UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
---------
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended October 31, 1998 Commission File Number 33-14576-D
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ELLIGENT CONSULTING GROUP, INC.
(Exact name of registrant as specified in its charter)
Nevada 87-0453842
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
152 West 57th Street, 40th Floor
New York, New York 10019
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (212) 765-2915
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 and 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
Indicate the number of shares outstanding of each class of the Registrant's
Common Stock.
The Registrant has only one class of Common Stock outstanding. As of November
30, 1998, there were 14,544,225 shares of the Registrant's Common Stock
outstanding.
Transitional Small Business Disclosure Format (check one)
Yes No X
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ELLIGENT CONSULTING GROUP, INC.
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INDEX TO FORM 10-QSB
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Page to Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet as of October 31, 1998 [Unaudited] 1.....
Consolidated Statements of Operations for the three months ended
October 31, 1998 and 1997 [Unaudited]....................... 2.....
Consolidated Statement of Stockholders' Equity for the three months
ended October 31, 1998 and 1997 [Unaudited]................. 3.....
Consolidated Statements of Cash Flows for the three months ended
October 31, 1998 and 1997 [Unaudited]....................... 4.....5
Notes to Consolidated Financial Statements [Unaudited]...... 6.....10
Item 2. Managements' Discussion and Analysis of Financial
Condition and Results of Operations................... 11.....14
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds............. 15.....
Item 6. Exhibits and Reports on Form 8-K...................... 15.....
Signature...................................................... 16.....
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ELLIGENT CONSULTING GROUP, INC.
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BALANCE SHEET AS OF OCTOBER 31, 1998
[UNAUDITED]
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<TABLE>
Assets:
Current Assets:
<S> <C>
Cash in Bank $ 47,944
Trade Accounts Receivable - Net of Allowance
for Doubtful Accounts of $56,689 4,013,966
Due from Related Parties 620,831
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Total Current Assets 4,682,741
Property and Equipment - Net of Accumulated Depreciation of $596,847 342,384
Goodwill - Net of Amortization of $151,173 11,942,653
Other Assets 154,926
Total Assets $17,122,704
Liabilities and Stockholders' Equity:
Current Liabilities:
Cash Overdraft $ 82,055
Bank Loans 2,007,292
Accounts Payable 1,839,340
Accrued Expenses and Other Liabilities 381,926
Notes Payable - Related Parties 8,268,890
Deferred Taxes Payable 207,000
Leases Payable - Current 50,173
Due to Related Parties 1,528,623
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Total Current Liabilities 14,365,299
Long-Term Liabilities:
Bank Loans - Long-Term 75,000
Leases Payable - Long-Term 107,190
Total Long-Term Liabilities 182,190
Commitment and Contingencies --
Stockholders' Equity:
Common Stock - $0.001 Par Value; 50,000,000 Shares Authorized
14,544,225 Shares Issued and Outstanding 14,544
Capital in Excess of Par Value 3,014,005
Accumulated Deficit (453,334)
Total Stockholders' Equity 2,575,215
Total Liabilities and Stockholders' Equity $17,122,704
See Accompanying Notes to Consolidated Financial Statements.
1
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ELLIGENT CONSULTING GROUP, INC.
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STATEMENTS OF OPERATIONS
[UNAUDITED]
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Three months ended
October 31,
1 9 9 8 1 9 9 7
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Income:
<S> <C> <C>
Revenue $5,813,106 $ --
Cost of Service 3,878,740 --
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Gross Profit 1,934,366 --
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Cost and Expenses:
General and Administrative 1,808,311 6,848
Depreciation 56,974 --
Amortization of Goodwill 151,173 --
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Total Cost and Expenses 2,016,458 6,848
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Operating Loss (82,092) (6,848)
Other Expense:
Interest (224,484) --
---------- -----------
Loss Before Income Taxes (306,576) (6,848)
Income Tax Benefit (62,000) --
---------- -----------
Net Loss $ (244,576) $ (6,848)
========== ===========
Basic and Diluted Loss Per Share $ (0.02) $ (0.01)
========== ===========
Weighted Average Number of Shares Outstanding 14,544,225 994,225
========== ===========
See Accompanying Notes to Consolidated Financial Statements.
