SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from to
Commission file number 0-25372
COTELLIGENT GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3173918
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 California Street, Suite 2050
San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
(415) 439-6400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b)of the Act:
Common Stock, $.01 par value
(Title of class)
Securities registered pursuant to Section 12(g) of the Act: None
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_____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $284,006,000 based on the closing price of $20.125
of the registrant's Common Stock as reported on the New York Stock Exchange on
June 23, 1998.
The number of shares of the registrant Common Stock outstanding as of June 23,
1998 was 14,112,100
DOCUMENTS INCORPORATED BY REFERENCE
There is incorporated by reference portions of the registrant's Proxy Statement
for the 1998 Annual Meeting of Stockholders, expected to be filed with the
Securities and Exchange Commission within 120 days after the end of the
registrant's fiscal year, in Part III, Items 10, 11, 12 and 13 of this report.
COTELLIGENT GROUP, INC.
TABLE OF CONTENTS
FORM 10-K
PAGE
Part 1
Item 1 Business............................................................................... 3
Item 2 Properties............................................................................. 15
Item 3 Legal Proceedings...................................................................... 15
Item 4 Submission of Matters to a Vote of Security Holders.................................... 15
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters.................. 16
Item 6 Selected Financial Data................................................................ 17
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 19
Item 8 Financial Statements and Supplementary Data............................................ 24
Item 9 Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure............................................................... 45
Part III
Item 10 Directors and Executive Officers of the Registrant..................................... 47
Item 11 Executive Compensation................................................................. 47
Item 12 Security Ownership of Certain Beneficial Owners and Management......................... 47
Item 13 Certain Relationships and Related Transactions......................................... 47
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................... 48
Signatures ....................................................................................... 50
2
PART 1
Item 1. Business
Cotelligent Group, Inc. ("Cotelligent" or the "Company", including all
subsidiaries unless otherwise noted) is a software professional services firm
providing information technology ("IT") consulting services, including project
management, staff augmentation, alliance services, network services and IT
education to businesses with complex IT operations. The Company operates 28
offices in major metropolitan areas across the United States. The Company
provides its clients with IT professionals who are proficient in a wide variety
of hardware and software platforms. Cotelligent's IT professionals are primarily
billed on a time and materials basis and offer clients specialized expertise in
implementation services including applications design, programming, development
and maintenance, client/server design and development, systems software design,
systems engineering, systems integration, intranet/internet design and
development and network design and management services. At March 31, 1998, the
Company had approximately 2,800 employees, including a technical staff of
approximately 2,300 IT professionals, providing services to approximately 800
clients across a broad spectrum of commercial industries throughout the United
States, including telecommunications, technology and financial services.
Included among the Company's active clients are AT&T Corp., AT&T Wireless
Services, Bell Communications Research, Cargill Financial Services Corp.,
Frito-Lay, Inc., JC Penney, Inc., Liberty Mutual Insurance Co., Lucent
Technologies Inc., MCI Communications Corporation, Mercantile Bankshares
Corporation, Microsoft Corporation, Monsanto Company, Office Depot, Inc.,
Pacific Bell and U S West, Inc.
The IT consulting services industry is expected to experience continued
growth over the next several years. According to Dataquest a market research
firm, estimated United States spending for IT professional services (excluding
training and education) will be approximately $68 billion in 1998 and is
projected to grow at a compound annual growth rate of 14% through 2000. This
increased demand for IT consulting services is largely fueled by: (i) increasing
pressure on businesses to generate timely, accurate business information; (ii)
the proliferation of more powerful and less expensive computer
hardware/software; (iii) the trend away from centralized mainframes and custom
applications to personal computer-driven systems employing a broad range of
complex software applications; and (iv) the emergence of the Year 2000 issue,
which has caused companies to seek out and implement more advanced IT systems
and solutions. As a result, businesses have invested, and are likely to continue
to invest, significant amounts of capital to build, support and update their IT
infrastructures. Concurrent with the increase in IT-related expenditures,
competition has pressured corporations to reduce or eliminate costs unrelated to
core operational competencies. As such, businesses are increasing their use of
IT consulting services companies such as Cotelligent to help them appropriately
manage, staff and solve a wide array of IT consulting and support needs. By
contracting with Cotelligent, clients can outsource projects and access skilled
IT professionals on an "as-needed" basis, converting their fixed labor costs
into variable costs and reducing their costs of permanent employees.
The Company's goal is to be a leading nationwide provider of IT consulting
services, including project management, staff augmentation, alliance services,
network services and IT education to businesses with complex IT operations. To
accomplish this goal, the Company has implemented a business strategy consisting
of two distinct components. First, the Company has adopted an operating strategy
for internal growth by: (i) creating an infrastructure to effectively recruit
and retain qualified IT professionals; (ii) leveraging its local client
relationships in a coordinated effort to provide services on a national scope to
its larger accounts; (iii) operating with a decentralized management structure
to foster an environment in which best practices are shared on a Company-wide
basis, allowing successful strategies to be implemented at various operating
locations; (iv) leveraging the Cotelligent brand by transitioning from the local
names of the operating locations to Cotelligent's national identity; and (v)
pursuing strategic alliances with nationally established technology companies,
through which the Company will enhance its technical support capabilities and
strengthen certain of its key business relationships.
As the second part of its business strategy, the Company intends to broaden
the geographic and technical scope of its operations by acquiring established
firms that offer complementary IT consulting services in new or existing regions
and that will expand the depth and breadth of services provided to its clients.
The IT consulting industry is highly fragmented. According to INPUT, an
international research firm, approximately 3,500 IT consulting services
businesses with annual revenues in excess of $1 million provide services and
expertise in the United States. As a result of this fragmentation, the IT
consulting services industry has recently experienced consolidation as smaller,
regional firms have become less able to effectively compete with larger,
national IT consulting services firms which often possess greater access to
capital and IT
3
professionals as well as the service capabilities required to serve large
companies that are consolidating their vendor lists. To capitalize on this
industry fragmentation and trend toward consolidation, the Company has developed
an acquisition strategy to: (i) purchase local or regional IT consulting
services firms with successful, proven operating models; (ii) allow the acquired
company to operate in a manner consistent with its historical practice and as
dictated by local market conditions, rather than converting the operations to a
standardized national business model; and (iii) improve the acquired company's
profitability by passing on the operating and financial benefits associated with
national firm status. The Company believes that this approach differentiates
Cotelligent from other potential acquirers and is attractive to acquisition
candidates who wish to preserve their corporate culture. The Company also
believes that this acquisition strategy will allow it to secure assignments from
clients seeking to do business with national IT consulting services firms, as
well as regional businesses seeking local relationships.
In February 1996, the Company acquired, simultaneously with the closing of
its initial public offering (the "IPO"), four established providers (the
"Initially Acquired Companies") of IT consulting services to serve as a
foundation to execute its growth strategy. Since the IPO, the Company has
acquired sixteen additional IT consulting services firms (the "Subsequent
Acquisitions") which have strengthened the Company's operations by diversifying
its base of Fortune 1000 clients, expanding its national presence, broadening
its nationwide resource pool and client base and increasing the Company's
capabilities and expertise.
The Company was incorporated in February 1993 under the laws of the State
of California as TSX, a California corporation. In November 1995, the Company
changed its jurisdiction of incorporation to Delaware and its name to
Cotelligent Group, Inc. Unless the context otherwise requires, references to the
"Company" and to "Cotelligent" refer to TSX, a California corporation, and
Cotelligent Group, Inc., a Delaware corporation.
The Company's executive offices are located at 101 California Street, Suite
2050, San Francisco, California 94111 and its telephone number is (415)
439-6400.
The IT Consulting Services Industry
IT consulting services represent a significant and rapidly expanding market
opportunity. According to Dataquest, a market research firm, United States
spending for IT professional services (excluding training and education) will be
approximately $68 billion in 1998 and is projected to grow at a compound annual
rate of 14% through 2000. The Company believes that the following are the three
key industry drivers:
Technological Evolution. Computer hardware and software technology has
shifted from centralized mainframes and custom applications to decentralized,
scalable architectures centered on low cost personal computers, client/server
architectures, local and wide area networks, shared databases, intranet/internet
applications and generally available applications software packages. As a
result, the rate of new technology introduction and spending by corporations has
accelerated and the need for a larger and more skilled technology staff has
increased.
Increase in Outsourcing Opportunities. Recent economic factors have forced
large organizations to focus on core competencies and rely more upon third
parties for a variety of IT consulting services. As a result, IT services
managers are charged with developing and supporting increasingly complex IT
systems while working under budgetary pressures within their organizations.
Faced with the challenges of adequately serving the needs of their customers and
employees, companies are increasingly turning to skilled and experienced outside
organizations to help them appropriately staff and manage their IT requirements.
This provides the following benefits:
Access to Specialized Skills on an As-Needed Basis. "As-needed access"
avoids both the need to maintain a larger permanent staff and implementation
delays involved with retraining staff as technologies and applications change.
Fixed labor costs are converted into variable costs by better matching staffing
levels to actual needs. Moreover, the costs of recruiting, hiring and
terminating permanent employees are reduced. Management is able to focus on
strategic business issues rather than on maintaining or implementing changes in
the IT infrastructure.
4
Trend Toward Consolidation. The IT consulting services industry is highly
fragmented and is experiencing consolidation. According to INPUT, an
international research firm, approximately 3,500 IT consulting services
businesses with annual revenues in excess of $1 million provide such services
and expertise in the United States. In recent years, the industry has
experienced an increase in consolidation activity driven by several factors.
First, large buyers of IT consulting services are consolidating their vendors to
the few that can provide a full range of services nationwide. Second, higher
level professionals (such as network administrators and software engineers) are
attracted to larger firms that can offer a broad range of career opportunities
nationwide. Third, larger firms often achieve operational efficiencies by
providing centralized support services to their operating locations. Finally,
larger firms have, in many cases, successfully accessed the public equity
markets, thereby enabling them to use their publicly traded stock to fund
acquisitions.
Services Offered Within the IT Consulting Services Industry
Services offered within the IT consulting services industry can be divided
into three categories based upon the lifecycle of IT projects: (i) strategic
planning services (pre-implementation services); (ii) development and
integration services (implementation services); and (iii) maintenance and
support services (post-implementation services). The Company has made a
strategic decision to focus on providing development and integration services.
Strategic Planning Services. Pre-implementation services include strategic
planning and consulting, requirements definition studies and systems planning
and design. These services are provided on a project basis by a small number of
national and international professional services firms and normally command
premium billing rates. The professional staffs of these firms are generally
salaried employees. Barriers to entry in this category are high due to the
complexity of projects and level of expertise required.
Development and Integration Services. Implementation services, which
represent the Company's primary business, are conducted on a project management
or staff augmentation basis and include software applications design,
programming, development and maintenance, client/server design and development,
systems software design, systems engineering, systems integration,
intranet/internet design and development and network design and management
services. This category within the IT consulting services market is highly
fragmented and is serviced by several thousand local and regional firms, as well
as several national firms. Historically, the barriers to entry in this market
have been low. However, as technology has become more sophisticated, the
knowledge and expertise required to enter this sector has increased. Firms in
this market category utilize salaried employees, hourly employees and
independent consultants in providing services.
Maintenance and Support Services. Post-implementation services include
facilities management, systems maintenance, help-desk assistance and education.
These services are provided on a project or staff augmentation basis. This
market is also highly fragmented and has low barriers to entry. Firms in this
category utilize salaried employees, hourly employees and independent
consultants in executing their assignments.
Service providers in the IT consulting services industry vary by category
and geographic area and include local, regional and niche firms, national
providers of IT consulting services, several of the "Big Six" accounting firms,
the professional service groups of computer equipment companies and large-scale
system integrators.
Operating Strategy
The Company's goal is to be a leading nationwide provider of IT consulting
services, including project management staff augmentation and outsourcing
services, to businesses with complex IT operations. Key elements for achieving
this objective include the following:
Enhance Client Relationships. The Company has historically focused its
client marketing efforts on companies with substantial recurring needs for
supplemental applications or software development, systems integration and
network design and management services, which tend to be large companies. The
combined resources and geographic dispersion of the operating locations enables
the Company to continue to focus its marketing efforts on clients requiring
national service capabilities. To enhance these marketing efforts, the Company
is in the process of implementing a national business
5
development team which will expand and coordinate the Company's marketing
focus towards more effectively serving national clients and will assist the
operating locations in the bidding process for projects involving nationwide
projects for its clients. Further, the Company believes that its commitment to
consistently providing high quality services has enabled it to establish and
maintain long-term relationships with its clients. During the last three fiscal
years, on average approximately 88% of the Company's revenues were derived from
clients to whom services or solutions had been provided in the preceding year.
In addition, the Company believes that the access and goodwill derived from
these client relationships provide it with significant advantages in marketing
additional services and solutions to such clients, both regionally and
nationally.
Operate with Decentralized Management Structure; Share Information and
Expertise. The Company fosters a communications environment centered upon a
decentralized management structure. The Company believes that this provides
quality client service, a motivating environment for its professional staff and
the ability to give each operating location direct access to the substantial
collective resources of the entire Cotelligent enterprise. The Company believes
that many of its national competitors which have acquired IT consulting services
firms have homogenized their operating office and professional service
operations, potentially adversely affecting the continuity and quality of
service and the motivation of its employees.
Recruit and Retain Qualified IT Professionals. The Company's goal is to be
the "employer of choice" of the IT professionals in the markets in which it
operates. The Company's strategy of acquiring established and reputable service
providers in local and regional markets stems from its belief that such firms
are closest to the pool of IT professionals servicing the clients in such
markets. These firms' strong reputations tend to attract and foster favorable
working relationships with local IT professionals, which enhances their
recruiting capabilities when new client requirements arise. To recruit and
retain qualified IT professionals, the Company offers its professionals training
programs, the ability to participate in the Company's Employee Stock Purchase
Plan, 401(k) Plan and Section 125 Plan, as well as benefits packages that the
Company believes are competitive with those generally offered in the
consultant's region. In addition, the Company's broad client base gives the
Company's IT professionals the opportunity to work on a wide range of
challenging projects and assignments across the Company's geographically
dispersed network of operating locations. Finally, the Company's decentralized
management structure emphasizes the importance of its operations to retaining
the culture and operating style that existed prior to acquisition by the Company
and offers its IT professionals the particular benefits and incentives viewed as
important within each of its regional operating areas.
The Company's operating presidents and senior management have day-to-day
responsibility for management of professional services and operating and
administrative activities at the local and regional levels in a manner
consistent with their historical practice and as dictated by local market
conditions. Executive management, acquisitions, finance, IT, marketing,
planning, legal and administrative support are managed or provided centrally.
