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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, 1996
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
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
----------------------------
(Title of class)
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 [_] NO [X]
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 registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $81,013,454 as of June 10, 1996.
The number of shares of the issuers common stock outstanding as of June 10,
1996 was 6,234,305.
DOCUMENTS INCORPORATED BY REFERENCE
There is incorporated by reference the registrants Proxy Statement for the 1996
Annual Meeting of Stockholders, expected to be filed with the Securities and
Exchange Commission within 120 days after the end of the registrants fiscal
year, in Part III hereof.
1
PART I
ITEM 1. BUSINESS.
---------
Cotelligent Group, Inc. ("Cotelligent" or the "Company") is an independent
software professional services firm devoted primarily to providing computer
consulting and contract programming services. The Company owns four
subsidiaries: BFR Co., Inc. ("BFR"), Chamberlain Associates, Inc. ("CAI"), Data
Arts & Sciences, Inc. ("DASI") and Financial Data Systems, Inc. ("FDSI"), which
operate offices in eight metropolitan areas including Boston, New York, San
Francisco/Silicon Valley and Seattle. All four subsidiaries (the "Founding
Companies") were acquired simultaneously (the "Acquisitions") with the closing
of the Companys initial public offering of common stock (the "Offering") on
February 20, 1996.
The Company provides its clients with the services of technical personnel who
are skilled in implementing systems using a wide range of software development
and support services. These services include mainframe and mid-range software
development, personal computer and client/server applications development
support, telecommunications and help-desk support.
Serving clients across a broad spectrum of commercial industries throughout
the United States, the Company has provided significant services to companies in
the financial services, technology and telecommunications industries, including
such companies as AT&T, AT&T Wireless (formerly McCaw Cellular Communications),
Bellcore, Lucent Technologies, Microsoft, Pacific Bell and U S West. The Company
believes that its large and diverse client base presents excellent opportunities
for further marketing of its services. See Item 1, "Business-Business Strategy."
--------
The Company has eight operating offices located in eight states across the
United States and, at March 31, 1996, had a staff of approximately 700 persons,
including approximately 600 technical software professionals. In 1996, Company
employees provided approximately 1,047,000 hours of technical services for over
150 clients. The Company has provided services to approximately 100 clients
listed on the Fortune 1000 over the last 3 years. The Company's engagements are
supported, developed and managed by specialized teams from each of the Company's
offices.
THE INFORMATION TECHNOLOGY SERVICES MARKET
The Company competes in the information technology services market, which can
be divided into three categories: (i) pre-implementation services; (ii)
implementation services; and (iii) post-implementation services. The Company's
principal activities, computer consulting and contract programming, fall within
the implementation segment of the market.
Pre-Implementation Services
Services in this category include strategic planning and consulting,
requirements definition studies, systems planning and design for information
technology. These services are provided by a handful of national and
international professional services firms and normally command premium billing
rates. The professional staff of these firms are generally full-time employees.
Implementation Services
These services, which represent the Company's business focus, include project
management, software applications development, systems and network
implementation, systems integration and higher-level contract programming
services. This segment of the information technology services market is highly
fragmented and serviced by several thousand local and regional firms, as well as
a few national firms. Historically, the barriers to entry in this market have
been low. However, as technology has become more sophisticated, the barriers to
entry have grown. Firms in this market segment utilize full-time employees,
hourly employees and independent consultants in providing their services.
Post-Implementation Services
Services in this category include facilities management, systems maintenance,
help-desk assistance and education and training. This market is also highly
fragmented and has historically had, and continues to have, low barriers to
entry. Firms in this market segment utilize full-time employees, hourly
employees and independent consultants in executing their assignments.
2
According to industry sources, worldwide spending for the Implementation
segment of the software professional services market in 1994 exceeded $38.0
billion and is projected to grow at a compound annual rate of 12% through 1999.
United States spending in this market segment in 1994 was approximately $17.7
billion and is also projected to grow at a compound annual rate of 12% through
1999. The principal buyers of implementation services are large businesses with
recurring information technology needs.
The Company's focus market is highly fragmented and without a dominant service
provider. Service providers in the information technology services industry vary
by market segment and geographic area and include several of the "Big Six"
accounting firms, the professional service groups of computer equipment
companies, large-scale system integrators, outsourcers and smaller regional and
niche firms.
THE INFORMATION TECHNOLOGY SERVICES ENVIRONMENT
The growth of information technology and the increasing importance of
generating timely business information has transformed the way businesses
operate. In the 1960s and 1970s, businesses' dependence on mainframe and mini-
computers resulted in the creation of large information services departments
supporting specialized applications and centralized computing environments.
Given the proprietary nature of the systems and their attendant customized
applications, these organizations were forced to build significant
infrastructure to support and enhance information services capabilities,
resulting in large expenditures of capital resources and the need for a highly
trained, dedicated staff.
In the mid-to-late 1980s, computing environments began to shift from
centralized mainframes and custom applications to decentralized, scaleable
architectures centered on low cost personal computers, client/server
architectures, local and wide area networks, shared databases and generally
available applications software packages. Such trends permitted individuals
greater access to business data and an enhanced ability to analyze and interact
with information. Though highly beneficial to end-users, the client/server
migration has proved problematic to information services managers due to
increased operational challenges, including the integration of multiple
computing platforms, networking protocols, databases and operating systems, as
well as the customization of off-the-shelf applications to conform to existing
business rules and reporting standards. Despite this shift away from the
centralized mainframe model, businesses are often required to maintain and
support certain legacy mainframe systems for a variety of business functions.
At the same time, external economic factors have forced large organizations to
focus on core competencies, trim workforces in the information technology
services area and rely more upon third parties for a variety of services. As a
result, information technology services managers are charged with developing and
supporting increasingly complex information technology systems and applications
of significant strategic value while working under budgetary pressures within
their own 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
information technology projects. Outsourcing such projects provides the
following benefits:
. Provides 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.
. Reduces Costs. Outsourcing converts fixed labor costs into variable costs
by better matching staffing levels to actual needs. Moreover, outsourcing
reduces the costs of recruiting, hiring and terminating permanent
employees.
. Allows Management to Focus on Core Business Issues. Outsourcing enables
management to focus on strategic business issues rather than on
maintaining or implementing changes in the information technology
infrastructure.
Recognizing the advantages applications development outsourcing affords
businesses in the United States, a large number of specialized computer
consulting firms has developed over the last 20 years. According to INPUT, an
international research firm, approximately 3,500 businesses with annual revenues
in excess of $1.0 million provide such services and expertise in the United
States.
3
THE COTELLIGENT STRATEGY
In more recent years, however, the growth of local and regional computer
consulting firms has been hindered by a number of factors, including difficulty
in locating qualified personnel, limited access to capital and the lack of a
national presence. These limitations have made it more difficult for such firms
to provide services to large organizations, many of which have been decreasing
the number of vendors from whom they purchase services. The Company believes
that by acquiring computer consulting services businesses in diverse geographic
regions, it will create a unified entity which has the national presence,
capital, human resources and name recognition required to serve larger
organizations while retaining the local focus and management structures under
which these firms have developed.
BUSINESS STRATEGY
The Company's objective is to be a leading nationwide provider of computer
consulting and contract programming services. The following are key elements for
achieving this objective.
Maintain and Enhance Relationships with Existing Clients. The Company is
committed to consistently provide high quality services. The Company believes
that the quality of its services has enabled it to establish and maintain long-
term relationships with many of its clients. During 1994, 1995 and 1996,
approximately 85.7%, 85.0% and 90.8%, respectively, 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. The Company operates with a
decentralized management structure to provide superior client service and a
motivating environment for its professional staff. The Company believes that
many competitors have homogenized their operating office and professional
service operations, thereby reducing the quality of services, focus and
creativity provided to clients. Therefore, the Company permits its acquired
businesses to manage the professional services and technical aspects of their
respective businesses in a manner consistent with their historical practices and
as dictated by local market conditions. Finance, marketing, planning and
administrative support is managed or provided on a centralized basis. The
Company believes that this approach enables its acquired businesses to maintain
their high level of client service and contact, while allowing them to draw upon
the collective resources of the Company as a whole.
Share Information and Expertise. Each acquired company possesses unique
expertise in certain technologies or vertical markets. The Company fosters an
environment, structure and communications infrastructure to enable its
subsidiaries to continually share knowledge, expertise, resources and
information. The Company believes such activities allow its subsidiaries to
integrate new ideas and systems into their respective operations, thereby
enhancing opportunities for growth.
Focus on Large Clients; Expand Geographically. The Company has historically
focused its client marketing efforts on large companies with substantial
recurring needs for supplemental applications or software development services.
Over the last five years, the Company has qualified as an approved vendor for
more than 100 companies in the Fortune 1000. The combined resources and
geographic dispersion of its subsidiaries enables the Company to continue to
focus marketing efforts on clients requiring national service capabilities.
Since 1989, in order to respond to specific client needs, the Company has
opened four new offices. The Company intends to open additional offices in
selected markets, especially as national account relationships expand.
Management of these new offices will be drawn from staff of existing offices or
newly hired personnel, supported in either case by the Company's executive
management team. See Item 1, "Business--Marketing and Clients."
Pursue Strategic Alliances. The Company seeks to form strategic alliances with
companies where opportunities exist to jointly market the services and
capabilities of both organizations. For example, FDSI and Microsoft jointly
provided an office automation solution to Mount Hood Community College ("MHCC")
in Portland, Oregon. With FDSI as project manager, MHCC standardized and
implemented Microsoft's state-of-the-art technology for MHCC's desktop
configuration. In addition to each party receiving direct benefits from this
project, Microsoft created with MHCC a new training curriculum and MHCC has
increased its enrollment and has become the only "Certified Microsoft Academic
Training
4
Center" in the State of Oregon. FDSI receives Microsoft product training from
MHCC for its technical staff. The project was the first in a series of tasks to
re-engineer the technical infrastructure of MHCC.
ACQUISITION STRATEGY
Recognizing the highly fragmented nature of its industry, the need for capital
and a wider geographic scope, as well as the evolving purchasing and outsourcing
patterns of its present and potential clients, the Company believes that there
are many independent firms that are attractive acquisition candidates. As part
of its strategic plan, the Company has commenced its acquisition program
utilizing a primary entry and tuck-in strategy for expansion into each of its
targeted metropolitan areas. A primary acquisition is an acquisition which
creates a significant presence for the Company in the geographic market in which
the acquisition candidate is located. A tuck-in acquisition is one in which the
candidate is located in a market where the Company already has a presence. A
tuck-in acquisition is also generally smaller in size than a primary
acquisition. The Company intends, where possible, to make a primary acquisition
in a targeted area by acquiring an established, high quality local company. In
most instances, the Company expects to retain the management, sales personnel
and name of the acquired company while seeking to improve the acquired company's
profitability by implementing the Company's business strategies, rather than
converting the local operation to a standardized national business model. The
Company also intends to make tuck-in acquisitions where feasible. The Company
expects to increase its revenues and margins by eliminating a substantial
portion of the costs associated with the revenues derived from acquired
companies.
The Company believes that the continued autonomy offered to acquisition
candidates as a result of the Company's decentralized management philosophy, the
access to the increased capital offered by association with a larger, publicly
traded company and the ability to affiliate with a more geographically diverse
company, will make the Company an attractive acquirer of additional
businesses. While the Company cannot be certain that its acquisition strategy
will be successful, it believes that acquisition opportunities exist. A
significant number of software professional services firms providing
applications consulting and contract services are locally or regionally based
organizations. As competitive pressures increase and as clients continue to seek
national service capabilities, such firms are expected to seek affiliation with
a nationwide organization.
As consideration for future acquisitions, the Company intends to use various
combinations of its Common Stock, cash and notes.
SERVICES
The Company offers services to clients in the pre-implementation and
implementation services segments of the information technology services
environment.
Contract Programming and Technical Staffing
The Company's primary business is to provide highly skilled and trained
technical professionals to augment the internal information technology and
telecommunications staff and end-user groups of major corporations. These
services accounted for approximately 87% of the Company's revenues in 1996. The
Company contracts with its clients to provide ad hoc staffing support for
positions requiring highly specialized computer skills, including applications
programming and development, client/server development, systems software
architecture and design, systems engineering, data and telecommunications
analysis, systems integration and Internet/World Wide Web expertise. The Company
helps its clients complete their development projects by providing both short-
term and long-term staffing from among the Company's technical professionals,
supplemented by its database of over 40,000 qualified professionals nationwide.
Computer Consulting
In addition to its primary business of providing technical personnel to
augment the needs of its clients, the Company also provides certain computer
consulting and systems/application design services. With the increasing
complexity of computer applications, many of the Company's clients find that
they are not able to manage their development projects without added assistance.
Among the services the Company provides in this segment are project management,
systems and business process re-engineering, relational database design and
implementation, hardware and software selection, creation of migration plans,
development of customized software applications and systems integration. The
Company has the
5
resources and experience to plan and manage a project from conception through
completion, as well as the ability to enter a project midstream, assess its
status, develop a plan and successfully complete the project.
The Company also develops and implements open computer systems using
client/server architectures and integrating servers, mini- and mainframe
systems, workstations, terminals and communication gateways into complete,
flexible networks. The Company specializes in integrating local area network
environments into single heterogeneous networks and unifying enterprise networks
into wide area network environments. In addition, the Company offers client
support programs for facilities management, permanent placement and education
and training.
TECHNICAL PERSONNEL AND RECRUITMENT
Building and enhancing a database of skilled technical personnel is integral
to the Company's success. The Company uses traditional recruiting methods, such
as a presence at local and regional technical colleges, newspaper and technical
periodical classified advertising and participation in national and regional job
fair networks. It also employs less traditional methods, including the use of
the Internet through skill-specific user groups, World Wide Web page
advertisements, on-line and skills networks, resume referral services,
outplacement agencies and the Company's skills/resume retrieval networks. The
Company maintains a staff of 25 full-time recruiters in its operating offices.
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, availability and are also asked to
provide technical references. Once qualified, the candidate's profile, and
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 in the process of linking its
subsidiaries' separate databases in a manner that will allow each subsidiary to
access and search another's database.
Through its operating subsidiaries, the Company maintains databases with over
40,000 technical personnel who have a wide range of skills, including 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
As of March 31, 1996, the Company had a staff of approximately 700 employees,
including approximately 600 technical software professionals.
Although the Company has been successful in attracting and retaining qualified
technical personnel in the past, competition for such personnel is intense.
Demand for qualified professionals conversant with new technologies outstrips
supply as additional skills are required to keep pace with evolving
technologies. There can be no assurance that, in the future, the Company will be
successful in attracting and retaining qualified technical personnel.
MARKETING AND CLIENTS
The Company focuses its marketing efforts on large businesses with substantial
recurring needs for applications or software development support. The
development needs of such businesses can provide opportunities for major
projects that extend for multiple years or generate additional assignments. The
Company also intends to begin to focus its marketing efforts on rapidly growing
mid-sized companies. With the implementation of client/server technology, the
Company believes that there is an increasing need among mid-sized companies for
technical assistance and applications support.
The Company markets its services through account managers located in each
operating office. Approximately 26 people are engaged in marketing full time. To
market its services more effectively and consistently, the Company implements an
account team strategy. Assigning a team to key accounts creates the opportunity
to service a client's needs more quickly and efficiently and provides as well as
providing more marketing opportunities because the client and Company personnel
know specifically who is responsible for the service activities and are
generally more aware of a client's technology staffing
6
needs, methodologies and budgets. Account managers work as members of a team,
thereby permitting them to focus on identifying and understanding a client's
needs while other members of the team focus on finding qualified technical
personnel to meet the needs of the client. Performance bonuses and commissions
constitute a significant portion of the total compensation of account managers
and are based upon the profitability of the business generated.
The Company is expanding its marketing efforts by coordinating its
subsidiaries responses to requests for proposals from current clients. The
Company is pursuing new client accounts primarily in those geographic areas
presently serviced by its subsidiaries. The Company believes that its size will
create opportunities to more effectively compete in vendor list selection, large
contract programming assignments and project engagements.
The Company has historically derived a significant percentage of its total
revenue from a relatively small number of clients. In 1995, the Company's four
largest clients accounted for 30.6% of the Company's revenue. In 1996, the
Company generated approximately 50% of its revenue from its top 13 clients. In
accordance with industry practice, the Company's contracts are generally
terminable at will by clients without penalty. The Company does not believe that
backlog is material to its business. The loss of a significant client could have
a material adverse effect on the Company's business, financial condition and
results of operations.
