UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1999 Commission File Number 33-14576-D
ELLIGENT CONSULTING GROUP, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
Nevada 87-0453842
------ ----------
(State or other jurisdiction of(I. R. S. Employer Identification No.)
incorporation or organization)
152 West 57th Street, 40th Floor
New York, N. Y. 10019
--------------- -----
(Address of principal executive offices)
Registrant's current telephone number, including area code: (212) 765 - 2915
----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities 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.
[ Item - 1 ] Yes [ X ] No [ ] [ Item - 2] Yes [ X ] No [ ]
Indicate the number of shares outstanding of each class of the Registrant's
Common Stock.
The Registrant has only one class of Common Stock outstanding. As of April 30,
1999, there were 14,857,226 shares of the Registrant's Common Stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
<PAGE>
ELLIGENT CONSULTING GROUP, INC.
FORM 10-QSB
For the quarterly period ended March 31, 1999
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 1999 (unaudited)
Consolidated Statement of Operations for the three months ended
March 31, 1999 (unaudited)
Consolidated Statement of Stockholders' Equity for the three months
period ended March 31, 1999 (unaudited)
Consolidated Statement of Cash Flows for the three months ended
March 31, 1999 (unaudited)
Notes to Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
INDEX TO EXHIBITS
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF MARCH 31,1999 [Unaudited]
Assets
Current assets:
Cash $ 87,533
Trade accounts receivable, net of allowance
for doubtful accounts of $100,260 3,768,032
Deferred taxes receivable 48,600
Other assets 35,170
-----------
Total current assets 3,939,335
-----------
Property and equipment, net 427,765
-----------
Goodwill, net 11,613,120
-----------
Other Assets
Customer lists - net 433,333
Security deposits 117,723
Due from employees 13,929
Due from stockholders 8,550
Due from affiliates 14,924
-----------
Total other assets 588,459
-----------
Total assets $16,568,679
===========
See Accompanying Notes to Consolidated Financial Statements.
1
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999 [Unaudited]
Liabilities and Stockholders' Equity
Current liabilities:
Cash overdraft $ 269,240
Accounts payable 1,749,649
Accrued expenses and other liabilities 126,852
Notes and leases payable - current 2,244,983
Accrued expenses -- stockholders 327,167
Notes payable--related parties 5,316,712
Taxes payable 165,431
Due to affiliates 738,646
Advances from Stockholders 2,336,057
-----------
Total current liabilities 13,274,737
-----------
Long-term liabilities
Notes and leases payable--long term 123,385
-----------
Total long-term liabilities 123,385
-----------
Commitment and contingencies --
Stockholders' equity:
Common stock--$0.001 par value; 50,000,000 shares authorized
14,794,226 shares issued and outstanding 14,794
Capital in excess of par value 4,538,418
Accumulated deficit (1,382,655)
-----------
Total stockholders' equity 3,170,557
-----------
Total liabilities and stockholders' equity $16,568,679
===========
See Accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 [Unaudited]
Income:
Revenue $ 5,589,447
Cost of services 3,672,851
-----------
Gross profit 1,916,596
-----------
Costs and expenses:
General and administrative 2,227,087
Depreciation 40,257
Amortization 175,169
-----------
2,442,513
-----------
Operating income (525,917)
-----------
Other expense:
Interest (62,228)
Interest expense - Stockholders (121,817)
-----------
Total Other Expense (184,045)
-----------
Loss before income taxes (709,962)
Income tax benefit (159,200)
-----------
Net loss $ (550,762)
===========
Basic and Diluted Loss Per Share $ (0.03)
===========
Weighted Average Number of Shares Outstanding 14,684,675
===========
As more fully described in the Company's December 31, 1998, report on Form
10-KSB, 1998 operations are not meaningful.