2
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ELLIGENT CONSULTING GROUP, INC.
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STATEMENTS OF STOCKHOLDERS' EQUITY
[UNAUDITED]
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Deficit
Accumulated
Capital in During the Total
Common StockExcess ofAccumulatedStockholders'
Shares Amount Par Value Deficit Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - July 31, 1998 1,594,225 $ 1,594 $ 386,955 $ (55,645) $ 332,904
Common Stock Issued in
Merger [11] 12,950,000 12,950 2,627,050 -- 2,640,000
Accumulated Deficit of
Merged Company -- -- -- (153,113) (153,113)
Net Loss for the Three Months
Ended October 31, 1998 -- -- -- (244,576) (244,576)
--------- -------- --------- --------- ---------
Balance - October 31, 1998 14,544,225$ 14,544 $3,014,005 $(453,334) $2,575,215
================== ========== ========= ==========
See Accompanying Notes to Consolidated Financial Statements.
3
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ELLIGENT CONSULTING GROUP, INC.
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STATEMENTS OF CASH FLOWS
[UNAUDITED]
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Three months ended
October 31,
1 9 9 8 1 9 9 7
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Operating Activities:
<S> <C> <C>
Net Loss $ (244,576) $ (6,848)
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Adjustments to reconcile Net Loss to
Cash Provided by Operating Activities:
Depreciation and Amortization 208,147 --
Deferred Income Taxes (113,104) --
Imputed Interest 110,005 --
Change in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (1,027,573) --
Other Assets (48,567) --
Due from Related Parties (25,234) --
Increase [Decrease] in:
Accounts Payable 259,563 367
Accrued Expenses 88,364 --
Due to Related Parties (201,265) --
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Total Adjustments (749,664) 367
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Net Cash - Operating Activities (994,240) (6,481)
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Investing Activities:
Payments for Property and Equipment (29,442) --
Cost of Acquisition (41,104) --
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Net Cash - Investing Activities (70,546) --
---------- -----------
Financing Activities:
Decrease in Cash Overdraft (17,106) --
Proceeds from Bank Loans 815,000 --
Payments on Bank Loans (14,583) --
Payments on Capital Leases (4,277) --
---------- -----------
Net Cash - Financing Activities 779,034 --
---------- -----------
Net Decrease in Cash (285,752) (6,481)
Cash -Beginning of Years 333,696 14,338
---------- -----------
Cash - End of Years $ 47,944 $ 7,857
========== ===========
See Accompanying Notes to Consolidated Financial Statements.
4
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ELLIGENT CONSULTING GROUP, INC.
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STATEMENTS OF CASH FLOWS
[UNAUDITED]
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Years ended
October 31,
1 9 9 8 1 9 9 7
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Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
<S> <C> <C>
Interest $ 114,479 $ --
Income Taxes $ -- $ --
Supplemental Schedule of Non-Cash Investing and Financing Activities:
During the three months ended October 31, 1998, the Company acquired all of
the outstanding common stock of Patra Capital in exchange for 12,950,000 shares
of its common stock.
During the three months ended October 31, 1998, Patra Capital acquired all of
the outstanding common stock of CSI in exchange for 1,100,000 shares of Elligent
common stock, notes payable of $8,500,000, with a discounted value of
$8,158,885, and $1,500,000, which was paid by a stockholder of the Company and
related companies owned or controlled by a principal stockholder of the
Company..
During the three months ended October 31, 1998, and 1997, the Company entered
into capital leases for $113,154, and $-0-, respectively.
