UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[ X ] TRANSITION REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: July 31, 1998 to December 31, 1998
Commission file number: 33-14576-D
ELLIGENT CONSULTING GROUP, INC.
-------------------------------
(Exact name of Registrant as specified in its charter)
Nevada 87-0453842
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(State of Incorporation) (IRS Employer 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
---------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act :
Common Stock, $0.001 par value
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
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this Form. X
Issuer's pro forma twelve month revenues through December 31, 1998: $22,148,905
As of March 18, 1998, the number of shares of Common Stock outstanding was
14,794,226 and the aggregate market value of the Common Stock (based on the
closing price on that date) held by non-affiliates of the Registrant was
approximately $31,767,440.
Exhibit Index Page 21
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PART I
ITEM 1. BUSINESS
Current
Operations Elligent Consulting Group, Inc. ("Elligent"), a Nevada corporation,
is a holding company with one operating subsidiary, Conversion
Services International, Inc. ("CSI"). References in this Report to
the Company, "we," "us" or "our" refer to Elligent and CSI, unless
otherwise noted. CSI has been engaged for nine years in the
provision of information technology consulting services, including
project management, applications implementation, data warehousing,
consulting, Internet, e-business and information technology staffing
services. CSI recently expanded its operations to accommodate
additional consultants/employees and new in-house training
facilities.
Our goal is to build a vertically integrated Information Technology
("IT") consulting firm that can provide services on an enterprise
wide basis and offer one-stop shopping and complete IT solutions for
large companies seeking specialized technology consulting services.
Our principal executive office is located at 152 West 57th Street,
40th Floor, New York, New York 10019 and our telephone number is
(212) 765-2915.
The Information
Technology
Market The globalization of competition and the fast pace of technological
change have increasingly driven companies to seek high technology
solutions to improve their productivity and competitive position.
Frequently, these technology solutions are in the information
technology field. Many companies view information technology as a
critical component in their overall business strategy. Increasingly,
information technology affects an entire enterprise, rather than
being relegated to the status of isolated back office functions. In
fact, this phenomenon has led to designation of information
technology used on an enterprise-wide basis as enterprise service
offerings, otherwise known as Enterprise Resource Planning ("ERP").
We believe that the migration of technology to desktops throughout
companies has created a wide range of business opportunities. Data
that was once collected nightly or weekly using custom developed
software and used to analyze events retrospectively can now be
gathered using enterprise-wide packaged software applications
capable of linking manufacturing, sales, distribution and finance
functions enabling a company to manage an entire enterprise in real
time.
ERP is being deployed in geographically dispersed, complicated
technology environments. The multitude of different protocols,
operating systems, devices and architectures makes deployment of
technology solutions a difficult challenge. Companies must
continually keep pace with new developments that often render
existing equipment and internal skills obsolete. At the same time,
external economic factors have forced organizations to focus on
their core competencies and trim workforces. Accordingly, these
organizations often lack the information technology skills and
personnel necessary to design and implement comprehensive
information technology solutions.
The shortage of skilled information technology professionals and the
complexity of information technology solutions have pushed company
management to increasingly rely on outside specialists to implement
information technology strategies and, as a result, we believe that
the demand for consulting services will continue to grow rapidly.
According to the International Data Corporation, US total systems
integration revenue for 1998 was projected to close at $70.6 billion
compared to $62.8 billion in 1997, a 12.4% increase, and is expected
to grow to $92.9 billion by 2001, a 9.6% annual increase. Worldwide
revenue for 1998 was projected to close at $140.2 billion compared
to $124.6 billion in 1997, a 12.5% increase, and is expected to grow
to $196.1 billion by 2001, an annual increase of 11.8%.
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Companies that require information technology consultants to help
them implement information technology solutions choose between
tactical, or point-solution, solution providers and larger
organizations that offer strategic, or ERP services. The point
solution providers typically focus on limited functionality
requirements, such as application development and staff
augmentation. As a result, they usually do not address broader
strategic business and information technology goals that are
critical to the customer and the success of the information
technology solutions implemented. The larger more diverse
information technology consulting firms propose more comprehensive
solutions than the point-solution providers and do so only after
extensive studies of a particular client's business problems, but
often fail to deliver the right solutions on time and on budget.
We believe that these circumstances create the market opportunity
for us. In our view, companies today require strategic service
providers that provide one-stop shopping for their clients. Our
plan, therefore, is to be able to have a comprehensive understanding
of the relevant business issues, the ability to design and implement
integrated solutions that can help them meet their strategic
business goals as they evolve and the skills and tools necessary to
deliver solutions in a timely and cost-effective manner.
Strategy We plan to become a vertically integrated provider of IT consulting
services on an enterprise wide basis and grow through strategic
acquisitions and internal growth. As an enterprise service provider
we will offer solutions to all levels and areas of a client rather
than simply offering single solutions to a sole level or area of a
client's business. This will distinguish and differentiate us from
the point-solution approach of other information technology service
companies by becoming a leader in the emerging market for companies
that can provide enterprise service offerings. We believe that
market dynamics are demanding the emergence of companies that can
provide enterprise service offerings, in the same way that companies
demanded the creation of enterprise software companies such as SAP,
PeopleSoft, BAAN and others to replace single solution software
companies.
With CSI we have completed our first strategic acquisition. We
intend to continue to pursue other strategic acquisitions that will
provide us with additional well-trained, high-quality professionals,
new service offerings, additional industry expertise, a broader
client base and an expanded geographic presence.
- -Value Pyramid
of Services Our strategic acquisition program is based upon the "Value Pyramid
of Services," a business model that combines a number of companies
offering different yet complementary skills, service offerings,
practice areas and consulting expertise. The complementary companies
we initially acquire will create the "platform" or "building block"
companies to support further growth and consolidation to cover the
key set of service offerings required by customers. The following
four major areas of expertise in the technology consulting services
arena comprise the four levels of our Value Pyramid of Services:
Pyramid Level I Management Consulting, Business Function
Re-engineering and Domain Consulting
Pyramid Level II Mission Critical Application Rollouts, Package
Implementation, Platform Migration,
E-commerce and Outsourcing
Pyramid Level III Project Management and Implementation, Data
Warehousing and Database Management,
Internet, Intranet, Networking, Systems
Integration and Infrastructure
Pyramid Level IV Information Technology Staffing/Staff Outsourcing
and Permanent Placement
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These four areas of expertise (pyramid levels) range from the high
growth, high margin businesses of management consulting and business
function re-engineering at the top of the pyramid to the lower
growth but high revenue and cash flow businesses of information
technology staffing/staff outsourcing and permanent placement at the
base of the pyramid. The center of the Value Pyramid of Services
encompasses the businesses of package implementation, database
management, data warehousing inter/intranet, e-commerce and
networking. These businesses that comprise the center of the pyramid
and the core of our business model combine the characteristics of a
high degree of expertise and significant growth and profit margins.
We believe that there are a number of businesses we can acquire in
each of these four areas or segments. We refer to the initial
companies we acquire in each of the four segments as "platform
companies." CSI is our first platform company.
- -Acquisition
Candidate
Characteristics
Our acquisition candidates must have:
o a strategic fit with our overall business model;
o above average internal growth of revenues and earnings;
o above average cash flow; and
o a large customer base composed of national and multi-national
companies.
- -Sources of
Growth We believe that our growth will come from three major sources:
o Acquisition - As we acquire platform companies, we expect that
each company will grow partly by acquisition within its area of
expertise and in geographic diversity.
o Internal Growth - We will also seek additional growth through
the internal growth within each individual company. Our
platform companies will seek to augment their own strong
internal growth through the cross marketing to each other's
clients.
o Expansion of Value - Through our acquisition strategy and
internal growth we will be able to provide additional services
and geographic depth to our customers, thus creating the
ability to aggressively price our services and increase our
inherent profitability.
- -Clients We focus our marketing efforts on larger companies with substantial
needs for supplemental programmer staffing, ERP software
implementation and systems integration services and other
computer-related professional services. Such clients afford us the
opportunity to develop long-term relationships based on high quality
and consistent services that CSI has provided for nine years and
that we will continue to provide.
Management believes that larger clients have started to limit the
number of information technology vendors they use. In order to
achieve the reduction in the number of vendors used, companies often
review and screen both existing and potential vendors and generate
select lists of approved vendors. We believe that the factors
considered for placement of a company on a vendor list include size,
geographic and technical breadth of operations, quality assurance
programs, reliability and cost effectiveness.
- -Contracts We normally offer professional services through agreements that
specify that services are rendered on a best-efforts basis, that we
make no express or implied warranties and that the client must
continue to pay all charges incurred prior to the termination of the
agreement. Because services are typically rendered on an as-required
basis, we do not consider our backlog of unfinished assignments
significant in understanding our business.
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The typical client contract term is six months to two years and
there can be no assurance that a client will renew its contract when
it terminates. In fact, following expiration of an original contract
term with any given client, it is often the case that we begin
operating on an as-needed basis not under any contract of specific
duration. Our contracts are generally cancelable by the client at
any time and clients may unilaterally reduce or increase their use
of our services under such contracts without penalty. The
termination or significant reduction of our business relationship
with any of our significant clients could have an adverse effect on
our operating results.
We generally price our services to clients on a time and materials
basis and maintain price ranges that reflect the technical skills
and experience levels of the consultants on each project.
- -Employee and
Consultant
Recruitment Our future success will depend in part on our ability to hire
adequately trained personnel who address the increasingly
sophisticated needs of our clients. Our on-going employee and
consultant needs arise from:
o increasing demand for our services;
o consultant turnover; and
o the clients' requests for programmers trained in the newest
software technologies.
Few of our employees, and more of our consultants, are bound by
non-compete agreements. Competition for personnel in the information
technology services industry is significant and we may have
difficulty in attracting and retaining an optimal level of qualified
personnel in the future. In particular, competition for the limited
number of qualified project managers and professionals with certain
specialized skills, such as working knowledge of certain
sophisticated software, is intense. Because of this, recruitment of
employees and consultants is a critical element in our success. We
devote significant resources to meeting our personnel requirements.