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999 [Unaudited]
<TABLE>
Capital in Total
Common Stock Excess of Accumulated Stockholders'
Shares Amount Par Value Deficit Equity
------ ------ --------- ------- ------
Balance - December 31,
<S> <C> <C> <C> <C> <C>
1998 14,544,225 $ 14,544 $2,992,517 $ (831,893) $2,175,168
Common Stock Issued 250,001 250 1,499,750 -- 1,500,000
Imputed Interest [8] -- -- 46,151 -- 46,151
Net Loss for the three
Months Ended
March 31, 1999 --- -- -- (550,762) (550,762)
---------- --------- ---------- ---------- ----------
Balance - March 31,
1999 [Unaudited] 14,794,226 $ 14,794 $4,538,418 $(1,382,655) $ 3,170,557
========== ========= ========== =========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THREE MONTHS ENDED MARCH 31, 1999 [Unaudited]
Cash Flows From Operating Activities
Net loss $ (550,762)
-----------
Adjustments to reconcile net loss
to cash utilized for operating activities:
Depreciation 40,257
Amortization 175,169
Imputed interest 121,817
Deferred income tax benefit (180,800)
Change in Assets and Liabilities:
[Increase] decrease in:
Accounts receivable 143,757
Other current assets (17,298)
Due from employees 874
Increase [decrease] in:
Accounts payable 64,598
Accrued expenses (63,007)
Accrued expenses-stockholders 95,616
Income taxes payable (60,069)
-----------
Total adjustments 320,914
-----------
Net cash - operating activities (229,848)
-----------
Investing Activities
Payments for Property and Equipment (63,118)
-----------
Financing Activities
Decrease in cash overdraft (127,888)
Due to affiliates 241,579
Advances from stockholders 90,000
Proceeds from notes payable 200,000
Payments on notes and leases payable (23,792)
Payment on notes payable - stockholders (1,500,000)
Issuance of common stock 1,500,000
-----------
Net cash - financing activities 379,899
-----------
Net Increase in Cash 86,933
Cash at Beginning of Period 600
-----------
Cash at End of Period $ 87,533
===========
As more fully described in the Company's December 31, 1998, report on Form
10-KSB, 1998 operations are not meaningful.
Supplemental Schedule of Non-Cash Investing and Financing Activities:
During the three months ended March 31, 1999, the Company issued 250,001 shares
of common stock valued at $1,500,000 to related parties in settlement of the
January 21, 1999, installment of notes payable related to the acquisition of
CSI.
See Accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Unaudited]
[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. Operations for the three months ended March 31, 1999, are
primarily those of CSI.
In prior years, the Company was considered a development stage company and the
operations were not meaningful.
6
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2 [Unaudited]
[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 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
$354,038 as of March 31, 1999, 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 three months ended March
31, 1999, are as follows:
1 9 9 9
Customer A $2,063,604
Customer B $ 520,558
The above customers comprised 15% of accounts receivable at March 31, 1999.
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.
7
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3 [Unaudited]
[2] Summary of Significant Accounting Policies [Continued]
[G] Advertising - The Company expenses advertising costs as incurred. There was
no advertising cost during the three months ended March 31, 1999.
[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 March 31, 1999.
[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 March 31, 1999, 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 March
31, 1999, are as follows:
Computers and Equipment $ 288,833
Furniture and Fixtures 45,536
Leasehold Improvements 60,353
Property Held Under Capital Lease 147,623
----------
Total - At Cost 542,345
Less: Accumulated Depreciation and
Amortization 114,580
----------
Property and Equipment - Net $ 427,765
---------------------------- ==========
Depreciation expense for the three months ended March 31, 1999, was $40,257.
For property held under capital leases, amortization expense, which is included
in depreciation expense, for the three months ended March 31, 1999, is $8,167,
and accumulated amortization is $29,255 at March 31, 1999.
8
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4 [Unaudited]
[4] Intangible Assets
A breakdown of intangible assets as of March 31, 1999, is as follows:
Accumulated
Cost Amortization Net
---- ------------ ---
Goodwill $12,013,571 $ 400,451 $11,613,120
Customer List $ 500,000 $ 66,667 $ 433,333
The customer list is included in the caption "other assets" on the balance
sheet.
Amortization expense for the three months ended March 31, 1999, amounted to
$175,169.
[5] Due From Employees
The amounts due from employees of $13,929 at March 31, 1999, 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 $13,455 for the three months ended
March 31, 1999. 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 March 31, 1999, consists of the following:
Revolving line of credit (A) $2,050,000
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. 100,000
Obligations under capital leases, collateralized by equipment originally
costing $147,623, payable in monthly installments including
interest at rates from 12.69% to 24.43%, through 2003. 118,368
----------
Total 2,368,368
Less: Current Portion 2,244,983
----------
Total $ 123,385
----- ==========
9
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5 [Unaudited]
[7] Long-Term Debt and Capital Leases [Continued]
The revolving line of credit (A) was due June 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 $2,050,000. At March 31,
1999 the Company had no available credit under this line.