The Company believes that this approach enables its operating locations to
maintain a high level of client service and contact, while allowing them to draw
upon the collective resources of the Company as a whole. This also allows its
operating locations to integrate new ideas and systems into their respective
operations and facilitates the active sharing of knowledge, technical expertise,
best practices, client relationships and other resources. Through these
practices, the Company is able to integrate and leverage new ideas resulting in
enhanced systems, improved service offerings and opportunities for growth. The
execution of a coordinated Company-wide strategy across all operating locations
combined with the pursuit of a common goal, has proven effective in management
and client service activities.
Management also seeks to integrate its operating locations over time. The
Company believes that the incorporation of best practices, combined with sharing
of information and expertise through the Company's centralized systems, will
lead the operating locations to integrate synergistically. To foster further
integration, the Company has established a "Presidents' Council," which consists
of Cotelligent's executive management and the presidents of each of the acquired
operations. Through tri-weekly teleconferences and quarterly meetings, the
Presidents' Council shares best practices, discusses business trends and
opportunities and reviews Company-wide financial and operating measures.
Leverage the Cotelligent Brand. The Company is engaged in an initiative to
transition the brand names of the local and regional companies it has acquired,
and will acquire, to the Cotelligent brand. Prior to starting this process, the
Company received the endorsement of the heads of each of its acquired operations
and has now engaged them in facilitating this process. In addition to changing
the names of all of the acquired operations to Cotelligent within the next 12 to
18 months, the Company has retained consultants to assist in building the
Cotelligent brand. With guidance from the Company, these
6
consultants have developed a "Migration Plan" and an "Orientation Plan."
The Migration Plan, in a three stage process, details the steps that each
acquired operation will follow in transitioning from its former brand to the
Cotelligent brand. The Migration Plan also sets forth a specific protocol for
the printing and presentation of the Cotelligent trademark and signature. The
Orientation Plan provides guidance for educating Company employees, clients and
the broader market in presenting the new, combined Cotelligent entity. The
Company expects this process to result in a combined culture based on the
values, philosophies, environment and modes of business that have successfully
evolved at the local level over many years. The Company believes this gradual
transition will help to properly plan for and execute broad changes with a
minimum amount of business disruptions.
Pursue Strategic Alliances. The Company seeks to form strategic alliances
with established companies where opportunities exist to jointly market the
services and capabilities of both organizations. The Company currently has such
alliances with Microsoft Corporation, Lawson Software, PeopleSoft, Tandem and
others. Through its strategic alliance with Microsoft, for example, the Company
and Microsoft jointly provided an office automation solution to one of the
Company's clients. With the Company as project manager, Microsoft's
state-of-the-art technology was integrated into the client's desktop
configuration as part of the Company's assignment to re-engineer the client's
technical infrastructure. Through acquisitions, the Company gained operating
locations that are Microsoft solution provider program partners, and two of
which are Microsoft authorized training centers. One of the Company's operating
locations, a PeopleSoft implementation partner, presents the Company with the
opportunity to become a nationwide implementation partner of a rapidly growing
enterprise-wide software company. This operating location's recent agreement
with PeopleSoft to become part of its "Select" program further enhances this
relationship and offers Cotelligent an entrance into middle market
opportunities. The Company intends to continue to strengthen its business
relationships with these and other strategic partners, and expects that more
operating locations will participate in such alliances in the future in an
effort to enhance the Company's overall technical support capabilities and
software applications expertise.
Acquisition Strategy
The Company seeks to acquire successful companies that add to the range of
complementary implementation services and expertise available within the
Company, as well as diversify the Company's existing client base. The Company
believes that there are many independent firms that are attractive acquisition
candidates due to: (i) the highly fragmented nature of the IT consulting
services industry; (ii) the dynamic growth in spending on services offered by
the IT consulting services industry; (iii) the need for capital to fuel the
expansion of many independent firms; (iv) the wide geographic scope and the
evolving purchasing and outsourcing patterns of the Company's present and
potential clients; and (v) the trend of large corporations with recurring needs
to reduce the number of implementation services providers to the advantage of
those companies offering broad, national coverage.
As part of its acquisition strategy, the Company utilizes primary entry
acquisition and tuck-in strategies for expansion into targeted metropolitan
areas. Primary entry acquisitions are acquisitions which create a significant
presence for the Company in geographic markets in which the acquisition
candidate is located. There may be more than one primary entry acquisition in
the larger metropolitan markets. The Company intends, where possible, to make a
primary entry acquisition in a targeted area by acquiring an established, high
quality local company. In most instances involving a primary entry acquisition,
the Company expects to retain the management, sales and recruiting personnel
while seeking to improve the acquired company's profitability by centralizing
executive management, acquisitions, finance, IT, marketing, planning, legal and
administrative functions, thereby allowing newly acquired businesses to draw
upon the collective resources of the Company as a whole. In contrast to a
primary entry acquisition, a tuck-in acquisition is one in which the acquired
company is immediately integrated into one of Cotelligent's existing operating
locations. The Company intends to make tuck-in acquisitions where feasible.
The Company believes that its approach to its acquired companies retaining
day-to-day responsibility for their operations, its decentralized management
philosophy, the access to the increased capital and human resources offered by
association with a larger, publicly traded company and the ability to become
part of a more geographically diverse company, will make the Company an
attractive acquirer of additional businesses. The Company also intends to pursue
growth opportunities internationally, thereby enabling it to provide better
service to its multinational clients.
7
In connection with its acquisition strategy, the Company has established a
profile to evaluate the compatibility of an acquisition target with the
Company's growth and business strategies. In identifying primary entry
acquisition candidates, the Company seeks to locate companies which: (i) have
experienced past success as providers of IT consulting services; (ii) possess a
strong local or regional presence; (iii) provide their IT professionals with a
culture that will be compatible with the Company's culture; (iv) have
experienced and knowledgeable management that desire to remain in control of the
candidate's local operations yet will vigorously promote Cotelligent after the
consummation of the acquisition by the Company; and (v) service a number of
national clients. The Company believes that such an evaluation will help the
Company locate attractive acquisition candidates whose addition to the Company
will be consistent with the Company's philosophy, national marketing efforts and
existing infrastructure for sharing best practices among the operating
locations.
Since the IPO, the Company has acquired sixteen IT consulting services
firms, which have strengthened the Company's operations by diversifying its base
of Fortune 1000 clients, expanding its national presence, broadening its
nationwide resource pool and client base and increasing the Company's
capabilities and expertise. Eight acquisitions were consummated in the fiscal
year ended March 31, 1997 and eight acquisitions were consummated in the fiscal
year ending March 31, 1998. As consideration for future acquisitions, the
Company intends to use various combinations of Common Stock, cash and notes.
Services
For the twelve months ended March 31, 1998, the Company provided project
management, staff augmentation, alliance services, network services and IT
education services. Within these categories, the Company's scope of
implementation services include the following:
Application Development Project Management Systems Administration
Business Analysis Software Engineering Systems Integration
Computer programming Software Quality Assurance Systems programming
Database Administration Software Testing Telecommunication Analysis
Data Analysis Client/Server System Design Client/Server development
Systems Engineering Network Design & Management Intranet/Internet Design and Development
Hardware/Software Selection Systems Software Design Creation/Execution of IT migration plans
Systems/Business process re-engineering
Project Management. When hired on a project basis, the Company manages the
design, development, and implementation of a custom software solution or a
turnkey software system. The Company staffs these engagements with project teams
including project managers, systems and business analysts, application system
programmers, network service technicians and other IT professionals and assumes
responsibility for the project from requirements definition to end user
training. Project management engagements typically last one to two years.
Project engagements are provided in-house as well as being outsourced.
Development efforts may be assisted with development tools provided through
Cotelligent's strategic relationships with Microsoft and others. These
engagements may be on a fixed fee basis.
Staff Augmentation Assignments. IT staff augmentation assignments require
the Company to provide highly skilled and trained IT professionals to augment
the internal IT personnel and end-user groups of major corporations. The Company
provides its clients with IT professionals who are proficient at providing
services related to a wide variety of hardware and software platforms and who
are available to clients for either short-term or long-term support. In these
cases, the client or prospective client circulates a job specification to the
Company describing the technical qualifications of the position to be filled.
Using the resources of its account management and recruitment organizations, the
Company works to match the specified qualifications with the technical talents
and availability of employees of the Company, or consultants known to the
Company. Staff augmentation work is performed under the direction of the client
for the duration of an assignment, which is typically three to nine months.
8
Network Services. Network services include the design, development,
installation, management and security of networks. Typically, these engagements
involve the design or installation of local or wide-area networks as well as
internet connectivity.
Alliance Services. Alliance services involve working in partnership with a
variety of hardware and software vendors to provide client solutions. For
example, working with PeopleSoft, Lawson, or Oracle applications, Cotelligent
implements their enterprise resource planning software to assist Cotelligent
clients in managing information resources.
IT Education Services. Cotelligent believes that training plays a major
role in the ability of an IT consulting company to recruit and retain talented
IT professionals. The Company is able to leverage the skills of certain of its
operating locations to provide training throughout the entire organization. For
example, certain operating locations are authorized Microsoft training centers
at which Cotelligent employees, clients and IT professionals seeking to expand
their skills are instructed on Microsoft tools and applications. These locations
offer the full Microsoft Official Course Curriculum. Based on this training,
Cotelligent's IT professionals can become, for example, Microsoft Certified
Systems Engineers or Microsoft Certified Solutions Developers. In addition, the
Company creates training programs to help consultants prepare for official
certification of competency on Microsoft applications software systems. These
services enhance the technical skills of Cotelligent internal staff as well as
provide knowledge-transfer capability to Cotelligent clients.
Recruiting
Recruiting skilled IT professionals is integral to the Company's success.
The Company, through its staff of approximately 100 full time recruiters uses
traditional recruiting methods, such as a presence at local and regional
technical colleges and newspaper and technical periodical classified
advertising. The Company also has agreements with Westech ExpoCorp and The
Lendman Group which allow all of its operating locations to participate in
specialized national and regional job fair networks. In addition, the Company
employs less traditional methods, including the use of the Internet through
skill-specific user groups, World Wide Web page advertisements, on-line skills
networks, resume referral services, out-placement agencies and the Company's
skills/resume retrieval networks. To date, the Company has also recruited a
small percentage of its IT professionals from such foreign markets as India,
Europe and Australia. The Company anticipates that this international recruiting
capability would be enhanced if it successfully acquired one or more U.S. based
companies that have an international presence.
Each applicant is interviewed by the Company's recruiting personnel.
Technical applicants are also required to complete a questionnaire regarding
skill levels, past professional experience, education and availability, and they
are also asked to provide technical references. The Company has entered into an
agreement with a national technical testing company that allows each operating
location to test the technical competence of candidates prior to hiring. Once
qualified, the candidate's profile, relevant skills and experience are scanned
into a database which can be searched based on a number of different criteria,
including specific skills and qualifications. The Company regularly updates its
databases to reflect changes in employee skills, experience or availability. To
place employees in client organizations more efficiently, the Company is
currently implementing a common client information and candidate tracking
system.
The Company maintains a database with over 150,000 IT professionals with a
wide range of technical skills. On March 31, 1998, the Company had a staff of
approximately 2,300 IT professionals providing services to approximately 800
clients across a broad spectrum of commercial industries throughout the United
States, including the telecommunications, technology and financial services
industries.
Marketing, Sales and Account Management
The Company focuses its marketing efforts on businesses with substantial
recurring needs for applications or software development support, which tend to
be large companies. As the Company has expanded its operations nationally, there
is an increasing focus on supporting national accounts with multiple operating
sites. The development needs of such businesses can provide opportunities for
major projects that may extend for multiple years or generate additional
assignments. The
9
Company has also experienced increased opportunity in rapidly growing
mid-sized companies. With the implementation of client/server technology, the
Company believes that there is a growing need among mid-sized companies for
technical assistance and applications support and intends to expand this aspect
of its business.
The Company markets its services through account managers located in each
operating location. Approximately 100 employees are engaged in account marketing
and management full time. Many of the Company's operating locations use an
account team strategy in their marketing efforts. These account teams are
comprised of both account managers and recruiters working closely to coordinate
client services activities. Assigning a team to key accounts creates the
opportunity to service a client's needs more quickly and efficiently and
provides more marketing opportunities because Company personnel know
specifically who is responsible for the service activities. They are also
generally more aware of a client's technology staffing needs, methodologies and
budgets. Account managers work as members of the team, focusing on identifying
and understanding a client's needs while recruiters on the team focus on finding
qualified IT professionals to meet the needs of the client. Performance bonuses
and commissions constitute a significant portion of the total compensation of
account managers and generally are based upon the profitability of the business
generated.
The Company is expanding its marketing efforts by centrally coordinating
its operating locations responses to requests for proposals from current
national clients. The Company is pursuing new client accounts primarily in those
geographic areas presently serviced by its operating locations. The Company
believes that the size, scale and scope of its growing operations will create
opportunities to more effectively compete in vendor list selection, large
project engagements, staff augmentation assignments and outsourcing
opportunities.
The Company believes that its decentralized structure puts it in the
advantageous position of bidding on assignments as either a national services
provider or a regional services provider, depending on the needs and desires of
a particular client. The Company believes it will be able to successfully secure
projects from clients seeking to only do business with national providers of IT
consulting services, to whom the Company will stress its size and national
presence. The Company will also secure projects and assignments from clients
seeking relationships with local and regional firms, to whom the Company will
highlight its established regional presence and localized management.
Clients
As a result of the Company's broad client base, it does not rely upon any
one client for a significant percentage of revenues. The Company has no client
that accounted for more than 7% of the Company's revenues for the twelve months
ended March 31, 1998 and the Company's 10 largest clients accounted for
approximately 31% of revenues in the same period.
During the twelve months ended March 31, 1998, approximately 41 clients
each provided the Company with more than $1 million in revenue. The following
table sets forth a selected list of such clients of the Company:
Telecommunications Technology Other
AT&T Corp. Amdahl Corp. Medtronic, Inc.
Bell Communications Research Hewlett-Packard Co. Monsanto Company
Lucent Technologies Inc. Microsoft Corporation Ortho Diagnostics Systems, Inc.
MCI Communications Corporation State of Georgia
U S West, Inc. Financial Services
Western Wireless Corp. Liberty Mutual Insurance Co.
The Progressive Corporation
Mercantile Bankshares
Corporation
10
Management Information System
The Company believes in applying IT solutions to maximize productivity and
aid in the management of its own business. Consequently, the Company has
installed an enterprise-wide communications network, or intranet, and is
implementing an integrated management information system ("MIS").