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
5
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ELLIGENT CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1-ORGANIZATION AND CORPORATE HISTORY
Elligent Consulting Group, Inc., (the "Company") was incorporated in February of
1987 under the laws of the state of Nevada as Coronado Ventures, Inc. During the
period commencing in 1990 through 1992, the Company acquired Tahoeview
Cablevision, Inc. ("Tahoe") and Weststar Group North ("North") and changed its
name to Weststar Group, Inc. Subsequently, Tahoe and North became subject to a
bankruptcy proceeding, which, on July 31, 1996, was concluded by an Order and
Judgment from the Court regarding the Final Distribution of Proceeds of Sale of
Assets by the Receiver. The Company was not named as a defendant in the
bankruptcy and was not involved in any manner, except that it was the sole
shareholder of Tahoe and North. The conclusion of the aforementioned proceedings
resulted in the Company emerging without any business operations and being
deemed to be a new entity for financial statement reporting purposes. Pursuant
to the order and Judgment of the Court, Tahoe and North were ordered dissolved
and therefore, only the operations of the Company since July 31, 1996 (the "Date
of Inception"), are included in the accompanying financial statements.
In July of 1997, the Company changed its name to Arena Group, Inc. and two
shareholders of the Registrant, Lloyd T. Rochford and Denny W. Nestripke, were
elected as directors, with the express purpose of locating a business venture
with which the Registrant could enter into a Reorganization. On July 23, 1998,
the Registrant, through its wholly owned subsidiary Patra Acquisition, Inc., a
Delaware corporation ("Patra Acquisition"), entered into a Non-Binding Letter of
Intent (the "Letter of Intent") with Patra Capital Ltd., a Delaware corporation
("Patra Capital"). The Letter of Intent provided for the execution of a
definitive merger agreement (the "Merger Agreement"). Pursuant to the Merger
Agreement, Patra Capital merged with Patra Acquisition and Patra Capital, the
surviving corporation of the merger, became a wholly owned subsidiary of the
Registrant (the "Reorganization"). As part of the Reorganization, the Registrant
changed its name to Elligent Consulting Group, Inc. on July 31, 1998.
On September 21, 1998, effective August 1, 1998, for accounting purposes, the
Company through its wholly owned subsidiary, Patra Capital, purchased Conversion
Services International, Inc. ("CSI"). The operations of CSI are included in the
Company's results of operations commencing on August 1, 1998. In connection with
the acquisition of CSI, CSI's shareholders signed employment agreements with the
Company for three years.
NOTE 2-BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited interim consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary make the interim financial statements not
misleading The financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission for quarterly reports on
Form 10-QSB and do not include all of the information and note disclosures
required by generally accepted accounting principles.
It is suggested that these financial statements be read in conjunction with the
audited financial statements and notes for the fiscal year ended July 31, 1998,
included in the Elligent Consulting Group, Inc. Form 10-KSB.
The Company was deemed to be a new entity for financial statement reporting
purposes on July 31, 1996 [See Note 1] and was in the development stage through
July 31, 1998. The three months ended October 31, 1998 is the first period
during which it is considered an operating company.
6
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ELLIGENT CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
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NOTE 3-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER
DISCLOSURES
Principles of Consolidation -- The accompanying unaudited consolidated financial
statements include the accounts of Elligent Consulting Group, Inc., and its
wholly owned subsidiary, Conversion Services International, Inc. ("CSI"). All
significant intercompany balances and transactions have been eliminated in the
consolidation.
Property and Equipment -- Property and equipment are stated at cost less
accumulated depreciation and amortization and includes equipment held under
capital lease agreements. Depreciation and amortization, which includes
amortization of leased equipment, are computed using the straight-line method
over the estimated useful lives of the respective assets. Estimated useful lives
range from 3 to 5 years as follows:
Furniture and fixtures 5 years
Computers and technological equipment 3 years
Revenue recognition -- The Company records revenue as services are provided to
its customers by its personnel (employees and consultants).