The revolving line of credit (B) was due June 1, 1999, and bears interest at the
bank's prime rate plus 1.5% payable monthly. At March 31, 1999, the Company had
no available credit under this line.
The prime rate at March 31, 1999, was 7.75%. For the three months ended March
31, 1999, 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:
Twelve Months ended
March 31,
---------
2000 $2,200,000
2001 50,000
----------
Total $2,250,000
----- ==========
The following schedule shows the minimum lease payments under capital lease as
of March 31, 1998:
Twelve Months ended
March 31,
---------
2000 $ 58,131
2001 50,345
2002 24,623
2003 7,887
2004 3,032
----------
Total 144,018
Less: Amount Representing Interest 25,650
----------
Total 118,368
Less: Current Portion 44,983
----------
Long-Term Portion $ 73,385
----------------- ==========
[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.
Amounts due to affiliates of $738,646 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 $2,336,057 are working capital advances which
are non-interest bearing and have no stated terms of repayment. Imputed interest
expense of $46,151 was recorded at 8% interest for the three months ended March
31, 1999, and was recorded as an increase to capital in excess of par value.
10
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6 [Unaudited]
[8] Related Party Transactions [Continued]
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
March 31, 1999, are $5,417,601, with a discounted value of $5,316,712. The
payments are due as follows:
$3,750,000 May 1, 1999
$1,667,601 August 1, 1999
The May 1, 1999, and August 1, 1999, notes are interest free and have been
discounted at 8%. The imputed interest expense for the three months ended March
31, 1999, was $75,666. 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 March 31, 1999, 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.
Minimum annual rentals under the leases are as follows:
Twelve Months ended
March 31,
---------
2000 $ 462,754
2001 462,754
2002 462,754
2003 273,917
----------
Total $1,662,179
----- ==========
Total rent expense was $90,465 for the three months ended March 31, 1999.
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.
11
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7 [Unaudited]
[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 $ 16,700
State 4,900
---------
Total 21,600
---------
Deferred Taxes:
Federal (140,100)
State (40,700)
---------
Total (180,800)
---------
Income Tax Benefit $ 159,200
------------------ =========
The tax effect of significant items comprising the Company's deferred tax
liability at March 31, 1999, are as follows:
Deferred Tax Assets:
Deductibility of Accounts Payable and
Accrued Expenses $ 96,500
Deferred Tax Liability:
Taxable Accounts Receivable 47,900
---------
Net Deferred Tax Asset $ 48,600
---------------------- =========
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 23 %
Other (5)%
State Income Tax (6)%
-----
Income Tax Benefit - Effective Rate (22)%
----------------------------------- =====
[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.
12
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8 [Unaudited]
[13] Stock Options
An incentive stock option plan, which was adopted by the Company, 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 three months ended March 31, 1999:
Weighted Average
Number of Shares Exercise Price
---------------- --------------
July 31, 1998 - Balance -- $ --
Granted 90,100 $ 5.00
Exercised -- $ --
Canceled or Expired -- $ --
------- ---------
Options Outstanding at March 31, 1999 90,100 $ 5.00
------------------------------------- ======= =========
No options were exercisable at March 31, 1999.
The following table summarizes information about stock options outstanding at
March 31, 1999:
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 three months ended
March 31, 1999.
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 9
-------
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] Subsequent Events
On April 15, 1999, the Company issued 63,000 shares of restricted common stock
in connection with an agreement to obtain marketing services. The value
associated with the issuance of these shares was $378,000.
13
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Summary Financial Information
The following table contains certain selected financial data of the
Company and is qualified by the more detailed financial statements and the notes
thereto provided in this report. The financial data for the three months ended
March 31, 1999, has been derived from the Company's unaudited financial
statements, which statements are included elsewhere in this Report. The pro
forma (unaudited) twelve month numbers provide an historic view of our revenue
growth.