Intranet. Early in the Company's development, management realized the
importance of bringing the operating locations, as well as newly acquired
companies, into an enterprise-wide communications network. In April 1996, under
the supervision of the Information Technology Division ("ITD"), the Company
implemented an automated communications infrastructure, or intranet, to provide
Cotelligent's employees with a way to easily communicate. This intranet is
Microsoft NT based and includes Microsoft Office 97, Exchange and related tools.
As new companies are acquired they are integrated into the network, which at
March 31, 1998 consists of approximately 700 employee workstations. The ITD
responsibilities include the development, deployment, monitoring and maintenance
of the Company's communications network.
Management Information System. In August 1996, the Company embarked on an
initiative to define business requirements, evaluate turnkey systems meeting
these requirements and implement an enterprise-wide, fully integrated MIS. The
application systems being implemented as part of this initiative include
finance, accounting and management reporting, human resource management
reporting, and client and candidate tracking. The Company selected three
application software systems which are compatible with one another and which
reside on an Oracle platform. These new systems are in the process of being
implemented.
The Company believes its investment in this MIS should help it to improve
productivity and enhance its competitive position. As a "backbone" for all
administrative and operating information, MIS offers management at all levels
on-line access to information on a real time basis. These systems should add
consistency to back office business practices across the Company's operating
locations, thereby providing management with more direct control over the
conduct of the Company's operations. In addition, the Company has begun the
process of building intranet applications to support internal practices. As with
its other MIS initiatives, the Company is implementing application systems and
tools internally that add value to its operating activities and improve the
sharing of knowledge and information at all organization levels and across its
entire geographic network.
Competition
The IT consulting services market is highly competitive, fragmented and
served by numerous firms, many of which serve only their respective local
markets. The market includes participants in a variety of market segments,
including local, regional and national systems consulting and integration firms,
professional service divisions of application software firms, the professional
service groups of computer equipment companies, management information systems
outsourcing companies, certain "Big Six" accounting firms and general management
consulting firms. The Company's competitors, which may vary depending on
geographic region and the nature of the service(s) being provided, may have
significantly greater financial, technical and marketing resources and generate
greater revenues than the Company. Some of these same companies, from time to
time, retain the services of the Company's operating locations to subcontract IT
professionals for their clients' requirements.
The Company believes that the principal competitive factors in the IT
consulting services industry include quality of service, reputation,
responsiveness to client needs, the number and availability of qualified IT
professionals, price, project management capability, technical expertise, size
and scale of operation. The Company intends to remain competitive as a result of
its (i) ability to locate, place and retain IT professionals with strong
performance capabilities and experience, (ii) capability on both a regional and
national level, including its ability to market itself and secure assignments
from clients seeking to do business with national IT consulting services firms
as well as regional businesses seeking local relationships, and (iii) ability to
provide effective management of account relationships and rapidly respond to
clients' ongoing business needs.
11
Intense competition also exists for viable acquisition candidates. The
Company believes that its decentralized management philosophy and operating
strategies will make it an attractive acquirer of other IT consulting services
companies. See "--Risk Factors--Competition."
Risk Factors
Investment in the Company has a degree of risk. Prospective investors should
consider the following risk factors.
Dependence on Availability of Qualified IT Professionals
The Company is dependent upon its ability to attract, hire and retain IT
professionals who possess the skills and experience necessary to meet the
service requirements of its clients. The Company must continually identify,
screen and retain qualified IT professionals to keep pace with increasing client
demand for rapidly evolving technologies and changing client needs. Further,
many of the IT professionals provided by the Company to its clients are not
committed to provide their services exclusively to the Company. The Company
competes with other companies in a variety of industry segments seeking to
engage the services of such personnel. Competition for individuals with proven
technical skills is intense. The Company competes for such individuals with
other providers of technical services, systems integrators, providers of
outsourcing services, computer systems consultants, clients and temporary
staffing companies. In the past, the Company has experienced difficulties in
identifying and retaining qualified IT professionals and has therefore been
unable in certain instances to fill requests for services from clients. There
can be no assurance that qualified IT professionals will be available to the
Company in sufficient numbers. An inability to locate, retain and successfully
place qualified IT professionals to fill client requests could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "--Recruiting."
Integration of Operating Locations
Prior to February 20, 1996, the date of the IPO, Cotelligent was a
non-operating entity and generated no revenue. Since the IPO, the Company has
acquired the Subsequent Acquisitions, eight of which were acquired in the fiscal
year ended March 31, 1997 and eight of which have been acquired in the fiscal
year ending March 31, 1998. There can be no assurance that the Company will be
able to successfully integrate its operating entities on an economic or
operational basis or that the Company's management group will be able to oversee
the combined entity and effectively implement the Company's business strategy.
The combined historical financial results of the Company cover periods when the
operating entities and Cotelligent were not under common control or management
and as such may not be indicative of the Company's future financial or operating
results.
In addition, the Company intends to expand its business through the
acquisition of additional IT consulting services businesses. There can be no
assurance that the Company will be able to successfully integrate acquired
businesses, if any, into the Company's infrastructure without substantial costs,
delays or other operational or financial problems. Further, the Company's
ability to manage future growth will depend significantly upon the Company's
ability to integrate its operating entities and any future acquired businesses
and develop Company-wide systems and operating procedures. An inability of the
Company to successfully integrate the operating entities or any acquired
businesses would have a material adverse effect on the Company's business,
financial condition and results of operations. See "--Operating Strategy" and
"--Acquisition Strategy."
Reliance on and Retention of Key Management
The Company's operations are dependent on the continued efforts of its
executive officers and on the senior management of the operating locations.
While the Company has entered into employment agreements with certain of these
individuals, there can be no assurance that any individual will continue in his
or her present capacity with the Company for any specified period. The Company
also expects that in order to pursue its operating strategy successfully, it
will be required to hire additional management personnel at regional levels to
implement adequate Company-wide systems and controls at each of the operating
locations. If the Company is unable to hire, train and integrate new management
personnel effectively,
12
or if such personnel are unable to achieve anticipated performance levels,
the Company's business, financial condition and results of operations could be
adversely affected. Furthermore, the Company will likely be dependent on the
senior management of businesses, if any, that may be acquired in the future. If
any of these people become unable to continue in their present roles, or if the
Company is unable to attract and retain other skilled employees, the Company's
business or prospects could be adversely affected. The Company does not maintain
key man life insurance covering any of its executive officers or other members
of senior management.
Pricing and Margin Pressure
Many of the Company's larger clients purchase IT services primarily from a
limited number of pre-approved vendors. In order to remain on its clients'
vendor lists and to develop new client relationships, the Company must satisfy
client requirements at competitive rates. Although the Company continually
attempts to lower its costs, there are other IT consulting services
organizations and temporary placement agencies that provide the same or similar
services at equal or lower costs. Furthermore, as competition intensifies
between IT consulting services providers, there may be increased demand for
qualified IT professionals resulting in upward market pressure on compensation
rates. Additionally, certain of the Company's clients require that their vendors
reduce rates after services have commenced. There can be no assurance that the
Company will be able to compete effectively on pricing or other requirements
and, as a result, the Company could lose clients or be unable to maintain
historical gross profit levels or to operate profitably. See "--Competition."
Competition
The IT consulting services industry is highly competitive, fragmented and
subject to rapid change. There are numerous companies engaged in the Company's
business, many of which have greater technical, financial or marketing resources
than the Company. Competition in the IT consulting services industry includes
local, regional and national systems consulting and integration firms,
professional service divisions of applications software firms, the professional
service groups of computer equipment companies, management information
outsourcing companies, certain "Big Six" accounting firms and general management
consulting firms. The Company intends to enter new markets and offer new
services by acquiring companies and expects that one or more of its competitors
will have a presence in each of such new markets and are or will be providing
such new services. The majority of the Company's competitors are smaller
regional firms with a strong presence in their respective local markets.
Further, many of the larger companies which have traditionally made up a
substantial portion of the Company's target markets have recently been
consolidating their vendor lists to a smaller number of preferred service
providers. To the extent the Company is unable to meet the necessary
requirements of such larger companies and become a preferred service provider,
its ability to attract and retain such clients will be adversely affected. As a
result, the Company may lose its existing clients or have difficulty acquiring
new clients. There can be no assurance that the Company will be able to compete
effectively against present and future competitors or that competitive pressures
will not have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the Company competes for
qualified IT professionals and viable acquisition candidates. There can be no
assurance that the Company will be successful in attracting, hiring and
retaining such personnel or in implementing its acquisition program. See
"--Dependence on Availability of Qualified IT Professionals" and
"--Competition."
Risks Related to Acquisitions
The Company intends to expand its operations through the acquisition of
additional IT consulting services businesses. There can be no assurance that the
Company will be able to identify, acquire or profitably manage additional
businesses, if any, without substantial costs, delays or other operational or
financial problems. Acquisitions may also involve a number of special risks,
including diversion of management's attention, failure to retain key acquired
personnel, risks associated with unanticipated events, circumstances or legal
liabilities and amortization of acquired intangible assets, some or all of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Further, if competition for acquisition
candidates increases, the purchase price of such target companies may increase
to the point that otherwise viable acquisitions become cost prohibitive. Client
satisfaction or performance problems at a single acquired firm could have a
material adverse effect on the reputation of the Company as a whole. In
addition, there can be no assurance that
13
acquired businesses, if any, will achieve anticipated revenues and
earnings. The inability of the Company to implement and manage its acquisition
strategy successfully may have an adverse effect on the future prospects of the
Company. See "--Operating Strategy" and "--Acquisition Strategy."
Need for Acquisition Financing
The Company currently intends to finance future acquisitions by using cash,
notes and/or shares of its Common Stock for all or a portion of the
consideration to be paid. If the Common Stock does not maintain a sufficient
value, or potential acquisition candidates are unwilling to accept Common Stock
as part or all of the consideration for the sale of their businesses, the
Company may be required to use more of its cash resources, if available, to
execute its acquisition program. If the Company does not have sufficient cash
resources, its growth could be limited unless it is able to obtain additional
capital through debt or equity financing. There can be no assurance that the
Company will be able to obtain such financing if and when it is needed or that,
if available, it will be available on terms the Company deems acceptable. As a
result, the Company might be unable to successfully implement its acquisition
strategy, which may have an adverse effect on the future prospects of the
Company. The Company has a $40 million syndicated revolving line of credit
facility (the "Credit Line") available for working capital and other general
corporate purposes, which may include acquisitions. There can be no assurance,
however, that the Credit Line will be sufficient for the Company's needs. See
"--Operating Strategy", "--Acquisition Strategy." and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources".
Absence of Long-Term Contracts; Client Concentration
A significant amount of the Company's revenues are primarily derived from
services provided in response to client requests or on an
assignment-by-assignment basis, and the Company's engagements, generally billed
on a time and materials or arranged fee basis, are terminable at any time by
clients, generally without penalty. There can be no assurance that existing
clients will continue to use the Company's services at historical levels, if at
all. In addition, for the year ended March 31, 1998, the Company's largest
client accounted for approximately 7% of the Company's revenues and the
Company's ten largest clients accounted for approximately 31% of the Company's
revenues. There can be no assurance that these clients will continue to engage
the Company for additional projects or do so at the same revenue levels. Loss of
a major client could have a material adverse effect on the Company's business,
financial condition and results of operations. See "--Clients."
Year 2000 Conversion Efforts
As the Year 2000 approaches, many date sensitive computer applications will
fail because they are unable to process data beyond December 31, 1999 properly.
Businesses have been required to devote significant resources to converting
their information systems over the next two years. In the event that Year 2000
conversions result in a significant increase in competition for IT professionals
or the Company's clients devote substantial resources to such conversions and
decrease their expenditures on projects worked on by the Company's IT
professionals, the Company's business, financial condition and results of
operations may be materially adversely affected.
Possible Fluctuation of Results and Volatility of Stock Price
The Company's revenues, gross margins and operating margins for any
particular quarter are generally affected by business mix and billing rates,
resource requirements, marketing activities, retention rates and the timing and
size of client projects. Results for any quarter are not necessarily indicative
of the results that the Company may achieve for any subsequent fiscal quarter or
for a full fiscal year and may cause the market price of the Common Stock to
fluctuate, perhaps substantially. In addition, in recent years the stock market
in general, and the shares of high growth companies in particular, have
experienced extreme price fluctuations, often for reasons unrelated to the
performance of a particular company's business. These broad market and industry
fluctuations may adversely affect the market price of the Common Stock.
14
Project Risks
The Company's IT professionals are often deployed in the workplace of other
businesses. An attendant risk of such activity includes possible claims of
discrimination and harassment, employment of illegal aliens and other similar
claims. A failure to avoid these risks may result in negative publicity for the
Company and the payment by the Company of money damages or fines. Although the
Company historically has not had any significant problems in this area, there
can be no assurance that the Company will not experience such problems in the
future.
The Company is also exposed to liability with respect to actions taken by
its IT professionals while on assignment, such as damages caused by employee
errors, misuse of client-proprietary information or theft of client property.
Due to the nature of the Company's assignments and the potential liability with
respect thereto, there can be no assurance that any insurance maintained by the
Company will be adequate to cover any such liability. To the extent that such
insurance is not sufficient in amount or scope to cover a loss, the Company's
business, financial condition and results of operations could be materially
adversely affected.
Item 2. Properties.
The Company's principal executive offices and its operating subsidiaries
are located in 37 facilities with an aggregate of approximately 185,000 square
feet and are leased at aggregate current monthly rents of approximately $260,000
with no lease commitment extending past the year 2002. The Company believes that
its properties are adequate for its needs. Furthermore, the Company believes
that suitable additional or replacement space will be available when required on
terms the Company believes will be acceptable.
Item 3. Legal Proceedings.
The Company is, from time to time, a party to litigation arising in the
normal course of its business. The Company is not presently subject to any
material litigation.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of Security Holders.
15
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
Price range of common stock
Since February 20, 1998, the Common Stock has been listed on the NYSE under
the symbol "CGZ." From February 14, 1996 to February 19, 1998, the Common Stock
was listed on the NASDAQ under the symbol "COTL." Prior to February 14, 1996,
there was no public market for the Common Stock. The following table sets forth,
for the periods indicated, the high and low sales prices for the Common Stock as
reported on the NASDAQ through February 19, 1998 and includes the high and low
sales price information on the NYSE subsequent to such date:
High Low
1996 Fiscal Year
February 14, 1996 through March 31, 1996 $11.75 $ 8.00
1997 Fiscal Year
April 1, 1996 through June 30, 1996 $21.50 $ 11.13
July 1, 1996 through September 30, 1996 $18.50 $ 11.75
October 1, 1996 through December 31, 1996 $25.25 $ 15.63
January 1, 1997 through March 31, 1997 $26.75 $ 8.00
1998 Fiscal Year
April 1, 1997 through June 30, 1997 $14.38 $ 7.25
July 1, 1997 through September 30, 1997 $20.63 $ 12.75
October 1, 1997 through December 31, 1997 $22.88 $ 17.13
January 1, 1998 through March 31, 1998 $29.63 $ 19.13
On June 23, 1998, the last reported sales price of the Common Stock, as
reported on the NYSE, was $20.125 per share. On June 23, 1998, there were 116
stockholders of record of the Common Stock.