Income Taxes -- Income taxes are provided based upon the provisions of Statement
of Financial Accounting Standards ["SFAS"] No. 109, "Accounting for Income
Taxes," which requires recognition of deferred tax liabilities and assets for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Use of Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
Actual results could differ from those estimates.
Concentration of Credit Risk -- The Company extends credit to customers which
results in accounts receivable arising from its normal business activities. It
routinely assesses the financial strength of its customers and based upon
factors surrounding their credit risk believes that its accounts receivable
credit risk exposure is limited. Such estimate of the financial strength of such
customers may be subject to change in the near future. The Company's largest 5
clients, when combined, account for 41% of total revenues and 56% of accounts
receivable. The Company's largest client accounts for 26% of the total revenues
and 36% of accounts receivable.
Basic and Diluted Loss per Common Share -- During the year ended July 31, 1998,
the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings Per Share. Under SFAS 128, loss per common share is computed by
dividing net loss available to common stockholders by the weighted-average
number of common shares outstanding during the period. Diluted loss per share
reflects the potential dilution which could occur if all contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock. In the Company's present position, diluted loss per
share is the same as basic loss per share. The effect of the new standard on
prior years was immaterial; accordingly, prior periods have not been restated.
7
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ELLIGENT CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
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NOTE 4-INTERIM RESULTS
The results of operations for the three months ended October 31, 1998, are not
necessarily indicative of the results to be expected for the year ending July
31, 1999.
NOTE 5-DUE FROM RELATED PARTIES
Due from related parties includes amounts due from the shareholders of CSI and
an entity wholly owned by a major stockholder. Repayment terms have not been
established. These amounts will be received during 1999.
NOTE 6-BANK LOANS
Bank loans include the outstanding amount of a revolving line of credit through
Summit Bank ("Summit"), in New Jersey, that is used to finance the Company's
accounts receivable. The line of credit is limited to the lesser of $1,850,000
or 80% of eligible receivables under 90 days aged. Interest is payable on the
outstanding balance under this line of credit at the rate of 1.50% above
Summit's prime rate. At December 8, 1998, Summit's prime rate was 7.75%. There
was a balance of $1,850,000 outstanding under this line of credit as of October
31, 1998. The line is collateralized by accounts receivable and equipment and is
due on January 1, 1999.
Additional debt consists of installment loans at interest rates ranging from 10%
to !0.50% due through April 2001.
NOTE 7-NOTES PAYABLE--Related Parties
Notes payable--related parties represent amounts due to the Stockholders of CSI
as a result of its acquisition by Patra Capital. Total notes payable as of
October 31, 1998, are $8,500,000, with a discounted value of $8,268,890. The
payments are due as follows:
$1,000,000 November 24, 1998
$1,500,000 January 21, 1999 (payable in cash or stock at
the option of the Company)
$3,750,000 May 1, 1999
$2,250,000 August 1, 1999
Interest at 8% is payable on the November 24th and January 21st payments. The
final two payments bear no interest. The principal value of the last two
installments has been discounted at the rate of 8%.
NOTE 8-DUE TO RELATED PARTIES
Amounts due to related parties consist of $1.1 million due to a principal
stockholder of the Company and $400,000 due to related entities owned or
controlled by a principal stockholder of the Company. These amounts are not
subject to any pre-specified repayment schedule and are not interest bearing
liabilities.
NOTE 9-COMMON STOCK
Pursuant to a reorganization and acquisition of Patra Capital and Conversion
Services International, Inc. ("CSI"), effective as of August 1, 1998, the
Company issued 12,950,000 additional common shares. There are now 14,544,225
shares issued and outstanding and 50,000,000 shares authorized.