We also offer a number of programs designed to retain our trained
personnel, including:
o Competitive salaries;
o Stock option plan;
o Training of employees and consultants in new skill sets;
o 401(k) plan; and
o medical benefits.
We also plan to acquire staffing companies to be used as an
additional entree into the higher margin services provided in Levels
II and III of the Value Pyramid of Services. This will also allow us
to increase our own recruitment efforts and to provide recruiting
services for our clients.
- -Competition
The information technology services industry is extremely
competitive. A number of companies compete with us in select markets
with substantially similar services. In most of the markets in which
we compete, we believe that there are participants that have
significantly greater financial, technical and marketing resources
than we do. However, we believe that the size of the overall market
prevents any one competitor from dominating any of the relevant
markets.
There are a few very large competitors with annual revenues over
$500 million; however, according to the Updata Group, an independent
consulting firm, over 3,000 software
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service firms with yearly revenues over $1 million compete for
market share. Most of these firms participate in just one geographic
area and none offer the full range of services that we plan to
through our Value Pyramid of Services. Our competition, therefore,
varies significantly from one geographic area to another.
In order to remain on our clients' vendor lists and develop new
client relationships, we must satisfy their requirements at
competitive rates. Although we continually attempt to lower our
costs, there are other software service organizations and temporary
placement agencies that may offer the same or similar services as we
offer at the same or lower costs. Additionally, certain of our
clients require that their vendors reduce rates after services have
commenced. There can be no assurance that we will be able to compete
effectively on pricing or other requirements and, as a result, we
may lose clients or be unable to maintain historic gross margin
levels or to operate profitably.
We have developed a direct, high-level sales organization that
encourages the pursuit, establishment and maintenance of close
relationships with senior management of possible client companies.
With our planned growth of service offerings, we believe that we
will have a significant advantage in cross-selling additional
services and solutions to our client base. However, there can be no
assurances that our growth of service offerings will provide any
such advantages.
In addition, we intend to target new clients by (i) utilizing the
business contacts of management personnel (ii) continuing to
leverage and expand our direct sales efforts, (iii) increasing the
hiring of consultants with existing client relationships and (iv)
pursuing referrals from existing clients and third-party
organizations including hardware partners, software partners and
industry research organizations.
Employees As of December 31, 1998, we had 186 employees and consultants. Of
this total, 162 employees and consultants provide consulting
services to our clients and 24 are in sales, finance, administration
and executive management.
Our History In March 1987, our predecessor, Coronado Ventures, Inc., was
incorporated in Nevada. As Coronado Ventures, we filed a
registration statement on Form S-18 with the SEC which became
effective in November 1989. Pursuant to the registration statement
we sold 1,000,000 units consisting of one share of Common Stock and
three Common Stock purchase warrants, raising $50,000 in gross
proceeds. None of the warrants were exercised prior to expiration.
Shortly after the completion of the above offering, we acquired 100%
of the issued and outstanding common stock of Tahoeview Cablevision,
Inc., a cable television company, for which we issued shares of our
Common Stock. At the time of this transaction we changed our name to
Westar Group, Inc. Tahoeview Cablevision operated as a subsidiary of
Westar Group.
In 1991, we acquired the assets of several other cable television
systems located in eastern Montana through a newly-formed
subsidiary, Westar Group North. We issued shares of our Common Stock
and paid cash for the purchase of these assets. The cash portion of
the purchase price was part of a revolving credit facility obtained
from a financial institution. Upon expiration of the revolving
credit facility in 1993, and the inability of Tahoeview Cablevision
and Westar Group North to either renew the facility or pay off the
balance owed, the financial institution filed a suit in U.S.
District Court, District of Massachusetts, naming our subsidiaries
Tahoeview Cablevision and Westar Group North as defendants. The
district court appointed a permanent receiver to oversee our
subsidiaries during the pendency of their bankruptcy. Westar Group
was not directly involved in this action. On July 31, 1997, the
district court ordered the receivership closed and that Tahoeview
Cablevision and Westar Group North be dissolved. This left Westar
Group, the holding company, as the only surviving entity.
In July 1997, we changed our name from Westar Group to Arena Group,
Inc. and began a search to locate suitable businesses with which to
reorganize. On July 23, 1998, we
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entered into a non-binding letter of intent to merge with Patra
Capital Ltd., a Delaware corporation ("Patra Capital"). In order to
complete this merger we formed a special purpose acquisition
subsidiary, Patra Acquisition, Inc., a Delaware corporation.
Effective July 31, 1998, Patra Acquisition and Patra Capital merged
under an agreement and plan of merger and Patra Capital was the
surviving entity. As a result of this transaction, Patra Capital
became our wholly-owned subsidiary, the management of Patra Capital
became the management of Arena and we changed our name to Elligent
Consulting Group, Inc.
On September 3, 1998, with an effective date of August 1, 1998, for
accounting purposes, we issued 12,950,000 shares of Elligent's
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.
On September 21, 1998, effective August 1, 1998, for accounting
purposes, we purchased CSI through our wholly owned subsidiary,
Patra Capital.
Cautionary Factors that May Affect Future Results
Employee and
Consultant
Recruitment Our future success will depend in part on our ability to hire
adequately trained personnel who address the increasingly
sophisticated needs of our clients. Our on-going employee and
consultant needs arise from:
o increasing demand for our services;
o consultant turnover; and
o clients' requests for programmers trained in the newest
software technologies.
Few of our employees, and more of our consultants, are bound by
non-compete agreements. Competition for personnel in the information
technology services industry is significant and we may have
difficulty in attracting and retaining an optimal level of qualified
personnel in the future. In particular, competition for the limited
number of qualified project managers and professionals with certain
specialized skills such as working knowledge of certain
sophisticated software is intense. Because of this, recruitment of
employees and consultants is a critical element in our success. We
devote significant resources to meeting our personnel requirements.
Contracts We normally offer professional services through agreements providing
that our services are rendered on a best-efforts basis, that we make
no express or implied warranties and that the client must continue
to pay all charges incurred prior to the termination of the
agreement. Because services are typically rendered on an as-required
basis, we do not consider our backlog of unfinished assignments
significant in understanding our business.
The typical client contract term is six months to two years and
there can be no assurance that a client will renew its contract when
it terminates. In fact, following expiration of an original contract
term with any given client, it is often the case that we begin
operating on an as-needed basis not under any contract of specific
duration. Our contracts are generally cancelable by the client at
any time and clients may unilaterally reduce or increase their use
of our services under such contracts without penalty. The
termination or significant reduction of our business relationship
with any of our significant clients could have an adverse effect on
our operating results.
We generally price our services to clients on a time and materials
basis and maintain price ranges that reflect the technical skills
and experience levels of the consultants on each project.
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Acquisition
Strategy A key element of our strategy for the future is expansion through
the acquisition of companies that have complementary businesses,
that can utilize or enhance our existing capabilities and resources
or that expand our existing range of services in the information
technology consulting marketplace.
As a result, we continually evaluate potential acquisition
opportunities, some of which may be large in size or scope when
compared to our size. Acquisitions involve a number of special
risks, including the time associated with identifying and evaluating
possible acquisitions, the diversion of management's attention to
the integration of the operations and personnel of the acquired
companies, the incorporation of acquired services into our services,
possible adverse short-term effects on our operating results, the
realization of acquired intangible assets and the loss of key
employees of the acquired companies.
To accomplish future acquisitions we may issue equity securities and
other forms of consideration that could cause dilution to investors
purchasing our common stock. There can be no assurance that we will
be able to identify additional suitable acquisition candidates,
consummate or finance any such acquisitions, or integrate any such
acquisitions successfully into our operations.
Management of
Growth We are currently experiencing a period of rapid growth resulting
from our first acquisition and the internal expansion of our
operations, both of which have placed significant demands on our
resources. Our success in managing this growth will require us to
continue to improve our operational, financial and management
information systems, and to motivate and effectively manage our
employees and consultants. We are relying primarily upon the
experience and expertise of our executive officers and the
management of CSI to provide a base of knowledge in the information
technology consulting field. Further, we have retained, and are
relying on, certain key employees in each of the businesses we
acquired in 1998. We plan to add to our areas of expertise within
this field through the acquisition of additional platform companies
and their management teams.
We cannot assure you that we will successfully assimilate new
acquisitions into our existing business operations. We can also give
you no assurance that we will be successful in expanding the
businesses of any of our new acquisitions, that new customers can be
attracted as anticipated, or that there will be a continued, if any,
demand for the services of our new acquisitions' technology,
products or expertise in new and competitive markets.
If our management is unable to manage growth effectively, to
maintain the quality of our products and services, and to retain key
personnel, our business, financial condition and results of
operations could be materially adversely affected.
Competition We operate in a highly competitive and rapidly changing industry and
compete with a variety of companies for positions on the vendor
lists of particular clients. Most of these competing companies, many
of which are significantly larger and have greater financial,
technical and marketing resources, provide the same services and
some offer a wider variety of services than those we offer. There
can be no assurance that we will be able to compete successfully
with these companies.
Many large accounting and management consulting firms offer services
that overlap with a significant portion of our services, and we
compete with the internal information technology staffs of our
clients and potential clients. Also, computer hardware and software
companies are increasingly becoming involved in systems integration
projects. Recently, temporary placement agencies have begun
expanding their businesses to provide computer-related services.
There can be no assurance that we will be able to continue to
compete successfully with our existing competitors or will be able
to compete successfully with new competitors.
