904)
--------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 111,486 290,341
CASH AND CASH EQUIVALENTS, beginning of period 243,522 (46,819)
--------------------------
CASH AND CASH EQUIVALENTS, end of period $ 355,008 $ 243,522
==========================
SUPPLEMENTAL DISCLOSURES ON CASH FLOWS: Interest paid in 1997
was $31,753. Income taxes paid in 1997 were $10,891.
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES: The Company
purchased 20 percent of the outstanding common stock in July 1997 by
issuing a note payable for $415,000.
</TABLE>
The accompanying notes are an integral part of these financial statements.
-13-
<PAGE>
THE HURST COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND OPERATIONS:
The combined financial statements of The Hurst Companies (the Combined Company)
include the financial statements of Hurst Consulting, Inc. (HCI), Hurst
Processing, Inc. (HPI), and Optimum Administrative Resources, Inc. (OAR). These
entities have the same ownership and are not wholly owned subsidiaries of the
Combined Company. The Combined Company is located in Casselberry, Florida.
HCI was incorporated on April 13, 1990, in the state of Florida. HCI provides
critical path expertise to computer software conversion and implementation
projects at major financial institutions across the United States.
HPI was incorporated on January 29, 1996, in the state of Florida. HPI provides
data and information processing services to financial institutions.
OAR was incorporated on February 17, 1997, in the state of Florida. OAR
provides management and administrative services to HCI and HPI.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF COMBINATION
HCI, HPI and OAR have the same ownership. Therefore, these entities have been
presented on a combined basis after all significant intercompany transactions
are eliminated in the combination.
BASIS OF ACCOUNTING
The accompanying combined financial statements are prepared on the accrual basis
of accounting in conformity with generally accepted accounting principles.
CASH AND CASH EQUIVALENTS
For purposes of the combined statement of cash flows, the Combined Company
considers all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.
CERTIFICATE OF DEPOSIT
The Combined Company has a $25,000 certificate of deposit, which is used as a
guarantee under the Combined Company's office lease agreement (see Note 4).
-14-
<PAGE>
COMMON STOCK
The par value, authorized shares, and issued and outstanding shares for the
corporations included in Combined Company are as follows:
Issued and
Par Authorized Outstanding
Value Shares Shares Total
--------------------------------------------
HCI $1.00 1,000 100 $100
HPI 0.01 1,000 100 1
OAR 1.00 1,000 100 100
ACCOUNTS RECEIVABLE
Bad debts are recorded using the direct write-off method. At December 31, 1997,
all receivables were deemed collectible, and no reserve for doubtful accounts
was recorded.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost. Depreciation has been
provided in the financial statements on the modified accelerated recovery method
at rates based on reasonable estimates of useful lives, which fall within the
following ranges for major asset classifications:
Furniture and fixtures 7 years
Computer equipment 5 to 7 years
Vehicle 5 years
Office equipment 4 years
Maintenance, repairs, and minor renewals are charged to earnings in the year in
which the expense is incurred. Additions, improvements, and major repairs are
capitalized.
The costs retired or sold, together with the related accumulated depreciation,
are removed from the accounts, and any profit or loss on disposition is credited
or charged to earnings.
DEFINED CONTRIBUTION PLAN
The Combined Company has a qualified 401(k) profit-sharing plan that provides
benefits to employees who are at least 21 years of age with one year or more of
service. Employee contributions are matched by the Combined Company at the
discretion of the employer. Vesting does not occur during the first three years
of service. Participants are fully vested after three years of service. The
Combined Company is allowed to make discretionary contributions to the plan.
For the year ended December 31, 1997, the Combined Company elected to contribute
$27,071 to the plan.
-15-
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Combined Company in
estimating its fair value disclosures for financial instruments:
. Cash and cash equivalents, stockholder advances, line of credit, and
notes payable: the carrying amounts reported in the combined balance
sheet approximate fair values because of the short maturities of those
instruments and rates available for similar debt.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
INCOME TAXES
HCI, HPI, OAR, and the stockholder of the Combined Company have elected to be
taxed as an S corporation under Subchapter S of the Internal Revenue Code.
Accordingly, no provision has been made for federal and state income taxes by
the Combined Company.
FINANCIAL INSTRUMENTS
The Combined Company grants credit to customers in the banking industry in the
United States. Financial instruments subject to credit risk include accounts
receivable. Consequently, the Combined Company's ability to collect the amounts
due from customers may be affected by economic fluctuations in the banking
industry in the United States.
GOODWILL
Goodwill resulted from the purchase of information processing servicing
contracts for three banks. Goodwill is amortized over the estimated duration of
the contracts and is recorded net of accumulated amortization of $19,902 at
December 31, 1997.
REVENUE AND COST RECOGNITION
The Combined Company recognizes revenue when the work is performed. The
Combined Company's billing policy is typically to bill in advance for services
to be rendered.
ADVANCED BILLINGS
Advanced billings represent billings in advance for work and expenses to be
performed and incurred, respectively. The advanced billings were collected
subsequent to December 31, 1997.
DEFERRED REVENUE
Deferred revenue represents money received in advance of work performed and
advanced billings for work and expenses to be performed and incurred,
respectively.
-16-
<PAGE>
3. RELATED-PARTY TRANSACTIONS:
During the year, the Combined Company advanced funds to its stockholder. These
advances are noninterest-bearing and are payable on demand. At December 31,
1997, the stockholder owed $85,9,889 to the Combined Company. The Combined
Company expects to collect these advances within the next year.