COMPETITION
The commercial information technology 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 systems consulting and integration firms,
professional service divisions of application software firms, the professional
service groups of computer equipment companies, facilities management and
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. The
majority of the Company's competition at the Founding Company level is made up
of smaller regional firms with a strong presence in their respective local
markets. The Company believes that as it grows and expands geographically, it
may compete with additional national, regional and local service providers.
The Company believes that the principal competitive factors in the information
technology services industry include quality of service, responsiveness to
client needs, speed of application software development, price, project
management capability, technical expertise, size and reputation. Pricing has its
greatest importance as a competitive factor in the area of professional service
staffing. The Company believes its ability to compete also depends in part on a
number of competitive factors outside its control, including the ability of its
competitors to hire, retain and motivate skilled technical and management
personnel, the ownership by competitors of software used by potential clients,
the price at which others offer comparable services and the extent of its
competitors' responsiveness to client needs.
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 computer consulting and contract
programming companies. However, no assurance can be given that the Company's
acquisition program will be successful or that the Company will be able to
compete effectively in its chosen market segments.
ITEM 2. PROPERTIES.
-----------
The Company's principal executive offices and the headquarters of its four
subsidiaries are located in five facilities with an aggregate of approximately
34,800 square feet and are leased at aggregate current monthly rents of
approximately $55,000 for terms not expiring before the year 2000. The Company's
remaining five offices aggregate approximately 12,630 square feet and are leased
at aggregate current monthly annual rents of approximately $24,000 for various
terms, with no lease commitment extending past the year 2001. 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 favorable.
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.
7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
Not applicable.
8
PART II
ITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER
---------------------------------------------------------------
MATTERS.
--------
The Company's Common Stock has traded on the NASDAQ National Market since
February 14, 1996, the date of the Company's initial public offering. On March
31, 1996, the last sale price of the Common Stock was $11.75 per share, as
published in The Wall Street Journal on April 1, 1996. At March 31, 1996, there
were 58 stockholders of record of the Company's Common Stock. The following
table sets forth the range of high and low sale prices for the Common Stock for
the period from February 14, 1996, through March 31, 1996 and the period from
April 1, 1996 through June 10, 1996.
HIGH LOW
------------------------------
February 14, 1996 through
March 31, 1996.......................... $ 11.75 $ 8.25
======= ======
April 1, 1996 through June 10, 1996...... $ 21.50 $11.13
======= ======
The Company intends to retain all of its earnings to finance the expansion of
its business and for general corporate purposes and does not anticipate paying
any dividends on its Common Stock for the foreseeable future. In addition, the
line of credit facility restricts the Companys ability to pay dividends without
the consent of the lender.
9
ITEM 6. SELECTED FINANCIAL DATA.
------------------------
The Company was founded in February 1993 to create a nationwide computer
consulting and contract programming company. On February 20, 1996 Cotelligent
acquired BFR, CAI, DASI and FDSI (the "Founding Companies") simultaneously with
the completion of the Offering. These Founding Companies and Cotelligent,
for the periods prior to the Acquisitions (February 20, 1996), are herein
referred to as the "Combined Predecessor Companies". The historical financial
statements of the Combined Predecessor Companies have been combined for the
periods prior to the Acquisitions as if these companies had always been members
of the same operating group. However, during these periods presented, the
Combined Predecessor Companies were not under common control or management, and
one of the Founding Companies, BFR, was an S corporation through March 31, 1995
and therefore, not subject to federal income tax. Accordingly, the data
presented may not be comparable to or indicative of, the post-combination
results to be achieved by the Company. The financial data presented for the
Successor Cotelligent Group represents the results of the consolidated entity
subsequent to the Acquisitions (February 20, 1996).
The following selected financial data with respect to the Combined
Predecessor Companies combined statements of operations for the years ended
March 31, 1993, 1994 and 1995 and the period April 1, 1995 through February 19,
1996 and with respect to the Combined Predecessor Companies combined balance
sheets as of March 31, 1994 and 1995, have been audited by Price Waterhouse LLP.
The selected combined financial data with respect to the Combined Predecessor
Companies combined statements of operations for the year ended March 31, 1992,
and with respect to the Combined Predecessor Companies combined balance sheets
as of March 31, 1992 and 1993, 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. In addition, the Cotelligent Group, Inc. consolidated
balance sheet as of March 31, 1996 has also been audited by Price Waterhouse
LLP. The Successor Cotelligent Group, Inc. consolidated statement of operations
for the period February 20, 1996 through March 31, 1996, as presented in the
following selected data, has been prepared by management and represents the
results of the consolidated entity subsequent to the Acquisitions.
The pro forma statement of operations has been derived from unaudited
financial data and gives effect to compensation differentials to employees
and former owners of the Combined Predecessor Companies, the planned
termination of contributions to retirement plans, incremental selling,
general and administrative costs of the corporate activities of Cotelligent and
adjustments to reflect income taxes at the effective statutory rate for the
combined entity.
The selected financial data for the individual Founding Companies and
Cotelligent for the years ended March 31, 1993, 1994 and 1995 and for the period
April 1, 1995 through February 19, 1996 have been derived from financial
statements of each of these companies and have been audited by Price Waterhouse
LLP. The selected financial data for the individual Founding Companies and
Cotelligent for the year ended March 31, 1992 have been derived from unaudited
financial statements of these companies which, in the opinion of management,
reflect all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of such data.
The selected financial data provided should be read in conjunction with the
Cotelligent Group, Inc., financial statements, the Combined Predecessor
Companies financial statements, the individual financial statements of BFR, CAI,
DASI and FDSI, the related notes thereto and "Managements Discussion and
Analysis of Financial Condition and Results of Operations" in this Form 10-K.
10
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SUCCESSOR
COTELLIGENT
COMBINED PREDECESSOR COMPANIES (1) GROUP, INC. (2) PRO FORMA (3)
------------------------------------------------------------ --------------- -------------
YEAR ENDED MARCH 31,
---------------------------------------------
YEAR ENDED
APRIL 1, 1995- FEB 20, 1996- MARCH 31,
1992 1993 1994 1995 FEB 19, 1996 MAR 31, 1996 1996
--------- ---------- ---------- --------- -------------- ------------- ---------
STATEMENT OF OPERATIONS
DATA:
Revenues.......................... $23,974 $31,138 $39,434 $50,028 $55,746 $ 8,265 $64,011
Cost of services.................. 18,030 23,090 29,941 38,488 42,362 6,173 48,236
------- ------- ------- ------- ------- -------- -------
Gross margin...................... 5,944 8,048 9,493 11,540 13,384 2,092 15,775
Selling, general and
administrative
expenses......................... 5,721 7,035 8,055 10,743 10,788 1,481 11,962
------- ------- ------- ------- ------- -------- -------
Operating income.................. 223 1,013 1,438 797 2,596 611 3,813
Other expense (income),
net.............................. 68 109 165 179 394 (25) 222
------- ------- ------- ------- ------- -------- -------
Income before provision
for income taxes................. 155 904 1,273 618 2,202 636 3,591
Provision for income taxes........ 58 211 339 393 1,952 125 1,436
------- ------- ------- ------- ------- -------- -------
Income from continuing
operations....................... 97 693 934 225 250 511 2,155
Discontinued operations (4)....... - (257) (285) (184) - - -
------- ------- ------- ------- ------- -------- -------
Net income........................ $ 97 $ 436 $ 649 $ 41 $ 250 $ 511 $ 2,155
======= ====== ====== ====== ===== ========= =======
Pro forma net income per
share (5)........................ $ .46
=======
UNAUDITED PRO FORMA DATA (6):
Income before provisions for
income taxes.................... $ 155 904 1,273 618 2,202
Provision for income taxes....... 65 328 566 333 881
------ ----- ------ ------ ------
Income from continuing operations 90 576 707 285 1,321
====== ===== ====== ====== ======
MARCH 31, MARCH 31,
-------------------------------------------- ---------
1992 1993 1994 1995 1996
------- -------- --------- -------- ---------
BALANCE SHEET DATA:
Working capital................. $ 2,309 $ 3,220 $ 3,806 $ 3,621 $17,363
Total assets.................... $ 3,427 $ 7,689 $ 8,936 $ 11,048 $27,991
Long-term debt, less
current portion................ $ 1,453 $ 1,535 $ 944 $ 838 $ 258
Stockholders' equity............ $ 2,303 $ 2,788 $ 3,532 $ 3,632 $18,050
(1) As a result of the substantial continuing interests in the Company of the
former stockholders of FDSI, BFR, DASI, CAI and Cotelligent, (the "Combined
Predecessor Companies"), the historical financial information of the
Combined Predecessor Companies has been combined on a historical cost basis
for the periods presented. Financial data presented represents the results
of the Combined Predecessor Companies prior to the consummation of the
Acquisitions by Cotelligent Group, Inc. on February 20, 1996.
(2) Represents the statement of operations and balance sheet data of the
consolidated entity subsequent to the Acquisitions on February 20, 1996.
(3) Pro forma data reflect adjustments for the Acquisitions including: (i)
compensation differentials to former owners and employees of the Combined
Predecessor Companies; (ii) termination of contributions to retirement
plans; (iii) incremental selling, general and administrative costs
associated with Cotelligent corporate activities; and (iv) income taxes as
if the entities were combined and subject to the effective federal and
state statutory rates throughout the periods presented. See Notes to the
March 31, 1996 Cotelligent Group, Inc. financial statements which includes
the detailed pro forma statement of operations for the year ended March 31,
1996.
(4) Discontinued operations represent the results of a security system software
development and marketing subsidiary of FDSI which was spun off to FDSI
stockholders in June 1994. See note 14 of Notes to the Financial
Statements of the Combined Predecessor Companies.
(5) Pro forma weighted average shares outstanding used to determined pro forma
net income per share were 4,636,664. Shares used to calculate the weighted
average shares were as follows: (i) shares issued by Cotelligent prior to
the Offering, shares issued to the stockholders of the Founding Companies
in connection with the Acquisitions and shares sold in the Offering to pay
the cash portion of the consideration for the Founding Companies, were
considered outstanding for the entire period; (ii) additional shares sold
to the public in the Offering and (iii) dilution attributable to options to
purchase common stock in applying the treasury stock method.
(6) One of the Founding Companies, BFR, was an S corporation through March 31,
1995 and, accordingly, was not subject to federal income taxes. The
unaudited pro forma information is presented for the purpose of reflecting
a provision for income taxes as if all of the Founding Companies had been
subject to income tax for all periods presented, calculated in accordance
with FAS 109, based on tax laws that were in effect during the respective
periods.
11
SELECTED FINANCIAL DATA
FOUNDING COMPANIES AND COTELLIGENT
(IN THOUSANDS)
The following table presents selected information for each of the Founding
Companies and Cotelligent for the five most recent fiscal years.
YEAR ENDED MARCH 31, APRIL 1, 1995-
----------------------------------------------------------------------------- FEBRUARY 19,
1992 1993 1994 1995 1996
----------------------------------------------------------------------------- --------------
(IN THOUSANDS)
FDSI:
Revenues................... $6,119 $8,206 $11,191 $15,807 $16,468
Gross margin............... 1,659 2,362 2,955 3,541 4,314
Selling, general and
administrative expenses... 1,543 1,927 2,419 3,120 3,166
Income from continuing
operations................ 55 278 314 223 1,022
Net income................. 55 22 29 39 658
BFR:
Revenues................... $7,958 $10,138 $14,440 $15,221 $15,623
Gross margin............... 2,065 3,069 3,626 3,981 4,129
Selling, general and
administrative expenses... 2,047 2,648 2,833 4,173 3,589
Net income (loss).......... 17 364 681 (179) (702)
DASI:
Revenues................... $7,170 $9,396 $10,065 $12,437 $14,455
Gross margin............... 1,549 1,884 2,094 2,696 3,201
Selling, general and
administrative expenses... 1,427 1,694 1,862 2,195 2,344
Net income................. 47 71 80 235 442
CAI:
Revenues................... $2,727 $3,398 $ 3,738 $ 6,563 $ 9,200
Gross margin............... 671 733 818 1,322 1,740
Selling, general and
administrative expenses... 704 728 774 1,054 1,274
Net income (loss).......... (22) 17 26 147 275
COTELLIGENT:
Revenues................... -- -- -- -- --
Gross margin............... -- -- -- -- --
Selling, general and
administrative expenses... -- 38 167 201 415
Net income (loss).......... -- (38) (167) (201) (423)
12
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- - -------------------------------------------------------------------------------
OF OPERATIONS.
- - --------------
Cotelligent was formed in February 1993 to create a nationwide computer
consulting and contract programming company. Cotelligent acquired,
simultaneously with the closing of its initial public offerings of common stock,
(the "Offering"), four established businesses (the Founding Companies) which
provide a wide variety of computer consulting services in various metropolitan
areas of the country. The Founding Companies have operated since 1975 (DASI),
1980 (CAI), 1982 (FDSI) and 1985 (BFR). During the periods discussed below,
except for the period February 20, 1996 through March 31, 1996, the Combined
Predecessor Companies were not under common control or management; therefore,
the data presented may not be comparable to or indicative of the post-
combination results to be achieved by the Company. The entire fiscal year ended
March 31, 1996 is compared to the entire fiscal year ended March 31, 1995
because, in the opinion of management, the consolidated period in fiscal 1996 is
not material to the year taken as a whole and there were no significant events
during the consolidated period that would make the results of operations during
such period inconsistant with the pre-consolidation results of operations.
The Company derives substantially all of its revenues from professional
service activities. The majority of these activities are provided under "time
and expense" 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 such rates 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 margins (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 margins can be adversely impacted if
service activities cannot be billed, if the Company is not effective in managing
its service activities or if fixed-fee engagements (which historically have not
constituted a significant portion of total revenues) are not properly priced.
Operating income (gross margin less selling, general and administrative
expenses) can be adversely impacted by administrative staff compensation,
expenses related to growing and expanding the Company's business, which may be
incurred before revenues are generated from such investment, or high levels of
unutilized time (work activities not chargeable to clients or unrelated to
client services) of full-time service professional employees.
From time to time, the Company has opened new operating or branch offices, and
it may open new offices in the future. Historically, a new office requires
approximately 12 months to reach break-even profitability. During such period, a
new office may lose on average $50,000 per month. There can be no assurance that
any new office will ever become profitable.
The Company's historical tax rates have been lower than statutory rates due to
the S corporation election BFR had in effect through March 31, 1995. The
Companys effective statutory tax rate as of April 1, 1995 is approximately 40%.
As a result of the substantial continuing interests in the Company of the
former stockholders of BFR, CAI, DASI, FDSI and Cotelligent (the "Combined
Predecessor Companies"), the historical financial information of the Combined
Predecessor Companies have been combined on a historical cost basis for all
periods presented. Accordingly, no goodwill has been recorded in combining these
businesses. In the future, the Company may be required to record goodwill to
account for the amount of the purchase price of acquired businesses which
exceeds the fair value of the assets of businesses which it may acquire.
Pro forma data reflect adjustments for the Acquisitions including: (i)
compensation differentials to former owners and employees of the Combined
Predecessor Companies; (ii) termination of contributions to retirement plans;
(iii) incremental selling, general and administrative costs associated with
Cotelligent corporate activities; and (iv) income taxes as if the entities were
combined and subject to the effective federal and state statutory rates
throughout the periods discussed.
As part of its strategic plan, the Company intends to acquire other computer
consulting and contract programming companies. 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, financial 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.
13
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.
RESULTS OF OPERATIONS
The following discusses the results of operations for the fiscal years
ended March 31, 1994, 1995 and 1996. For fiscal years ended March 31, 1994 and
1995, the results of operations represent the results of the Combined
Predecessor Companies . For the fiscal year ended March 31, 1996, the results of
operations represent the Combined Predecessor Companies, for the period April 1,
1995 through February 19, 1996 and have been combined with the results of the
Successor Cotelligent Group, Inc. for the period February 20, 1996 through March
31, 1996 subsequent to the Acquisitions.
The following table sets forth the percentage of net revenues represented by
items in the Company's statement of operations for the periods presented.