16
Item 6. Selected Financial Data.
The selected financial data with respect to Cotelligent's consolidated
statements of operations for the years ended March 31, 1995, 1996, 1997 and 1998
and with respect to the consolidated balance sheets as of March 31, 1996, 1997
and 1998 have been derived from Cotelligent's financial statements that have
been audited by Arthur Andersen LLP. The selected financial data with respect to
Cotelligent's consolidated statement of operations for the year ended March 31,
1994, 1995 and 1996 and Cotelligent's consolidated balance sheets as of March
31, 1994 and 1995 have been derived from unaudited financial statements which,
in the opinion of management, reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of such data. Pro forma
data for the year ended March 31, 1998 reflect adjustments for acquisitions
accounted for under the pooling-of-interests method. Additionally, the pro forma
results are not necessarily indicative of the results that would have been
achieved if the companies had operated on a combined basis for the periods
presented.
The following selected financial data should be read in conjunction
with the financial statements, related notes and other financial information of
the Company included elsewhere herein. See - "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations."
17
Selected Financial Data
Cotelligent Group, Inc. (1)
(In thousands, except share data)
ProForma Pro Forma
1998(2) 1997(2) 1998 1997 1996 1995 1994
------- -------
(Unaudited)(Unaudited) (Unaudited)
Statements of Operations
Data:
Revenues.............. $ 244,683 $ 165,417 $ 244,683 $ 165,417 $ 66,433 $ 44,600 $ 34,446
Cost of services 173,518 116,817 173,537 116,844 45,814 30,003 21,929
---------- --------- --------- --------- -------- -------- --------
Gross profit 71,165 48,600 71,146 48,573 20,619 14,597 12,517
Selling, general and
administrative
expenses............ 53,968 37,611 55,929 39,167 17,867 13,848 10,798
Non-recurring
transaction costs -- -- 855 1,969 -- -- --
---------- --------- --------- --------- ------- ------- -------
Operating income 17,197 10,989 14,362 7,437 2,752 749 1,719
Other income (expense),
net................. (708) 15 (708) 15 108 (95) (92)
---------- --------- --------- --------- ------- ------- --------
Income before provision
for income taxes 16,489 11,004 13,654 7,452 2,860 654 1,627
Provision for income
taxes............... 6,760 4,512 7,223 3,742 248 115 218
---------- --------- --------- --------- ------- ------- --------
Net income.............. $ 9,729 $ 6,492 $ 6,431 $3,710 $2,612 $ 539 $ 1,409
============-======================================================-==========
Earnings per share(3)
Basic................. $ 0.85 $ 0.57 $ 0.56 $ 0.33
============-=================================
Diluted............... $ 0.84 $ 0.57 $ 0.55 $ 0.33
============-=================================
Weighted average shares
outstanding
Basic.................. 11,485,393 11,328,518 11,485,393 11,328,518
===========-=================================
Diluted............... 11,610,339 11,402,513 11,610,339 11,402,513
===========-=================================
March 31,
-------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- --------- --------- -------
(Unaudited)(Unaudited)
Balance Sheet Data:
Working capital $ 64,029 $ 15,471 $ 20,491 $ 2,091 $ 2,861
Total assets.......... 118,559 45,167 39,472 10,545 7,157
Long-term debt, less
current portion 199 648 706 304 217
Stockholders' equity 90,339 23,137 21,462 2,265 3,246
(1) On February 20, 1996, Cotelligent acquired the Initially Acquired Companies
simultaneously with the IPO. Prior to that date, Cotelligent was a non-operating
entity. The operating results of the Initially Acquired Companies have been
included since the date of acquisition. During fiscal 1997 and 1998, the Company
acquired ten businesses accounted for under the pooling-of-interests method (the
"Pooled Companies") and has restated its financial statements for all periods to
present financial data as if Cotelligent and the Pooled Companies had always
been members of the same operating group. In addition, during fiscal 1997 and
1998, the Company acquired six businesses accounted for under the purchase
method (the "Purchased Companies"). The consolidated financial statements
include the operating results of the Purchased Companies subsequent to their
respective acquisition dates.
(2) Pro forma data reflect adjustments for the acquisitions of the Pooled
Companies including compensation differentials to former owners and employees
($1,556 for the year ended March 31, 1997 and $1,964 for the year ended March
31, 1998), termination of contributions to retirement plans ($27 for the year
ended March 31, 1997 and $19 for year ended March 31, 1998), removal of
non-recurring transaction costs associated with the Pooled Companies ($1,969 for
the year ended March 31, 1997 and $855 for the year ended March 31, 1998), and
income taxes as if the entities were combined and subject to a 41% effective
federal and state statutory rate throughout the periods presented. Pro forma
results, including the Purchased Companies as if they were acquired on April 1,
1996, as adjusted for interest expense on cash consideration and amortization of
goodwill are: Revenues $185,598 and $258,712, Net Income $7,248 and $10,310 and
Diluted Earnings Per Share $0.61 and $0.86 for the year ended March 31, 1997 and
the year ended March 31, 1998, respectively. See Note 4 of Notes to Consolidated
Financial Statements.
(3) Earnings per share for the years ended March 31, 1994, 1995 and 1996 has not
been presented because, as discussed in footnote 1 above and Note 2 of Notes to
Consolidated Financial Statements, the issuance of shares of Common Stock sold
in the IPO and the inclusion of the results of the Initially Acquired Companies
are not reflected in any period prior to February 20, 1996.
18
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Cotelligent was formed in February 1993 to acquire, own and operate IT
consulting services businesses. Cotelligent acquired four companies (the
"Initially Acquired Companies") simultaneously with its IPO. Prior to this date,
Cotelligent was a non-operating entity.
During fiscal 1997 and 1998, the Company acquired ten businesses accounted
for under the pooling-of-interests method, (the "Pooled Companies").
Accordingly, the Selected Financial Data of Cotelligent for the years ended
March 31, 1994, 1995, 1996, 1997 and 1998 have been restated in accordance with
generally accepted accounting principles to present the financial data as if
Cotelligent and the Pooled Companies had always been members of the same
operating group.
In addition, during fiscal 1997 and 1998, the Company acquired six
businesses accounted for under the purchase method (the "Purchased Companies").
Accordingly, the Selected Financial Data of Cotelligent includes the operating
results of these acquisitions subsequent to their respective acquisition date.
Pro forma data reflect adjustments for the Pooled Companies, including
compensation differentials to former owners and employees, termination of
contributions to retirement plans, removal of non-recurring transaction costs
associated with the Pooled Companies and income taxes as if the entities were
combined and subject to the effective federal and state statutory rates of
approximately 41% throughout the periods presented.
The Company derives substantially all of its revenues from professional
service activities. The majority of these activities are provided under "time
and materials" billing arrangements, and revenues are recorded as work is
performed. Revenues are directly related to the total number of hours billed to
clients and the associated hourly billing rates. Hourly billing rates are
established for each service professional and are a function of the
professional's skills, experience and the type of work performed. The Company's
principal costs are professional compensation directly related to the
performance of services and related expenses. Gross profits (revenues after
professional compensation and related expenses) are primarily a function of
hours billed to clients per professional employee or consultant, hourly billing
rates of those employees or consultants and employee or consultant compensation
relative to those billing rates. Gross profits can be adversely impacted if
service activities cannot be billed, if the Company is not effective in managing
its service activities, if fixed-fee engagements (which historically have not
constituted a significant portion of total revenues) are not properly priced or
if there are high levels of unutilized time (work activities not chargeable to
clients or unrelated to client services) of full-time salaried service
professional employees. Operating income (gross profit less selling, general and
administrative expenses) can be adversely impacted by increased administrative
staff compensation and expenses related to growing and expanding the Company's
business, which may be incurred before revenues or economies of scale are
generated from such investment.
As part of its strategic plan, the Company intends to acquire other IT
consulting services businesses. Should the Company be successful in acquiring
such businesses, the period in which such acquisition is consummated could be
adversely impacted by costs associated with such acquisition. In addition,
periods subsequent to the completion of an acquisition could be adversely
impacted by costs and activities associated with the assimilation and
integration of the acquired company.
As a professional services organization, the Company responds to
service demands from its clients. Accordingly, the Company has limited control
over the timing and circumstances under which its services are provided.
Therefore, the Company can experience volatility in its operating results from
quarter to quarter. The operating results for any quarter are not necessarily
indicative of the results for any future period.
The Company has conducted a comprehensive review of its internal
computer systems to identify the systems that could be affected by the "Year
2000" issue and has concluded that the Year 2000 problem will not pose any
significant operational issues for the Company. The Company does not expect the
expenditures related to the Year 2000 issue to have a material effect on its
financial position or results of operations in any year.
19
Results of Operations
The following tables set forth the percentage of net revenues
represented by items in the Company's statement of operations for the periods
presented.
Year Ended March 31,
ProForma ProForma
Statement of Operations Data: 1998 (1) 1997 (1) 1998 1997 1996 1995
--------- ---------- ---------- --------- -------- ---------
Revenues................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services........................ 70.9 70.6 70.9 70.6 69.0 67.3
--------- ---------- ---------- --------- -------- ---------
Gross profit............................ 29.1 29.4 29.1 29.4 31.0 32.7
Selling, general and
administrative expenses................. 22.1 22.7 22.9 23.7 26.9 31.0
Non-recurring transaction
costs................................... - - .3 1.2 - -
--------- ---------- ---------- --------- -------- ---------
Operating income........................ 7.0 6.7 5.9 4.5 4.1 1.7
Other expense income (expense),
net................................ .3 - .3 - 0.2 (0.2)
--------- ---------- ---------- --------- -------- ---------
Income before provision
for income taxes...................... 6.7 6.7 5.6 4.5 4.3 1.5
Provision for income
taxes.................................. 2.8 2.7 3.0 2.3 0.4 0.3
--------- ---------- ---------- --------- -------- ---------
Net income............................ 3.9% 4.0% 2.6% 2.2% 3.9% 1.2%
========== =========== ========== ========= ========= =========
Proforma data reflect adjustments for the acquisitions of the Pooled Companies
including compensation differentials to former owners and employees, termination
of contributions to retirement plans, removal of non-recurring transaction costs
associated with the Pooled Companies and income taxes as if the entities were
combined and subject to a 41% effective federal and state statutory rate
throughout the periods presented.
Year Ended March 31, 1998 Compared to Year Ended March 31, 1997
Revenues. In fiscal 1998 revenues increased $79.3 million, or 47.9%, to
$244.7 million from $165.4 million for 1997. The increase was primarily due to a
35.7% increase in client service hours to 3.8 million from 2.8 million hours,
and a 9.2% increase in the average billing rate to $62.67 from $57.38 in the
comparable period of fiscal 1997. The increase in revenues was also attributable
to the inclusion of revenues of the companies acquired under the purchase method
of accounting during fiscal 1998 ("Fiscal Year 1998 Purchases").
Gross Profit. Gross profit increased $22.6 million, or 46.5%, to $71.1
million during 1998 from $48.6 million primarily as a result of an increase in
client service hours and the inclusion of the Fiscal Year 1998 Purchases. Gross
profit as a percentage of revenues decreased to 29.1% of revenues from 29.4%
primarily due to the inclusion of the Fiscal Year 1998 Purchases and certain
Pooled Companies with lower gross margins that engaged new clients at lower
gross margins prior to acquisition by the Company.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $16.7 million, or 42.8%, to $55.9 million from
$39.2 million in fiscal 1997. The increase was primarily due to staff added to
support growth, additional locations, installation of a company-wide network and
associated costs to maintain these systems as well as incremental costs of
Cotelligent's corporate activities. Selling, general and administrative expenses
decreased as a percentage of revenues to 22.9% of revenues in fiscal 1998 from
23.7% in fiscal 1997.
On a pro forma basis, selling, general and administrative expenses
increased $16.4 million, or 43.5%, to $54.0 million in 1998 from 1997. The
increase was primarily due to increased staff from Purchased Companies and
increased compensation to existing staff, plus staff added to support
anticipated growth, additional occupancy costs and an increased level of
corporate activities. Pro forma selling, general and administrative expenses
decreased as a percentage of revenues to 22.1% in 1998 from 22.7% in 1997
reflecting greater operating efficiencies and a larger revenue base. The Company
cannot be certain that such efficiencies can be sustained in the near term as it
integrates the acquired entities, expand geographically and acquire other
companies.
20
In fiscal 1998, selling, general and administrative expenses on a pro forma
basis were $54.0 million or 22.1% of pro forma revenues and historical selling,
general and administrative expenses were $55.9 million, or 22.9% of historical
revenues. The reduced selling, general and administrative expenses on a pro
forma basis reflect a reduction in executive compensation arrangements in
connection with the Pooled Companies.
Non-Recurring Transaction Costs. Non-recurring transaction costs include
expenditures associated with the acquisition of four Pooled Companies acquired
during the period and are expensed as incurred on an historical cost basis.
Interest Expense, Net. Interest expense, net of interest income increased
$0.5 million to $0.7 million in fiscal 1998 primarily due to a reduction in cash
balances to fund growth and acquisition activity.
Provision for Income Taxes. Provision for income taxes was $7.2 million, or
an effective tax rate of 52.9% of pre-tax income for fiscal 1998 compared to
income taxes of $3.7 million, or an effective rate of 50.2% of pre-tax income
for 1997. The increase in the effective tax rate is due to an increase in
federal rate from 34% to 35% and certain non-recurring transaction costs, which
are non-deductible for tax purposes.
On a pro forma basis the provision for income taxes was $4.5 million, or an
effective tax rate of 41.0% of pro forma pre-tax income. The primary difference
between the Company's historical and pro forma effective tax rates is related to
the termination of certain Pooled Companies' S corporation election and the
non-deductibility of certain non-recurring transaction costs.
Year Ended March 31, 1997 Compared to Year Ended March 31, 1996
Revenues. In 1997, revenues increased $99.0 million or 149.0% to $165.4
million from $66.4 million in 1996. The increase was primarily due to $70.6
million of revenues from the full year impact of the Initially Acquired
Companies acquired February 20, 1996, a 33.3% increase in client service hours
provided by the Pooled Companies to 1.6 million hours from 1.2 million hours in
1996 and a 7.6% increase in the average billing rate of the Pooled Companies to
$52.17 from $48.47.