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Additionally, over the past several years there has been an influx
of foreign nationals who provide skilled computer programming
services at lower pay scales than domestic programmers. Some of
these foreign nationals are being hired as consultants directly by
our clients and potential clients, as well as by certain of our
competitors. Moreover, in an attempt to decrease costs, some of our
clients and potential clients are awarding business to competitors
with operations in "low cost" foreign countries, including Ireland,
India and the former Soviet Union. An increase in the use of skilled
foreign national labor at lower rates or foreign software service
firms by our competitors or clients could have a material adverse
effect on our results of operations.
Dependence
Upon Major
Customers
and Large
Contracts Our five largest clients, when combined, account for 55% of our
total revenues and 51% of accounts receivable as of December 31,
1998. Our largest client accounts for 34% of our total revenues and
25% of accounts receivable as of December 31, 1998. Any decision by
these major customers to cease or reduce their use of our services
may have an adverse effect on our business. Further, any delay in
payment or non-payment of fees owed by our large clients may delay
the implementation of our growth strategy and will have an adverse
effect on our results of operations.
Dependence
on Key
Management
Personnel The success of our growth and business strategies will be highly
dependent upon the efforts of our key management personnel and
management personnel of acquired companies, particularly our
executive officers. The loss of the services of any one of our
executive officers could have an adverse effect on our business and
on the implementation and success of our growth strategy. However,
we have applied for key man insurance with respect to Andreas
Typaldos, Edwin Brondo and Scott Newman in the amounts of $500,000
each. We will evaluate the necessity of carrying such insurance on
selected individuals at acquired companies on an ongoing basis. The
amount of insurance, however, may not be sufficient to offset our
losses if the services of any of our executive officers were
unavailable. It is not possible to estimate the amount of any such
loss.
Insurance We have directors and officers, errors and omissions and employment
practice insurance in place. We purchased directors and officers
insurance in order to assist us in attracting and retaining
qualified individuals to serve on our board and to become our
officers. We obtained errors and omission insurance to help protect
us from liabilities arising from claims that our work on a
particular project resulted in losses to a client. We purchased
employment practices insurance to protect us against damages
resulting from claims by employees under various state and federal
employment laws. A finding by a court with jurisdiction over such a
suit that we were responsible for damages as claimed by a client or
an employee may have a material adverse effect on our operating
results. The insurance we have in place may not be sufficient to
cover the full extent of such losses.
Potential
Fluctuations
in Operating
Results Our quarterly operating results may fluctuate significantly in the
future as a result of a variety of factors, many of which are
outside our control. Factors that may affect our quarterly revenue
or operating results generally include:
o costs relating to the expansion of the Company's business;
o the extent and timing of business acquisitions;
o the incurrence of merger costs;
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o the timing of assignments from customers;
o the seasonal nature of our business due to variations in
holidays and vacation schedules;
o the introduction of new services by us or our competitors;
o price competition or price changes; and
o general economic conditions and economic conditions specific to
the information technology, consulting or information
technology staffing industries.
Quarterly sales and operating results can be difficult to forecast
even in the short term. Due to all of the foregoing factors, it is
possible that our revenues or operating results in one or more
future quarters will fail to meet or exceed the expectations of
securities analysts or investors. In such event, the trading price
of our common stock would likely be materially adversely affected.
Price
Volatility The market price of our common stock could be subject to significant
fluctuations in response to variations in quarterly operating
results, our prospects, changes in earnings estimates by securities
analysts and by economic, financial and other factors and market
conditions that can affect the capital markets generally, the
industry segment of which we are a part, including the level of and
fluctuations in the trading prices of stocks generally and by other
events that are difficult to predict and beyond our control. In
addition, the securities markets have experienced significant price
and volume fluctuations from time to time in recent years that have
often been unrelated or disproportionate to the operating
performance of particular companies. Such broad fluctuations may
adversely affect the market price of our common stock in the future.
Control by Current
Stockholders
At March 18, 1999, our directors and executive officers owned
beneficially 11,450,285 shares of common stock, representing
approximately 77% of the outstanding common stock. As a result, our
directors and executive officers are able to exercise significant
influence on the election of our board of directors and thereby
direct our policies.
ITEM 2. DESCRIPTION OF PROPERTY
We maintain our principal executive office in approximately 4,000 square
feet of leased space at 152 West 57th Street, 40th Floor, New York, New York
10019. CSI maintains its office in approximately 13,000 square feet of leased
space at 100 Eagle Rock Avenue, East Hanover, New Jersey 07936.
ITEM 3. LEGAL PROCEEDINGS
The registrant is not a participant in any legal proceedings at the
current time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matter for a vote by our shareholders, through the
solicitation of proxies or otherwise, during the fourth quarter of 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
INFORMATION
Our common stock is traded over the counter on the bulletin board under
the symbol "ECGR." The following table sets forth, for the periods shown,
closing bid prices in dollars per share as reported by Bloomberg. Such prices
generally reflect market making transactions, but may also reflect inter-dealer
prices without retail mark-up, mark-down or commission that may not represent
actual transactions.
Fiscal Year Ended December 31, 1998 Low High
- ----------------------------------- --- ----
Third Quarter (commencing August 1998) $4.875 $7.625
Fourth Quarter 7.25 10.75
The number of beneficial holders of our common stock as of the close of
business on December 31, 1998, was approximately 325.
Dividend Policy
Holders of common stock are entitled to receive such dividends as may be
declared by our Board of Directors. We have not declared nor paid cash dividends
on our common stock and we do not anticipate that we will pay such dividends in
the foreseeable future. Rather, we intend to apply any earnings to the expansion
and development of the business. Any payment of future dividends on the common
stock and the amount thereof will be determined by the Board of Directors and
will depend among other factors, upon our earnings, financial condition and cash
requirements, and any other factors our Board of Directors deems relevant.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
FINANCIAL INFORMATION
Summary Financial Information
The following table contains certain selected financial data of the
Company and is qualified by the more detailed financial statements and the notes
thereto provided in this report. The financial data for the short year (five
months) ended December 31, 1998, has been derived from the Company's financial
statements, which statements have been audited by Moore Stephens, P.C. and are
included elsewhere in this Report. The pro forma (unaudited) twelve month
numbers provide an historic view of our revenue growth.
Statement of Operations Data
($ in thousands)
Five Months Twelve Months Twelve Months Twelve Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
1 9 9 8 1 9 9 8 1 9 9 7 1 9 9 6
------- ------- ------- -------
Actual Pro Forma Pro Forma Pro Forma
Gross revenue $ 9,970 $ 22,149 $ 13,247 $ 9,306
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<PAGE>
Balance Sheet Data
As at
December 31,
------------
1 9 9 8
-------
Actual
------
[in Thousands]
Current Assets $ 3,930
Total Assets 16,713
Current Liabilities 12,890
Long-Term Debt 1,648
Total Liabilities 14,538
Shareholders' Equity 2,175
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
As part of a Reorganization, we changed our 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, we 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 our management. The merger was
accounted for as a Recapitalization.
On September 21, 1998, effective August 1, 1998, for accounting purposes,
we, through our wholly owned subsidiary, Patra Capital, purchased Conversion
Services International, Inc. The operations of CSI are included in our results
of operations commencing on August 1, 1998. In connection with the acquisition
of CSI, CSI's shareholders signed three-year employment agreements with us.
The purchase price was $12,298,885 consisting of 1,100,000 shares of our
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% was payable on the November 24th and January 21st
payments. The final two payments bear no interest. As of December 31, 1998, the
remaining payments were due as follows:
$1,500,000 January 21, 1999
(paid in stock at the election of the Company)
$3,750,000 May 1, 1999
$2,250,000 August 1, 1999
We expect 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, we plan to offer our 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.
We will then continue our development through continued internal growth
from the acquired platform companies and additional rollup acquisitions within
each of our service offering areas. Through this expansion and growth strategy,
we plan to develop into a leading vertically integrated IT consulting services
company.
-11-
<PAGE>
We plan to enter a business segment that has significant competition from
other much larger companies. We expect to offer our services to large national
and multi-national companies. We own no copyrights or patents.
Our corporate headquarters are located in New York City, New York. CSI
maintains its offices in East Hanover, New Jersey.
We plan to continue an expansion strategy through (i) the acquisition of a
select number of technology consulting companies with complementary areas of
expertise and (ii) 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, we plan
to develop into a leading information technology services company. Key to the
acquisition strategy is the retention of the acquired company's management and
staff.
For the five month period ended December 31, 1998, we had revenue of $9.97
million versus $6.83 million in the year earlier period, an increase of 46%, and
a net loss $.68 million.
The major components of this loss are as follows:
$ in thousands
--------------
Operating Income $ 395
--------
Depreciation, Amortization and Interest 756
Income Tax Benefit (180)
Management and Holding Company Expenses 498
--------
Subtotal Acquisition Related and Other Expenses 1,074
--------
Net Loss $ (679)
========
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 our growth goals. The remaining analysis of results focuses
on the operations of our sole subsidiary company, CSI. The unaudited information
for this transition period is not necessarily indicative of the results for the
entire year, nor should it be used to project our operations for future dates or
periods.
The financial statements presented herein represent the 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 five 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 us.
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 for 1998 increased by 70% over 1997, and the current annual revenue run
rate is $25 million.
For the five months ended December 31, 1998, we had revenues of $9.97
million from our operating subsidiary CSI reflecting a 46% increase from the
revenues of CSI during the corresponding period in 1997 prior to its acquisition
by us. The cost of revenues was $6.5 million resulting in a gross margin from
operations of $3.5 million or 35%.
-12-
<PAGE>
The results of operations for CSI for the five months ended December 31,
1998, and 1997, are as follows:
[In Thousands]
Five months ended
December 31,
------------
1 9 9 8 1 9 9 7
------- -------
Revenue $ 9,970 $ 6,834
Cost of Revenue 6,466 3,766
Gross Margin 3,504 3,068
Operating Expense [Excluding Depreciation
and Amortization] 3,109 2,747
-------- --------
Operating Income $ 395 $ 321
======== ========
CSI continues to show significant growth in revenues in 1998, versus the
comparable period a year ago. Operating expenses for 1998 include additional
staffing costs to further develop business practice and channel management
capabilities. We expect operating expenses as a percent of revenue to decrease
during 1999.