8
<PAGE>
ELLIGENT CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
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NOTE 10-INCOME TAXES
The major components of the net deferred liability as of October 31, 1998, are
as follows:
Deferred Tax Assets:
Net Operating Loss Carryforward $ 124,800
Cash Basis Tax Accounting Asset 112,200
----------
Total 237,000
Cash Basis Tax Accounting Liability 444,000
Net Deferred Tax Liability $ 207,000
-------------------------- ==========
The Company had operating loss carry forwards at July 31, 1998, of $53,926,
which expire in the years 2012 through 2013, if unused. Under federal tax law,
certain potential changes in ownership of the Company may operate to restrict
future utilization of these carry forwards.
NOTE 11-REORGANIZATION AND ACQUISITIONS
On July 23, 1998, the Registrant, through its wholly owned subsidiary Patra
Acquisition, Inc., a Delaware corporation ("Patra Acquisition"), entered into a
Non-Binding Letter of Intent (the "Letter of Intent") with Patra Capital Ltd., a
Delaware corporation ("Patra Capital"). The Letter of Intent provided for the
execution of a definitive merger agreement (the "Merger Agreement"). Pursuant to
the Merger Agreement, Patra Capital merged with Patra Acquisition and Patra
Capital, the surviving corporation of the merger, became a wholly owned
subsidiary of the Registrant (the "Reorganization"). As part of the
Reorganization, the Registrant changed its name to Elligent Consulting Group,
Inc. on July 31, 1998. On September 3, 1998, with an effective date of August 1,
1998, for accounting purposes, the Registrant issued 12,950,000 shares of its
restricted common stock to the then current shareholders of Patra Capital in
exchange for all of the issued and outstanding common stock of Patra Capital. At
that time, the management of Patra Capital became the management of the Company.
The merger was accounted for as a Recapitalization of the Company.
On September 21, 1998, effective August 1, 1998, for accounting purposes, the
Company through its wholly owned subsidiary, Patra Capital, purchased Conversion
Services International, Inc. ("CSI"). The operations of CSI are included in the
Company's results of operations commencing on August 1, 1998. In connection with
the acquisition of CSI, CSI's shareholders signed employment agreements with the
Company for three years.
The purchase price was $12,298,885 consisting of 1,100,000 shares of the
Company's common stock (valued at $2,640,000), cash payments of $1,500,000
delivered at the closing and notes payable of $8,500,000, with a discounted
value of $8,158,885. Interest at 8% is payable on the November 24th and January
21st payments. The final two payments bear no interest. The payments are due as
follows:
$1,000,000 November 24, 1998
$1,500,000 January 21, 1999 (payable in cash or stock at
the option of the Company)
$3,750,000 May 1, 1999
$2,250,000 August 1, 1999
Goodwill of $12,093,826 will be amortized over 20 years under the straight line
method.
9
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ELLIGENT CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
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NOTE 11-REORGANIZATION AND ACQUISITIONS [CONTINUED]
CSI has been in the business of providing information technology consulting
services for approximately nine years. CSI provides high-end project management,
applications implementation, data warehousing, consulting, internet and
information technology ("IT") staffing services. CSI has recently expanded its
operation to accommodate additional consultant/employees and new in-house
training facilities. CSI currently has approximately 180 employees and
consultants, and expects that number to increase as its business grows.
NOTE 12-NEW AUTHORITATIVE PRONOUNCEMENTS
The Financial Accounting Standard Board ["FASB"] has issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and how it is designated, for example, gain or losses related to changes in the
fair value of a derivative not designated as a hedging instrument is recognized
in earnings in the period of the change, while certain types of hedges may be
initially reported as a component of other comprehensive income [outside
earnings] until the consummation of the underlying transaction.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS No. 133 should be as of the
beginning of a fiscal quarter, on that date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is
not to be applied retroactively to financial statements of prior periods. The
Company does not currently have any derivative instruments and is not currently
engaged in any hedging activities.
NOTE 13--COMMITMENTS AND CONTINGENCIES
Letter of Credit - The Company is committed under an outstanding letter of
credit with a bank to secure the security deposit on the new office space, in
the amount of $291,657, which expires November 1999. The agreement will
automatically extend for additional one year periods with a final expiration
date of November 2003.