Gross Profit. Gross profit increased $28.0 million or 135.6% to $48.6
million in 1997 from $20.6 million in 1996, as a result of $16.2 million for the
full year impact of the Initially Acquired Companies and an increase in hours of
service provided to clients. Gross profit as a percentage of revenues decreased
to 29.4% of revenues in 1997 from 31.0% in 1996 principally due to lower average
gross margins achieved in new client engagements.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $21.3 million, or 119.2% to $39.2 million in
1997 from $17.9 million in 1996. The increase was primarily due to the full year
effect of additional selling, general and administrative costs of $12.9 million
for the Initially Acquired Companies, staff added to support growth, additional
locations, installation of a company-wide network and associated costs to
maintain these systems and incremental costs of Cotelligent's corporate
activities. Selling, general and administrative expenses decreased as a
percentage of revenues to 23.7% in 1997 from 26.9% in 1996, reflecting greater
operating efficiencies and a larger revenue base. There can be no assurance that
such efficiencies will be sustained in the future as the Company undertakes to
integrate the acquired entities, expand geographically and acquire other
companies.
Selling, general and administrative expenses on a pro forma basis were
$37.6 million or 22.7% of pro forma revenues compared to historical selling,
general and administrative expenses of $39.2 million, or 23.7% of historical
revenues for 1997. The reduced selling, general and administrative expenses on a
pro forma basis reflect a reduction in executive and employee compensation
arrangements in connection with the Pooled Companies.
Non-recurring Transaction Costs. Non-recurring transaction costs include
expenditures associated with the acquisition of the six Pooled Companies in 1997
and were expensed as incurred on an historical cost basis.
21
Provision for Income Taxes. Provision for income taxes was $3.7 million, or
an effective tax rate of 50.2% of pre-tax income for 1997 compared to income
taxes of $0.2 million, or an effective rate of 8.6% of pre-tax income for 1996.
The increase in the effective tax rate is due to the termination of certain
Pooled Companies respective S corporation elections and the non-deductibility of
certain non-recurring transaction costs.
Provision for income taxes on a pro forma basis was $4.5 million, or an
effective tax rate of 41.0% of pro forma pre-tax income. The primary difference
between the Companies' historical and pro forma effective tax rates is related
to the termination of certain Pooled Companies' S corporation election, and the
non-deductibility of certain non-recurring transaction costs.
Quarterly Operating Results 1998 through 1996
The Company's results of operations may fluctuate significantly from
quarter to quarter. Revenues are generated from services provided in response to
client requests or events that occur without notice, and the Company's
engagements, generally billed on a time and materials basis, are terminable at
any time by clients. Revenues and operating margins for any particular quarter
are generally affected by staffing mix, resource requirements and the timing and
size of engagements, and the results for any particular quarter are not
necessarily indicative of results for any other period. Quarterly results of
operations for the years ended March 31, 1996, 1997 and 1998, are summarized
below. See "--Risk Factors--Possible Fluctuation of Results and Volatility of
Stock Price."
Year Ended March 31, 1998 Year Ended March 31, 1997 Year Ended March 31, 1996
First Second Third Fourth First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
---------------------------------- ------------------------------------ -----------------------------------
Revenues $54,304 $58,566 $63,111 $68,702 $36,103 $39,658 $42,534 $47,122 $14,409 $14,579 $14,059 $23,386
Gross profit 16,117 17,327 18,381 19,322 10,540 12,352 12,430 13,251 4,504 4,622 4,553 6,940
Operating income 3,155 3,455 2,767 4,985 1,651 2,047 2,417 1,322 575 688 630 859
Net income (loss) 1,810 2,030 (138) 2,729 415 1,489 1,587 219 465 949 533 665
The net loss for the quarter ended December 31, 1997 was due to
non-recurring transaction costs associated with acquiring businesses under the
pooling-of-interests method and an increase in the provision for income taxes
due to the non-deductibility of certain non-recurring transaction costs and
taxes related to the termination of certain Pooled Companies' S corporation
election.
Liquidity and Capital Resources
The Company has financed its growth principally through cash flows
from operations, periodic borrowing under its credit facilities and the use
of the net proceeds from its IPO and the Companies recent secondary
public offering completed in March 1998. On September 12, 1997, the Company
entered into a $40 million revolving line of credit facility (the "Credit
Line"). Interest rate options include base borrowings at the lead lender's
prime rate and term loans at LIBOR plus an applicable margin. The Company
believes the existing sources of liquidity and funds generated from
operations will provide adequate cash to fund its anticipated cash needs
for operations and acquisitions at least through the next year.
The Company's primary sources of liquidity are cash balances, the
Credit Line and the collection of its accounts receivable. Accounts
receivable have increased as the Company's operations have grown. Billed
receivables were 57 and 59 days of revenue at March 31, 1998 and 1997
respectively. Total receivables were 72 and days of revenue at March 31,
1998 and 1997. Should the Company be unable to bill and collect for its
services on a timely basis, the Company could draw upon available cash or
existing credit facilities to finance its operations.
Cash provided from operating activities was $3.4 million for 1998. The
Company supplemented cash provided by operations periodically with
short-term borrowings. The average balance of such borrowings outstanding
was approximately $8.5 million during fiscal 1998 and approximately $5.9
million during fiscal 1997. At March 31, 1998 the Company had no balance
outstanding under the Credit Line.
22
At March 31, 1998, the Company had $40.5 million in cash and cash
equivalents as compared to $2.9 million at March 31, 1997. The increase in cash
and cash equivalents is primarily related to net proceeds from the secondary
public offering offset by purchases of businesses and property and equipment. At
March 31, 1998, the Company had long-term capital lease obligations and other
notes outstanding in the amount of $0.4 million. The current installments of the
long-term capital lease obligations and other notes were $0.2 million at March
31, 1998.
On May 29, 1998 the Company registered 4 million shares of its common
stock to be used in connection with merger and acquisition activities.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 established standards to measure
all changes in equity that result from transactions and other economic events
other than transactions with owners. Comprehensive income is the total of net
income and all other non-owner changes in equity. This statement is effective
for financial statements for periods beginning after December 15, 1997.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. SFAS No.
131 introduces a new model for segment reporting, called the "management
approach". The management approach is based on the manner in which management
organizes segments within a company for making operating decisions and assessing
performance. The management approach replaces the notion of industry and
geographic segments. This statement is effective for financial statements for
periods beginning after December 15, 1997.
The Company does not believe that adoption of SFAS No. 130 and SFAS No. 131
will significantly alter its financial statement presentation.
23
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cotelligent Group, Inc.
We have audited the accompanying consolidated balance sheets of
Cotelligent Group, Inc. (a Delaware Corporation) and subsidiaries as of March
31, 1997 and 1998 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended March 31, 1996 and 1997
and 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Cotelligent Group, Inc. and subsidiaries as of March 31, 1997 and 1998, and the
results of their operations, and their cash flows for the years ended March 31,
1996, 1997 and 1998 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
San Francisco, California
April 28, 1998
24
COTELLIGENT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, March 31,
1998 1997
ASSETS ----------- -------------
Current assets:
Cash and cash equivalents...................................... $ 40,528 $ 2,904
Accounts receivable, including unbilled accounts of $10,120
and $5,595 and net of allowance for doubtful accounts
of $2,123 and $632 respectively........................ 48,982 32,387
Notes receivable from officers................................. 230 225
Prepaid expenses and other..................................... 2,292 1,306
Total current assets......................................... 92,032 36,822
Property and equipment, net...................................... 7,568 5,448
Deferred tax assets.............................................. - 54
Goodwill, net of accumulated amortization of $359 and $159$159,
$38, respectively....................................... 18,106 2,409
Other assets.................................................... 853 434
Total assets................................................ $ 118,559 $ 45,167
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt and current maturities of long-term debt..... $ 192 $ 4,409
Accounts payable............................................. 4,344 2,590
Accrued compensation and related payroll liabilities......... 15,268 9,990
Income taxes payable......................................... 3,171 491
Deferred tax liabilities..................................... 503 761
Other accrued liabilities.................................... 4,525 3,110
Total current liabilities.................................. 28,003 21,351
Long-term debt................................................... 199 648
Deferred tax liabilities....................................... - -
Other long-term liabilities.................................... 18 31
Total liabilities.......................................... 28,220 22,030
Stockholders' equity:
Preferred Stock, $0.01 par value; 500,000 shares authorized,
no shares issued or outstanding............................ - -
Common Stock, $0.01 par value; 100,000,000 shares
authorized, 14,057,884 and 11,272,401 shares
issued and outstanding, respectively....................... 141 113
Additional paid-in capital..................................... 80,335 19,046
Retained earnings.............................................. 9,863 3,978
Total stockholders' equity................................... 90,339 23,137
Total liabilities and stockholders' equity................... $ 118,559 $ 45,167
================== ===================
The accompanying notes are an integral part of these consolidated
financial statements.
25
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
Year Ended March 31,
1998 1997 1996
Revenues..................................................... $ 244,683 $ 165,417 $ 66,433
Cost of services............................................. 173,537 116,844 45,814
--------- --------- --------
Gross profit............................................ 71,146 48,573 20,619
Selling, general and administrative expenses................. 55,929 39,167 17,867
Non-recurring transaction costs.............................. 855 1,969 -
--------- --------- --------
14,362 7,437 2,752
Other income (expense):
Interest expense......................................... (725) (571) (340)
Interest income.......................................... 51 356 80
Other.................................................... (34) 230 368
--------- --------- --------
Total other income (expense)........................... (708) 15 108
Income before income taxes.................................. 13,654 7,452 2,860
Provision for income taxes............................... 7,223 3,742 248
--------- --------- --------
Net income............................................... $ 6,431 $ 3,710 $ 2,612
========= ========= ========
Earnings per share
Basic............................................. $ 0.56 $ 0.33
========= ========
Diluted........................................... $ 0.55 $ 0.33
========= ========
Weighted average shares outstanding
Basic................................................ 11,485,393 11,328,518
========== ==========
Diluted.............................................. 11,610,339 11,402,513
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
26
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Additional
Paid-In Retained Total
Shares Amount Capital Earnings Equity
------------- ------------- -------------- ------------ --------------
Balance at March 31, 1995 $ 5,019,886 $ 51 $ 469 $ 1,745 $ 2,265
Issuance of Common Stock prior to
Offering....................................... 120,478 1 381 - 382
Redemption of Common Stock prior to
Offering....................................... (74,140) (1) (119) - (120)
Dividends of certain pooled companies
prior to acquisition.......................... - - - (1,536) (1,536)
Reclassification of Initially Acquired
Companies' equity.............................. - - 4,307 - 4,307
Issuance of Common Stock, net of cost ................ 5,595,305 56 16,903 - 16,959
Distribution to founding stockholders................. - - (3,492) - (3,492)
Adjustments to conform year-ends of Pooled Companies:
Capital contribution......................... - - 103 - 103
Net income................................... - - - 270 270
Dividends.................................... - - - (288) (288)
Net income............................................ - - - 2,612 2,612
Balance at March 31, 1996.............................. 10,661,529 107 18,552 2,803 21,462
Issuance of Common Stock........................... 610,872 6 463 - 469
Tax benefit on stock options exercised............. - - 295 - 295
Dividends/distributions of certain Pooled
Companies prior to acquisition................. - - (423) (2,246) (2,669)
Retained Earnings of immaterial Pooled
Companies acquired in fiscal 1997.............. - - - (187) (187)
Adjustments to conform year-ends of
Pooled Companies:
Capital Contribution........................ - - 159 - 159
Net income.................................. - - - (12) (12)
Dividends................................... - - - (90) (90)
Net income........................................ - - - 3,710 3,710
Balance at March 31, 1997............................. 11,272,401 113 19,046 3,978 23,137
Issuance of Common Stock, net of costs............ 2,785,483 28 60,961 - 60,989
Tax benefit on stock options exercised............ - - 328 - 328
Dividends/distributions of certain
Pooled Companies prior to acquisition............ - - - (546) (546)
Net income........................................ - - - 6,431 6,431
Balance at March 31, 1998............................. 14,057,884 $ 141 $ 80,335 $ 9,863 $ 90,339
============= ============= ============== ============ =============
The accompanying notes are an integral part of these
consolidated financial statements.
27
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended March 31,
---------------------------------------------
1998 1997 1996
--------------- -------------- --------------
Cash flows from operating activities:
Net income................................................................. $ 6,431 $ 3,710 $ 2,612
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................... 2,085 1,146 310
Deferred income taxes, net.................................. (204) 297 (587)
(Gain)loss on disposal of property and equipment.......... 27 - (325)
Provision for doubtful accounts............................. 1,408 472 195
Changes in current assets and liabilities:
Accounts receivable................................ (14,921) (11,979) (1,769)
Prepaid expenses and other current assets.......... (960) (325) (226)
Accounts payable and accrued expenses.............. 7,413 6,023 1,333
Income taxes payable............................... 2,709 (297) 349
Changes in other assets..................................... (560) (276) 321
Changes in long-term liabilities............................ (13) (911) -
------------ --------- ---------
Net cash provided by (used in) operating activities 3,415 (2,140) 2,213
Cash flows from investing activities:
Proceeds from sale of assets............................................... 174 - 374
Purchase of businesses, net of cash of acquired companies.................. (9,674) (2,915) -
Purchases of property and equipment........................................ (3,570) (4,394) (867)
Cash and cash equivalents of Initially Acquired Companies at
acquisition......................................................... - - 525
------------ --------- ---------
Net cash provided by (used in) investing activities. (12,819) (7,309) 32
Cash flows from financing activities:
Redemption of common stock................................................. - - (120)
Net proceeds on long-term debt........................................ - (427) 471
Principal payments on long-term debt.................................. (595) - (19)
Payments on capital lease obligations................................. (180) (185) (49)
Distribution to Initially Acquired Companies' former
stockholders......................................................... - - (3,492)
Dividends and distributions................................................ (546) (2,672) (1,536)
Net borrowings (repayments) on short-term debt............................. (4,086) 443 (1,140)
Borrowings on loans with former related parties............................ - - 848
Repayments on loans with former related parties............................ - (417) (700)
Net proceeds from issuance of common stock................................. 52,686 469 17,341
Net change in cash due to conforming fiscal year end of
Pooled Companies...................................................... - 201 539
---------- -------- ---------
Net cash provided by (used in) financing activities................... 47,279 (2,588) 12,143
---------- -------- ---------
Net increase (decrease) in cash and cash equivalents....................... 37,624 (12,037) 14,388
Cash and cash equivalents at beginning of period........................... 2,904 14,941 553
---------- -------- ---------
Cash and cash equivalents at end of period................................. $ 40,528 $ 2,904 $ 14.941
======== ========= ========
28
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
Year Ended March 31,
---------------------------------------------
1998 1997 1996
--------------- -------------- --------------
Supplemental disclosures of cash flow information:
Interest paid............................................................. $ 884 $ 570 $ 374
Income taxes paid......................................................... 5,597 3,460 530
Fair Market value of Common Stock issued to acquire business.............. 7,464 - -
Non-cash investing and financing transactions:
Capital lease obligations incurred........................................ - 188 158
Conversion of trade accounts receivable to note receivable................ - - 53
Net liabilities of immaterial Pooled Companies............................ - 187 -
The accompanying notes are an integral part of these
consolidated financial statements.