Liquidity and Financial Position
As of December 31, 1998, we had a working capital deficit of $8.9 million.
Our working capital deficit reflects (i) $2.0 million due to a bank related to
the revolving lines of credit, collateralized by our accounts receivable, and
other loans, (ii) accounts payable and accrued expenses of $2.1 million, (iii)
notes payable to stockholders of $5.2 million related to the acquisition of CSI,
and (iv) amounts due to related parties of $2.7 million, relative to the
acquisition of CSI, working capital advances and the funding of costs related to
future acquisitions in progress. These latter amounts are principally due to our
principal stockholder and entities owned or controlled by him.
We believe that sufficient sources of funds exist to cover the working
capital needs of the Company. The principal sources of these funds are (i)
projected cash flow from operations, (ii) the revolving lines of credit, (iii)
the personal assets of a principal stockholder and related entities owned or
controlled by him, (iv) the issuance of the Company's common stock, and (v)
additional financing sources.
Our principal stockholder has committed to providing the funds necessary
to cover the remaining note payments due on the purchase of CSI, to the extent
that the required funds cannot be obtained from other sources. We are presently
engaged in negotiations with respect to additional financing sources. These
include (i) negotiating with four financial institutions for a new $20 million
asset-based line of credit to replace the current revolving lines of credit.
This credit line will provide the working capital resources needed for the
current operations and the requirements that will exist after the next several
planned acquisitions; and (ii) a private placement of our common stock to
accredited investors during 1999, that will raise up to $20 million. These funds
will be used to provide the acquisition capital necessary to fund the cash
portion of the purchase price for the currently planned acquisitions.
However, no assurance can be given that we will be successful in obtaining
such financing, and the failure to obtain necessary financing could have a
material adverse effect on our acquisition timetable. At the present time, our
management believes that our current sources of funding are adequate to support
our growth and that of CSI. The current sources are not adequate to support our
acquisition plans.
Inflation
Inflation has not had a material effect upon the Company's results of
operations to date. In the event the rate of inflation should accelerate in the
future, it is expected that costs in connection with the provision by the
Company of its services and products will increase, and, to the extent such
increased costs are not offset by increased revenues, the operations of the
Company may be adversely affected.
-13-
<PAGE>
Year 2000
General Description of the Year 2000 Problem. The Year 2000 problem
concerns the inability of certain computer systems to appropriately recognize
the Year 2000 when the last two digits of the year are entered in the date
field. Our date critical functions related to the Year 2000 and beyond, may be
adversely affected unless these computer systems are or become Year 2000
compliant.
Our State of Readiness. We are a service business and do not use major
computer systems in our business. Our computer needs are satisfied through a
local area network comprised of personal computers and a server, all of which
are Year 2000 compliant.
Effect of Third Party Readiness. Our Year 2000 compliance is partially
dependent upon key third parties also being Year 2000 compliant on a timely
basis. We provide consulting services and we could be adversely affected by the
Year 2000 problem if computer systems of third parties such as banks, suppliers
and others with whom we do business fail to address the Year 2000 problem
successfully. For example, in the course of rendering our consulting services,
we may be adversely affected by, among other things, warranty and other claims
made by our suppliers related to product failures caused by the Year 2000
problem, the disruption or inaccuracy of data provided to us by non-Year 2000
compliant third parties, and the failure of our service providers to become Year
2000 compliant.
In an effort to evaluate and reduce our exposure in this area, we intend
to make an inquiry of vendors and other business partners about their progress
in identifying and addressing problems that their computer systems may face in
correctly processing date information related to the Year 2000. In particular,
we will seek to obtain statements from a substantial majority of our vendors
that they are Year 2000 compliant or are unaffected by "date sensitive"
information. We estimate that this process, including analysis of responses and
follow up interviews will be complete on or before September 30, 1999.
Our management believes that the purchasing patterns of customers and
prospective customers might be affected by Year 2000 issues. Many companies may
need to modify or upgrade their information systems to address the Year 2000
problem. The effects of this issue and of the efforts by other companies to
address it are unclear. Many companies are expending significant resources to
correct their current software systems for Year 2000 compliance. These
expenditures might result in reduced funds available to purchase services and
products such as those that we offer.
Risks. We have no reason to believe that our exposure to the risks or lack
of supplier and customer Year 2000 readiness is any greater than the exposure to
such risks that affect our competitors generally. However, if a significant
number of our key vendors, customers and other business partners experience
business disruptions as a result of their lack of Year 2000 readiness, their
problems could have a material adverse effect on our financial position and
operations. In addition, if all Year 2000 issues within our business are not
properly identified there can be no assurance that the Year 2000 issue will not
have a material adverse effect on our results of operations or financial
position.
Our cost estimates and time frames will be influenced by our ability to
identify Year 2000 problems, the nature of programming required to fix any
problems, and the compliance success of third parties. For those reasons, no
assurance can be given at this point that our computer system will be Year 2000
compliant in a timely manner or that we will not incur significant additional
expenses pursuing Year 2000 compliance.
Forward Looking Information
This report contains certain forward-looking statements and information.
The cautionary statements made in this report should be read as being applicable
to all related forward-looking statements wherever they appear. Forward-looking
statements, by their very nature, include risks and uncertainties. Accordingly,
our actual results could differ materially from those discussed herein. A wide
variety of factors could cause or contribute to such differences and could
adversely impact revenues, profitability, cash flows and capital needs. Such
factors, many of which are beyond our control, include the following: our
success in obtaining new contracts; the volume and type of work orders that are
received under such contracts; levels of, and ability to, collect accounts
receivable; availability of trained
-14-
<PAGE>
personnel and utilization of our capacity to complete work; competition and
competitive pressures on pricing; availability, cost and terms of debt or equity
financing; and economic conditions in the United States and in the regions
served.
Quantitative and Qualitative Disclosures about Market Risk
The Company is not exposed to material risk based on interest rate
fluctuation, exchange rate fluctuation, or commodity price fluctuation.
ITEM 7. FINANCIAL STATEMENTS
The financial statements and schedules are attached to this report
beginning on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
We have not had any disagreements with our accountants on matters relating
to accounting and financial disclosures.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth certain information with respect to directors and
executive officers of the Company with the year in which each director's term
expires in parentheses.
Each of the directors has been nominated for re-election at the stockholders
meeting scheduled for June 1999 for a three year term, commencing July 1, 1999.
Andreas Typaldos
(age 52) Chairman of the Board and President. Mr. Typaldos was founder,
President and CEO of Computron Software, Inc.
(ASE:CFW)("Computron"), an international public software and
consulting company until 1996. Mr. Typaldos is a principal
shareholder of Computron. He is also founder, Chairman, and major
shareholder of Enikia, LLC, an advanced home networking and
communications company. Mr. Typaldos became Chairman of the Board of
the Company effective August 1, 1998.
Edwin T. Brondo
(age 51) Director, Executive Vice President, Chief Financial Officer,
Secretary and Treasurer. Mr. Brondo was Vice President of First
Albany Companies, Inc. and Senior Vice President, Chief
Administrative Officer of First Albany Corporation from May 1993
until December 1997. Mr. Brondo currently serves as a director of
Computron Software, Inc. and has been a director since May 1997.
During the last five years Mr. Brondo was a senior consultant at
Comtex Information Systems, Inc. and a senior financial executive at
Bankers Trust Company. He has also held senior positions at Goldman
Sachs & Co., Morgan Stanley & Co., G.A. Saxton and Arthur Young &
Company (predecessor to Ernst & Young). Mr. Brondo became a director
and officer of the Company in August 1998.
Scott Newman
(age 39) Director and Vice President. Mr. Newman is co-founder and President
of Conversion Services International, Inc. and has served in that
capacity since its founding in 1989. Mr. Newman became a director
and officer of the Company in September 1998.
Michel Berty
(age 59) Director. Mr. Berty is currently a member of the board of directors
of Mastech, a large public consulting services company, and member
of the board of directors of LEVEL 8, a public software and services
company, member of the board of directors of MERANT, a public
software and services company, and member of the board of directors
of SAPIENS International, a public software and services
-15-
<PAGE>
company. He is also a member of the board of directors of ASCENT
LOGIC CORPORATION, a risk management systems engineering private
company and of BUYSMART, Inc., a start-up company in the internet
business. From 1992 until 1997, he was the CEO of Cap Gemini
America, a $700 million consulting services company, and member of
the executive committee of Cap Gemini, a $5 billion international
consulting services company. Mr. Berty has been a member of our
board of directors since August 1998.
Lloyd T. Rochford
(age 52) Director. In February of 1989, Mr. Rochford founded Magnum Hunter
Resources, Inc. and served as a director and as its Chief Executive
Officer through the end of 1995. Commencing in January of 1996
through June of 1997, Mr. Rochford served as Magnum's Chairman of
the Board of Directors. Magnum is engaged in the exploration for and
the production of oil and gas and is a company listed on the
American Stock Exchange. Since his resignation from Magnum, Mr.
Rochford has pursued his own personal business interests until being
elected a director of the Registrant in July of 1997. Mr. Rochford
served as Chairman of the Board of the Registrant until August 1,
1998.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth all cash compensation paid by the Company
to the chief executive officer and the most highly compensated executive
officers and key employees whose total remuneration exceeded $100,000 for
services rendered in all capacities to the Company during the last three
completed fiscal years.