NOTE 14-SUBSEQUENT EVENT
In November 1998, the Company issued stock options to acquire 92,000 shares of
common stock to employees of CSI.
. . . . . . . . .
10
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD - LOOKING INFORMATION
The forward-looking statements herein are based on current expectations that
involve a number of risks and uncertainties. Such forward-looking statements are
based on assumptions that the Registrant will have adequate financial resources
to fund the development and operation of its business and planned acquisitions,
and that there will be no material adverse change in the Registrant's operations
or business and in the economy as a whole. The foregoing assumptions are based
on judgment with respect to, among other things, information available to the
Registrant, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the Registrant's control. Accordingly,
although the Registrant's management believe that the assumptions underlying the
forward-looking statements are reasonable, any such assumption could prove to be
inaccurate and therefore there can be no assurance that the results contemplated
in forward-looking statements will be realized. There are a number of other
risks presented by the Registrant's business and operations which could cause
the Registrant's financial performance to vary markedly from prior results or
results contemplated by the forward-looking statements. Management decisions,
including budgeting, are subjective in many respects and periodic revisions must
be made to reflect actual conditions and business developments, the impact of
which may cause the Registrant to alter its capital investment and other
expenditures, which may also adversely affect the Registrant's results of
operations. In light of significant uncertainties inherent in forward-looking
information included in this Quarterly Report on Form 10-QSB, the inclusion of
such information should not be regarded as a representation by the Registrant or
any other person that the Registrant's objectives or plans will be achieved.
In addition to general economic factors that could adversely affect the
economy, the several factors that could cause expectations to differ and
adversely affect the Registrant's plan of operations include, but are not
limited to, the following: (1) the Registrant may not be able to attract
acquisition candidates on favorable terms; (2) financing sources may not be
available to achieve the planned acquisitions; (3) competition for consulting
assignments remains strong and the Registrant must continue to demonstrate its
ability to meet the needs of its current and prospective clients; and (4)
changes in technology may result in the Registrant not being able to meet the
needs of its current and prospective clients due to an inability to locate a
sufficient number of qualified consultants.
OVERVIEW
As part of a Reorganization, the Company changed its name to Elligent Consulting
Group, Inc. on July 31, 1998. On September 3, 1998, with an effective date of
August 1, 1998, for accounting purposes, the Company issued 12,950,000 shares of
its restricted common stock to the then current shareholders of Patra Capital in
exchange for all of the issued and outstanding common stock of Patra Capital. At
that time, the management of Patra Capital became the management of the Company.
The merger was accounted for as a Recapitalization of the Company.
On September 21, 1998, effective August 1, 1998, for accounting purposes, the
Company through its wholly owned subsidiary, Patra Capital, purchased Conversion
Services International, Inc. ("CSI"). The operations of CSI are included in the
Company's results of operations commencing on August 1, 1998. In connection with
the acquisition of CSI, CSI's shareholders signed employment agreements with the
Company for three years.
11
<PAGE>
The purchase price was $12,298,885 consisting of 1,100,000 shares of the
Company's common stock (valued at $2,640,000), cash payments of $1,500,000
delivered at the closing and notes payable of $8,500,000, with an original
discounted value of $8,158,885. Interest at 8% is payable on the November 24th
and January 21st payments. The final two payments bear no interest. The payments
are due as follows:
$1,000,000 November 24, 1998
$1,500,000 January 21, 1999 (payable in cash or stock at
the option of the Company)
$3,750,000 May 1, 1999
$2,250,000 August 1, 1999
The Registrant expects to continue an acquisition program to acquire other
technology consulting companies constituting a set of key consulting practice
areas to serve as a platform ("platform") for further roll-up and consolidation
through acquisition of similar companies in the future. Through these platform
companies, the Registrant plans to offer its clients an enterprise-type offering
of services. These services will include management consulting, business
function reengineering, mission critical application rollouts and package
implementation, database and datawarehousing consulting, networking and interim
and permanent staffing or support.