29
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Note 1 - Business Organization and Basis of Presentation
Cotelligent Group, Inc. ("Cotelligent" or the "Company") was formed in
February 1993 to acquire, own and operate software professional services
businesses specializing in providing information technology ("IT") consultants
on a contract basis and consulting and outsourcing services to businesses with
complex IT operations. On February 20, 1996, Cotelligent acquired four companies
simultaneously with its IPO (the "Initially Acquired Companies"). The aggregate
consideration paid by Cotelligent in these transactions was $3,492 in cash and
3,206,875 shares of Common Stock of the Company and the assumption of
approximately $3,000 in debt, for an aggregate value of $35,304. These
acquisitions were accounted for on a historical cost basis. Prior to this date
Cotelligent was a non-operating entity. The operating results of the Initially
Acquired Companies have been included since the date of acquisition.
During the year ended March 31, 1998 ("fiscal 1998") and March 31, 1997
("fiscal 1997") the Company issued 4,976,826 shares of Common Stock to acquire
ten businesses accounted for under the pooling-of-interests method (the "Pooled
Companies"). The consolidated financial statements have been restated in
accordance with generally accepted accounting principles to present the
financial data as if Cotelligent and these companies had always been members of
the same operating group.
In addition, during fiscal 1998 and 1997, the Company acquired six
businesses accounted for under the purchase method (the "Purchased Companies")
for aggregate consideration of $19,390 (362,998 shares of Common Stock issued at
fair market value of $11,926 and $7,464 of cash). The consolidated financial
statements include the operating results of these companies subsequent to their
respective acquisition dates.
All of the businesses acquired since the IPO have operations
substantially the same as the Company.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts and results of
Cotelligent Group, Inc., the Initially Acquired Companies from their date of
acquisition on February 20, 1996, the Purchased Companies from their respective
acquisitions dates and give retroactive effect to the results of the Pooled
Companies for all periods presented. All significant intercompany transactions
and accounts have been eliminated.
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 revenue and expenses during the reported
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
30
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
Receivables arising from services provided to clients are not collateralized and
accordingly, the Company performs ongoing credit evaluations of its clients to
reduce the risk of loss.
Property and Equipment
Property and equipment are stated at cost. Depreciation, including
amortization of capitalized leases, is provided over the estimated useful lives
of the respective assets (generally ranging from three to ten years) on a
straight-line or an accelerated basis. Leasehold improvements are amortized over
the shorter of the lease term or the estimated useful life of the respective
assets.
Goodwill
Goodwill represents the excess of cost over fair value of net tangible
assets acquired through acquisitions. Such excess of cost over fair value of net
tangible assets acquired is being amortized on a straight-line basis over the
period of 30 years. At each balance sheet date management reviews the potential
impairment of goodwill on a non-discounted cash flow basis to assess
recoverability.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, short-term accounts
receivables and accounts payables for which current carrying amounts are equal
to or approximate fair market value. Additionally, interest rates on outstanding
debt are at market rates for debt with similar terms and average maturities;
therefore, the carrying value of debt approximates its fair value.
Revenue Recognition
Revenue is recognized as services are performed. Unbilled receivables
represent revenue recognized on services performed which have not been billed.
Income Taxes
The Company accounts for income taxes using an asset and liability approach
requiring the recognition of deferred tax assets and liabilities for the tax
consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
Certain Pooled Companies elected to be treated as an S corporation for
federal and state income taxes prior to acquisition by the Company. Accordingly,
any tax liabilities of these Companies were the responsibility of the respective
stockholders. These S corporation elections terminated upon the merger with
Cotelligent.
Earnings Per Share
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per share" effective December 16, 1997 and has restated all
earlier periods. Basic earnings per share was calculated by dividing net income
by the weighted average number of shares of common stock outstanding during the
period. Diluted earnings per
31
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
share includes the impact of common stock options outstanding. Earnings per
share for the year ended March 31, 1996 has not been presented because the
issuance of shares of common stock sold in the IPO and the inclusion of the
results of the Initially Acquired Companies are not reflected in any period
prior to February 20, 1996.
Reclassifications
Certain amounts have been reclassified in 1996 and 1997 to conform to
the March 31, 1998 presentation.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 established standards to measure all changes in equity that result
from transactions and other economic events other than transactions with owners.
Comprehensive income is the total of net income and all other non-owner changes
in equity. This statement is effective for financial statements for periods
beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 131 introduces a new model for
segment reporting, called the "management approach". The management approach is
based on the manner in which management organizes segments within a company for
making operating decisions and assessing performance. The management approach
replaces the notion of industry and geographic segments. This statement is
effective for financial statements for periods beginning after December 15,
1997.
The Company has adopted SFAS No. 130 and SFAS No. 131 and believes such
adoption will not significantly alter its financial statement presentation.
Note 3 - Business Combinations
Pooling-of-Interests Method
During fiscal 1998 and 1997, the Company issued 1,541,615 shares of common
stock to acquire four companies and 3,435,211 shares of common stock to acquire
six companies, respectively, in acquisitions accounted for under the
pooling-of-interests method. Accordingly, the Company's consolidated financial
statements have been restated for all material poolings in accordance with
generally accepted accounting principles for all periods presented.
Commencing on April 1, 1996, the year ends of the fiscal 1997
Pooled Companies were changed to March 31, resulting in an increase to retained
earnings of $270 during fiscal 1996 as follows.
Year Ended
March 31, 1996
-------------------
Revenues................. $ 11,823
Costs and expenses.. 11,553
-------------------
Net income.............. $ 270
===================
Commencing on April 1, 1997, the year ends of the fiscal 1998 Pooled
Companies were changed to March 31, resulting in a decrease to retained earnings
of $12 during fiscal 1997 as follows.
32
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Year Ended
March 31, 1997
------------------
Revenues................. $ 8,624
Costs and expenses.. 8,636
------------------
Net income.............. $ (12)
==================
The previously reported separate results of operations of Cotelligent
Group Inc. and the results of the Pooled Companies acquired in fiscal 1998 for
periods prior to the mergers are presented below.
Pooled
For the Year Ended March 31, Cotelligent Companies Combined
----------- ---------- ----------
1997
Revenue..................... $146,772 $18,645 $165,417
Net income.................. 3,636 74 3,710
1996
Revenue..................... 52,786 13,647 66,433
Net income.................. 2,518 94 2,612
During the year ended March 31, 1998, businesses acquired as poolings
recognized revenues of $23,222 and net income of $354 in the period prior to
acquisition by the company.
Purchase Method
During fiscal 1998, Cotelligent acquired four companies (acquired on August
27,1997, October 31, 1997, November 6, 1997 and January 3, 1998) accounted for
under the purchase method for aggregate consideration of $19,390 (362,998 shares
issued at fair market value of $7,464 and $11,926 of cash). The total assets
related to these acquisitions were $4,153 and resulted in the recognition of
$15,739 of goodwill, which is being amortized over a 30 year period. The results
of these acquisitions have been included in the Company's results from their
respective acquisition dates.
During fiscal 1997, Cotelligent acquired two companies (acquired on October
7, 1996 and November 27, 1996) accounted for under the purchase method for an
aggregate consideration of $2,928. The total assets related to these
acquisitions were $112 and resulted in the recognition of $2,726 of goodwill,
which is being amortized over a 30 year period. The results of these
acquisitions have been included in the Company's results from their respective
acquisition dates.
The allocation of the purchase price to the underlying net assets acquired
is based upon preliminary estimates of the fair value of the net assets, which
may be revised at a later date. It is anticipated that any purchase price
allocation adjustments will be made within one year from the date of the
acquisition. Management does not believe that the final allocations of the
purchase price will have a material effect on the Company's financial position
or results of operations.
33
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Note 4 - Pro Forma Results (Unaudited)
The pro forma consolidated statements of operations for the years ended
March 31, 1998 and 1997 give effect to the acquisitions of the Initially
Acquired Companies and Purchased Companies as if these acquisitions were made on
April 1, 1996. The pro forma consolidated statement of operations also reflect
adjustments for the acquisitions of the Pooled Companies including compensation
differentials to employees and former owners of the Pooled Companies, the
planned termination of contributions to retirement plans, and adjustments to
reflect income taxes as if the entities were combined and subject to the
effective federal and state statutory rates for the combined entity.
Additionally, the pro forma consolidated financial statements reflect
adjustments for interest expense on cash consideration and amortization of
goodwill for the Purchased Companies.
Year Ended March 31,
--------------------------------
1998 1997
-------------- ---------------
Revenues............................................. $ 258,712 $ 185,595
Cost of services..................................... 183,231 131,344
-------------- ---------------
Gross profit.................................... 75,481 54,251
Selling, general and administrative.................. 56,833 41,316
-------------- ---------------
Operating income..................................... 18,648 12,935
Other expense........................................ 1,174 650
-------------- ---------------
Income before provision for income taxes............. 17,474 12,285
Provision for income taxes........................... 7,164 5,037
-------------- ---------------
Net income........................................... $ 10,310 $7,248
============== ===============
Earnings per share-
Basic............................................. $ 0.88 $ 0.62
============== ===============
Diluted........................................... $ 0.86 $ 0.60
============== ===============
Weighted average shares-
Basic............................................. 11,748,939 11,748,939
============== ===============
Diluted........................................... 11,980,515 11,980,515
============== ===============
Note 5 - Allowance for Doubtful Accounts
Allowance for doubtful accounts activity is as follows.
Balance, March 31, 1996....................................................................................... $ 340
Charges to costs and expenses................................................................................. 472
Write-offs.................................................................................................... (180)
-------------
Balance, March 31, 1997....................................................................................... 632
Balance of newly acquired companies' allowance for doubtful accounts at acquisition........................... 235
Charges to costs and expenses................................................................................. 1,408
Write-offs.................................................................................................... (152)
-------------
Balance, March 31, 1998...................................................................................... $ 2,123
34
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Note 6 - Property and Equipment
Property and equipment is comprised of the following.
March 31,
------------------------------
1998 1997
-------------- -------------
Land and building........................................................ $ 341 $ 440
Computer and office equipment............................................ 9,841 5,859
Furniture and fixtures................................................... 2,047 2,796
Leasehold improvements................................................... 630 366
-------------- -------------
12,859 9,461
Less: Accumulated depreciation........................................... (5,291) (4,013)
$ 7,568 $ 5,448
============== ==============
Depreciation and amortization expense of property and equipment for the
years ended March 31, 1998 and 1997 was $1,764 and $1,108, respectively.
Note 7 - Credit Facilities
Cotelligent maintains a syndicated revolving line of credit facility
("Credit Line") with three banks, which provides a borrowing capacity of amounts
derived from specific covenant ratios, up to $40,000. The Company generally pays
off the outstanding debt of acquired companies. The Credit Line requires the
Company to maintain certain financial covenants and restricts the payment of
dividends. At March 31, 1998, the Company had a borrowing capacity of
approximately $40,000 under the facility and was in compliance with all
covenants. Debt consists of the following:
March 31,
------------------------------
1998 1997
-------------- -------------
Bankline of credit with borrowings derived from covenant ratios, had full
capacity $40,000, secured by accounts receivable and other assets of the
Company, interest at the bank's lending rate (approximately 8.0% at March
31, 1998)................................................................... $ - $ -
Bank line of credit with borrowings up to 80% of the Company's eligible
accounts receivable or $20,000, secured by the accounts receivable and
other assets of the Company, interest at prime (8.5% at March 31, 1997)...... - 3,926
Various Pooled Companies' bank lines of credit, secured by various assets
of the Pooled Companies, with interest rates up to prime plus 2.0%.......... - 160
Pooled Companies' other notes payable, including payables to related
parties, with interest rates from 8.0% to 11.0%, secured by various
assets of the Pooled Companies, with due dates through December 2000......... 259 659
Capital lease obligations....................................................... 132 312
Less: current maturities........................................................ (192) (4,409)
-------------- -------------
Total long-term debt............................................................ $ 199 $ 648
============== ============
35
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Total maturities of long-term debt, at March 31, 1998 are as follows:
1999.................................................. $ 192
2000.................................................. 140
2001.................................................. 59
2002.................................................. -
2003.................................................. -
Thereafter............................................ -
--------------
Total................................................. $ 391
==============
Note 8 - Income Taxes
The income tax provision consists of the following:
March 31,
---------------------------------------------
1998 1997 1996
-------------- ------------- -------------
Current:
Federal...................................................... $ 5,906 $ 2,577 $ 763
State......................................................... 1,521 868 162
-------------- ------------- -------------
$ 7,427 3,445 925
-------------- ------------- -------------
Deferred:
Federal...................................................... 26 268 (570)
State......................................................... (230) 29 (107)
-------------- ------------- -------------
(204) 297 (677)
-------------- ------------- -------------
Total provision for income taxes...................... $ 7,223 $ 3,742 $ 248
============== ============= ============
The tax benefits associated with nonqualified stock options reduce taxes
currently payable as shown above by $328 for fiscal 1998 and $295 for fiscal
1997. No tax benefits associated with nonqualified stock options were realized
in fiscal 1996. Such tax benefits are credited to capital when realized.
Significant components of deferred tax assets and liabilities are as
follows:
March 31,
------------------------------
1998 1997
-------------- -------------
Deferred Tax Assets:
Allowance for doubtful accounts....................................... $ 512 $ 159
Accrued vacation...................................................... 297 189
Other................................................................. 138 148
-------------- -------------
Total Deferred Tax Assets........................................ 947 496
-------------- -------------
Deferred Tax Liabilities:
Cash to accrual....................................................... (1,267) (1,164)
Other................................................................. (183) (39)
-------------- -------------
Total Deferred Tax Liabilities................................... (1,450) (1,203)
-------------- -------------
Net Deferred Tax Liability....................................... $ (503) $ (707)
============== ============
36
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
March 31,
---------------------------------------------
1998 1997 1996
-------------- ------------- -------------
U.S. federal statutory rate............................................. 35.0% 34.0% 34.0%
State income tax, net of federal benefit................................ 6.2 7.9 1.0
Income of S corporation................................................ 1.5 (7.4) (27.8)
Conversion to C corporation............................................. 6.9 8.9 -
Non-deductible acquisition costs....................................... 2.2 7.6 -
Change in valuation allowance........................................... - (1.7) 1.4
Other................................................................... 1.1 0.9 -
-------------- ------------- -------------
Effective tax rate................................................. 52.9% 50.2% 8.7%
============== ============= ===========
Prior to the IPO, the Company had established a valuation allowance against
the tax assets associated with the net operating losses of previous years due to
the uncertainty of realization through future income. In 1997, the Company
reversed this valuation allowance as a result of utilization of the operating
losses against taxable income.