Annual Compensation Long Term Compensation
Awards Payouts
Name Other
and Annual Restricted All Other
Principal Fiscal Compen- Stock Options/ LTIP Compen-
Position Year Salary Bonus sation Award(s) SARs Payouts sation
- ------------------------------------------------------------------------------
Andreas Typaldos
Chief Executive
Officer,
President (1) 1998 $104,167
1997 -0-
1996 -0-
Edwin T. Brondo
Executive Vice
President, Chief
Financial Officer,
Secretary and
Treasurer (2) 1998 $72,917
1997 -0-
1996 -0-
Scott Newman
Vice President(3)1998 $104,167 $23,664 $36,629
1997 -0-
1996 -0-
Lloyd T. Rochford
Chief Executive
Officer (3) 1998 $12,000
1997 -0-
1996 -0-
Glenn Peipert(3) 1998 $104,167 $3,151 $6,976
1997
1996
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<PAGE>
- --------------------
(1)Salary for Mr. Typaldos was accrued beginning August 1, 1998, based upon an
annual rate of $250,000. This compensation was not paid during the five
months ended December 31, 1998.
(2)Salary for Mr. Brondo reflects payments made during the five month period
ended December 31, 1998, based upon an annual rate of $250,000.
(3)Salary for Messrs. Newman and Peipert reflect payments made during the five
months period ended December 31, 1998, based upon employment agreements at an
annual rate of $250,000. Mr. Rochford's salary was paid during the fiscal
year ended July 31, 1998.
Stock Option Plan
Summary of
the 1998 Stock
Option Plan The Board adopted the 1998 Stock Option Plan in August 1998 (the
"Plan"). For the purposes of this summary, unless otherwise
stated, "Plan" will refer to the 1998 Stock Option Plan. There
are 1,500,000 shares of Common Stock available for issuance upon
exercise of options granted under the Plan. We intend to submit
the Plan to our shareholders for approval at our next annual
meeting of shareholders. At December 1, 1998, we had outstanding
options to purchase 90,100 shares at $5.00 vesting over a
three-year period. The options expire ten years from the date of
issuance. These options will become effective upon approval of
the Plan by our shareholders.
The Plan authorized us to grant to our employees and directors
(i) incentive stock options to purchase shares of Common Stock
and (ii) non-qualified stock options to purchase shares of
Common Stock.
Objectives The objectives of the Plan are to provide incentives to our key
employees, directors, officers and consultants to encourage them
to devote their abilities and industry to the success of our
business enterprise. We intend to achieve this purpose by
extending an additional long-term incentive for high levels of
performance and unusual effort.
Oversight A Committee of the Board administers the Plan by making
determinations regarding the persons to whom options should be
granted and the amount, terms, conditions and restrictions of
the awards. It also has the authority to interpret the
provisions of the Plan and to establish and amend rules for its
administration subject to the Plan's limitations. This Committee
is comprised of non-employee directors as required by Rule 16b-3
of the Securities and Exchange Act of 1934, as amended.
Statutory Conditions
on Stock Options
- -exercise price Incentive stock options granted under the Plan must have an
exercise price at least equal to 100% of the fair market value
of our Common Stock as of the date of grant. Incentive stock
options granted to any person who owns, immediately after the
grant, stock possessing more than 10% of the combined voting
power of all classes of our stock, or of any parent or
subsidiary corporation, must have an exercise price at least
equal to 110% of the fair market value of our Common Stock on
the date of grant. Non-statutory stock options may have exercise
prices as determined by the Committee or the Board.
- -dollar limit The aggregate fair market value, determined as of the time an
incentive stock option is granted, of our Common Stock with
respect to which incentive stock options are exercisable by an
employee for the first time during any calendar year, cannot
exceed $100,000. However, there is no aggregate dollar
limitation on the amount of non-statutory stock options which
may be exercisable for the first time during any calendar year.
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<PAGE>
- -expiration date
Any option granted under the Plan will expire at the time fixed
by the Committee, which cannot be more than ten years after the
date it is granted or, in the case of any person who owns more
than 10% of the combined voting power of all classes of our
stock or of any subsidiary corporation, not more than five years
after the date of grant.
- -exercisability The Committee may also specify when all or part of an option
becomes exercisable, but in the absence of such specification,
the option will become exercisable in four (4) equal annual
installments, the first of which becomes exercisable on the
first anniversary of the date of grant of the option. However,
the Compensation Committee may accelerate the exercisability of
any option or any part thereof at its discretion.
- -assignability Options granted under the Plan are not assignable. Incentive
Stock Options may be exercised only while the optionee is
employed by us or within twelve months after termination by
reason of death, within twelve months after the date of
disability, or within three months after termination for any
other reason.
Payment Upon
Exercise of
Options Payment of the exercise price for any option may be in cash, by
withheld shares which, upon exercise, have a fair market value
at the time the option is exercised equal to the option price
(plus applicable withholding tax) or in the form of shares of
our Common Stock.
Tax Consequences
of Options An employee or director will not recognize income on the
awarding of incentive stock options and nonstatutory options
under the Plan.
An optionee will recognize ordinary income as the result of the
exercise of a nonstatutory stock option in the amount of the
excess of the fair market value of the stock on the day of
exercise over the option exercise price.
An employee will not recognize income on the exercise of an
incentive stock option, unless the option exercise price is paid
with stock acquired on the exercise of an incentive stock option
and the following holding period for such stock has not been
satisfied. The employee will recognize long-term capital gain or
loss on a sale of the shares acquired on exercise, provided the
shares acquired are not sold or otherwise disposed of before the
earlier of: (i) two years from the date of award of the option
or (ii) one year from the date of exercise. If the shares are
not held for the required period of time, the employee will
recognize ordinary income to the extent the fair market value of
the stock at the time the option is exercised exceeds the option
price, but limited to the gain recognized on sale. The balance
of any such gain will be a short-term capital gain. Exercise of
an option with previously owned stock is not a taxable
disposition of such stock.
An employee generally must include in alternative minimum
taxable income the amount by which the price he paid for an
incentive stock option is exceeded by the option's fair market
value at the time his rights to the stock are freely
transferrable or are not subject to a substantial risk of
forfeiture.
The Company and its subsidiaries will be entitled to deductions
for federal income tax purposes as a result of the exercise of a
nonstatutory option and the disqualifying sale or disposition of
incentive stock options in the year and the amount that the
employee recognizes ordinary income as a result of such
disqualifying disposition
Director Compensation
Directors currently receive no cash compensation for their services in
that capacity. Reasonable out of pocket expenses may be reimbursed to directors
in connection with attendance at meetings.
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<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information, as of March 18, 1998, with
respect to the number of shares of Common Stock of the Company beneficially
owned by individual directors, by all directors and officers of the Company as a
group, and by persons known to own more than 5% of the Company's Common Stock.
The Company has no other class of voting stock outstanding.
Name of Beneficial Owner Percent of Common Stock
and Address Number of Shares Owned
----------- ---------------- -----
Patra Holdings, LLC (1)
152 W. 57th Street, 40th Floor
New York, New York 10019 10,000,000 67.59
Andreas Typaldos (1)
152 W. 57th Street, 40th Floor
New York, New York 10019 10,350,000 69.96
Scott Newman
152 W. 57th Street, 40th Floor
New York, New York 10019 900,000 6.08
Edwin T. Brondo
152 W. 57th Street, 40th Floor
New York, New York 10019 1,000 0.01
Michel Berty
152 W. 57th Street, 40th Floor
New York, New York 10019 25,000 0.17
Lloyd T. Rochford (2) 174,285 1.18
152 W. 57th Street, 40th Floor
New York, New York 10019
Directors and Officers as a Group 11,450,285 77.40
(1) Mr. Typaldos controls Patra Holdings, LLC and therefore beneficial
ownership of shares held by Patra Holdings are attributed to Mr. Typaldos
for the purposes of this table.
(2) Mr. Rochford's holdings include 3,000 shares owned by his wife as to
which Mr. Rochford disclaims beneficial ownership.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Market Information
Our Common Stock was not actively traded until we completed our
merger with CSI and became listed in the Standard & Poors Corporations Manual on
September 23, 1998.
Fiscal Year Ended December 31, 1998 Low High
- ----------------------------------- --- ----
Third Quarter (commencing August 1998) $4.875 $7.625
Fourth Quarter 7.25 10.75
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<PAGE>
Number of Shareholders
The number of beneficial holders of our common stock as of the close of
business on December 31, 1998, was approximately 325.
Dividend Policy
Holders of common stock are entitled to receive such dividends as may be
declared by our Board of Directors. We have not declared nor paid cash dividends
on our common stock and we do not anticipate that we will pay such dividends in
the foreseeable future. Rather, we intend to apply any earnings to the expansion
and development of its business. Any payment of future dividends on the common
stock and the amount thereof will be determined by our Board of Directors and
will depend, among other factors, upon our earnings, financial condition and
cash requirements, and any other factors our Board of Directors deems relevant.
RECENT SALES OF UNREGISTERED SECURITIES
In July 1997, we sold 214,285 shares of our common stock to two
individuals at a cash price of $0.07 per share under the private offering
exemption of Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"). Lloyd T. Rochford, who at the time of the placement was a
director and an officer, purchased 174,285 shares for $12,200 and Robert Morley
purchased 40,000 shares for $2,800.
In January 1998, we issued 200,000 shares of our common stock to KM
Financial for services rendered having a value of $14,000 or $0.07 per share
under the private offering exemption of Section 4(2) of the Securities Act.
In June 1998, we sold an additional 400,000 shares of our common stock to
Robert Morley at a price of $0.90 per share under the private offering exemption
of Section 4(2) of the Securities Act for $359,799, representing the purchase
price of $360,000 less certain incidental costs of $201.
In connection with our merger with Patra Capital we issued 12,950,000
shares of our common stock, including 1,100,000 shares in connection with the
acquisition of CSI.
As of January 21, 1999, we issued 166,667 shares of common stock to Scott
Newman in lieu of cash due for the $1,000,000 installment due on the purchase
note payable to Mr. Newman.
As of January 21, 1999, we issued 83,334 shares of common stock to Glenn
Peipert in lieu of cash due for the $500,000 installment due on the purchase
note payable to Mr. Peipert.