YEAR ENDED MARCH 31,
-----------------------------------
PRO FORMA
1994 1995 1996 1996
-----------------------------------
Revenues.............................. 100.0% 100.0% 100.0% 100.0%
Cost of services...................... 75.9 76.9 75.8 75.4
----- ----- ----- -----
Gross margin........................ 24.1 23.1 24.2 24.6
Selling, general and administrative
expenses............................. 20.4 21.5 19.2 18.7
----- ----- ----- -----
Operating income.................... 3.7 1.6 5.0 5.9
----- ----- ----- -----
Other expense, net.................... 0.4 0.3 0.6 0.3
----- ----- ----- -----
Income before provision for income
taxes................................ 3.3 1.3 4.4 5.6
----- ----- ----- -----
Provision for income taxes............ 0.9 0.8 3.2 2.2
Income from continuing operations..... 2.4% 0.5% 1.2% 3.4%
===== ===== ===== =====
PRO FORMA COMBINED RESULTS OF OPERATIONS
PRO FORMA 1996 COMPARED TO HISTORICAL 1996
Revenues. Revenues were $64.0 million for 1996 on both a pro forma and
historical basis.
Gross Margin. The pro forma gross margin was 24.6% of pro forma revenues
compared to historical gross margin of 24.2% of historical revenues in 1996. The
increase in pro forma gross margin as a percentage of pro forma revenues
compared to historical 1996 results is primarily due to the renegotiation of
executive compensation arrangements in connection with the Acquisitions and
elimination of retirement fund contributions since the Company plans to make no
such contributions in the future.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses on a pro forma basis were $12 million, or 18.7% of pro
forma revenues, compared to historical selling, general and administrative
expenses of $12.3 million, or 19.2% of historical revenues in 1996. The reduced
selling, general and administrative expenses on a pro forma basis reflect a
reduction in executive compensation from historical levels due to the
renegotiation of executive compensation arrangements in connection with the
Acquisitions and elimination of retirement fund contributions since the Company
plans to make no such contributions in the future. This reduction was partially
offset by estimated additional expenses related to Cotelligent's corporate
operating activities.
14
Interest expense, Net. Net interest expense on a pro forma basis was $261,000,
or .4% of pro forma revenues, compared to historical net interest expense of
$408,000, or .6% of historical revenues in 1996. The reduced net interest
expense on a pro forma basis reflects the elimination of interest expense
associated with the borrowings of BFR's Employee Stock Ownership and Money
Purchase Plan.
Provision for Income Taxes. Provision for Income Taxes on a pro forma basis
were $1.4 million, or an effective tax rate of 40.0% of pro forma income before
provision for income taxes, compared to historical provision for income taxes of
$2.1 million, or an effective rate of 73.2% of income before provision for
income taxes in 1996. The reduced provision for income taxes on a pro forma
basis reflects an effective tax rate of 40% whereas the historical effective
rate includes a $925,000 liability recorded in April 1995 due to the termination
by BFR of its S corporation election and the inability of Cotelligent Group,
Inc. to recognize a tax benefit on net operating losses incurred prior to the
Acquisitions.
HISTORICAL COMBINED RESULTS OF OPERATIONS
1996 COMPARED TO 1995
Revenues. Revenues increased $14.0 million, or 28%, to $64.0 million in 1996
from $50.0 million in 1995. The increase was primarily attributable to a 24.9%
increase in total client service hours provided to 1,047,000 hours in 1996 from
838,000 hours in 1995, and a 6.2% increase in the average hourly billing rate to
$60.78 in 1996 from $57.24 in 1995. The increase in hourly billing rate reflects
increased demand for employees and consultants with higher skill levels and a
more favorable economic climate. The increases discussed above were in addition
to an increase in placement fee revenues and were offset by the absence of $1.6
million of revenue from FDSI's fixed-price business.
Gross Margin. Gross margin increased $3.9 million, or 34.1%, to $15.5 million
in 1996 from $11.5 million in 1995, primarily as a result of an increase in
hours of service provided to clients. Gross margin as a percentage of revenues
increased to 24.2% in 1996 from 23.1% in 1995, principally due to hourly billing
rates having risen faster than compensation costs. These gains were partially
offset by a nonrecurring $297,000 contribution made to the BFR Plan and costs
(for which there were no revenues) incurred by FDSI in connection with winding
down its fixed-price hardware and software systems integration services it
provided primarily to government organizations which FDSI ceased providing in
1995 ("FDSI's fixed-price business").
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.6 million, or 14.2%, to $12.3 million in
1996 from $10.7 million in 1995. The increase in absolute dollars was primarily
due to increased compensation to existing staff and staff added to support
anticipated growth, increased occupancy expenses and related operating costs
associated with the Company's growth. Selling, general and administrative
expenses decreased as a percentage of revenues from 21.5% in 1995 to 19.2% in
1996, 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 undertakes to integrate the Founding Companies, expand geographically
and acquire other companies.
Interest Expense, Net. Interest expense, net of interest income, increased
$199,000 to $408,000 from $209,000 in 1995, reflecting increased borrowings
under the Company's various bank revolving credit facilities and $147,000
associated with contributions to the BFR Plan. The bank revolving credit
facilities borrowings were required to support the expansion of the Company's
infrastructure.
Provision for Income Taxes. The Company's provision for income taxes increased
$1.7 million to $2.1 million, an effective rate of 73.2%, in 1996, from
$393,000, an effective rate of 63.5%, in 1995. The increase in the provision
for income taxes is due to an increase in income before taxes to $2.8 million in
1996 from $618,000 in 1995 and the liability of $925,000 recorded in April 1995
due to the termination by BFR of its S corporation election. The Company's
effective statutory tax rate as of April 1, 1995 is 40%.
1995 COMPARED TO 1994
Revenues. Revenues increased $10.6 million, or 26.9% to $50.0 million in 1995
from $39.4 million in 1994. The increase was attributable to a 27.4% increase in
total client service hours provided to 838,000 in 1995 from 658,000 hours in
1994 and a 2.1% increase in the average hourly billing rate to $57.24 in 1995
from $56.04 in 1994. The increase in hours of service was primarily due to
greater utilization of personnel. The increase in hourly billing rate reflects
increased
15
demand for employees and consultants with higher skill levels. The increases
discussed above were supplemented by a slight increase in placement fee revenues
and were offset by a decrease of $639,000 of revenue from $2.3 million in 1994
to $1.6 million in 1995 from FDSI's fixed-price business.
Gross Margin. Gross margin increased $2.0 million, or 21.6%, to $11.5 million
in 1995 from $9.5 million in 1994, primarily as a result of an increase in hours
of service provided to clients. Gross margin as a percentage of revenues
decreased from 24.1% in 1994 to 23.1% in 1995, principally due to compensation
costs which rose more rapidly than hourly billing rates due to increased
competition for qualified personnel, a $704,000 contribution made to the BFR
Plan and an increase in costs relative to revenues in connection with FDSI's
fixed-price business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.7 million, or 33.4%, to $10.7 million in
1995 from $8.0 million in 1994 primarily due to increased compensation to
existing staff, an increase in officers' compensation of $696,000, a $196,000
contribution made to the BFR Plan and an increase from $608,000 to $663,000 in
the costs incurred in connection with FDSI's fixed-price business. The increase
in officers' compensation consists of an increase of $790,000 paid by BFR in
anticipation of the termination of its S corporation election, increases
incurred by CAI and DASI of $81,000 and $51,000, respectively, and a decrease in
officers' compensation incurred by FDSI of $226,000. Selling, general and
administrative expenses increased as a percentage of revenues to 21.5% in 1995
from 20.4% in 1994, reflecting higher staffing levels and the factors described
above.
Interest Expense, Net. Interest expense, net of interest income, increased
$50,000 to $209,000 in 1995 from $159,000 in 1994 as a result of increased
borrowings under the Company's various bank revolving credit facilities. Such
borrowings were used to support operating activities.
Provision for Income Taxes. The Company's provision for income taxes increased
$54,000 to $393,000, an effective rate of 63.5%, in 1995 from $339,000, an
effective rate of 26.6%, in 1994. The effective tax rate increased significantly
because little benefit was derived from BFR's operating loss due to its S
corporation election, and no separate company tax benefit was obtained from
Cotelligent's separate company operating loss.
QUARTERLY OPERATING RESULTS 1996 AND 1995
The Companys 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-expense 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 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 last two years are summarized below. Data for the fourth quarter of 1996 is
separated to distinguish the results of operation before and after the
Acquisition.
(IN THOUSANDS)
- - -----------------------------------------------------------------------------------------------------------------------------------
SUCCESSOR
COTELLIGENT
COMBINED PREDECESSOR COMPANIES GROUP, INC.
- - -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1995 YEAR ENDED MARCH 31, 1996
- - -------------------------------------------------------------------- -------------------------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD JAN 1- FEB 20-
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER FEB 19 MARCH 31
- - -----------------------------------------------------------------------------------------------------------------------------------
Revenues $11,409 $11,654 $13,033 $ 13,941 $14,781 $15,855 $16,140 $ 8,970 $ 8,265
Gross Profit 2,754 3,015 3,269 2,511 3,357 3,669 4,192 2,166 2,092
Operating Income 543 331 538 (794) 619 637 1,022 (76) 636
- - -----------------------------------------------------------------------------------------------------------------------------------
Income from
continuing
operations $ 393 $ 288 $ 370 $ (826) $ 332 $ 332 $ 620 $ (116) $ 511
- - ------------------------------------------------------------------------------------------------------------------------------------
16
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth principally through cash flows from
operations, periodic borrowings under its credit facilities, related party
borrowings and sales of shares of common stock of the individual Founding
Companies.
The Company's primary sources of liquidity are cash, credit facilities and the
collection of its accounts receivable. Accounts receivable have grown as the
Company's operations have grown. Receivables were 67 days of revenue at March
31, 1996 and 1995. The Company's ability to reduce significantly the aging of
its outstanding receivables is limited because of a continuing general trend by
clients to slow their payment of invoices as a means of managing cash. Should
the Company not be able 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 used by operating activities of Cotelligent and the Founding Companies
was $48,000 for the year ended March 31, 1996. The Company has supplemented cash
generated by operations periodically with short-term borrowings under various
credit facilities with banks. The average balance of such borrowings outstanding
was approximately $4.0 million and approximately $2.7 million during 1996 and
1995, respectively.
At March 31, 1996, the Company had $14.0 million in cash and cash equivalents
as compared to $603,000 at March 31, 1995 reflecting primarily the net cash
proceeds from the Offering. At March 31, 1996, the Company had short-term notes
payable under its bank revolving credit facilities and current installments of
long-term obligations outstanding in the amount of $2.4 million. Long-term
obligations, consisting primarily of capital lease obligations, totaled $258,000
at March 31, 1996 compared to $838,000 at March 31, 1995. The Company had
approximately $2.1 million available under bank credit facilities at March 31,
1996. The bank facilities bear interest at rates ranging from 8.25% to 9.75%
and are secured by accounts receivable, various assets of the Founding Companies
and are guaranteed by the principals of each of the Founding Companies. The
Company is not in default under any of its credit agreements.
Cotelligent and each of the Founding Companies had separate banking
relationships through May 31, 1996. Effective June 1, 1996, the Company's
separate banking relationships were consolidated into a single banking
relationship with a major bank. The single relationship will provide for a more
effective means of managing operating capital. The new relationship provides a
credit facility in the amount of $10.0 million for the Company, secured by
accounts receivable and other assets of the Company. Borrowings on the facility
will bear interest at the bank's prime rate. The Company intends to borrow from
time-to-time to meet normal operating needs, finance its receivables or to
effect acquisitions in connection with its acquisition strategy.
As of April 1, 1995, BFR terminated its S corporation election. As a result,
federal and state income taxes of approximately $925,000 are expected to be paid
ratably over the next four years.
The Company believes the remaining proceeds from the sale of Common Stock in
the Offering, together with 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 six months.
RECENTLY ISSUED ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", which is required for fiscal years beginning after December 15,
1995 and adoption of the recognition and measurement provisions for non employee
transactions no later than December 15, 1995. The new standard defines a fair
value method of accounting for stock options and other equity instruments. Under
the fair value method, compensation cost is measured at the grant date based on
the fair value of the award and is recognized over the service period, which is
usually the vesting period.
Pursuant to the new standard, companies are encouraged, but are not required,
to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", but would be required to disclose in a note to the
financial statements pro forma net income earnings per share as if the Company
had applied the new method of accounting.
17
The accounting requirements of the new method are effective for all employee
awards granted after the beginning of the fiscal year of adoption. The Company
plans to account for employee-stock based compensation under Accounting
Principles Board Opinion No. 25. Accordingly, the Company does not anticipate
that the adoption of the standard will have any material impact on the Company's
financial position, results of operations or cash flows.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------
The remainder of this page is left intentionally blank.
19
COTELLIGENT GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----------
COTELLIGENT GROUP, INC.
Report of Price Waterhouse LLP,
Independent Accountants................ 22
Consolidated Balance Sheet at
March 31, 1995 and 1996................ 23
Consolidated Statement of
Operations for the Years Ended March
31, 1994, 1995 and 1996................ 24
Consolidated Statement of
Stockholders' Equity for the Years
Ended March 31, 1994, 1995 and 1996.... 25
Consolidated Statement of Cash
Flows for the Years Ended March 31,
1994, 1995 and 1996.................... 26
Notes to Consolidated Financial
Statements............................. 27
COMBINED PREDECESSOR COMPANIES
Report of Price Waterhouse LLP,
Independent Accountants................ 36
Balance Sheet as of March 31, 1994
and 1995............................... 37
Statement of Operations for the
Years Ended March 31, 1994 and 1995,
and for the Period April 1, 1995
Through February 19, 1996............... 38
Statement of Stockholders' Equity
for the Years Ended March 31, 1994
and 1995 and for the Period April 1, 1995
Through February 19, 1996............... 39
Statement of Cash Flows for the
Years Ended March 31, 1994 and 1995
and for the Period April 1, 1995 Through
February 19, 1996....................... 40
Notes to Financial Statements............ 42
FINANCIAL DATA SYSTEMS, INC.
Report of Price Waterhouse LLP,
Independent Accountants................. 53
Consolidated Balance Sheet as of
March 31, 1994 and 1995................. 54
Consolidated Statement of
Operations for the Years Ended March 31,
1994 and 1995, and for the Period
April 1, 1995 Through February 19, 1996. 55
Consolidated Statement of Stockholders'
Equity for the Years Ended
March 31, 1994 and 1995 and for
the Period April 1, 1995 Through
February 19, 1996....................... 56
Consolidated Statement of Cash
Flows for the Years Ended March 31,
1994 and 1995 and for the
Period April 1, 1995 Through
February 19, 1996....................... 57
Notes to Consolidated Financial
Statements.............................. 58
BFR CO., INC.
Report of Price Waterhouse LLP,
Independent Accountants................. 66
Balance Sheet as of March 31, 1994
and 1995................................ 67
Statement of Operations for the
Years Ended March 31, 1994 and 1995,
and for the Period April 1, 1995 Through
February 19, 1996....................... 68
Statement of Stockholders' Equity
for the Years Ended March 31, 1994 and
1995 and for the Period April 1, 1995
Through February 19, 1996............... 69
Statement of Cash Flows for the
Years Ended March 31, 1994 and 1995
and for the Period April 1, 1995 Through
February 19, 1996....................... 70
Notes to Financial Statements............ 71
20
COTELLIGENT GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
DATA ARTS & SCIENCES, INC.
Report of Price Waterhouse LLP,
Independent Accountants................. 77
Combined Balance Sheet as of
March 31, 1994 and 1995................. 78
Combined Statement of Operations
for the Years Ended March 31, 1994 and
1995, and for the Period April 1, 1995
Through February 19, 1996............... 79
Combined Statement of Stockholders'
Equity for the Years Ended March 31,
1994 and 1995 and for the
Period April 1, 1995 Through
February 19, 1996....................... 80
Combined Statement of Cash Flows
for the Years Ended March 31, 1994 and
1995 and for the Period April 1, 1995
Through February 19, 1996............... 81
Notes to Financial Statements............ 82
CHAMBERLAIN ASSOCIATES, INC.