Certain Pooled Companies elected to be treated as an S corporation for
federal and state income taxes prior to their merger with Cotelligent.
Accordingly, any tax liabilities prior to acquisition by the Company were the
responsibility of the former stockholders. These S corporation elections
terminated as a result of the merger with Cotelligent and accordingly the net
difference between book and tax basis of net assets was immediately recognized.
This net deferred tax liability was approximately $947 and $670 in fiscal 1998
and 1997, respectively, which will be paid on a pro rata basis over a four-year
period.
37
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Note 9 - Lease Commitments
Cotelligent leases various office space and certain equipment under
noncancelable lease agreements which expire at various dates.
Future minimum rental payments under such leases at March 31, 1998 are
as follows.
Capital Leases Operating Leases
---------------------- -------------------------
1999................................................. $ 116 $ 3,194
2000................................................. 36 2,841
2001................................................. - 2,025
2002................................................. - 980
2003................................................. - 560
Thereafter........................................... - 398
---------------------- -------------------------
Total minimum lease payments......................... 152 $ 9,998
=========================
Less: Amounts representing interest................. (20)
----------------------
Present value of net minimum lease payment........... $ 132
======================
Rental expense under these leases for the years ended March 31, 1998, 1997
and 1996 was $2,754, $1,620 and $783 respectively.
Note 10 - Employee Benefit Plans
Long-Term Incentive Plan
In September 1995, Cotelligent's Board of Directors and stockholders
approved the Cotelligent 1995 Long-Term Incentive Plan (the "Plan"). The purpose
of the Plan is to provide directors, officers, key employees and consultants
with additional incentives by increasing their ownership interests in the
Company.
Under the provisions of the Plan, stock-based awards are granted at terms
and prices determined by the Plan Committee as defined in the Plan. A summary of
option transactions is described in the table below. All options described below
are non-qualified and were granted with exercise prices no less than the fair
market value of the underlying stock on the date of the grant.
38
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Weighted
Option Price Average
Number Range per Exercise Expiration
of Shares Share Price Date
------------- ------------- ----------- ------------
Outstanding at March 31, 1996............ 476,702 $2.70 - 10.25 $6.73 2003
Granted............................ 852,113 8.88 - 24.88 18.08 2004
Exercised.......................... (59,099) 2.70 - 9.00 3.08 2003
Canceled........................... (136,589) 2.70 - 24.25 6.66 2003 - 2004
------------- ------------- ----------- ------------
Outstanding at March 31, 1997............ 1,133,127 2.70 - 24.88 15.46 2003 - 2004
Granted............................ 449,525 7.25 - 29.00 17.75 2004 - 2005
Exercised.......................... (62,210) 2.70 - 20.00 9.33 2003 - 2004
Canceled........................... (109,015) 8.88 - 24.88 16.08 2003 - 2004
------------- ------------- ----------- ------------
Outstanding at March 31, 1998............ 1,411,427 2.70 - 29.00 16.41 2003 - 2005
Exercisable options at March 31, 1996, 1997 and 1998 were 87,072,
249,040 and 554,114 at exercise prices between $2.70 and $24.88, and weighted
average exercise prices of $6.89, $15,25 and $16.11 respectively.
The Plan provides for stock-based awards in an aggregate amount of up to
15% of the number of Cotelligent's outstanding stock at the time of grant. Of
the non-qualified options granted to date, a majority are generally exercisable
beginning one year from the date of the grant in cumulative yearly amounts of
25% of the shares under option and generally expire seven years from the date of
the grant.
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
issued in October 1995, and as permitted by the provisions of SFAS No. 123, the
Company continues to apply the provisions of APB Opinion 25 and related
interpretations in accounting for its employee stock option plans. If the
Company had elected to recognize compensation expense for options granted in
1996, 1997 and 1998, based on the fair value as described in SFAS No. 123, net
income and earnings per share would have been reduced to the pro forma amounts
indicated below. The fair value of these options was estimated at the date of
grant using a Black-Scholes option pricing ("Black-Scholes") model with the
following weighted average assumptions for 1996, 1997, and 1998 respectively:
(i) risk-free interest rates of 5.97%, 6.12% and 5.65%, (ii) a dividend yield of
0%, (iii) volatility factors of the expected market price of the Company's
common stock of 40%, and (iv) a weighted average expected life of 3.5 years, 4.2
years and 4.1 years.
The Black-Scholes model was developed for use in estimating the fair
value of traded options that have no vesting restriction and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected volatility of the Company's
Common Stock. In management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options because the Company's employee stock options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimated.
39
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
For purposes of pro forma disclosure, the estimated fair value of options
is amortized to expense over the options' vesting period. Had compensation for
the Company's stock-based compensation plan been determined based on the fair
value at the grant dates for awards under the Plan consistent with SFAS 123, the
Company's net income and earnings per share would have been adjusted to the pro
forma amounts indicated below.
---------------------------- ----------------------------- ---------------------
1998 1997 1996
---------------------------- ----------------------------- ---------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------------- ------------ ----------------- ---------- ----------- --------
Net income $6,431 $4,121 $3,710 $2,416 $2,612 $2,304
Diluted Earnings per share 0.55 0.35 0.33 0.21 - -
Earnings per share for the year ended March 31, 1996 has not been
presented because it is not considered to be meaningful as a result of the
acquisitions of the Initially Acquired Companies and the IPO as discussed in
Note 1.
The weighted average fair values of options granted during the years ended
March 31, 1998, 1997 and 1996 were $8.01 and $6.16 and $4.03 per share,
respectively. The fair value of each option grant is estimated on the date of
grant using the Black Scholes option-pricing model.
Employee Stock Purchase Plan
During fiscal year 1997, the Company implemented an employee stock purchase
plan whereby eligible employees may purchase shares of the Company's Common
Stock at a price equal to 85 % of the lower of the closing market price on the
first or last trading day of the Plan's quarter. A total of 300,000 shares of
Common Stock have been reserved for issuance under the plan. During fiscal 1998,
employees purchased 79,000 shares for aggregate proceeds to the Company of $754.
During fiscal 1997 employees purchased approximately 20,171 shares for aggregate
proceeds to the Company of $284.
401(k) Plan
During fiscal 1997, the Company initiated the Cotelligent Group, Inc.,
401(k) Retirement Saving Plan, (the "401(k) Plan") effective March 1, 1997, for
the benefit of all employees upon date of hire. The 401(k)Plan is funded by
employee payroll deductions. In addition, the Company has the option to
contribute to the 401(k) Plan on the employee's behalf. The Company did not make
any contributions to the 401(k) Plan for the year ended March 31, 1997, or 1998.
Subsidiary Plans
Prior to their acquisition certain of the Company's subsidiaries had
various defined contribution plans which allowed employees to participate upon
meeting specified service requirements additionally, these plans also provided
for discretionary contributions by the respective entities. The subsidiaries'
contributions to these plans for the fiscal years ended March 31, 1998, 1997 and
1996 were, $27 and $47 and $70 respectively.
40
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Note 11 - Stockholders' Equity
Common Stock
The Company has one class of $0.01 par value Common Stock with 100,000,000
authorized shares. The holders of Common Stock are entitled to one vote for each
share on all matters voted upon by stockholders, including the election of the
directors. At March 31, 1997 and 1998, there were 11,272,401 and 14,057,884
shares of Common Stock outstanding, respectively. In March, 1998, the Company
completed a secondary offering of its common stock whereby 2,312,040 new shares
were issued and net proceeds to the Company were $52,359. In May, 1998, the
Company registered 4 million shares of its common stock to be used in connection
with merger and acquisition activities.
Preferred Stock
The Company has one class of $0.01 par value Preferred Stock with
500,000 authorized shares. The Board of Directors has authority, without further
vote or action by stockholders, to issue the shares, fix the number of shares
and change the number of shares constituting any series, and to provide for or
change the voting powers, designations, preferences and relative, participating,
optional or other special rights, qualifications, limitations or restrictions
thereof, including dividend rights (and whether dividends are cumulative),
dividend rates, terms of redemption (including sinking fund provisions), a
redemption price or prices, conversion rights and liquidation preferences of the
shares constituting any class or series of the Preferred Stock. No Preferred
Stock was outstanding at March 31, 1997 and 1998. The Company has no current
plans to issue any shares of Preferred Stock of any class or series.
Anti-takeover Provisions
The Company has a stockholder rights plan in effect (the "Rights
Plan"). Under the terms of the Rights Plan, the holders of the Common Stock
received one preferred share purchase right (each, a "Right"), as a dividend for
each share of common stock held as of the close of business on September 24,
1997. Each Right entitles the holder to buy 1/10,000 of a share of Series A
Junior Preferred Stock of the Company at an exercise price of $90.00. Further,
each Right gives the holder the right to buy Common Stock of the Company having
twice the value of the exercise price of the Rights if a person or group
acquires beneficial ownership of 20% or more of the Common Stock or commences a
tender or exchange offer that would result in such a person or group owning 20%
or more of the Common Stock. In addition, the Board of Directors of the Company
is empowered to issue up to 500,000 shares of preferred stock, and to determine
the price, rights, preferences and privileges of such shares, without any
further stockholder action. The existence of the Rights Plan and this "blank
check" preferred stock may have the effect of delaying, discouraging,
inhibiting, preventing or rendering more difficult an attempt to obtain control
of the Company by means of a tender offer, merger, proxy contest or otherwise.
In addition, this "blank check" preferred stock, any issuance thereof, may have
an adverse effect on the market price of the Common Stock. The Company's
Certificate of Incorporation provides for a "staggered" Board of Directors,
which may also have the effect of inhibiting a change of control of the Company
and may have an adverse effect on the market price of the common stock.
41
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Note 12 - Earnings Per Share
Earnings per share is as follows:
For the Year Ended March 31, 1998
--------------------------------------------------------
Per Share
Income Shares Amount
---------------- ------------ --------------
Basic earnings per share-
Net income available to common stockholders $ 6,431 11,485,393 $ 0.56
Options issued to directors and employees....... 124,946
------------
Diluted earnings per share-
Income available to common stockholders
plus assumed conversions................... $ 6,431 11,610,339 $ 0.55
============
For the Year Ended March 31, 1997
--------------------------------------------------------
Per Share
Income Shares Amount
---------------- ------------ --------------
Basic earnings per share-
Net income available to common stockholders.... $ 3,710 11,328,518 $ 0.33
Options issued to directors and employees....... 73,995
-----------
Diluted earnings per share-
Income available to common stockholders
plus assumed conversions.................... $ 3,710 11,402,513 $ 0.33
============
Options to purchase common shares of 700,000 were excluded from the
computation of diluted earnings per share for the years ended March 31, 1997 and
1998, as the options' exercise price was greater than the market price of the
common shares for the respective periods.
Note 13 - Commitments and Contingencies
Employment Agreements
Certain executive officers and certain principals of the Company's
subsidiaries have entered into employment agreements with the Company which
contain provisions for compensation upon termination without cause or changes in
control. Pursuant to such employment agreements, each such officer is eligible
to earn bonus compensation payable out of a bonus pool determined by the Board
of Directors or its Compensation Committee. Bonuses will be determined by
measuring, among other objective and subjective measures, such officer's
performance, the performance of the local operation for which such officer has
primary responsibility and the Company's' performance against targets.
42
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Legal Matters
The Company is involved in various legal matters in the normal course of
business. In the opinion of management, these matters are not anticipated to
have a material adverse effect on the financial position or results of
operations or cash flows of the Company.
Additional Purchase Price under Acquisition Contracts.
In connection with the agreements to acquire two of the Purchased Companies
during fiscal 1998, the Company agreed to additional consideration based on the
financial performance of the acquired companies subsequent to the acquisition
(the "earn-out"). Potential earn-outs are payable in the fiscal years 1999 and
2000. Earn-out payments, if made, will be recorded as additional purchase price
in the year the earn-out period ends. During the year ended March 31, 1998, no
additional purchase price has been accrued for any earn-out payments.
43
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Note 14 - Quarterly Financial Data (Unaudited)
Year Ended March 31, 1998
----------------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
-------------------- --------------------- -------------------- ---------------------
Revenues............................ $ 54,304 $ 58,566 $ 63,111 $ 68,702
Gross profit........................ 16,117 17,327 18,381 19,322
Operating income.................... 3,155 3,455 2,767 4,985
Net income.......................... 1,810 2,030 (138) 2,729
Earnings per share-
Basic........................... $ 0.16 $ 0.18 $ (0.01) $ 0.23
==================== ==================== =================== ====================
Diluted......................... $ 0.16 $ 0.18 $ (0.01) $ 0.23
==================== ==================== =================== ====================
Weighted average shares-
Basic........................... 11,322,569 11,314,751 11,584,359 11,748,939
==================== ==================== =================== ====================
Diluted.......................... 11,367,474 11,436,630 11,584,359 11,980,515
==================== ==================== =================== ====================
Year Ended March 31, 1997
----------------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
-------------------- --------------------- -------------------- ---------------------
Revenues............................ $ 36,103 $ 39,658 $ 42,534 $ 47,122
Gross profit........................ 10,540 12,352 12,430 13,251
Operating income.................... 1,651 2,047 2,417 1,322
Net income.......................... 415 1,489 1,587 219
Earnings per share-
Basic.......................... $ 0.04 $ 0.13 $ 0.14 $ 0.02
==================== ==================== =================== ====================
Diluted........................ $ 0.04 $ 0.13 $ 0.14 $ 0.02
==================== ==================== =================== ====================
Weighted average shares-
Basic.......................... 11,211,131 11,229,131 11,229,131 11,342,977
==================== ==================== =================== ====================
Diluted........................ 11,365,573 11,364,115 11,393,769 11,486,595
==================== ==================== =================== ====================
Year Ended March 31, 1996
----------------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
-------------------- --------------------- -------------------- ---------------------
Revenues.......................... $ 14,409 $ 14,579 $ 14,059 $ 23,386
Gross profit...................... 4,504 4,622 4,553 6,940
Operating income.................. 575 688 630 859
Net income........................ 465 949 533 665
Earnings per share for the year ended March 31, 1996 has not been
presented because, as discussed in Note 2, the issuance of shares of common
stock sold in the IPO and the inclusion of the results of the Initially Acquired
Companies are not reflected in any period prior to February 20, 1996.
44
Item 9. Changes in and Disagreement With Accountants on Accounting and
Financial Disclosure.