DESCRIPTION OF SECURITIES
We are authorized to issue 50,000,000 shares of common stock, $.001 par
value per share, of which 14,794,226 are outstanding as of March 18, 1999.
Holders of the common stock are entitled to one vote for each share owned
for all matters to be voted on by the shareholders. Holders of the common stock
are entitled to receive dividends as may be declared from time to time by our
Board of Directors, and in the event of any liquidation, dissolution, or winding
up of the affairs of the Corporation, are entitled to receive a pro rata share
of any assets of the corporation legally available for distribution. There are
no redemption or sinking fund provisions applicable to the common stock. The
rights of the holders of the common stock are subject to any rights that may be
fixed for the holders of preferred stock, if and when any preferred stock is
issued. The common stock currently outstanding is validly issued, fully paid and
nonassessable.
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<PAGE>
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) EXHIBITS.
Exhibit
Notes Number Description
----- ------ -----------
(6) 2.1 Agreement and Plan of Merger dated as of August 26, 1998, by
and among Elligent Consulting Group, Inc., Patra
Acquisition, Inc., Patra Capital Limited and the
Shareholders of Patra Capital Limited
(6) 2.2 Plan and Agreement of Merger dated as of August 1, 1998, by
and among Patra Capital Limited, Patra Holdings LLC,
Conversion Services International, Inc., Scott Newman and
Glenn Peipert.
(1) 3(i).1 Initial Articles of Incorporation
(2) 3(i).2 Articles of Incorporation, as Amended on January 5, 1990
(4) 3(i).3 Articles of Incorporation, as Amended on August 5, 1997
(5) 3(i).4 Articles of Incorporation, as Amended on July 25, 1998
(1) 3(ii).1 Initial Bylaws
(3) 3(ii).2 Bylaws, as amended on July 2, 1991
(5) 3(ii).3 Bylaws, as amended on April 1, 1998
(6) 10.1 1998 Stock Option Plan
(6) 21.1 Subsidiaries
23.1 Consent of Moore Stephens, P.C.
27.1 Financial Data Schedule
(1) Filed with a Registration Statement on Form S-18 (File Number
33-23314).
(2) Filed with a Form 10-QSB for the quarter ended December 31, 1989.
(3) Filed with a Form 10-KSB for the year ended June 30, 1991.
(4) Filed with a Form 10-KSB for the year ended July 31, 1997.
(5) Filed with a Form 10-KSB for the year ended July 31, 1998.
(6) Filed with a Form 8-K/A Amendment No. 3 to report dated
September 21, 1998.
(b) CURRENT REPORTS ON FORM 8-K
We filed an amendment to a report on Form 8-K during the period from
November 1, 1998 to December 31, 1998. The following table contains information
with respect to that filing:
Financial Date of
Items Reported Statements Filed Event Reported
-------------- ---------------- --------------
Merger with Patra Capital and Yes September 21, 1998
Acquisition of Conversion
Services International, Inc.
-21-
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Elligent Consulting Group, Inc.
New York, New York
We hereby consent to the incorporation by reference of our report dated
March 4, 1999, which appears on Page F-1 of the 1998 Annual Report on Form
10-KSB.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
April 9, 1999
-22-
<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.
ELLIGENT CONSULTING GROUP, INC.,
a Nevada corporation
By /s/ Edwin T. Brondo
----------------------
Edwin T. Brondo
Chief Financial Officer
Dated: April 9, 1999
-23-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of
Elligent Consulting Group, Inc.
New York, New York
We have audited the accompanying consolidated balance sheet of
Elligent Consulting Group, Inc. and Subsidiaries as of December 31, 1998, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the five months then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Elligent Consulting Group, Inc. and Subsidiaries as of December 31,
1998, and the results of their operations and their cash flows for the five
months then ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 16 to the consolidated financial statements, the Company
incurred a net loss of approximately $680,000 and utilized cash for operating
activities of approximately $1,400,000 for the five months ended December 31,
1998, and has a working capital deficit of approximately $8,960,000 at December
31, 1998. These factors raise substantial doubt about its ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 16. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
March 4, 1999
F-1
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998.
- ------------------------------------------------------------------------------
Assets:
Current Assets:
Cash $ 600
Trade Accounts Receivable - Net of Allowance
for Doubtful Accounts of $100,260 3,911,789
Other Current Assets 17,872
-----------
Total Current Assets 3,930,261
-----------
Property and Equipment - Net 404,904
-----------
Goodwill - Net 11,763,289
-----------
Other Assets:
Customer Lists [Net of Amortization of $41,667] 458,333
Security Deposits 117,723
Due from Employees 14,803
Due from Stockholders 8,550
Due from Affiliates 14,924
-----------
Total Other Assets 614,333
-----------
Total Assets $16,712,787
===========
See Accompanying Notes to Consolidated Financial Statements.
F-2
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998.
- ------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Current Liabilities:
Cash Overdraft $ 397,128
Accounts Payable 1,685,051
Accrued Expenses 189,859
Income Taxes Payable 225,500
Notes and Leases Payable - Current 2,044,175
Accrued Expenses - Stockholders 231,551
Notes Payable - Stockholders [Net of Discount of $176,555] 5,241,046
Due to Affiliates 497,068
Advances from Stockholders 2,246,057
Deferred Taxes Payable 132,200
-----------
Total Current Liabilities 12,889,635
-----------
Long-Term Liabilities:
Notes and Leases Payable - Long-Term 147,985
Notes Payable - Stockholders 1,500,000
-----------
Total Long-Term Liabilities 1,647,985
-----------
Commitment and Contingencies [9] --
-----------
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 2,992,517
Accumulated Deficit (831,894)
-----------
Total Stockholders' Equity 2,175,167
-----------
Total Liabilities and Stockholders' Equity $16,712,787
===========
See Accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE FIVE MONTHS ENDED
DECEMBER 31, 1998.
- ------------------------------------------------------------------------------
Income:
Revenue $ 9,970,026
Cost of Revenue (6,466,437)
-----------
Gross Profit 3,503,589
-----------
Cost and Expenses:
General and Administrative 3,606,525
Depreciation 69,104
Amortization 291,949
-----------
Total Cost and Expenses 3,967,578
-----------
Operating Loss (463,989)
-----------
Other Expenses:
Interest Expense - Stockholders (310,569)
Interest Expense (84,522)
-----------
Total Other Expense (395,091)
-----------
Loss Before Income Taxes (859,080)
Income Tax Benefit 180,300
-----------
Net Loss $ (678,780)
===========
Basic and Diluted Loss Per Share $ (0.05)
===========
Weighted Average Number of Shares Outstanding 14,544,225
===========
As described in Notes 1 and 12 the accounting acquiror [Patra Capital] in the
recapitalization of the Company, began operations on January 2, 1998. Patra
Capital's operations for the seven months ended July 31, 1998, are not
meaningful to this statement of operations. The amounts on this statement of
operations are primarily those of the purchased subsidiary, CSI. See Pro forma
data in Note 15.
See Accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
<TABLE>
Capital in Total
Common Stock Excess of Accumulated Subscription Stockholders'
Shares Amount Par Value Deficit Receivable Equity
<S> <C> <C> <C> <C> <C> <C>
Balance - July 31,
1998 1,000 $ 1,000 $ -- $(153,114) $ (1,000) $ (153,114)
Common Stock Issued
in Merger [1] [12] 12,950,000 12,950 2,627,050 -- -- 2,640,000
Acquired Equity of
Merged Company [1] 1,594,225 1,594 331,310 -- -- 332,904
Recapitalization [1] (1,000) (1,000) -- -- 1,000 --
Imputed Interest [8] -- -- 34,157 -- -- 34,157
Net Loss for the Five
Months Ended
December 31, 1998 -- -- -- (678,780) -- (678,780)
---------- --------- ---------- --------- --------- ----------
Balance - December 31,
1998 14,544,225 $ 14,544 $2,992,517 $(831,894) $ -- $2,175,167
========== ========= ========== ========= ========= ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE FIVE MONTHS ENDED
DECEMBER 31, 1998.
- ------------------------------------------------------------------------------
Operating Activities:
Net Loss $ (678,780)
-----------
Adjustments to reconcile Net Loss to
Cash [Used for] Operating Activities:
Depreciation and Amortization 361,053
Deferred Income Taxes (405,800)
Imputed Interest 213,911
Change in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (988,047)
Other Current Assets (17,872)
Due from Employees 1,003
Due from Affiliates (1,726)
Other Assets (43,313)
Increase [Decrease] in:
Accounts Payable (62,896)
Accrued Expenses (61,942)
Accrued Expenses - Related Parties 108,551
Billings in Excess of Costs and Estimated Earnings (55,425)
Income Taxes Payable 225,500
-----------
Total Adjustments (727,003)
-----------
Net Cash - Operating Activities (1,405,783)
-----------
Investing Activities:
Payments for Property and Equipment (74,341)
-----------
Financing Activities:
Increase in Cash Overdraft 297,967
Advances from Stockholders 1,068,955
Proceeds from Notes Payable 815,000
Payments on Notes and Leases Payable (38,863)
Payment on Notes Payable - Stockholders (1,000,000)
-----------
Net Cash - Financing Activities 1,143,059
-----------
Net Decrease in Cash (337,065)
Cash - Beginning of Period 337,665
-----------
Cash - End of Period $ 600
===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 210,953
Income Taxes $ --
See Accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
ELLIGENT CONSULTING GROUP, INC.
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE FIVE MONTHS ENDED
DECEMBER 31, 1998.
- ------------------------------------------------------------------------------
Supplemental Schedule of Non-Cash Investing and Financing Activities:
During the five months ended December 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 five months ended December 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 $7,561,292
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 five months ended December 31, 1998, the Company entered into
capital leases for $104,954.