Report of Price Waterhouse LLP,
Independent Accountants................. 88
Balance Sheet as of March 31,
1994 and 1995........................... 89
Statement of Operations for the
Years Ended March 31, 1994 and 1995,
and for the Period April 1, 1995 Through
February 19, 1996....................... 90
Statement of Stockholders' Equity
for the Years Ended March 31, 1994 and
1995 and for the Period April 1, 1995
Through February 19, 1996............... 91
Statement of Cash Flows for the
Years Ended March 31, 1994 and 1995
and for the Period April 1, 1995 Through
February 19, 1996....................... 92
Notes to Financial Statements............ 93
21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Cotelligent Group, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Cotelligent Group, Inc. and its subsidiaries at March 31, 1995 and 1996 and the
results of their operations and cash flows for each of the three years in the
period ended March 31, 1996, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Minneapolis, Minnesota
April 20, 1996
22
COTELLIGENT GROUP, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, MARCH 31,
ASSETS 1995 1996
---------------- -----------------
Current assets:
Cash and cash equivalents.............. $ 3,608 $14,005,920
Accounts receivable, less allowance for
doubtful accounts of $0 and $40,000... -- 11,681,000
Note receivable from stockholder....... -- 37,902
Note receivable from related party..... -- 104,844
Deferred income taxes.................. -- 286,138
Prepaid expenses and other current
assets................................ -- 517,398
----------- -----------
Total current assets................. 3,608 26,633,202
=========== ===========
Property and equipment, net............ -- 1,061,749
Deferred income taxes.................. -- 146,450
Other assets........................... -- 149,832
----------- -----------
Total assets......................... $ 3,608 $27,991,233
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term debt........................ $ 51,501 $ 2,408,765
Accounts payable....................... 27,140 573,901
Accrued compensation and related
payroll liabilities................... -- 3,096,652
Income taxes payable................... -- 1,168,192
Deferred income taxes.................. -- 846,041
Other accrued liabilities.............. -- 1,176,485
----------- -----------
Total current liabilities............ 78,641 9,270,036
=========== ===========
Long-term debt........................... -- 257,999
Deferred income taxes.................... -- 19,569
Other long-term liabilities.............. -- 393,484
Commitments and contingencies
(Notes 8 and 11)........................ -- --
Stockholders' equity:
Common Stock, $0.01 par value; 100,000,000
shares authorized; 574,662 and 6,216,305
shares outstanding, respectively...... 1,550 62,163
Preferred Stock, $0.01 par value; 500,000
shares authorized; none issued and
outstanding........................... -- --
Additional paid-in capital............. 328,955 18,305,299
Retained deficit....................... (405,538) (317,317)
----------- -----------
Total stockholders' equity (deficit). (75,033) 18,050,145
----------- -----------
Total liabilities and
stockholders' equity $ 3,608 $27,991,233
=========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
23
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
PRO FORMA
YEAR ENDED
YEAR ENDED MARCH 31, MARCH 31,
----------------------------------------------- 1996
1994 1995 1996 (NOTE 3)
-----------------------------------------------------------------------
Revenues. ........................ $ -- $ -- $8,265,303 $64,011,234
Cost of services.................. -- -- 6,173,229 48,236,177
--------- --------- ---------- -----------
Gross margin.................... -- -- 2,092,074 15,775,057
--------- --------- ---------- -----------
Selling, general and
administrative expenses........... 167,356 200,781 1,895,462 11,961,966
--------- --------- ---------- -----------
Operating income................. (167,356) (200,781) 196,612 3,813,091
--------- --------- ---------- -----------
Other (income) expense:
Interest expense................. -- -- 53,413 369,116
Interest income.................. (22) (116) (66,535) (108,063)
Other............................ -- -- (3,028) (39,203)
--------- --------- ---------- ------------
Total other.................... (22) (116) (16,150) 221,850
--------- --------- ---------- -----------
Income before provision for
income taxes...................... (167,334) (200,665) 212,762 3,591,241
--------- --------- ---------- -----------
Provision for income taxes......... -- -- 124,541 1,436,497
Net Income......................... $(167,334) $(200,665) $ 88,221 $ 2,154,744
========= ========= ========== ===========
Net Income per share............... $ .46
===========
Weighted average shares outstanding 4,636,664
===========
The accompanying notes are an integral part of these consolidated financial
statements.
24
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
TOTAL
ADDITIONAL RETAINED STOCKHOLDERS'
PAID-IN EARNINGS EQUITY
COMMON STOCK CAPITAL (DEFICIT) (DEFICIT)
------------------------ ---------- --------- --------------
SHARES AMOUNT
---------- ----------
Balance at March 31, 1994.............. 417,781 $ 1,127 $ 121,173 $(204,873) $ (82,573)
Issuance of common stock............... 156,881 423 207,782 -- 208,205
Net loss............................... -- -- -- (200,665) (200,665)
--------- ------- ----------- --------- -----------
Balance at March 31, 1995.............. 574,662 1,550 328,955 (405,538) (75,033)
Redistribution of capital for stock
dividend.............................. -- 4,197 (4,197) -- --
Issuance of common stock prior to
Offering.............................. 120,478 1,205 380,895 -- 382,100
Redemption of common stock prior to
Offering.............................. (74,140) (742) (119,258) (120,000)
Reclassification of Founding Companies'
equities on date of Acquisitions...... -- -- 4,307,367 -- 4,307,367
Issuance of common stock............... 5,595,305 55,953 16,753,488 -- 16,809,441
Distribution to Founding stockholders.. -- -- (3,491,951) -- (3,491,951)
Net income............................. -- -- -- 88,221 88,221
--------- ------- ----------- --------- -----------
Balance at March 31, 1996.............. 6,216,305 $62,163 $18,155,299 $(317,317) $17,900,145
========= ======= =========== ========= ===========
The accompanying notes are an integral part of these consolidated financial
statements.
25
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED MARCH 31,
---------------------------------------------------
1994 1995 1996
---------------------------------------------------
Cash flows from operating
activities:
Net income (loss)..................... $ (167,334) $(200,665) $ 88,221
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization....... -- -- 43,573
Deferred income taxes, net.......... -- -- (584,067)
Changes in current assets and
liabilities:
Accounts receivable............... -- -- (1,278,350)
Prepaid expenses and other current
assets........................... -- -- (197,712)
Accounts payable and
accrued expenses................. 36,046 (12,406) 374,974
Income taxes payable.............. -- -- 335,997
Changes in other assets............. -- -- 21,994
---------- --------- ------------
Net cash (used in) operating
activities....................... (131,288) (213,071) (1,195,370)
---------- --------- ------------
Cash flows from investing activities:
Purchases of property and equipment... -- -- (380,222)
Advances to stockholder............... -- -- 25,519
Net advances to related parties....... -- -- (2,921)
Cash balances of subsidiaries at date
of Acquisition....................... -- -- 525,461
---------- --------- ------------
Net cash provided by investing
activities....................... -- -- 167,837
---------- --------- ------------
Cash flows from financing activities:
Proceeds from notes payable........... -- -- 64,414
Payments on long-term debt............ -- -- (4,788)
Payments on capital lease obligations. -- -- (10,716)
Net borrowings (repayments) on
short-term debt...................... -- -- 8,134
Proceeds from notes to related parties 41,650 4,851 449,560
Advances from related parties......... -- -- 397,800
Repayments with related parties....... -- -- (640,300)
Net proceeds from issuance of common
stock................................ 92,300 208,205 18,377,692
Repurchase of common stock............ -- -- (120,000)
Distribution to Founding stockholders. -- -- (3,491,951)
---------- --------- ------------
Net cash provided by financing
activities......................... 133,950 213,056 15,029,845
---------- --------- ------------
Net increase (decrease) in cash and
cash equivalents..................... 2,662 (15) 14,002,312
Cash and cash equivalents at
beginning of period.................. 961 3,623 3,608
---------- --------- ------------
Cash and cash equivalents at end of
period............................... $ 3,623 $ 3,608 $ 14,005,920
========== ========= ============
Supplemental disclosures of cash flow
information:
Interest paid......................... $ -- $ -- $ 59,540
Income taxes paid..................... $ -- $ -- $ 229,410
The accompanying notes are an integral part of these consolidated financial
statements.
26
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Cotelligent Group, Inc. ("Cotelligent or the Company") was formed to
create a professional services firm devoted to providing computer consulting and
contract programming services. On February 20, 1996, Cotelligent acquired (the
"Acquisitions") four companies (the "Founding Companies"): Financial Data
Systems, Inc. ("FDSI"), BFR Co., Inc. ("BFR"), Data Arts & Sciences, Inc.
("DASI") and Chamberlain Associates, Inc. ("CAI"). All outstanding shares of the
Founding Companies' capital stock were converted into shares of Cotelligent
Common Stock concurrently with the consummation of an initial public offering
(the "Offering") of such Common Stock.
The aggregate consideration paid by Cotelligent in these transactions was
$3,491,951 in cash, 3,206,875 shares of Common Stock of the Company and the
assumption of approximately $3.0 million in debt, for an aggregate value of
$35,303,905. The aggregate consideration for each of the Founding Companies was
as follows: BFR: $11,958,283, consisting of $1,450,000 paid in cash and
1,167,587 shares of Common Stock; CAI: $3,998,849, consisting of $300,000 paid
in cash, 388,761 shares of Common Stock and $200,000 in short-term and related-
party debt; DASI: $5,606,396, consisting of $400,000 paid in cash, 443,044
shares of Common Stock and $1,219,000 in short-term and related-party debt; and
FDSI: $13,740,377, consisting of $1,341,951 paid in cash, 1,207,483 shares of
Common Stock and $1,531,079 in short-term, long-term and related-party debt.
The accompanying consolidated financial statements include Cotelligent
Group, Inc. through the date of the Acquisitions, after which the financial
statements reflect the results of Cotelligent Group, Inc. and its wholly-owned
subsidiaries. Prior to the Acquisitions, the Company was a nonoperating entity
and incurred principally selling, general and administrative expenses. For the
period April 1, 1995 through February 19, 1996, the Company incurred $414,528 of
selling, general and administrative expenses and had a net loss before provision
for income taxes of $423,740.
As a result of the substantial continuing interests in the Company of the
former stockholders of BFR, CAI, DASI, FDSI and Cotelligent, the Acquisitions
have been accounted for on a historical cost basis.
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 reporting
period. Actual results could differ from those estimates.
27
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 five 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.
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.
Revenue Recognition
Revenue is recognized as services are performed.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). The asset and liability approach used in SFAS 109 requires 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.
Earnings Per Share
Historical earnings per share has not been presented because it is not
considered to be meaningful as a result of the Acquisitions and the Offering as
discussed in Note 1. Earnings per share has been presented on a pro forma basis
only for the year ended March 31, 1996 (See Note 3).
NOTE 3-PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
The following unaudited pro forma combined financial statements presents
the results as if the Acquisitions referred to in Note 1, occurred on April 1,
1995. Unaudited pro forma adjustments are based upon historical information,
estimates and certain assumptions management deems appropriate. The unaudited
pro forma combined financial data presented herein are not necessarily
indicative of the results Cotelligent would have obtained had such events
occurred at the beginning of the period, as assumed, or of the future results of
Cotelligent. The pro forma combined financial statements should be read in
conjunction with the other financial statements and notes thereto appearing
elsewhere in the Form 10-K.
28
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMBINED
PREDECESSOR PRO FORMA PRO FORMA
COMPANIES ADJUSTMENTS COMBINED
----------- ----------- ---------
Revenues......................................... $64,011,234 $ -- $64,011,234
Cost of services................................. 48,534,798 11,032 (a) 48,236,177
(309,653)(b)
----------- ---------- -----------
Gross margin................................... 15,476,436 298,621 15,775,057
Selling, general and administrative expenses..... 12,269,178 (231,676)(a) 11,961,966
(75,536)(b)
----------- ---------- -----------
Operating income............................... 3,207,258 605,833 3,813,091
Other (income) expense
Interest expense............................... 516,434 (147,318)(b) 369,116
Interest income................................ (108,063) -- (108,063)
Other.......................................... (39,203) -- (39,203)
----------- ---------- -----------
Total other expense............................ 369,168 (147,318) 221,850
----------- ---------- -----------
Income before provision for income taxes......... 2,838,090 753,151 3,591,241
Provision for income taxes....................... 2,076,485 (639,988)(c) 1,436,497
----------- ---------- -----------
Net Income....................................... $ 761,605 $1,393,139 $ 2,154,744
=========== ========== ===========
Net income per share............................. $ .46
===========
Weighted average shares outstanding.............. 4,636,664 (d)
===========
(a) Adjustment to reflect the reduction in compensation to former owners
and employees ($924,255) as a result of the renegotiation of executive
compensation arrangements, consulting contract to a former employee and the
termination of contributions to employee benefit plans made in conjunction with
the transaction. These reductions are partially offset by increased expenses for
corporate operating activities ($703,000) related to the newly formed public
entity.
(b) Adjustment to eliminate $532,506 of expense recorded in connection with
BFR's Employee Stock Ownership and Money Purchase Plan. This Plan was converted
to a profit sharing plan in December 1995 and no future contributions will be
made.
(c) Adjustment to calculate the provision for income taxes on the combined
pro forma results at the effective statutory tax rates (40%).
(d) Pro forma weighted average shares outstanding used to determine pro
forma earnings per share were 4,636,664. Shares used to calculate the weighted
average shares were: (i) shares issued by Cotelligent prior to the Offering,
shares issued to the stockholders of the Founding Companies, in connection with
the Acquisitions and shares sold in the Offering to pay the cash portion of the
consideration of the Founding Companies were considered outstanding for the
entire period, (ii) additional shares sold to the public in the Offering and
(iii) dilution attributable to options to purchase common stock in applying the
treasury stock method.
29
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4-ALLOWANCE FOR DOUBTFUL ACCOUNTS
Allowance for doubtful accounts activity is as follows.
Balance, March 31, 1994 and 1995..... $ --
Balance of subsidiaries allowance
for doubtful accounts at Acquisition... 40,000
Charges to costs and expenses..... 4,109
Write-offs........................ (4,109)
-------
Balance at March 31, 1996......... $40,000
=======
NOTE 5-PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following.
MARCH 31,
------------------------------
1995 1996
------------- -------------
Automobiles................... $ -- $ 4,500
Equipment..................... -- 1,461,036
Furniture and fixtures........ -- 513,827
Leasehold improvements........ -- 313,783
------------ ----------
-- 2,293,146
Less: Accumulated depreciation
and amortization............. -- 1,231,397
============ ==========
$ -- $1,061,749
============ ==========
Depreciation and amortization expense for the year ended March 31, 1996 was
$43,573.
NOTE 6-CREDIT FACILITIES
Credit facilities consist of the following at March 31, 1996.
Short-Term Debt
MARCH 31,
---------------------------------
1995 1996
------------- ----------------
Note payable for consulting
services performed, which bears
interest at the rate of 10% from June $51,501 $ --
1995, and is due on completion of the
Offering...............................
Bank line of credit, with maximum
borrowings of $1,250,000, secured by
FDSI's accounts receivable, property
and equipment, and personally
guaranteed by several Cotelligent
stockholders who are also officers of
FDSI, due May 28, 1998. Interest at
the prime rate plus 1.50% per annum
(9.75% at March 31, 1996).............. -- 1,096,397
Bank line of credit, for borrowings up
to the lesser of $1,300,000 or
70% of the DASI's eligible
accounts receivable, secured by all
assets of DASI, as well as the
personal guarantees of two Cotelligent
stockholders who are also officers of
DASI, due May 31, 1996. Interest at
1.25% above the bank's base lending
rate (9.5% at March 31, 1996).......... -- 809,079
Bank line of credit, for
borrowings of up to $1,500,000,
secured by all of BFR's assets, due
May 31, 1996. Interest at bank's prime
rate of 8.25% at March 31, 1996........ -- 300,000
Capital lease obligations............... 100,401
Current portion of long-term debt....... -- 102,888
------- ----------
Total short-term debt............. $51,501 $2,408,765
======= ==========
30
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The lines of credit were executed pursuant to agreements that contain
various covenants that include, among other things, restrictions on additional
debt and distributions, and maintenance of certain financial ratios and net
worth requirements. The Subsidiaries were in compliance with all covenants at
March 31, 1996.
Long-Term Debt
MARCH 31,
--------------------------------
1995 1996
---------------- ---------------
Note payable to bank, monthly payments of $5,937, including interest at the bank's prime
rate plus 2.25% (10.50% at March 31, 1996) per annum; maturing March 30, 1998 and secured by
FDSI's assets and the personal guarantee of several Cotelligent stockholders who are also
officers of FDSI............................................................................. $ -- $ 130,894
Note payable to bank, monthly payments of $2,482, including interest at the bank's prime
rate plus 2.25% (10.50% at March 31, 1996) per annum; maturing May 29, 1998 and secured by FDSI's
assets and the personal guarantees of several Cotelligent stockholders who are also officers of
FDSI......................................................................................... -- 56,024
Capital lease obligations..................................................................... -- 274,370
---- ---------
-- 461,288
Less: Current maturities...................................................................... -- (203,289)
---- ---------
Total long-term debt.......................................................................... $ -- $ 257,999
==== =========
Total maturities of long-term debt are as follows.