Statement of Operations Data ($ in thousands)
Three Months Twelve Months Twelve Months Twelve Months
Ended Ended Ended Ended
March 31, December 31, December 31, December 31,
1 9 9 9 1 9 9 8 1 9 9 7 1 9 9 6
------- ------- ------- -------
Actual Pro Forma Pro Forma Pro Forma
Gross revenue $ 5,589 $ 22,149 $ 13,247 $ 9,306
Balance Sheet Data ($ in thousands)
As at March 31, 1999
Actual
------
Current Assets $ 3,939
Total Assets 16,569
Current Liabilities 13,275
Long-Term Debt 123
Total Liabilities 13,398
Shareholders' Equity 3,171
Cash Flow Data ($ in thousands)
Three Months Ended Five Months Ended
March 31, 1999 December 31, 1998
Actual Actual
------ ------
Gross revenue $ 230 $ 1,406
14
<PAGE>
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, 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.
Interest at 8% was paid on the first two installments (November 24th and January
21st ). The final two payments bear no interest. As of March 31, 1999, the
remaining payments were due as follows:
$3,750,000 May 1, 1999
$1,667,601 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.
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 three month period ended March 31, 1999, we had revenue of $5.6
million versus $4.5 million in the year earlier period, an increase of 24%, and
a net loss $0.5 million.
15
<PAGE>
The major components of the current quarter loss are as follows:
$ in thousands
--------------
Operating Income $ 97
-----------
Depreciation, Amortization and Interest 399
Income Tax Benefit (159)
Management and Holding Company Expenses 408
-----------
Subtotal Acquisition Related and Other Expenses 648
-----------
Net Loss $ (551)
===========
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. and its wholly owned subsidiary
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
operations since that date. 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 three months ended March 31, 1999, we had revenues of $5.6 million
from our operating subsidiary CSI reflecting a 24% increase from the $4.5
million revenues during the corresponding period in 1998. The cost of revenues
was $3.7 million resulting in a gross margin from operations of $1.9 million or
34%.
The results of operations for CSI for the three months ended March 31,
1999, and 1998, are as follows:
[In Thousands]
Three months ended
December 31,
1 9 9 9 1 9 9 8
------- -------
Revenue $ 5,589 $ 4,563
Cost of Revenue 3,672 3,049
---------- ---------
Gross Margin 1,917 1,514
Operating Expense [Excluding Depreciation
and Amortization] 1,820 1,445
---------- ---------
Operating Income $ 97 $ 69
========== =========
CSI continues to show significant growth in revenues in 1999 versus the
comparable period a year ago. Operating expenses for 1999 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 the remainder of 1999.
16
<PAGE>
Liquidity and Financial Position
As of March 31, 1999, we had a working capital deficit of $9.3 million.
Our working capital deficit reflects (i) $2.2 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 $1.9 million, (iii)
notes payable to stockholders of $5.3 million related to the acquisition of CSI,
and (iv) amounts due to related parties of $3.1 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 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 or other equity
securities 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.
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.
17
<PAGE>
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 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 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.
18
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
During the three months ended March 31, 1999, the Company issued 250,001 shares
of common stock with a value of $1,500,000 to related parties in settlement of
the January 21, 1999, installment of notes payable related to the acquisition of
CSI. This stock issuance represented payment in full for the $1,500,000
installment. The liquidation of debt resulted in an addition to Common Stock
equity of $250, and an increase in Paid in Capital of $1,499,750.
Item 6. Exhibits and Reports on Form 8-K
NONE
INDEX TO EXHIBITS
NONE
19
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act; the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ELLIGENT CONSULTING GROUP, INC.
Date: May 12, 1999 By:/s/ Edwin T. Brondo
---------------------------------
Edwin T. Brondo
Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature Title(s)
By: /s/ Edwin T. Brondo Chief Financial Officer
-------------------
(Edwin T. Brondo)
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statement of operations, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Mar-31-1999
<CASH> 87,533
<SECURITIES> 0
<RECEIVABLES> 3,868,292
<ALLOWANCES> 100,260
<INVENTORY> 0
<CURRENT-ASSETS> 3,939,335
<PP&E> 542,345
<DEPRECIATION> 114,580
<TOTAL-ASSETS> 16,568,679
<CURRENT-LIABILITIES> 13,274,737
<BONDS> 0
0
0
<COMMON> 14,794
<OTHER-SE> 3,155,763
<TOTAL-LIABILITY-AND-EQUITY> 16,568,679
<SALES> 5,589,447
<TOTAL-REVENUES> 5,589,447
<CGS> 3,672,851
<TOTAL-COSTS> 2,442,513
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 184,045
<INCOME-PRETAX> (709,962)
<INCOME-TAX> (159,200)
<INCOME-CONTINUING> (550,762)
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> (550,762)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
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