The Registrant will then continue its development through continued internal
growth from the acquired platform companies and additional rollout acquisitions
within each of its service offering areas. Through this expansion and growth
strategy, the Registrant plans to develop into a leading global technology
services company.
The Registrant plans to enter a business segment that has significant
competition from other much larger companies. The Registrant expects to offer
its services to large national and multi-national companies.
There are no copyrights or patents owned by the Registrant.
The Company's corporate headquarters are located in New York City, New York. CSI
maintains its offices in East Hanover, New Jersey.
The Registrant plans to continue an expansion strategy through (1) the
acquisition of a select number of technology consulting companies with
complementary areas of expertise and (2) internal growth from the acquired
operating subsidiaries. While there is significant risk as a result of potential
external problems, lack of available capital, changing economic and market
conditions, and significant competition from much larger companies, through this
expansion strategy, the Registrant's plans are to develop into a leading global
consolidator of technology services companies. Key to the acquisition strategy
is the retention of the acquired company's management and staff.
For the three month period ended October 31, 1998, the Company had revenue of
$5.8 million reflecting an increase of 46% from the comparable year earlier
period and a net loss of $244,576. The major components of this loss are as
follows:
Cash flow from operations of CSI $ 332,703
---------
Depreciation, amortization and interest 432,632
Income tax benefit (62,000)
Management and holding company expenses 206,647
---------
Subtotal acquisition related and other expenses 577,279
Net Loss $(244,576)
12
<PAGE>
The management and holding company expenses represent costs related to new
acquisitions in progress, and efforts to locate equity and debt financing
required to achieve the growth goals of the Company. The remaining analysis of
quarterly results focuses on the operations of CSI, our sole operating
subsidiary. The unaudited information for this interim period is not necessarily
indicative of the results for the entire year, nor should it be used to project
the Company's operations for future dates or periods.
The financial statements presented herein represent the first financial
statements of Elligent Consulting Group, Inc. since its reorganization in July
1998 and its acquisition of CSI. The CSI acquisition was accounted for as of
August 1, 1998, on the purchase method of accounting and therefore the financial
statements only reflect CSI's income and operations for the three month period.
In order to provide investors with appropriate historical data, Management's
discussion will include comparative data reflecting the results of operations
for CSI during the year preceding its acquisition by the Company.
CSI has been in the business of providing information technology consulting
services for approximately nine years. CSI provides high-end project management,
applications implementation, data warehousing, consulting, internet and
information technology ("IT") staffing services. CSI has recently expanded its
operation to accommodate additional consultant/employees and new in-house
training facilities. CSI currently has approximately 180 employees and
consultants, and expects that number to increase as its business grows. CSI's
revenues have doubled over the past two years, and the current revenue run rate
is $25 million.
For the three months ended October 31, 1998, the Company had revenues of $5.8
million from its operating subsidiary CSI reflecting a 46% increase from the
revenues of CSI during the corresponding period in 1997 prior to its acquisition
by the Company. The cost of revenues was $3.9 million resulting in a gross
margin from operations of $1.9 million or 33%.
The unaudited results of operations for CSI for the three months ended October
31, 1998, and 1997, are as follows:
Three months Three months
Ended Ended
October 31, 1998 October 31, 1997
[In Thousands] [In Thousands]
[Unaudited] [Unaudited]
Revenue $ 5,813 $ 3,983
Cost of revenue 3,879 2,640
------------ ------------
Gross margin 1,934 1,343
Operating expenses 1,601 1,162
------------ ------------
Cashflow from operations $ 333 $ 181
=========== ============
CSI continues to show significant growth in revenues in 1998, versus the
comparable period a year ago. Operating expenses are running higher than
projected for the next twelve month period, due to continued growth in staff and
related training costs prior to placing new staff on a billable status.