YEAR ENDING YEAR ENDING
MARCH 31, MARCH 31,
1995 1996
------------ ------------
[S] [C] [C]
1997................. $ -- $ 203,289
1998................. -- 194,074
1999................. -- 40,574
2000................. -- 23,351
---- ----------
$ -- $ 461,288
==== ==========
NOTE 7-INCOME TAXES
Cotelligent will file a consolidated federal income tax return for periods
subsequent to the Acquisitions described in Note 1.
The provision (benefit) for income taxes is as follows.
YEAR ENDED MARCH 31,
--------------------------------------
1994 1995 1996
--------------------------------------
Current:
Federal........................... $ -- $ -- $ 626,056
State............................. -- -- 131,967
-------- -------- ---------
-- -- $ 758,023
---------- --------- ---------
Deferred:
Federal........................... (57,000) (68,000) (486,093)
State............................. (10,000) (12,000) (107,389)
-------- -------- ---------
(67,000) (80,000) (593,482)
Valuation Allowance............... 67,000 80,000 (40,000)
-------- -------- ---------
Total provision for income taxes $ -- $ -- $ 124,541
======== ======== =========
31
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred tax assets (liabilities) are comprised of the following.
MARCH 31,
-----------------------------
1995 1996
-----------------------------
Allowance for doubtful accounts........... $ -- $ 16,471
Accrued liabilities....................... -- 286,117
Cash to accrual........................... -- (846,041)
Operating loss carryforward............... 147,000 317,000
Depreciation.............................. -- (19,569)
--------- ---------
Deferred tax asset (liability)........... 147,000 (246,022)
Valuation allowance....................... (147,000) (187,000)
--------- ---------
Net deferred tax assets (liabilities).... $ -- $(433,022)
========= =========
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows.
YEAR ENDED MARCH 31,
----------------------------
1994 1995 1996
-------- -------- --------
U.S. federal statutory rate.................................. (34.0)% (34.0)% 34.0%
State taxes, net of federal income tax benefit............... -- -- 3.9%
Valuation allowance against net operating loss............... 34.0% 34.0% 18.5%
Nondeductible expenses....................................... -- -- 1.1%
Other........................................................ -- -- 1.0%
----- ----- ----
Effective tax rate......................................... (0.0)% (0.0)% 58.5%
===== ===== ====
Prior to the Acquisitions, Cotelligent Group, Inc. 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. Subsequent to the Acquisitions, the Company reversed a portion of the
valuation allowance as a result of the estimated utilization of the operating
losses against future taxable income.
32
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8-LEASE COMMITMENTS
Cotelligent leases various office space and certain equipment under
noncancellable lease agreements which expire at various dates.
Future minimum rental payments under such leases are as follows.
MARCH 31
-------------------------------------
CAPITAL LEASES OPERATING LEASES
-------------------------------------
1997............................... $131,663 $ 791,155
1998............................... 105,223 778,865
1999............................... 72,490 788,655
2000............................... 28,000 640,436
2001............................... -- 312,609
Thereafter......................... -- 31,700
-------- ----------
Total minimum lease payments....... 337,376 $3,343,420
==========
Less: Amounts representing interest (63,006)
--------
Present value of net minimum
lease payments.................... $274,370
========
Rental expense under these leases was $73,094 for the year ended March 31,
1996.
NOTE 9-RELATED PARTIES
The Company recognized $5,000 in revenue for providing computer consulting
services to CyberSAFE (an entity owned in part by a few Cotelligent stockholders
who are also officers of FDSI) for the period subsequent to the Acquisitions
through March 31, 1996, all of which was included in accounts receivable at
March 31, 1996.
In May 1994, the Company negotiated a perpetual software marketing agreement
with CyberSAFE to sublicense CyberSAFE software in exchange for royalty payments
of 15% of the purchase price for every copy licensed. For the period subsequent
to the Acquisitions through March 31, 1996, the Company paid no royalties to
CyberSAFE.
In addition, the Company has made short-term advances to CyberSAFE. The
balance due on these short-term advances, bearing interest at 9% per annum at
March 31, 1996 was $103,416. Included in interest income is $1,995 for the
period subsequent to the Acquisitions through March 31, 1996, on the advances.
The Company leases general offices, and transportation equipment under
operating leases, occupied or used by BFR, from a third party, which is mostly
owned by several Cotelligent stockholders who are also officers of BFR. Rental
expense under these leases was $19,750 for the period subsequent to the
Acquisitions through March 31, 1996. In addition, the Company leases certain
office equipment under capital leases from the same entity. Payments under these
capital leases for the period subsequent to the Acquisitions through March 31,
1996, were $5,953.
The Company leases office space, occupied by DASI, from the Strathmore Realty
Trust. Two Cotelligent stockholders, one of whom is an officer of DASI and the
other of whom is a Director of the Company, are the sole trustees and
beneficiaries of the Strathmore Realty Trust. Rental expense recorded for this
office space was $11,700 for the period subsequent to the Acquisitions through
March 31, 1996.
NOTE 10-EMPLOYEE BENEFIT PLANS
BFR has a salary reduction plan (401(k)) for the benefit of all employees
after 30 days of service. The plan is non-contributory and is funded by the
amounts used to reduce employee salaries. In addition, BFR has the option to
contribute to the plan on the employees' behalf. BFR did not make any
contributions to the plan for the period subsequent to the Acquisitions through
March 31, 1996.
33
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BFR maintains a profit sharing plan for the benefit of substantially all
salaried employees. Contributions to the plan are made at the discretion of the
Company. The Company did not make any contributions to the plan for the period
subsequent to the Acquisitions through March 31, 1996.
FDSI maintains a discretionary profit-sharing (401(k)) plan which covers
all employees who have met minimum age and employment requirements. FDSI made no
contributions to this plan for the period subsequent to the Acquisitions through
March 31, 1996.
In September 1992, FDSI adopted a discretionary cash bonus profit sharing plan
for employees who have completed 1,500 hours of service to FDSI and who are
employees of FDSI on the payout date. FDSI made no contributions to this plan
for the period subsequent to the Acquisitions through March 31, 1996.
DASI maintains an unfunded, discretionary profit-sharing plan, which includes
substantially all full-time employees who have at least one year of continuous
service. No contributions were made to this plan for the period subsequent to
the Acquisitions through March 31, 1996.
In September 1995, Cotelligent's Board of Directors and stockholders
approved Cotelligent's 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.
Effective as of September 8, 1995, Cotelligent granted to each of two officers
an option to purchase 92,676 shares of common stock at $2.70 per share. Such
options vest as follows: 18,536 on February 21, 1996, and thereafter, an
additional 18,535 shares on each subsequent February 21 until all 92,676 shares
have vested. The options are each exercisable for a period of seven years after
the effective date of the grant.
On February 14, 1996, Cotelligent granted certain employees options to
purchase 196,000 shares of Common Stock at $9.00 per share. On various dates
subsequent to February 14, 1996, and through March 31, 1996, additional grants
of options to purchase 47,700 shares of Common Stock at prices ranging from
$9.00 to $10.25 were made to certain employees. Such options vest ratably over
four years on the anniversary of the option grant date. The term of each option
grant is determined by the Compensation Committee of the Board of Directors.
However, the term of any incentive stock option or a stock appreciation right
granted in tandem therewith, shall not exceed 10 years from the date of the
grant.
Each director who is not an employee of the Company receives an annual
retainer fee of $12,000. Effective January 12, 1996, each non-employee director
of the Company was granted an initial option under the Company's 1995 Long-Term
Incentive Plan to acquire 10,000 shares of Common Stock at an exercise price of
$10.00 per share. In addition, each non-employee director will receive an
automatic annual option grant under the 1995 Long-Term Incentive Plan to acquire
5,000 shares of Common Stock on the date of each of the Company's annual
meetings held after March 31, 1997. All of such options have or will have an
exercise price equal to the fair market value of the Common Stock on the date of
grant and, or will be, exercisable immediately except as limited by the rules
and regulations of the Securities Act and the Securities Exchange Act of 1934,
as amended, and will expire ten years from the date of grant. Directors are also
reimbursed for out-of-pocket expenses incurred in attending meetings of the
Board of Directors or committees thereof, or for other expenses incurred in
their capacity as directors.
NOTE 11-COMMITMENTS AND CONTINGENCIES
Employment Agreements
Each named executive officer has entered into an employment agreement with the
Company providing for an annual base salary of $150,000. 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
34
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
performance of the local operation for which such officer has primary
responsibility and the Company's performance against targets. Each executive
officer employment agreement is for a term of three years and, unless terminated
or not renewed by the employee, shall continue thereafter on a year-to-year
basis on the same terms and conditions. In the event of a termination of
employment by the Company or a Founding Company, as the case may be, without
cause, such employee shall be entitled to receive from the Company or such
Founding Company, as the case may be, such employee's then current salary for
the remaining term of the agreement or for one year, whichever amount is
greater, without regard to whether the employee obtains subsequent employment.
In the event of change in control of the Company, if the employee is not given
at least five days notice of such change in control, the employee may elect to
terminate his employment and shall be entitled to receive a minimum of three
years, current base salary as compensation. In the event the employee is given
at least five days notice of such a change in control, the employee may elect to
terminate his employment agreement and receive a minimum of two years' current
salary as compensation.
Each executive officer employment agreement contains a covenant not to
compete with the Company for a period equivalent to the longer of two years
immediately following the termination of his employment or, in the case of a
termination without cause, for a period of one year following the termination of
his employment. If any court of competent jurisdiction determines that the
scope, time or territorial restrictions contained in the covenant are
unreasonable, the covenant not to compete shall be reduced to the maximum period
permitted by such court. The compensation to which such employee is entitled
shall nonetheless be paid to the employee.
In addition, certain of the principals of the Founding Companies who did
not become executive officers of the Company upon consummation of the
Acquisitions and the Offering remain executive officers of one of the Founding
Companies. Each of such individuals entered into an employment agreement with
such Founding Company effective upon consummation of the Acquisitions and the
Offering, with a base compensation not to exceed $150,000 per annum.
Consulting Contract
The Company entered into a consulting contract with a former employee of BFR
effective February 19, 1996, whereby the former employee is required to perform
certain management advisory services as required by and at the request of the
Company. Payments under the contract are $8,333 per month, continue through
December 2000 and have been fully recorded as an obligation of the Company as of
March 31, 1996.
Legal Matters
The Company is involved in various legal matters in the normal course of
business. In the opinion of the Predecessor Companies' 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.
NOTE 12-SUBSEQUENT EVENT
Cotelligent and each of the Founding Companies had separate banking
relationships through May 31, 1996. Effective June 1, 1996, the separate
banking relationships were consolidated into a single banking relationship with
a major bank, providing a more efficient means of managing operating capital.
The new relationship provides a credit facility in the amount of $10.0 million,
secured by accounts receivable and other assets of the company. Borrowings on
the facility bear interest at the bank's prime rate.
35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
the Combined Predecessor Companies
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of the Combined
Predecessor Companies at March 31, 1995 and 1994 and the results of their
operations and cash flows for the years ended March 31, 1995 and 1994 and for
the period April 1, 1995 through February 19, 1996, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Minneapolis, Minnesota
April 20, 1996
36
COMBINED PREDECESSOR COMPANIES
BALANCE SHEET
MARCH 31, MARCH 31,
1994 1995
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents........................ $ 230,133 $ 602,752
Accounts receivable, less allowance
for doubtful accounts of $40,000................. 7,086,545 9,202,012
Due from related party........................... -- 111,877
Deferred income taxes............................ 64,081 14,081
Net assets of discontinued business.............. 483,630 --
Prepaid expenses and other current assets........ 294,823 196,416
----------- -----------
Total current assets................... 8,159,212 10,127,138
----------- -----------
Property and equipment, net...................... 475,958 525,280
Deferred income taxes............................ 11,341 12,599
Other assets..................................... 289,574 382,773
----------- -----------
Total assets........................... $ 8,936,085 $11,047,790
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt, including notes payable to
related party of $441,500 and $100,000
respectively..................................... $ 1,406,364 $ 2,414,852
Accounts payable................................. 764,286 683,547
Accrued compensation and
related payroll liabilities...................... 1,362,770 2,271,645
Income taxes payable............................. -- 81,890
Deferred income taxes............................ 369,147 453,487
Other accrued liabilities........................ 450,876 600,314
----------- -----------
Total current liabilities.............. 4,353,443 6,505,735
----------- -----------
Long-term debt, including notes payable
to related parties of $440,000............... 944,218 837,662
Deferred income taxes.............................. 106,700 72,000
Commitments and contingencies (Notes 8 and 12)..... -- --
Stockholders' equity:
Preferred stock.............................. 71,338 68,614
Common stock................................. 113,108 116,165
Additional paid-in capital................... 125,683 288,555
Retained earnings............................ 3,221,595 3,159,059
----------- -----------
Total stockholders' equity............. 3,531,724 3,632,393
----------- -----------
Total liabilities and
stockholders' equity................... $ 8,936,085 $11,047,790
=========== ===========
The accompanying notes are an integral part of these combined financial
statements.
37
COMBINED PREDECESSOR COMPANIES
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, APRIL 1, 1995 -
-------------------------------- FEBRUARY 19,
1994 1995 1996
-------------- ------------- --------------
Revenues....................................................... $39,434,234 $50,028,639 $55,745,931
Cost of services ............................................. 29,940,654 38,488,220 42,361,569
------------ -------------- --------------
Gross margin ......................................... 9,493,580 11,540,419 13,384,362
Selling, general and administrative expenses................... 8,055,171 10,743,231 10,788,244
------------ -------------- --------------
Operating income .................................... 1,438,409 797,188 2,596,118
Other (income) expense:
Interest expense ......................................... 194,363 246,508 472,266
Interest income .......................................... (35,748) (37,336) (41,561)
Other...................................................... 6,961 (29,866) (36,175)
----------- ------------- --------------
Total other expense .................................. 165,576 179,306 394,530
----------- ------------- --------------
Income before provision for income taxes ..................... 1,272,833 617,882 2,201,588
Provision for income taxes ................................... 339,103 392,565 1,951,944
------------ ------------- --------------
Income from continuing operations ............................ 933,730 225,317 249,644
Loss from operations of discontinued business (net of
applicable income tax benefit of $159,700 (1994)
and $80,100 (1995) respectively) ............................. (284,560) (184,004) --
------------ ------------- ---------------
Net income..................................................... $ 649,170 $ 41,313 $ 249,644
============ ============= ===============
The accompanying notes are an integral part of these combined financial
statements.