A. (i) Cotelligent Group, Inc.'s (the "Company") former accountants, Price
Waterhouse LLP, were dismissed on January 9, 1998 and were replaced by Arthur
Andersen LLP.
(ii) Price Waterhouse LLP's reports on the Company's financial statements
for the fiscal years ended March 31, 1997 and March 31, 1996 have not contained
an adverse opinion or a disclaimer of opinion, nor been qualified or modified as
to uncertainty, audit scope, or accounting principles.
(iii) At a meeting of the Company's Board of Directors on December 23,
1997, the Board authorized the Audit Committee and the Chairman of the Board to
review the relationship with Price Waterhouse LLP and engage in discussions with
additional accounting firms to determine whether a new accounting firm should be
engaged by the Company.
(iv) The Audit Committee of the Board of Directors and the Chairman of the
Board, approved Arthur Andersen LLP as the Company's accountants on January 9,
1998.
(v) During the fiscal years ended March 31, 1997 and 1996, and up to
January 9, 1998, there were no disagreements with the Company's former
accountants on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure.
(vi) None of the events set forth below have occurred during the fiscal
years ended March 31, 1997 or 1996 or in the interim period ended January 9,
1998:
(A) The Company's former accountants having advised the Company that the
internal controls necessary for the Company to develop reliable financial
statements do not exist;
(B) The Company's former accountants having advised the Company that
information has come to their attention that has led it to no longer be able to
rely on management's representations, or that has made it unwilling to be
associated with the financial statements prepared by management; (C) (1) The
Company's former accountants having advised the Company of the need to expand
significantly the scope of its audit, or that information has come to their
attention during the fiscal years ended March 31, 1997 and March 31, 1996 and
the interim period ending January 9, 1998, that if further investigated may: (i)
materially impact the fairness or reliability of either: a previously issued
audit report on the underlying financial statements; or the financial statements
issued or to be issued covering the fiscal period(s) subsequent to the date of
the most recent financial statements covered by an audit report (including
information that may prevent it from rendering an unqualified audit report on
those financial statements), or (ii) cause it to be unwilling to rely on
management's representations or be associated with the Company's financial
statements, and
(C) (2) Due to the Company's former accountants dismissal, or for any other
reason, the accountants did not so expand the scope of their audit or conduct
such further investigation; or
(D) (1) The Company's former accountants having advised the Company that
information has come to their attention that it has concluded materially impacts
the fairness or reliability of either: (i) a previously issued audit report or
the underlying financial statements, or (ii) the financial statements issued or
to be issued covering the fiscal period(s) subsequent to the date of the most
recent financial statements covered by an audit report (including information
that, unless resolved to their satisfaction, would prevent it from rendering an
unqualified audit report on those financial statements), and
45
(D) (2) Due to the Company's former accountants dismissal, or for any other
reason, the issue has not been resolved to the accountants' satisfaction prior
to its dismissal.
B. (i) Arthur Andersen LLP were engaged as the Company's independent
accountants as of January 9, 1998.
(ii) The Company has not, during its two most recent fiscal years, or any
subsequent interim period prior to their appointment on January 9, 1998,
consulted with Arthur Andersen LLP regarding any of the matters set forth in
Item 304(a)(2)(i) or (ii) of Regulation S-K.
46
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information called for by Item 10 with respect to identification of
directors and executive officers of the Company is incorporated herein by
reference to the material under the captions "Election of Directors" and "Other
Executive Officers of the Registrant" in the Company's Proxy Statement for its
1998 Annual Meeting of stockholders which will be filed with the Securities and
Exchange Commission within 120 days after the end of the Company's fiscal year
(the "Proxy Statement").
Item 11. Executive Compensation.
The information called for by Item 11 with respect to executive
compensation is incorporated herein by reference to the material under the
caption "Executive Compensation" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information called for by Item 12 with respect to security
ownership of certain beneficial owner and management is incorporated herein by
reference to the material under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information called for by Item 13 with respect certain
relationships and related transactions is incorporated herein by reference to
the material under the caption "Certain Transactions" in the Proxy Statement.
47
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of the Annual Report on
Form 10-K:
1. Financial Statements required by Item 14 are included and
indexed in Part II, Item 8.
2. Financial Data Schedule is included in Part IV of this report.
Schedule II is omitted because the information is included in
the Notes to Consolidated Financial Statements.
3. EXHIBITS
Exhibit 11.1 is omitted because the information is included in the
Notes to Consolidated Financial Statements. The following is a list
of all Exhibits filed as part of this report.
EXHIBIT NO. DESCRIPTION
3.1 Certificate of Incorporation of Cotelligent (Exhibit 3.1 of the
Registration Statement on Form S-1 (File No. 33-80267) effective
February 16, 1996, is hereby incorporated by reference)
3.2 By-laws of Cotelligent (Exhibit 3.2 of the Registration Statement on
Form S-1 (File No. 33-80267) effective February 16, 1996, is hereby
incorporated by reference)
4.1 Form of certificate evidencing ownership of Common Stock of
Cotelligent (Exhibit 4.1 of the Registration Statement on Form S-1
(File No. 33-80267) effective February 16, 1996, is hereby
incorporated by reference)
10.1 Employment Agreement between Cotelligent and James R. Lavelle (Exhibit
10.1 of the Registration Statement on Form S-4 (File No. 333-6086) is
hereby incorporated by reference)*
10.2 Employment Agreement between Cotelligent and Michael L. Evans (Exhibit
10.2 of the Registration Statement on Form S-4 (File No. 333-6086) is
hereby incorporated by reference)*
10.3 Employment Agreement between Cotelligent and Daniel E. Jackson
(Exhibit 10.4 of the Registration Statement on Form S-4 (File No.
333-6086) is hereby incorporated by reference)*
10.4 Employment Agreement between Cotelligent and Herbert D. Montgomery
(Exhibit 99 of the Registration Statement on Form 8-K (Filed February
2, 1998) is hereby incorporated by reference)*
10.5 Employment Agreement between BFR, Cotelligent and Jeffrey J. Bernardis
(contained in Exhibit 2.1) (Exhibit 10.5 of the Registration Statement
on Form S-4 (File No. 333-6086) is hereby incorporated by reference)*
10.6 Employment Agreement between CAI, Cotelligent and John E. Chamberlain
(contained in Exhibit 2.2) (Exhibit 10.6 of the Registration Statement
on Form S-4 (File No. 333-6086) is hereby incorporated by reference)*
10.7 Employment Agreement between ISI, Cotelligent and Susan E. Trice**
10.8 Cotelligent 1995 Long-Term Incentive Plan (Exhibit 10.9 of the
Registration Statement on Form S-1 (File No. 33-6086) is hereby
incorporated by reference)*
48
10.9 Lease Agreement between BFR Properties and BFR Co., Inc. effective
April 1, 1995, at 7 Clyde Road included with Company's annual report
filed on Form 10-K on June 28, 1997 is hereby incorporated by
reference.
10.10Lease Agreement between BFR Properties and BFR Co., Inc. effective
April 1, 1995, at 31 Clyde Road.
10.11Sublease Agreement between San Francisco Satellite Center and
Cotelligent Group, Inc. effective March 1, 1996.
10.12Business Loan Agreement between Cotelligent Group, Inc. and Bank
Boston, Agreement and effective September 12, 1997 (Exhibit 99.1 of
Form 8-K filed on October 28, 1997 is hereby incorporated by
reference.
21.1 Subsidiaries of the registrant **
23.1 Consent of Arthur Andersen LLP **
24.1 Power of Attorney**
27.1 Financial Data Schedule **
* Management contracts and compensatory plans or arrangements required to
be filed as Exhibits to this Form 10-K.
** Filed herewith.
(b) The following reports on Form 8-K were filed by the registrant during
the last quarter ended March 31, 1998.
(1) Report of the change in Certifying Accountants as filed on January 16,
1998.
(2) Report of the election of Herbert D. Montgomery by the Board of
Directors to serve as Senior Vice President, Chief Financial Officer
and Treasurer of the Company as filed on February 2, 1998.
(3) Report of Independent Accountants and the related financial statements
of Cotelligent Group, Inc. as at December 31, 1997, March 31, 1996 and
1997, including the results of operations and cash flows for each of
the three years in the period ended March 31, 1997, and the nine
months ended December 31, 1997 as filed on March 2, 1998.
(4) Report of revenues and net income of the Company for the month ended
January 31, 1998 as filed on March 11, 1998.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the city of San
Francisco, state of California on the 24th day of June, 1997.
COTELLIGENT GROUP, INC.
By: /s/ James R. Lavelle
-----------------------
James R. Lavelle
Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated. Each
person whose signature appears below hereby authorizes and constitutes
James R. Lavelle, Michael L. Evans, Daniel E. Jackson, and Herbert D.
Montgomery, and each of them singly, his true and lawful attorneys-in-fact
with full power of substitution and resubstitution for him and in his name,
place and stead, in any and all capacities (including his capacity as a
director and/or officer of Cotelligent Group, Inc.) to sign and file any
and all amendments to this report with all exhibits thereto, and other
documents in connection therewith with the Securities and Exchange
Commission, and he hereby ratifies and confirm as all that said
attorneys-in-fact or any of them, or this or his substitutes, may lawfully
do or cause to be done by virtue hereof.
Signature Capacity Date
--------- ------------- ----
/s/ James R. Lavelle
- ------------------------------------
James R. Lavelle Chairman of the Board of Directors June 25, 1998
and Chief Executive Officer
/s/ Edward E. Faber
- ------------------------------------
Edward E. Faber Vice Chairman of the Board of Directors June 25 , 1998
/s/ Michael L. Evans
- ------------------------------------
Michael L. Evans President and Chief Operating Officer and June 25 , 1998
Director
/s/Herbert D. Montgomery
- ------------------------------------
Herbert D. Montgomery Senior Vice President, Chief Financial Officer June 25 , 1998
and Treasurer (Principal Financial Officer)
/s/ Curtis J. Parker
- ------------------------------------
Curtis J. Parker Vice President, Chief Accounting Officer June 25 , 1998
(Principal Accounting Officer)
/s/ Daniel M. Beals
- ------------------------------------
Daniel M. Beals Director June 25 , 1998
/s/ Jeffrey J. Bernardis
- ------------------------------------
Jeffrey J. Bernardis Director June 25 , 1998
50
Signature Capacity Date
--------- ------------- ----
/s/ John E. Chamberlain
- ------------------------------------
John E. Chamberlain Director June 25, 1998
- ------------------------------------
Anthony M. Frank Director June , 1998
/s/ B. Tom Green
- ------------------------------------
B. Tom Green Director June 25, 1998
/s/ Harvey L. Poppel
- ------------------------------------
Harvey L. Poppel Director June 25, 1998
/s/ Susan E. Trice
- ------------------------------------
Susan E. Trice Director June 25, 1998
51
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3.1 Certificate of Incorporation of Cotelligent (Exhibit 3.1 of the
Registration Statement on Form S-1 (File No. 33-80267) effective
February 16, 1996, is hereby incorporated by reference)
3.2 By-laws of Cotelligent (Exhibit 3.2 of the Registration Statement on
Form S-1 (File No. 33-80267) effective February 16, 1996, is hereby
incorporated by reference)
4.1 Form of certificate evidencing ownership of Common Stock of
Cotelligent (Exhibit 4.1 of the Registration Statement on Form S-1
(File No. 33-80267) effective February 16, 1996, is hereby
incorporated by reference)
10.1 Employment Agreement between Cotelligent and James R. Lavelle (Exhibit
10.1 of the Registration Statement on Form S-4 (File No. 333-6086) is
hereby incorporated by reference)*
10.2 Employment Agreement between Cotelligent and Michael L. Evans (Exhibit
10.2 of the Registration Statement on Form S-4 (File No. 333-6086) is
hereby incorporated by reference)*
10.3 Employment Agreement between Cotelligent and Daniel E. Jackson
(Exhibit 10.4 of the Registration Statement on Form S-4 (File No.
333-6086) is hereby incorporated by reference)*
10.4 Employment Agreement between Cotelligent and Herbert D. Montgomery
(Exhibit 99 of the Registration Statement on Form 8-K (Filed February
2, 1998) is hereby incorporated by reference)*
10.5 Employment Agreement between BFR, Cotelligent and Jeffrey J. Bernardis
(contained in Exhibit 2.1) (Exhibit 10.5 of the Registration Statement
on Form S-4 (File No. 333-6086) is hereby incorporated by reference)*
10.6 Employment Agreement between CAI, Cotelligent and John E. Chamberlain
(contained in Exhibit 2.2) (Exhibit 10.6 of the Registration Statement
on Form S-4 (File No. 333-6086) is hereby incorporated by reference)*
10.7 Employment Agreement between ISI, Cotelligent and Susan E. Trice is
filed herewith.
10.8 Cotelligent 1995 Long-Term Incentive Plan (Exhibit 10.9 of the
Registration Statement on Form S-1 (File No. 33-6086) is hereby
incorporated by reference)*
10.9 Lease Agreement between BFR Properties and BFR Co., Inc. effective
April 1, 1995, at 7 Clyde Road included with Company's annual report
filed on Form 10-K on June 28, 1997 is hereby incorporated by
reference.
10.10Lease Agreement between BFR Properties and BFR Co., Inc. effective
April 1, 1995, at 31 Clyde Road.
10.11Sublease Agreement between San Francisco Satellite Center and
Cotelligent Group, Inc. effective March 1, 1996.
10.12Business Loan Agreement between Cotelligent Group, Inc. and Bank
Boston, Agreement and effective September 12, 1997 (Exhibit 99.1 of
Form 8-K filed on October 28, 1997 is hereby incorporated by
reference.
21.1 Subsidiaries of the registrant **
23.2 Consent of Arthur Andersen LLP **
24.1 Power of Attorney**
52
27.2 Financial Data Schedule **
* Management contracts and compensatory plans or arrangements required
to be filed as Exhibits to this Form 10-K.
** Filed herewith.
(b) The following reports on Form 8-K were filed by the registrant during
the last quarter ended March 31, 1998.
(1) Report of the change in Certifying Accountants as filed on January 16,
1998.
(2) Report of the election of Herbert D. Montgomery by the Board of
Directors to serve as Senior Vice President, Chief Financial Officer
and Treasurer of the Company as filed on February 2, 1998.
(3) Report of Independent Accountants and the related financial statements
of Cotelligent Group, Inc. as at December 31, 1997, March 31, 1996 and
1997, including the results of operations and cash flows for each of
the three years in the period ended March 31, 1997, and the nine
months ended December 31, 1997 as filed on March 2, 1998.
(4) Report of revenues and net income of the Company for the month ended
January 31, 1998 as filed on March 11, 1998.
53