4. LEASE OBLIGATIONS:
OFFICE LEASES
The Combined Company has an office lease in Casselberry, Florida, which expires
in October 2001, with monthly lease payments of $9,718 from January 1998 through
April 1998, $9,954 from May 1998 through October 1998, $10,232 from November
1998 through October 1999, $10,625 from November 1999 through April 2000,
$10,727 from May 2000 through October 2000, $11,034 from November 2000 through
April 2001, and $6,436 from May 2001 through October 2001.
Future noncancellable obligations under the above office lease are as follows
for the years after December 31, 1997:
1998 $119,061
1999 124,176
2000 128,931
2001 82,754
--------
Total $454,922
========
The Combined Company has purchased a $25,000 certificate of deposit as a
guarantee for this office lease.
Rent expense related to the above office lease for the year ended December 31,
1997, was $61,322.
AUTOMOBILE LEASES
At December 31, 1997, the Combined Company had 19 automobiles under
noncancellable operating leases. Subsequent to December 31, 1997, the Combined
Company leased 17 automobiles under noncancellable operating leases. These
leases range from 24 months to 39 months and expire through May 2001. Monthly
payments range from $256 to $630 per automobile.
Future noncancellable obligations under the above automobile leases are as
follows for the years after December 31, 1997:
1998 $121,950
1999 128,177
2000 30,535
2001 2,677
--------
Total $283,339
========
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<PAGE>
Automobile lease expense related to the above leases for the year ended December
31, 1997, was $101,418.
EQUIPMENT LEASES
The Combined Company leases various computer equipment under a lease that is
cancelable with no less than 90 days written notice, provided the lease is not
terminated before August 2000. The lease expires in August 2000 and requires
monthly payments ranging from $10 to $682. Future obligations under the above
lease for the years after December 31, 1997, are as follows:
1998 $125,517
1999 117,006
2000 63,877
2001 1,532
--------
Total $307,932
========
Equipment lease expense related to the above equipment leases was $85,728 for
the year ended December 31, 1997.
5. INDEBTEDNESS:
LINE OF CREDIT
At December 31, 1997, the Combined Company had a $250,000 revolving loan
agreement due on demand, bearing interest at prime plus 1 percent. This line of
credit is collateralized by a blanket lien on accounts receivable and is
personally guaranteed by the stockholder of the Combined Company and by HPI. At
December 31, 1997, $243,000 was outstanding under this line of credit.
Subsequent to December 31, 1997, this line of credit was increased to $500,000.
OTHER NOTES PAYABLE
The Combined Company has two notes payable owed to a bank with interest at 12
percent and 19 percent per annum, respectively, collateralized by a vehicle and
equipment, with monthly payments of $406 and $327, respectively, including
principal and interest, due through July 1999 and March 2000, respectively. The
outstanding balances at December 31, 1997, were $6,803 and $8,787, respectively.
The notes are personally guaranteed by the stockholder of the Combined Company.
The principal maturities of these notes for years after December 31, 1997, are
as follows:
1998 $ 7,070
1999 6,121
2000 2,399
-------
Total $15,590
=======
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<PAGE>
TREASURY STOCK NOTE PAYABLE
During 1997, HCI repurchased 20 shares of common stock representing 20 percent
of the issued and outstanding stock of HCI for $415,000. In connection with
this purchase, HCI entered into a note agreement for $415,000. The note
agreement includes interest at 7.0 percent per annum and is collateralized by
the treasury stock of HCI. The note requires monthly payments of principal and
interest in the amount of $8,217, beginning August 1997 and maturing July 2002.
The outstanding balance at December 31, 1997, was $385,677. The note is
personally guaranteed by the stockholder of HCI.
The principal maturities of the note for the years after December 31, 1997, are
as follows:
1998 $ 73,955
1999 79,301
2000 85,034
2001 91,181
2002 56,206
--------
Total $385,677
========
6. CONCENTRATION OF CREDIT RISK:
For the year ended December 31, 1997, HCI had sales of approximately $2,653,000,
$1,676,000, and $852,000 to three major customers in the banking industry.
Sales to these customers represented 42.0 percent, 26.5 percent, and 13.5
percent, respectively, of total HCI sales.
For the year ended December 31, 1997, HPI had sales of approximately $101,600,
$55,800, and $92,000 to three customers, representing 36.4 percent, 20.0
percent, and 33.0 percent of total HPI sales, respectively. The servicing
contracts for these customers expire in February 1998, September 2000, and
December 1999, respectively.
At December 31, 1997, HCI maintained cash and cash equivalents of $208,232 in
one bank account, which exceeded the $100,000 limit insured by the Federal
Deposit Insurance Corporation (FDIC).
7. COMMITMENTS:
HPI is obligated to pay a monthly royalty fee to a company for the use of
processing software. The royalty fee is based on the total assets of HPI's
customers who use this software.
8. SUBSEQUENT EVENTS:
Subsequent to December 31, 1997, HCI entered into an agreement with a bank in
New York to perform certain computer services related to the Year 2000 project
and other services. The term of the agreement is from January 1, 1998, to April
4, 1999, and the amount of contract, including expenses, is in excess of $10
million.
Subsequent to December 31, 1997, HPI signed a letter of intent to enter into an
agreement for a term of five years to perform certain data processing services
related to system conversion and monthly service for a bank in New York.
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<PAGE>
9. SALE OF COMBINED COMPANY:
On November 30, 1998, the Combined Company was acquired by a publicly traded
corporation, Cotelligent, Inc. Cotelligent, Inc. is a nationwide provider of
information technology consulting services to organizations with complex
information systems and technology operations.
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<PAGE>
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
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