38
COMBINED PREDECESSOR COMPANIES
STATEMENT OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK
------------------------------ --------------------------
SHARES AMOUNT SHARES AMOUNT
------------- -------------- ----------- ------------
Balance at March 31, 1993................... 100,395 $60,236 1,331,087 $ 106,658
Issuance of common stock.................... -- -- 93,409 252
Issuance of preferred stock................. 500 7,875 -- --
Issuance of preferred stock
charged to compensation expense............ 500 9,425 -- --
Conversion of preferred stock to
common stock............................... (2,143) (6,198) 2,143 6,198
Net income.................................. -- -- -- --
------------- -------------- ----------- ------------
Balance at March 31, 1994................... 99,252 71,338 1,426,639 113,108
Issuance of common stock.................... -- -- 123,526 333
Stock distribution of subsidiary............ -- -- -- --
Conversion of preferred stock to
common stock............................... (320) (2,724) 320 2,724
Net income.................................. -- -- -- --
------------- -------------- ----------- ------------
Balance at March 31, 1995................... 98,932 68,614 1,550,485 116,165
Dividends................................... -- -- -- --
Redistribution of capital for
stock dividend............................. -- -- -- 4,197
Issuance of common stock.................... -- -- 158,183 11,205
Issuance of preferred stock................. 400 14,000 -- --
Repurchase of common stock.................. -- -- (76,240) (5,717)
Purchase of BFR's ESOP shares............... -- -- -- --
Release of unearned shares to
BFR's ESOP.................................. -- -- -- --
Conversion of BFR's ESOP to
defined contribution plan.................. -- -- -- --
Net income.................................. -- -- -- --
------------- -------------- ----------- ------------
Balance at February 19, 1996................ 99,332 $82,614 $1,632,428 $ 125,850
============= ============== =========== ============
ADDITIONAL UNEARNED TOTAL
PAID-IN RETAINED ESOP STOCKHOLDERS'
CAPITAL EARNINGS SHARES EQUITY
------------- -------------- ----------- ------------
Balance at March 31, 1993................... $ 48,635 $2,572,425 $ $2,787,954
Issuance of common stock.................... 77,048 -- -- 77,300
Issuance of preferred stock................. -- -- -- 7,875
Issuance of preferred stock
charged to compensation expense............ -- -- -- 9,425
Conversion of preferred stock to
common stock............................... -- -- -- --
Net income.................................. -- 649,170 -- 649,170
------------- -------------- ----------- ------------
Balance at March 31, 1994................... 125,683 3,221,595 -- 3,531,724
Issuance of common stock.................... 162,872 -- -- 163,205
Stock distribution of subsidiary............ -- (103,849) -- (103,849)
Conversion of preferred stock to
common stock............................... -- -- -- --
Net income.................................. -- 41,313 -- 41,313
------------ -------------- ------------- ------------
Balance at March 31, 1995................... 288,555 3,159,059 -- 3,632,393
Dividends................................... -- (159,468) -- (159,468)
Redistribution of capital for
stock dividend............................. (4,197) -- -- --
Issuance of common stock.................... 382,895 -- -- 394,100
Issuance of preferred stock................. -- -- -- 14,000
Repurchase of common stock.................. (119,258) -- -- (124,975)
Purchase of BFR's ESOP shares............... -- -- (3,150,000) (3,150,000)
Release of unearned shares to
BFR's ESOP.................................. -- -- 1,114,286 1,114,286
Conversion of BFR's ESOP to
defined contribution plan.................. -- -- 2,035,714 2,035,714
Net income.................................. -- 249,644 -- 249,644
------------- -------------- ----------- ------------
Balance at February 19, 1996................ $547,995 $3,249,235 $ (0) $4,005,694
============= ============== =========== ============
The accompanying notes are an integral part of these combined
financial statements.
39
COMBINED PREDECESSOR COMPANIES
STATEMENT OF CASH FLOWS
Fiscal Years End
March 31,
-------------------------- April 1, 1995-
1994 1995 February 19, 1996
------------ ------------ ------------------
Cash flows from operating activities:
Net income....................................... $ 649,170 $ 41,313 $ 249,644
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................... 177,641 186,370 170,178
Loss (gain) on disposal of property and
equipment...................................... 2,176 655 (22,719)
Deferred income taxes, net...................... (26,751) 98,382 506,201
Preferred stock issued and charged to
compensation................................... 9,425 - 14,000
Changes in current assets and liabilities:
Accounts receivable............................ (1,685,432) (2,190,397) (1,200,457)
Prepaid expenses and other current assets...... (42,653) 117,378 469,590
Accounts payable and accrued expenses.......... 500,477 977,574 318,907
Income taxes payable........................... (81,602) 108,525 750,305
Deferred revenue................................ - - (168,405)
Changes in other assets......................... (25,463) (69,346) (480,510)
----------- ----------- -----------
Net cash provided by (used in) operating
activities................................... (523,012) (729,546) 606,734
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment............... (113,814) (50,962) (502,344)
Proceeds from the sale of investments............ - 14,989 11,000
Cash surrender value of life insurance........... (16,146) (15,491) (22,325)
Advances to stockholders......................... - - 25,519
Net repayments from (advances to) related
parties......................................... 127,673 83,900 (19,544)
Changes in net assets of discontinued
operations...................................... (66,924) 184,004 -
Increase in deferred transaction costs, net of
related accounts payable........................ - - (932,545)
----------- ----------- -----------
Net cash provided by (used in) investing
activities................................... (69,211) 216,440 (1,440,239)
----------- ----------- -----------
Cash flows from financing activities:
Payments on long-term debt....................... (61,200) (165,199) (284,291)
Payments on capital lease obligations............ (48,304) (76,745) (77,382)
Net borrowings (advances) on short-term debt..... 240,614 622,964 716,294
Borrowings from related parties.................. - 341,500 172,474
Payments on loans with related parties........... (25,000) - -
Proceeds from issuance of common and preferred
stock........................................... 85,175 163,205 349,125
Repurchases of common stock....................... - - (120,000)
Net cash provided by (used in) financing
activities................................... 191,285 885,725 756,220
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents...................................... (400,938) 372,619 (77,285)
Cash and cash equivalents at beginning of
period........................................... 631,071 230,133 602,752
----------- ----------- -----------
Cash and cash equivalents at end of period........ $ 230,133 $ 602,752 $ 525,467
=========== =========== ===========
40
COMBINED PREDECESSOR COMPANIES
STATEMENT OF CASH FLOWS (Continued)
Fiscal Years End
March 31, April 1, 1995-
------------------ --------------
1994 1995 Feb 19, 1996
-------- -------- --------------
Supplemental disclosures of cash flow information:
Interest paid............................................. $183,811 $226,244 $462,241
Income taxes paid......................................... $184,506 $105,583 $765,808
Schedule of noncash investing and financing transactions:
Capital lease obligations incurred........................ $ 99,780 $179,241 $ -
Conversion of accounts receivable to note receivable...... $ - $ 74,903 $ -
Conversion of preferred stock to common stock............. $ 6,198 $ 2,724 $ -
Debt refinancing.......................................... $ - $178,986 $ -
The accompanying notes are an integral part of these combined financial
statements.
41
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1-BUSINESS ORGANIZATION
In February 1993, Cotelligent Group, Inc. ("Cotelligent" or the "Company")
was formed to create a professional services firm devoted to providing computer
consulting and contract programming services. On February 20, 1996, Cotelligent
acquired (the "Acquisitions") four companies (the "Founding Companies"):
Financial Data Systems, Inc. ("FDSI"), BFR Co., Inc. ("BFR"), Data Arts &
Sciences, Inc. ("DASI") and Chamberlain Associates, Inc. ("CAI"). All
outstanding shares of the Founding Companies capital stock were converted into
shares of Cotelligent Common Stock concurrently with the consummation of and the
initial public offering (the "Offering") of such Common Stock.
NOTE 2-BASIS OF PRESENTATION
As discussed above, simultaneously with the closing of the Offering,
Cotelligent acquired by merger each of the four operating businesses, FDSI, BFR,
DASI and CAI. The accompanying combined financial statements and related notes
to combined financial statements are presented on a combined basis without
giving effect to the Acquisitions or the Offering. The assets and liabilities of
the Predecessor Companies are reflected at their historical amounts.
Discontinued Business
A previous division of FDSI, CyberSAFE Corporation (CyberSAFE) was
incorporated and became a wholly-owned subsidiary of FDSI in December 1993. The
stock of this subsidiary was subsequently distributed to FDSI's stockholders on
June 1, 1994 in a tax-free reorganization. The financial results of the
operations of this entity have been presented as discontinued operations in the
Statement of Operations for all periods presented. See further discussion in
Note 14.
NOTE 3-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 reporting
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.
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 five 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.
42
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS
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.
Revenue Recognition
Revenue is recognized as services are performed.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). The asset and liability approach used in SFAS 109 requires 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.
BFR was an S corporation through March 31, 1995 for federal income tax
purposes and, accordingly any federal income tax liabilities through this date
are the responsibility of BFR's stockholders. Effective April 1, 1995, BFR
terminated its S status. See further discussion in Note 7.
Earnings Per Share
Historical earnings per share has not been presented because it is not
considered to be meaningful as a result of the Acquisitions and the Offering as
discussed in Note 1.
NOTE 4-ALLOWANCE FOR DOUBTFUL ACCOUNTS
The activity in the allowance for doubtful accounts is as follows.
BALANCE AT CHARGES TO BALANCE
BEGINNING COSTS AND WRITE- AT END
OF PERIOD EXPENSES OFFS OF PERIOD
---------- ---------- ------ ---------
Year ended March 31, 1994........... $35,000 $10,000 $ -- $45,000
======= ======= ======== =======
Year ended March 31, 1995........... $45,000 $21,368 $(26,368) $40,000
======= ======= ======== =======
43
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5-PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following.
MARCH 31,
-----------------------------
1994 1995
------------- --------------
Automobiles.............................. $ 64,150 $ 64,150
Equipment................................ 1,050,217 1,261,672
Furniture and fixtures................... 235,246 238,031
Leasehold improvements................... 59,015 36,539
---------- ----------
1,408,628 1,600,392
---------- ----------
Less: Accumulated depreciation and
amortization............................ 932,670 1,075,112
---------- ----------
$ 475,958 $ 525,280
========== ==========
Depreciation and amortization expense for the years ended March 31, 1994 and
1995 and for the period April 1, 1995 through February 19, 1996 was $149,059,
$180,396 and $170,178 respectively.
44
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6-CREDIT FACILITIES
Short-Term Debt
Short-term debt consists of the following.
MARCH 31,
1994 1995
----------- ----------
Bank line of credit, with maximum borrowings
of $1,250,000, secured by FDSI's accounts
receivable, property and equipment, and
personally guaranteed by FDSI's principal
stockholders. Interest at the prime rate
(6.25% and 9.00% at March 31, 1994 and
1995, respectively) plus 1.50% per
annum........................................ $ 430,964 $1,134,077
Bank line of credit, for borrowings up to the
lesser of $1,300,000 or 70% of the DASI's
eligible accounts receivable, secured by all
assets of DASI, as well as the personal
guarantees of DASI's stockholders. Interest
at 1.25% above the bank's base lending rate
(8.75% at March 31, 1995), prior to
January 31, 1995, 2.00% above the bank's base
lending rate (6.25% at March 31, 1994),
.50% fee on the unused portion............... 168,000 398,000
Bank line of credit, for borrowings of up to
$1,500,000, secured by all of BFR's assets.
Interest at prime plus .50% on (6.75%),
prime (9.00%) at March 31, 1994 and 1995,
respectively................................. 550,000 --
Bank line of credit for borrowings of up to
$300,000, guaranteed by the President and
Vice President of the CAI. Interest at
2.00% plus prime (11.00% as of March 31,
1995)........................................ -- 235,000
Note payable, interest at 10%, due upon
completion of initial public offering........ 46,650 51,501
Note payable to CAI's President (also a
stockholder) and his son, due on December 31,
1995. Interest at 2.00% plus prime (11.00%
at March 31, 1995)........................... -- 150,000
Notes payable to FDSI's principal stockholders,
unsecured, interest at 9.25%, due on demand
and subordinated to bank debt................ -- 191,500
Note payable to FDSI stockholder, personally
guaranteed by the principal stockholders of
FDSI, interest at 9.00%...................... 100,000 100,000
Current capital lease obligations............. 43,303 90,671
Current maturities on long-term debt.......... 67,447 64,103
---------- ----------
Total short-term debt............. $1,406,364 $2,414,852
========== ==========
The lines of credit were executed pursuant to agreements that contain
various restrictive covenants that include, among other things, restrictions on
additional debt and distributions, and maintenance of certain financial ratios
and net worth requirements. The Predecessor Companies were in compliance with
all restrictive covenants for the periods presented.
45
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Long-Term Debt
Long-term debt consists of the following.
MARCH 31,
-------------------------------
1994 1995
-------------- ------------
Note payable to a bank; monthly payments of $5,937,
including interest at the bank's prime rate (9.00% at
March 31, 1995) plus 2.25% per annum; maturing
March 30, 1998 and secured by FDSI's assets and
the personal guarantee of FDSI's principal
stockholders............................................ $ -- $ 178,986
Note payable to a bank; monthly payments of $6,218,
including interest at the bank's prime rate (6.25% at
March 31, 1994) plus 2.75% per annum; refinanced in 1995 227,771 --
Loans payable to the officers and stockholders of DASI,
interest at the rate of 10.00% and payable monthly.
Principal amount matures as follows: $100,000 on
October 25, 1996, $140,000 on December 25, 1997 and
$200,000 on October 25, 2006. The $200,000 is
subordinated to DASI's line of credit................... 440,000 440,000
Automobile loan, interest at 9.75%, monthly principal and
interest payments of $1,060, assumed by a stockholder
of DASI in September 1995.............................. 22,121 10,983
Loan against the cash surrender value of DASI's officers'
life insurance policies................................. 105,276 --
Capital lease obligations................................ 259,800 362,467
---------- ----------
1,054,968 992,436
Less: Current maturities................................. (110,750) (154,774)
---------- ----------
Total long-term debt............................ $ 944,218 $ 837,662
========== ==========
Total maturities of long-term debt are as follows.
YEAR ENDING
MARCH 31,
-----------
1997............................................. $ 64,103
1998............................................. 159,413
1999............................................. 206,453
2000............................................. --
2001............................................. --
Thereafter....................................... 200,000
---------
$ 629,969
=========
46
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--INCOME TAXES
The Predecessor Companies will file a consolidated federal income tax
return for periods subsequent to the Acquisitions. The Founding Companies will
file "short period" federal tax returns through the date prior to the
Acquisitions, February 20, 1996.
The provision (benefit) for income taxes on continuing operations is as
follows.
YEAR ENDED APRIL 1,
MARCH 31, 1995
------------------------ FEBRUARY 19,
1994 1995 1996
------------------------ ------------
Current:
Federal........... $ 315,021 $ 333,455 $ 847,989
State............. 25,292 44,229 236,243
--------- --------- ----------
340,313 377,684 1,084,232
Deferred:
Federal........... (76,533) 12,209 947,243
State............. 75,323 2,672 (79,531)
--------- --------- ----------
(1,210) 14,881 867,712
--------- --------- ----------
Total provision
for income taxes $ 339,103 $ 392,565 $1,951,944
========= ========= ==========
Deferred tax assets (liabilities) are comprised of the following.
MARCH 31,
---------------------------
1994 1995
----------- -----------
Accounts receivable......................... $ (531,744) $ (812,991)
Accounts payable and accrued liabilities.... 160,451 242,034
Cash to accrual............................. (142,900) (111,700)
Operating loss carryforward................. 100,859 167,839
Depreciation................................ (6,259) (3,901)
Other....................................... 19,168 19,912
---------- -----------
Net deferred tax liability............. $ (400,425) $ (498,807)
========== ===========
The Company's effective income tax rate varied from the U.S. federal statutory
tax rate as a result of the following.
APRIL 1,
YEAR ENDED MARCH 31, 1995 -
-------------------- FEBRUARY 19,
1994 1995 1996
-------------------- ------------
U.S. federal statutory rate............ 34.0% 34.0% 34.0%
State taxes, net of federal income tax
benefit............................... 6.7 4.0 4.7
Nondeductible expenses................. 1.7 5.5 6.5
(Income) losses of S corporation....... (20.2) 10.2 --
Conversion to C corporation............ -- -- 42.0
Other.................................. 4.4 9.8 (.7)
----- ---- -----
Effective tax rate................ 26.6% 63.5% 86.5%
====== ==== ====
BFR was an S corporation through March 31, 1995 for federal income tax
purposes and, accordingly, any federal income tax liabilities through that date
were the responsibility of the stockholders of BFR. Appropriate provisions were
made for state income taxes. Effective April 1, 1995, BFR terminated its S
election. In connection with BFR's conversion from an S corporation to a C
corporation, approximately $925,000 of federal and state income taxes is
expected to be paid pro rata over the next four years. See Note 15 for Unaudited
Pro Forma Tax Information.
47
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--LEASE COMMITMENTS
The Predecessor Companies lease various office space and certain equipment
under noncancellable lease agreements which expire at various dates.
Future minimum rental payments under such leases are as follows.
YEAR ENDING MARCH 31,
---------------------------------
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
1997.................................. $ 130,066 $ 442,016
1998.................................. 130,066 451,475
1999.................................. 103,626 434,160
2000.................................. 72,357 407,026
2001.................................. 43,000 370,100
--------- ----------
Total minimum lease payments..... 479,115 $2,104,777
==========
Less: Amounts representing interest... (116,648)
---------
Present value of net minimum
lease payments....................... $ 362,467
=========
Rental expense under these leases was $422,058, $462,352 and $497,458 for
each of the years ended March 31, 1994 and 1995 and for the period April 1, 1995
through February 19, 1996, respectively.