During the five months ended December 31, 1998, the Company incurred $258,516
in acquisition related costs which are included in accounts payable.
See Accompanying Notes to Consolidated Financial Statements.
F-7
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
[1] Organization and Business
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. As such,
the Company was considered to be a development stage company. Pursuant to the
order and Judgment of the Court, Tahoe and North were ordered dissolved.
In July of 1997, the Company changed its name to Arena Group, Inc. and began the
process 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. and Patra Capital changed its name to Conversion Services International,
Inc. 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 with Patra as the
acquiror [See Note 12].
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"] and Doorways, Inc. ["Doorways"]. Doorways
is a wholly-owned subsidiary of CSI. The operations of CSI and Doorways are
included in the Company's results of operations commencing on August 1, 1998.
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, less amounts due from
stockholders acquired in the transaction of $582,399. The net discounted value
of the consideration, net of the acquired loan from the stockholders, was
$7,561,292.
CSI is in the business of providing information technology consulting services.
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.
In prior years, the Company was considered a development stage company.
F-8
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- ------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies
[A] Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of the Company, and its wholly-owned
subsidiaries, Conversion Services International, Inc. ["CSI"] and Doorways, Inc.
All significant intercompany transactions and balances have been eliminated in
the consolidation.
[B] Revenue Recognition - Revenue from consulting and professional services are
recognized at the time the services are provided. Revenue from systems
integration and software development are recognized based on the terms of the
contracts. Revenue under maintenance contracts is recognized ratably over the
life of the contract. Revenue under fixed price contracts is recognized on the
percentage of completion.
[C] 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 one to ten years. When the assets are sold or retired, the cost and
accumulated depreciation are removed from the accounts and any gain or loss is
included in operations.
[D] 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.
[E] Intangibles - Goodwill is recognized in business combinations accounted for
under the purchase method of accounting and represents the excess of the
purchase price over the fair value of identifiable net assets acquired. Goodwill
is amortized on a straight-line basis over twenty years, which is the period
during which the Company expects to receive benefits. A customer list is
recorded at cost and amortized on a straight-line basis over its estimated
useful life of five years.
[F] Concentrations of Credit Risk - Financial instruments which potentially
subject the Company to concentrations of credit risk are cash and accounts
receivable arising from its normal business activities. The Company routinely
assesses the financial strength of its customers, based upon factors surrounding
their credit risk, establishes an allowance for uncollectible accounts, and as a
consequence, believes that its accounts receivable credit risk exposure beyond
such allowances is limited. The Company places its cash with a high credit
quality financial institutions. The amount on deposit in any one institution
that exceeds federally insured limits is subject to credit risk. The Company had
$315,463 as of December 31, 1998, with financial institutions subject to credit
risk beyond the insured amount. The Company has not experienced any losses in
such accounts. The Company does not require collateral or other security to
support financial instruments subject to credit risk.
Customers accounting for 10% or more of revenue for the five months ended
December 31, 1998, are as follows:
1 9 9 8
Customer A $3,368,482
Customer B $1,092,528
The above customers comprised 38% of accounts receivable at December 31, 1998.
Any decision by these major customers to cease or reduce their use of the
Company's services may have an adverse effect on the Company's operations.
Further, any delay in payment or non-payment of fees owed by the Company's large
clients will have an adverse effect on the Company's results of operations.
F-9
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- ------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
[G] Advertising - The Company expenses advertising costs as incurred.
Advertising costs amounted to approximately $14,000 for the five months ended
December 31, 1998.
[H] 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.
[I] Cash and Cash Equivalents - The Company considers certain highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. The Company has no cash equivalents at December 31, 1998.
[J] Basic and Diluted Loss per Common Share - 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. In the Company's present position, diluted loss per share is the
same as basic loss per share. Securities that could potentially dilute EPS in
the future include the issuance of common stock in settlement of notes payable
and the exercise of stock options [See Notes 8 and 13].
[K] Impairment - Certain long-term assets of the Company are reviewed
periodically as to whether their carrying value has become impaired, pursuant to
guidance established in Statement of Financial Accounting Standards ["SFAS"] No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." Management considers assets to be impaired if the
carrying value exceeds the future projected cash flows from related operations
[undiscounted and without interest charges]. If impairment is deemed to exist,
the assets will be written down to fair value or projected discounted cash flows
from related operations. Management also reevaluates the periods of amortization
to determine whether subsequent events and circumstances warrant revised
estimates of useful lives. As of December 31, 1998, management expects these
remaining assets to be fully recoverable.
[3] Property and Equipment and Depreciation and Amortization
Property and equipment and accumulated depreciation and amortization as of
December 31, 1998, are as follows:
Computers and Equipment $ 221,417
Furniture and Fixtures 82,370
Leasehold Improvements 44,413
Property Held Under Capital Lease 131,027
----------
Total - At Cost 479,227
Less: Accumulated Depreciation and Amortization 74,323
----------
Property and Equipment - Net $ 404,904
---------------------------- ==========
Depreciation expense for the five months ended December 31, 1998 was $69,104.
For property held under capital leases, amortization expense, which is included
in depreciation expense, for the five months ended December 31, 1998, is
$12,583, and accumulated amortization is $12,583 at December 31, 1998.
F-10
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- ------------------------------------------------------------------------------
[4] Intangible Assets
A breakdown of intangible assets as of December 31, 1998, is as follows:
Accumulated
Cost Amortization Net
Goodwill $12,013,571 $ 250,282 $11,763,289
Customer List $ 500,000 $ 41,667 $ 458,333
The customer list is included in the caption "other assets" on the balance
sheet.
Amortization expense for the five months ended December 31, 1998, amounted to
$287,559.
[5] Due From Employees
The amounts due from employees of $14,803 at December 31, 1998, consist of loans
and advances which are non-interest bearing and have no stated terms of
repayment.
[6] Employee Benefit Plan
The Company has adopted a pension plan pursuant to Section 401 [K] of the
Internal Revenue Code, that covers substantially all employees. Eligible
employees may contribute on a tax deferred basis a percentage of compensation up
to the maximum allowable amount. Employee contributions vest immediately. The
Company is not required to make a matching contribution. The Company's
contribution to the Plan was 25% of the first $10,000 of employee contributions
which amounted to a charge to operations of $11,819 for the five months ended
December 31, 1998. The Company's contributions vest in 20% increments annually,
beginning with two years of service, until fully vested after six years of
service.
[7] Long-Term Debt and Capital Leases
Long-term debt at December 31, 1998 consists of the following:
Revolving line of credit (A) $ 1,850,000
Revolving line of credit (B) 100,000
Note payable - bank, due in monthly installments of $4,167, including
interest at the bank's prime rate plus 2%, due March 2001. The
note is collateralized by equipment. 112,500
Note payable - bank, due in monthly installments of $1,042 including
interest at the bank's prime rate plus 2.5%, due March 1999. The note
is collateralized by equipment. 3,125
Obligations under capital leases, collateralized by equipment originally
costing $131,027, payable in monthly installments including
interest at rates from 12.69% to 24.43%, through 2003. 126,535
----------
Total 2,192,160
Less: Current Portion 2,044,175
-----------
Total $ 147,985
----- ===========
F-11
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- ------------------------------------------------------------------------------
[7] Long-Term Debt and Capital Leases [Continued]
The revolving line of credit (A) was due January 1, 1999, and bears interest at
the bank's prime rate plus 1.5% payable monthly. The Company may borrow the
lesser of 80% of eligible accounts receivable, as defined, or $1,850,000. At
December 31, 1998, the Company had no available credit under this line.
The revolving line of credit (B) was due January 1, 1999, and bears interest at
the bank's prime rate plus 1.5% payable monthly. At December 31, 1998, the
Company had no available credit under this line.
Both lines are collateralized by accounts receivable and equipment and personal
guarantees of the former stockholders of CSI. On February 1, 1999, the bank
extended both lines until June 1, 1999, and increased the maximum amount
available under the revolving line of credit (A) to $2,050,000.
The prime rate at December 31, 1998, was 7.75%. For the five months ended
December 31, 1998, the weighted average interest rate on short-term borrowings
was 9.25%.
The following schedule shows the future maturities of long-term debt exclusive
of capital leases:
Years ended
December 31,
1999 $2,003,125
2000 50,000
2001 12,500
----------
Total $2,065,625
==========
The following schedule shows the minimum lease payments under capital lease as
of December 31, 1998:
Years ended
December 31,
1999 $ 59,510
2000 54,476
2001 33,751
2002 9,039
2003 4,331
---------
Total 161,107
Less: Amount Representing Interest 34,572
---------
Total 126,535
Less: Current Portion 41,050
---------
Long-Term Portion $ 85,485
----------------- =========
[8] Related Party Transactions
The amount due from stockholder of $8,550 is non-interest bearing and has no
stated terms of repayment.
The amount due from affiliate of $14,924 is due from an affiliated company
controlled by a principal stockholder of the Company. The amount is non-interest
bearing and has no stated terms of repayment.
F-12
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- ------------------------------------------------------------------------------
[8] Related Party Transactions [Continued]
Amounts due to affiliates of $497,068 are working capital loans due to
affiliated companies controlled by a principal stockholder of the Company. The
loans are non-interest bearing and have no stated terms of repayment.
The advances from stockholders of $2,246,057 are working capital advances which
are non-interest bearing and have no stated terms of repayment. Imputed interest
expense of $34,157 was recorded at 8% interest for the five months ended
December 31, 1998, and was recorded as an increase to capital in excess of par
value.
Notes Payable - Stockholders represent amounts due to the former Stockholders of
CSI as a result of its acquisition by Patra Capital. Total notes payable as of
December 31, 1998, are $6,917,601, with a discounted value of $6,741,046. The
payments are due as follows:
$1,500,000 January 21, 1999 (payable in cash or stock at
the option of the Company), at 8%
$3,167,601 May 1, 1999
$2,250,000 August 1, 1999
The January 21, 1999, payment of $1,500,000 was satisfied through the issuance
of 250,001 shares of the Company's common stock in 1999.