The Company expects to reduce operating expenses as a percent of gross margin in
1999.
Liquidity and Financial Position
As of October 31, 1998, the Company had a working capital deficit of $9.7
million. Its working capital deficit reflects (a) $2.0 million due to Summit
Bank related to the revolving line of credit collateralized by the Company's
accounts receivable and other loans, (b) accounts payable and accrued expenses
of $2.3 million, (c) notes payable to stockholders of $8.3 million related to
the acquisition of CSI, and (d) amounts due to related parties of $1.5 million,
relative to the acquisition of CSI and the funding of costs related to future
acquisitions in progress. These latter amounts are principally due to the
Company's principal stockholder.
13
<PAGE>
The principal sources of funds, other than from the revolving line of credit,
are (a) the personal assets of the Company's principal stockholder and related
entities owned or controlled by the Company's principal stockholder, (b) the
sale of securities and (c) additional financing sources. The Company is
presently engaged in negotiations with respect to additional financing sources
and the private placement of shares of the Company's common stock. A new
revolving line of credit of $30 million, to replace the Summit Bank line, is
expected to close and be funded in late December. A private placement of common
stock of the Company is expected to close in mid-January 1999. However, no
assurance can be given that the Company will be successful in obtaining such
financing, and the failure to obtain necessary financing could have a material
adverse effect upon the Company. At the present time, the Company's management
believes that its current sources of funding are adequate to support the growth
of the Company and its wholly owned subsidiary, CSI. The current sources are not
adequate to support the Company's acquisition plans.
14
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K.
The Company filed two reports on Form 8-K related to the acquisition of CSI and
the reorganization of the Company. These reports were filed as follows:
September 15, 1998 Name change and plan of merger of Patra Capital,
Patra Acquisition and CSI
October 6, 1998 This filing included the complete merger agreement
between SI, Patra Capital and Patra Acquisition.
The Company filed three reports on Form 8-K/A related to the acquisition of CSI
and the reorganization of the Company. These reports were filed as follows:
October 1, 1998 This filing was required to correct the name tag
associated with the 8K of September 15 regarding the
change of name of Arena Group to Elligent Consulting
Group
October 19, 1998 This filing included the audited financial
statements of Conversion Services International,
Inc. ("CSI") for the three years ended December 31,
1995, 1996 and 1997
December 7, 1998 This filing included the audited financial
statements of Patra Capital Ltd for the period
from its inception to July 31, 1998
INDEX TO EXHIBITS
15
<PAGE>
SIGNATURES
- ------------------------------------------------------------------------------
In accordance with Section 13 or 15(d) of the Exchange Act; the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ELLIGENT CONSULTING GROUP, INC.
Date: December 15, 1998 By: /s/ Edwin T. Brondo
---------------------
Edwin T. Brondo
Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature Title(s)
By: /s/ Edwin T. Brondo Chief Financial Officer
(Edwin T. Brondo)
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statement of operations, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> jul-31-1998
<PERIOD-END> Oct-31-1998
<CASH> 47,944
<SECURITIES> 0
<RECEIVABLES> 4,070,655
<ALLOWANCES> 56,689
<INVENTORY> 0
<CURRENT-ASSETS> 4,682,741
<PP&E> 939,231
<DEPRECIATION> 596,847
<TOTAL-ASSETS> 17,122,704
<CURRENT-LIABILITIES> 14,365,299
<BONDS> 0
0
0
<COMMON> 14,544
<OTHER-SE> 2,560,671
<TOTAL-LIABILITY-AND-EQUITY> 17,122,704
<SALES> 5,813,106
<TOTAL-REVENUES> 5,813,106
<CGS> 3,878,740
<TOTAL-COSTS> 2,016,458
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 224,484
<INCOME-PRETAX> (306,576)
<INCOME-TAX> (62,000)
<INCOME-CONTINUING> (244,576)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (244,576)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
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