NOTE 9--RELATED PARTIES
FDSI recognized a total of $76,192 and $5,000 in revenue for providing
computer consulting services to CyberSAFE (an affiliated entity) during the year
ended March 31, 1995 and the period April 1, 1996 through February 19,
1996, respectively. At March 31, 1995, $59,720 was due from CyberSAFE for
services up through that date and is included in accounts receivable.
In May 1994, FDSI negotiated a perpetual software marketing agreement with
CyberSAFE to sublicense CyberSAFE software in exchange for royalty payments of
15% of the purchase price for every copy licensed. For the year ended March 31,
1995 and for the period April 1, 1996 through February 19, 1996 FDSI paid no
royalties to CyberSAFE.
48
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In addition, FDSI has made short-term advances to CyberSAFE. The balance
due on these short-term advances, bearing interest at 9% per annum, at March 31,
1995 was $111,877. Included in other income is $41,265 for the year ended March
31, 1995 for management services provided to CyberSAFE. Included in interest
income was $7,335 and $16,208 for the year ended March 31, 1995 and for the
period April 1, 1995 through February 19, 1996 on the advances, respectively.
BFR leases its general offices, and certain computer and transportation
equipment under operating leases, from a third party, which is owned principally
by the former principal Stockholders of BFR. Rental expense under these leases
was $175,814, $176,104 and $174,874 for the years ended March 31, 1994 and 1995
and for the period April 1, 1995 through February 19, 1996, respectively.
Two former stockholders of FDSI each own in excess of 10% of the equity
interests in VoiceNet, Inc. ("VoiceNet"), a voicemail service bureau from
which FDSI obtained voicemail services. In 1995, consideration paid by FDSI to
VoiceNet was approximately $17,500. FDSI paid for services at VoiceNet's
advertised rates.
DASI leases its office space from the Strathmore Realty Trust. The former
stockholders of DASI are the sole trustees and beneficiaries of the Strathmore
Realty Trust. Rental expense recorded for this office space was $96,831, $97,462
and $92,673 for the years ended March 31, 1994 and 1995 and for the period April
1, 1995 through February 19, 1996, respectively. DASI renegotiated its lease
agreement for its office space with Strathmore Realty Trust (an affiliated
company) in November 1995. The provisions of the agreement allow for a five year
fixed term, with one successive option to extend the term for a period of five
years. The annual rental amount is $104,400 triple net, with a variable
provision for escalation.
NOTE 10--EMPLOYEE BENEFIT PLANS
BFR has a salary reduction plan (401(k)) for the benefit of all employees
after 30 days of service. The plan is non-contributory and is funded by the
amounts used to reduce employee salaries. In addition, BFR has the option to
contribute to the plan on the employee's behalf. BFR did not make any
contributions to the plan for the years ended March 31, 1994 and 1995 and for
the period April 1, 1995 through February 19, 1996.
BFR previously maintained an Employee Stock Ownership ("ESOP") and Money
Purchase Plan (the BFR Plan) which covered substantially all salaried employees.
Annual contributions to the ESOP were made at the discretion of BFR's Board of
Directors. The BFR Plan required fixed minimum annual contributions of 10% of
eligible payroll for the initial year ending March 31, 1995 and 5% of eligible
payroll for subsequent years. Employees' scheduled vesting of these benefits
occurs over seven years. In April 1995, the BFR Plan incurred a $2,250,000
liability to a bank with respect to the ESOP portion of the BFR Plan, which,
together with a $900,000 cash contribution from BFR, enabled the BFR Plan to
purchase all of the 300,000 outstanding shares of BFR's Class A common stock for
$3,150,000 from BFR's stockholders. The ESOP shares were allocated to
participants as contributions were made to the Plan. During the year ended March
31, 1995, BFR made contributions of $900,000 to the BFR Plan. As the debt was
repaid, shares were released from collateral and allocated to active employees
based upon the proportion of debt service paid in the year. BFR recorded
compensation expense equal to the market value of the shares at the release
date. On December 7, 1995, the BFR Plan was converted to a profit sharing plan.
Contributions to the BFR Plan are made at the discretion of the Company. The
Company did not make any contributions to the BFR Plan for the period from
December 7, 1995 through February 19, 1996.
FDSI maintains a discretionary profit-sharing (401(k)) plan which covers
all employees who have met minimum age and employment requirements. FDSI made no
contributions to this plan for the years ended March 31, 1994 and 1995 and the
period April 1, 1995 through February 19, 1996.
49
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In September 1992, FDSI adopted a cash bonus profit sharing plan for
employees who have completed 1,500 hours of service to FDSI and who are
employees of FDSI on the payout date. FDSI recorded $10,000, $24,000 and $30,000
of expense related to this Plan for the years ended March 31, 1994 and 1995 and
the period April 1, 1995 through February 19, 1996, respectively.
DASI maintains an unfunded profit-sharing plan, which includes substantially
all full-time employees who have at least one year of continuous service.
Contributions to the plan are made at the discretion of the Board of Directors,
based upon earnings levels. No contributions have been made for the years ended
March 31, 1994 and 1995 or for the period April 1, 1996 through February 19,
1996. DASI previously maintained a pension plan which was terminated in 1988 and
no further contributions made.
In September 1995, Cotelligent's Board of Directors and stockholders approved
Cotelligent's 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.
Effective as of September 8, 1995, Cotelligent granted to each of two officers
an option to purchase 92,676 shares of common stock at $2.70 per share. Such
options vest as follows: 18,536 one day after consummation of an initial public
offering of the Company's common stock and thereafter, an additional 18,535
shares on the annual anniversary of such initial vesting until all 92,676 shares
have vested. The options are each exercisable for a period of seven years after
the effective date of the grant. On May 2, 1996, one officer exercised the
option to purchase 18,000 shares of Common Stock.
On February 14, 1996, Cotelligent granted certain employees options to
purchase 196,200 shares of Common Stock at $9.00 per share. Such options vest
ratably over four years on the anniversary of the option grant date. The term
of each option grant is determined by the Compensation Committee of the Board of
Directors. However, the term of any incentive stock option or a stock
appreciation right granted in tandem therewith, shall not exceed 10 years from
the date of the grant.
NOTE 11--CAPITAL STRUCTURE
In November 1995, Cotelligent reincorporated in Delaware and increased the
number of authorized shares of common stock from 1,000,000 to 100,000,000,
authorized the issuance of up to 500,000 shares of preferred stock and exchanged
its then outstanding Class A and Class B shares for shares of a single class of
new common stock. Additionally, on November 29, 1995, Cotelligent's Board of
Directors declared a 2.71-for-one stock dividend to each stockholder of
Cotelligent's common stock. The financial statements have been adjusted to
reflect the changes resulting from the reincorporation and the stock dividend
for all periods presented.
NOTE 12--COMMITMENTS AND CONTINGENCIES
Employment Agreements
Effective April 20, 1995, BFR entered into employment agreements with the
four shareholders and officers of BFR. The agreements provide for minimum annual
compensation of $464,000 in addition to directors compensation, potential salary
increases and bonuses. The agreements include noncompete clauses and continue
through years ranging between 2001 and 2021, assuming the maintenance of certain
ownership percentages. These employment agreements were terminated in connection
with the Acquisition by Cotelligent, and three of such officers entered into new
employment agreements and one entered into a consulting agreement.
DASI and its stockholders are parties to a stock purchase agreement which
is effective upon the death of a stockholder. The terms of the agreement require
DASI to buy $350,000 of DASI's stock held by the deceased stockholder's
50
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
estate and require the surviving stockholder to buy from the stockholder's
estate all of the remaining shares owned by the stockholder at that time. In
the event of a stockholder's death, the "fair market value" of the outstanding
stock of DASI will be equal to 60% of the average gross revenues of DASI for the
three most recent years preceding the stockholder's death; however, the value of
such stock shall not be less than the proceeds of the life insurance contracts
maintained on that stockholder. Since DASI's obligation to purchase common stock
from a deceased stockholder's estate will be fully funded by a life insurance
policy maintained by DASI, the related common stock has been classified as
permanent equity. This agreement was terminated upon the Acquisition of DASI by
Cotelligent and certain of the officers.
Consulting Contract
BFR entered into a consulting contract with a former employee effective
February 19, 1996, whereby the former employee is required to perform management
advisory services at the request of BFR. In connection with the contract, BFR
recorded a $470,000 charge to selling, general and administration expenses
during the period April 1, 1995 through February 19, 1996. Payments under the
contract are $ 8,333 per month and continue through December 2000.
Legal Matters
The Company is involved in various legal matters in the normal course of
business. In the opinion of the Predecessor Companies' 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.
NOTE 13--SIGNIFICANT CLIENT
One client accounted for approximately 15% and 11% of the Combined Predecessor
Companies' revenues during the fiscal years ending March 31, 1994 and 1995,
respectively. During the period April 1, 1995 through February 19, 1996, no
individual client accounted for more than 10% of the Combined Predecessor
Companies' revenues.
NOTE 14--DISCONTINUED OPERATIONS
CyberSAFE was previously a separate business division of FDSI, which
developed and marketed security system software for a separate group of clients.
In December 1993, CyberSAFE was incorporated and became a wholly-owned
subsidiary of FDSI. Revenues for this business were approximately $117,000,
$861,000 and $84,000 for each of the fiscal years ended March 31, 1993, 1994 and
1995, respectively. Net assets of approximately $446,000 were transferred by
FDSI to the subsidiary. Management of FDSI subsequently decided to discontinue
this business segment and, accordingly, distributed the stock of this subsidiary
to its stockholders in a tax-free reorganization in June 1994.
Accordingly, the operating results of this business have been presented as
discontinued operations, net of applicable income taxes, for all periods
presented. The assets and liabilities of CyberSAFE have been presented as "Net
assets from discontinued business" on the March 31, 1994 balance sheet. These
March 31, 1994 assets consisted of the following.
Cash.......................................... $ 4,660
Accounts receivable........................... 209,892
Prepaid expenses and other current assets..... 28,797
Other assets.................................. 39,234
Capitalized software.......................... 497,203
Property and equipment........................ 144,284
Accounts payable and accrued liabilities...... (164,855)
Deferred income taxes......................... (103,300)
Long-term debt................................ (172,285)
----------
Net.................................... $ 483,630
==========
The net assets of CyberSAFE at June 1994, which approximated $103,000, were
distributed to its stockholders and this distribution has been reflected
appropriately in stockholders' equity.
51
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--UNAUDITED PRO FORMA INCOME TAX INFORMATION
The following unaudited pro forma tax information is presented in accordance
with Statement of Financial Accounting Standards No. 109 ("SFAS 109") as if BFR
Co., Inc., an S corporation, had been a C corporation subject to federal and
state income taxes throughout the periods presented.
FISCAL YEAR
ENDED MARCH 31, APRIL 1, 1995-
-------------------- FEBRUARY 19,
1994 1995 1996
----------- --------- --------------
Income from continuing operations
before provision for income taxes.. $1,272,833 $ 617,882 $ 2,201,588
Provision for income taxes............ (565,975) (333,485) (1,023,100)
---------- --------- -----------
Income from continuing operations..... 706,858 284,397 1,178,488
Loss from operations on discontinued
business (net of applicable
income taxes)...................... (284,560) (184,004) --
---------- --------- -----------
Pro forma net income.................. $ 422,298 $ 100,393 $ 1,178,488
========== ========= ===========
52
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Financial Data Systems, Inc.
In our opinion, the accompanying consolidated balance sheet, and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Financial Data Systems, Inc. and its subsidiary at March 31, 1995 and 1994, and
the results of its operations and cash flows for each of the years ended March
31, 1995 and 1994 and for the period April 1, 1995 through February 19, 1996, in
conformity with generally accepted accounting principles. These consolidated
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Minneapolis, Minnesota
April 20, 1996
53
FINANCIAL DATA SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, MARCH 31,
1994 1995
----------- -----------
ASSETS
Current assets:
Cash...................... $ 622 $ 86,141
Accounts receivable, less allowance for
doubtful accounts of $10,000............... 1,745,896 2,630,189
Receivable from related party................ -- 111,877
Current portion of note receivable........... -- 58,279
Deferred income taxes........................ 52,000 2,000
Prepaid expenses and other current assets.... 35,575 73,096
Net assets of discontinued business ......... 483,630 --
---------- ----------
Total current assets...................... 2,317,723 2,961,582
---------- ----------
Property and equipment, net.................... 139,474 272,396
Other assets................................... 32,283 70,634
---------- ----------
Total assets.............................. $2,489,480 $3,304,612
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt, including notes payable to
related parties of $291,500 and $0,
respectively................................ $ 595,926 $1,533,709
Accounts payable............................. 162,637 87,958
Accrued compensation......................... 790,540 795,465
Income taxes payable......................... -- 26,600
Other accrued liabilities.................... 180,448 154,455
---------- ----------
Total current liabilities................. 1,729,551 2,598,187
---------- ----------
Long-term debt................................. 211,787 257,473
Deferred income taxes.......................... 106,700 72,000
---------- ----------
Total liabilities......................... 2,048,038 2,927,660
---------- ----------
Commitments (Note 7)........................... -- --
Stockholders' equity:
Series A preferred stock--no par value;
100,000 shares authorized, 85,000 shares
issued and outstanding....................... 8,500 8,500
Series C preferred stock--no par value;
500,000 shares authorized, 13,932 and 14,332
shares issued and outstanding, respectively . 62,838 60,114
Series A common stock--no par value;
1,000,000 shares authorized, 9,813 and
9,713 shares issued and outstanding,
respectively................................. 106,211 108,935
Retained earnings.............................. 263,893 199,403
---------- ----------
Total stockholders' equity................ 441,442 376,952
---------- ----------
Total liabilities and stockholders' equity $2,489,480 $3,304,612
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
54
FINANCIAL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED
MARCH 31, APRIL 1, 1995 -
------------------------ FEBRUARY 19,
1994 1995 1996
------------------------- -----------
Revenues........................... $11,191,023 $15,807,642 $16,467,743
Cost of services................... 8,235,708 12,265,956 12,153,114
----------- ----------- -----------
Gross margin.................. 2,955,315 3,541,686 4,314,629
Selling, general and administrative
expenses.......................... 2,419,362 3,119,699 3,166,349
----------- ----------- ----------
Operating income.............. 535,953 421,987 1,148,280
----------- ----------- ----------
Other (income) expense:
Interest expense................. 60,771 117,445 157,991
Interest income.................. (12,967) (11,393) (18,772)
Other, net....................... 4,208 (29,428) (12,941)
----------- ----------- ----------
52,012 76,624 126,278
----------- ----------- ----------
Income from continuing operations
before income taxes............... 483,941 345,363 1,022,002
Income taxes....................... 170,000 122,000 364,000
----------- ----------- ----------
Income from continuing operations.. 313,941 223,363 658,002
Loss from operations of discontinued
business (net of applicable income
taxes of $159,700 and $80,100,
respectively) (Note 11)........... (284,560) (184,004) --
----------- ----------- ----------
Net income......................... $ 29,381 $ 39,359 $ 658,002
=========== =========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
55
FINANCIAL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK
----------------------------------------------------- RETAINED TOTAL
SHARES AMOUNT SHARES AMOUNT EARNINGS EQUITY
---------------------------------------------------------------------------------------
Balance at March 31, 1993.............. 100,395 $ 60,236 7,350 $ 100,013 $ 234,512 $ 394,761
Conversion of preferred stock to
common stock.......................... (2,143) (6,198) 2,143 6,198 -- --
Issuance of preferred stock............ 500 7,875 -- -- -- 7,875
Issuance of preferred stock charged to
compensation expense.................. 500 9,425 -- -- -- 9,425
Net income............................. -- -- -- -- 29,381 29,381
------- -------- ------ --------- --------- ----------
Balance at March 31, 1994.............. 99,252 71,338 9,493 106,211 263,893 441,442
Conversion of preferred stock to
common stock.......................... (320) (2,724) 320 2,724 -- --
Stock distribution of subsidiary....... -- -- -- -- (103,849) (103,849)
Net income............................. -- -- -- -- 39,359 39,359
-------- -------- ----- --------- ---------- ----------
Balance at March 31, 1995.............. 98,932 68,614 9,813 108,935 199,403 376,952
Issuance of Preference Stock........... 400 14,000 -- -- -- 14,000
Issuance of Common Stock............... -- -- 635 10,000 -- 10,000
Redemption of Common Stock............. -- -- (100) (2,975) -- (2,975)
Net Income............................. -- -- -- -- 658,002 658,002
-------- --------- ----- --------- ---------- -----------
Balance at February 19, 1996........... 98,332 $ 82,614 10,348 $ 115,960 $ 857,405 $ 1,055,979
======== ========= ====== ========= ========= ===========
The accompanying notes are an integral part of these consolidated
financial statements.