The following unaudited pro forma information presents the liabilities and
stockholders' equity of the Company as if the 250,001 shares of common stock
were issued as of December 31, 1998:
As Reported Transaction As Adjusted
----------- ----------- -----------
Long-Term Liabilities $ 1,647,985 $(1,500,000) $ 147,985
============ =========== ===========
Stockholders' Equity $ 2,175,167 $1,500,000 $ 3,675,167
============ ========== ===========
See Note 2[J] for the effect on earnings per share.
The May 1, 1999, and August 1, 1999, notes are interest free and have been
discounted at 8%. The imputed interest expense for the five months ended
December 31, 1998, was $276,412. All notes to stockholders are collateralized by
CSI common stock.
[9] Commitments and Contingencies
Leases - The Company leases office space under operating leases, which expire in
June of 1999 and March 2003. Rent expense in the amount of $33,517 has been
accrued as of December 31, 1998, representing the remainder of lease payments
due under a vacated lease through June of 1999. The liability is included in
accrued expenses. In November 1997, the Company entered into a commitment to
lease office space expiring March 2003. The lease contains an option to renew
for a term of five years. In addition to minimum rentals, the Company is liable
for additional rentals based on its proportionate share of real estate taxes and
operating expenses, as defined.
The Company occupies additional office space, which is leased by a related
company, of which one of the stockholders is a stockholder of the Company, under
an operating lease which expires in April of 2002. Approximately 62% of the cost
of the lease is allocated to the Company.
F-13
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- ------------------------------------------------------------------------------
[9] Commitments and Contingencies [Continued]
Minimum annual rentals under the leases are as follows:
Years Ended
- -----------
December 31,
- ------------
1999 $ 496,271
2000 462,754
2001 462,754
2002 325,418
2003 64,187
----------
Total $1,811,384
----- ----------
==========
Total rent expense was $164,889 for the five months ended December 31, 1998.
Letter of Credit - The Company is committed under an outstanding letter of
credit with a bank which expires in November 1999 to secure the security deposit
on CSI office space, in the amount of $291,657. The agreement automatically
extends for additional one year periods with a final expiration date of November
2003.
Employment Agreements - The Company is committed under employment agreements to
the two former stockholders of CSI. The Company is obligated to pay $250,000
each per year to the former stockholders. The agreements terminate on August 1,
2001, and include automatic annual renewals at the end of each term.
[10] Fair Value of Financial Instruments
In assessing the fair value of these financial instruments, the Company has used
a variety of methods and assumptions, which were based on estimates of market
conditions and risks existing at that time. For all financial instruments,
including cash, due from related parties, due to affiliates and stockholders,
debt maturing within one year, it was estimated that the carrying amount
approximated fair value for these financial instruments because of their short
maturities. The carrying amount of notes payable long-term approximates fair
value which is based on current rates at which the Company could borrow funds
with similar remaining maturities.
[11] Income Tax Benefit
The income tax benefit consists of the following:
Current Taxes:
Federal $ 174,700
State 50,800
-----------
Total 225,500
-----------
Deferred Taxes:
Federal $ (314,300)
State (91,500)
-----------
Total (405,800)
-----------
Income Tax Benefit $ 180,300
------------------ ===========
F-14
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- ------------------------------------------------------------------------------
[11] Income Tax Benefit [Continued]
The tax effect of significant items comprising the Company's deferred tax
liability at December 31, 1998, are as follows:
Deferred Tax Assets:
Net Operating Loss Carryforward $ 18,500
Deductibility of Accounts Payable and Accrued Expenses 148,600
Total 167,100
Deferred Tax Liability:
Taxable Accounts Receivable 299,300
-----------
Net Deferred Tax Liability $ 132,200
-------------------------- ===========
The net operating loss carryforward of approximately $54,000 expires in the
years 2012 and 2013.
A reconciliation of income tax at the statutory rate to the Company's effective
rate is as follows:
Statutory Federal Income Tax Rate (34)%
Nondeductible Amortization of Intangibles 20%
Other (1)%
State Income Tax (6)%
-----------
Income Tax Benefit - Effective Rate (21)%
----------------------------------- ===========
[12] Common Stock
Pursuant to a reorganization and acquisition of Patra Capital and CSI, effective
as of August 1, 1998, the Company issued 12,950,000 additional common shares.
[13] Stock Options
An incentive stock option plan, which was adopted by the Company and approved by
the shareholders, in August of 1998, reserves 1,500,000 shares of the Company's
common stock. Options granted under the plan are intended to qualify as
incentive stock options under existing tax regulations.
The following table summarizes the activity in common shares subject to
incentive stock options for the five months ended December 31, 1998:
Weighted Average
----------------
Number of Shares Exercise Price
---------------- --------------
July 31, 1998 - Balance -- $ --
Granted 90,100 $ 5.00
Exercised -- $ --
Canceled or Expired -- $ --
--------- ---------
Options Outstanding at December 31, 1998 90,100 $ 5.00
---------------------------------------- ========= =========
No options were exercisable at December 31, 1998.
F-15
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- ------------------------------------------------------------------------------
[13] Stock Options [Continued]
The following table summarizes information about stock options outstanding at
December 31, 1998:
Options Outstanding
---------------------------------------------------
Weighted-Average
----------------
Number Remaining Weighted-Average
------ --------- ----------------
Exercise Prices Outstanding Contractual Life Exercise Price
--------------- ----------- ---------------- --------------
$ 5.00 90,100 9.67 $ 5.00
=======
There was no compensation cost recognized in income for the five months ended
December 31, 1998.
Had compensation cost been determined on the basis of fair value pursuant to
FASB Statement No. 123, net loss and loss per share would have been recorded as
follows:
1 9 9 8
-------
Net Loss:
As Reported $ (678,780)
Pro Forma $ (925,857)
Loss Per Share:
As Reported $ (.05)
Pro Forma $ (.06)
The fair value of each option granted is estimated on the grant date using an
option pricing model which takes into account, as of the grant date, the
exercise price and the expected life of the option, the current price of the
underlying stock and its expected volatility, expected dividends on the stock
and the risk-free interest rate for the expected term of the option. The
following is the average of the data used for the following items:
Risk-Free Expected Expected
--------- -------- --------
Interest Rate Expected Life Volatility Dividends
------------- ------------- ---------- ---------
1998 4.95% 3 Years 80.26% N/A
[14] New Authoritative Pronouncements
The Financial Accounting Standard Board ["FASB"] has issued Statement of
Financial Accounting Standards ["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 its 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.
F-16
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- ------------------------------------------------------------------------------
[15] Pro Forma Data [Unaudited]
The following unaudited pro forma information presents the results of the
combined operations of Elligent Consulting Group, Inc. Patra, CSI and Doorways
with pro forma adjustments as if the combinations had been consummated as of
August 1, 1997. This pro forma information does not purport to be indicative of
what would have occurred had the acquisitions been made as of August 1, 1997, or
results which my occur in the future [See Note 1]. The Company changed its
fiscal year to December 31 during January 1999.
Year Ended
----------
July 31, 1998
-------------
Revenue $17,730,000
Net Loss $ (511,000)
Net Loss Per Share $ (.04)
[16] Going Concern
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern and realization of assets and settlement of
liabilities and commitments in the course of business.
As of December 31, 1998, the Company had a working capital deficit of
approximately $8,960,000 and utilized cash for operations of approximately
$1,400,000 for the five months ended December 31, 1998. The working capital
deficit reflects (i) $2,000,000 for two bank revolving lines of credit
collateralized by accounts receivable and other loans, (ii) accounts payable and
accrued expenses of $2,100,000, (iii) notes payable to stockholders of
$5,200,000 related to the acquisition of CSI, (iv) amounts due to related
parties of $2,700,000, related to the acquisition of CSI, working capital
advances and the funding of costs related to potential future acquisitions and
(v) a $400,000 cash overdraft. The related party obligations are principally due
to the principal stockholder of the Company and entities owned or controlled by
him.
The Company believes that sufficient sources of funds exist to cover working
capital needs. The principal sources of these funds are (i) projected cash flow
from operations, (ii) the revolving lines of credit, (iii) the personal assets
of the principal stockholder of the Company and related entities owned or
controlled by him, (iv) the issuance of the Company's common stock and (v)
additional financing sources.
The principal stockholder of the Company has committed to providing the funds
necessary to cover the remaining note payments due on the purchase of CSI, to
the extent that the required funds cannot be obtained from other sources. The
Company is presently engaged in negotiations with respect to additional
financing sources. These include (i) negotiating with financial institutions for
a new line of credit; and (ii) a private placement of the Company's common stock
to accredited investors during early 1999, that will raise up to $20 million.
The continuation of the Company as a going concern is dependent upon the success
of these plans.
There can be no assurances that management's plans to reduce operating losses
and to obtain additional financing to fund operations will be successful. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.
. . . . . . . . .
F-17
<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> 5-Mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 600
<SECURITIES> 0
<RECEIVABLES> 4,012,049
<ALLOWANCES> 100,260
<INVENTORY> 0
<CURRENT-ASSETS> 3,930,261
<PP&E> 479,227
<DEPRECIATION> 74,323
<TOTAL-ASSETS> 16,712,787
<CURRENT-LIABILITIES> 12,889,635
<BONDS> 0
0
0
<COMMON> 14,544
<OTHER-SE> 2,160,623
<TOTAL-LIABILITY-AND-EQUITY> 2,175,167
<SALES> 9,970,026
<TOTAL-REVENUES> 9,970,026
<CGS> 6,466,437
<TOTAL-COSTS> 3,967,578
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 395,091
<INCOME-PRETAX> (859,080)
<INCOME-TAX> (180,300)
<INCOME-CONTINUING> (678,780)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (678,780)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