56
FINANCIAL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FISCAL YEAR ENDED MARCH 31,
-------------------------- APRIL 1,
1995-FEBRUARY
1994 1995 19, 1996
---------- ---------- -------------
Cash flows from operating activities:
Net income ................................................................... $ 29,381 $ 39,359 $ 658,002
Adjustments to reconcile net income to net cash:
Depreciation and amortization ............................................... 79,511 82,512 85,664
Loss on disposal of property and equipment .................................. 4,208 655 --
Deferred income taxes ....................................................... (88,641) 15,300 (36,208)
Preferred stock issued and charged to compensation .......................... 9,425 -- 14,000
Change in current assets and liabilities:
Accounts receivable ....................................................... (606,176) (959,223) (374,058)
Prepaid expenses and other assets ......................................... 6,998 (50,194) 74,688
Accounts payable and accrued liabilities .................................. 577,723 (95,747) 16,465
Income taxes payable ...................................................... -- 26,600 320,308
Changes in other assets ..................................................... -- -- 1,051
---------- ---------- -------------
Net cash provided by (used in) operating activities .................... 12,429 (940,738) 759,912
---------- ---------- -------------
Cash flows from investing activities:
Property and equipment expenditures ........................................... (22,970) (30,704) (170,939)
Investment in Cotelligent ..................................................... (15,000) (15,000) --
Deferred transaction costs .................................................... -- -- (82,017)
Repayments from (advances to) related party ................................... -- 83,900 (19,544)
Advances to Cotelligent ....................................................... -- -- (336,158)
Change in net assets of discontinued business ................................. (66,924) 184,004 --
---------- ---------- -------------
Net cash provided by (used in) investing activities ..................... (104,894) 222,200 (608,658)
---------- ---------- -------------
Cash flows from financing activities:
Proceeds from long-term debt .................................................. -- -- --
Net borrowings on short-term debt ............................................. 130,964 703,113 173,938
Repayments on long-term debt .................................................. (51,932) (48,785) (43,303)
Payments under capital lease obligations ...................................... (17,377) (41,771) (47,138)
Borrowings from related parties ............................................... -- 191,500 --
Payments to related parties ................................................... -- -- (291,500)
Proceeds from issuance of preferred stock ..................................... 7,875 -- --
Proceeds from issuance of common stock ........................................ -- -- 10,000
Retirement of preferred stock ................................................. -- -- (2,975)
---------- ---------- -------------
Net cash provided by (used in) financing activities ..................... 69,530 804,057 (200,978)
---------- ---------- -------------
Net increase (decrease) in cash ................................................. (22,935) 85,519 (49,724)
Cash at beginning of period ..................................................... 23,557 622 86,141
---------- ---------- -------------
Cash at end of period ........................................................... $ 622 $ 86,141 $ 36,417
========== ========== =============
Supplemental disclosures of cash flow information and non cash investing and
financing activities are described in Note 2.
The accompanying notes are an integral part of these consolidated financial
statements.
57
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BUSINESS ORGANIZATION
Financial Data Systems, Inc. ("FDSI" or the "Company"), a Washington
corporation, commenced operations in 1982. The Company is a professional
services firm that provides computer consulting and contract programming
services.
The Company and its stockholders entered into a definitive agreement with
Cotelligent Group, Inc. ("Cotelligent") pursuant to which the Company merged
with Cotelligent (the "Acquisition"). All outstanding shares of the Company were
exchanged for cash and shares of Cotelligent's common stock concurrent with the
consummation of the initial public offering of the common stock of Cotelligent.
Cotelligent completed the initial public offering on February 14, 1996, and on
February 20, 1996, completed the Acquisition of the Company.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 reporting
period. Actual results could differ from those estimates.
Basis of Presentation
A previous division of the Company, CyberSAFE, was incorporated and became
a wholly-owned subsidiary of the Company in December, 1993. The stock of this
subsidiary was subsequently distributed to its stockholders on June 1, 1994 in a
tax-free reorganization. The financial results of the operations of this entity
have been presented as discontinued operations in the Statement of Operations
for all periods presented. See further discussion in Note 11.
Property and Equipment
Property and equipment are carried at cost. The cost of maintenance and
repairs is charged to expense as incurred. Depreciation, including amortization
of capitalized leases, is provided over the estimated useful lives of the
respective assets (five to seven years) on a straight line or accelerated basis.
Leasehold improvements are amortized over the shorter of the lease term or the
estimated useful life.
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.
Revenue Recognition
Revenue is recognized as services are performed.
Earnings Per Share
Historical earnings per share has not been presented because it is not
considered to be meaningful as a result of the Acquisitions and the offering as
discussed in Note 1.
58
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). The asset and liability approach used in SFAS 109 requires the
recognition of deferred tax assets and liabilities for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable for
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities.
Supplemental Disclosures of Cash Flow Information
FOR THE YEAR ENDED APRIL 1, 1995 -
MARCH 31, FEBRUARY 19,
---------------------------------------------
1994 1995 1996
---------------------------------------------
Interest paid .................... $ 74,663 $ 117,795 $ 148,500
Federal income taxes (refunded)
paid ........................... $ (4,334) $ -- $ 71,906
Supplemental schedule of noncash investing and financing activities is as
follows.
During 1995, the Company refinanced debt with a principal balance of
$178,986.
Capital lease obligations of $99,780 and $179,241 were incurred when the
Company entered into leases of new equipment in the years ended March 31, 1994
and 1995, respectively.
In 1995, the Company converted a trade accounts receivable into a note
receivable with a principal balance of $74,930.
The following assets and liabilities were transferred by the Company to
CyberSAFE, a wholly-owned subsidiary, in December 1993 in exchange for
10,000,000 shares of $.01 par value common stock.
Accounts receivable ...................... $ 343,222
Prepaid expenses ......................... 21,927
Property and equipment, net .............. 81,796
Other assets ............................. 29,892
Software development costs, net .......... 503,148
Accounts payable and accrued expenses,
including $174,191 due to the Company .. (310,261)
Long-term debt and capital lease
obligations ............................. (120,287)
Deferred income taxes .................... (103,300)
---------
Net assets ........................ $ 446,137
=========
On June 1, 1994, the Company distributed the stock of CyberSAFE to its
stockholders in a tax-free reorganization. The following is a summary of the
assets and liabilities of CyberSAFE as of that date.
Cash .................................... $ 1,095
Accounts receivable ..................... 141,740
Prepaid expenses and other current
assets ................................. 107,011
Property and equipment, net ............. 139,617
Other assets, net ....................... 37,926
Software development costs, net ......... 485,827
Accounts payable and accrued expenses,
including $240,385 due to the Company .. (543,936)
Long-term debt and capital
lease obligations ...................... (162,131)
Deferred income taxes .................... (103,300)
---------
Net reduction in retained
earnings ........................ $ 103,849
=========
59
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--ALLOWANCE FOR DOUBTFUL ACCOUNTS AND NOTES RECEIVABLE
BALANCE AT TRANSFER BALANCE
BEGINNING CHARGED TO TO CYBER- AT END
OF PERIOD EXPENSE SAFE OF PERIOD
--------- ---------- ----------- -----------
Year ended March 31, 1994 ........... $ 5,000 $10,000 $ -- $15,000
======= ======= ========= =======
Year ended March 31, 1995 ........... $15,000 $ -- $ (5,000) $10,000
======= ======= ========= =======
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment consist of the following.
MARCH 31,
--------------------------
1994 1995
--------- --------
Equipment.......................... $233,327 $433,642
Furniture and fixtures............. 37,097 37,808
Leasehold improvements............. 22,476 --
-------- --------
292,900 471,450
Less: Accumulated depreciation and
amortization...................... (153,426) (199,054)
-------- ---------
$139,474 $272,396
======== =========
Depreciation and amortization expense for the years ended March 31, 1994 and
1995 and for the period April 1, 1995 through February 19, 1996 was $50,929,
$76,538 and $85,664, respectively.
As described in Note 7, the Company leases certain equipment under capital
leases.
NOTE 5--CREDIT FACILITIES
Short-Term Debt
Short-term debt consists of the following.
MARCH 31,
-------------------------------
1994 1995
--------- ----------
Line of credit ........................... $430,964 $1,134,077
Equipment line of credit ................. -- --
Current capital lease obligations ........ 8,653 55,012
Current maturities on long-term debt ..... 56,309 53,120
Notes payable to related parties ......... 100,000 291,500
--------- ----------
$595,926 $1,533,709
========= ==========
The Company's line of credit agreement with a bank provides for borrowings
up to a maximum amount of $1,250,000 based on eligible accounts receivable, at
the prime rate (6.25% and 9.00% at March 31, 1994 and 1995, respectively) plus
1.50% per annum. The agreement, which expires June 30, 1996, is secured
by accounts receivable, property and
60
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
equipment, and personally guaranteed by the Company's principal stockholders.
The agreement contains certain financial covenants with which the Company is in
compliance as of March 31, 1995.
In May 1995, the Company established a line of credit with a bank which
provides for borrowing of up to $75,000 for the purchase of furniture and
fixtures and equipment. The line bears an interest rate of prime plus 2.25% and
is secured by the Company's accounts with the bank.
During 1995, the Company borrowed a total of $191,500 from its principal
stockholders. The notes are unsecured, bear interest at 9.25% per annum payable
monthly, are due on demand and subordinated to the bank debt. Accrued interest
includes $748 of interest on these notes at March 31, 1995. Interest expense
included $14,025 related to these notes for the year ended March 31, 1995, and
$13,465 for the period April 1, 1995 through February 20, 1996.
The Company borrowed $100,000 from a stockholder in 1993. The note, which
required interest at 9% per annum payable monthly, was paid on September 15,
1995. Accrued interest included $370 at March 31, 1994 and $393 at March 31,
1995 related to this note. Interest expense for the years ended March 31, 1994
and 1995 included $9,000 and $9,000, respectively, related to this note.
Long-Term Debt
Long-term debt consists of.
MARCH 31,
-------------------------------------
1994 1995
-------------------------------------
Capital lease obligations...................... $ 48,978 $ 186,619
Note payable to a bank; monthly
payments of $5,937, including interest
at the bank's prime rate (9.00% at March 31,
1995) plus 2.25% per annum; maturing
March 30, 1998 and secured by the
Company's assets and the personal guarantee
of the Company's principal stockholders....... -- 178,986
Note payable to a bank; monthly payments of
$6,218, including interest at the bank's
prime rate (6.25% at March 31, 1994) plus
2.75% per annum; refinanced in 1995........... 227,771 --
---------- ----------
276,749 365,605
Less: Current maturities....................... (64,962) (108,132)
---------- ----------
$ 211,787 $ 257,473
========== ==========
Principal maturities on notes payable over the next five years are as follows
(see Note 7 for capital lease obligations).
YEAR ENDING
MARCH 31, 1995
--------------
1996...................................................... $ 53,120
1997...................................................... 59,413
1998...................................................... 66,453
---------
$ 178,986
=========
61
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--INCOME TAXES
The provision (benefit) for income taxes is as follows.
YEAR ENDED MARCH 31, APRIL 1-
---------------------------------------------- FEBRUARY 19,
1994 1995 1996
---------------- ----------------- ---------------
Continuing operations:
Current--federal.................... $ 233,100 $ 190,200 $403,010
Deferred--federal................... (63,100) (68,200) (39,010)
---------- ----------- ----------
Total ......................... 170,000 122,000 364,000
Discontinued operations--federal ....... (159,700) (80,100) --
---------- ----------- ----------
Total provision for income taxes........ $ 10,300 $ 41,900 $364,000
========== =========== ==========
Deferred tax assets (liabilities) are comprised of the following.
MARCH 31,
----------------------------------------
1994 1995
------------------ ---------------
Accrued liabilities .......................... $ 51,100 $ 54,600
Cash to accrual conversion ................... (142,900) (111,700)
Depreciation ................................. (17,600) (16,500)
Net operating loss carryforward ............... 48,200 --
Other ......................................... 6,500 3,600
------------------ --------------
Total ......................................... $ (54,700) $ (70,000)
================== ==============
The Company's effective income tax rate for continuing operations varied
from the U.S. federal statutory rate as follows.
APRIL 1-
YEAR ENDED MARCH 31, FEBRUARY 19,
------------------------------------------------- ----------------------
1994 1995 1996
------------------- -------------- ----------------------
U.S. federal statutory rate. 34.0% 34.0% 34.0%
Non-deductible expenses..... .9 3.0 1.4
Other....................... .2 (1.7) 1.1
------------------- --------------- ----------------------
Effective income tax rate... 35.1% 35.3% 36.5%
=================== =============== ======================
NOTE 7--LEASE COMMITMENTS
The Company leases business offices under long-term lease agreements. The
leases are classified as operating leases and expire between 1997 and 2001.
Under such leases, the Company is responsible for all executory costs
(insurance, taxes and maintenance) and pro rata common area charges. The Company
also leases furniture and equipment under leases classified as capital leases.
Property and equipment includes the following leased property under capital
leases.
MARCH 31,
-------------------------
1994 1995
----------- -----------
Equipment .................................... $ 57,779 $ 236,042
Less: Accumulated amortization ............... (10,867) (46,957)
----------- ------------
$ 46,912 $ 189,085
=========== ============
62
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a schedule of future minimum lease payments for capital and
operating leases (with initial or remaining terms in excess of one year).
YEAR ENDING MARCH 31,
-------------------------
CAPITAL OPERATING
LEASES LEASES
---------- -------------
1997 ................................. $ 79,066 $172,172
1998 ................................. 79,066 202,368
1999 ................................. 52,626 198,662
2000 ................................. 21,357 201,026
2001 ................................. -- 179,100
--------------- -------------
Total minimum lease payments......... 232,115 953,328
=============
Less: Amounts representing interest... (45,496)
---------------
Present value of net minimum
lease payments ...................... $186,619
===============
Rent expense amounted to $78,549, $108,630 and $188,038 respectively, for
the years ended March 31, 1994 and 1995 and for the period April 1, 1995 through
February 19, 1996, respectively.
NOTE 8--RELATED PARTY TRANSACTIONS
Three individuals own 79% of the outstanding Series A preferred stock, and
are referred to as the "principal stockholders."
For the year ended March 31, 1995, the Company recognized a total of $76,192
in revenue for providing computer consulting services to CyberSAFE. At March 31,
1995, $59,720 was due from CyberSAFE for these services and are included in
accounts receivable.
In May 1994, the Company negotiated a perpetual software marketing agreement
with CyberSAFE to sublicense CyberSAFE software in exchange for royalty payments
of 15% of the purchase price for every copy licensed. For the year ended March
31, 1995, and for the period April 1, 1995 through February 19, 1996, the
Company paid no royalties to CyberSAFE.
In addition, the Company has made short-term advances to CyberSAFE. The
balance due on these short-term advances, bearing interest at 9% per annum at
March 31, 1995 was $111,877. Included in other income is $41,265 for the year
ended March 31, 1995 for management services provided to CyberSAFE . Included
in interest income on the advances was $7,335 and $14,213 for the year ended
March 31, 1995 and for the period April 1, 1995 through February 19, 1996,
respectively.
Two stockholders of the Company each own in excess of 10% of the equity
interests in VoiceNet, Inc. ("VoiceNet"), a voicemail service bureau from
which FDSI obtained voicemail services. For the year ended March 31, 1995,
consideration paid by FDSI to VoiceNet was approximately $17,500. FDSI paid for
services at VoiceNet's advertised rates.
The Company carries its investment in Cotelligent (see Note 1) at cost. The
investment, which totaled $15,000 and $30,000 at March 31, 1994 and 1995,
respectively, is included in the "Other assets" in the accompanying Balance
Sheet.
NOTE 9--EMPLOYEE BENEFIT PLANS
The Company maintains a discretionary 401(k) profit-sharing plan which
covers all employees who have met minimum age and employment requirements. The
Company made no contributions to this plan, for the years ended March 31, 1994
and 1995 and for the period April 1, 1995 through February 19, 1996.
63
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In September 1992, the Company adopted a cash bonus profit-sharing plan for
employees who have completed 1,500 hours of service to the Company. Individuals
must be an employee of the Company on the payout date. The Company recorded
$10,000, $24,000 and $30,000 of expense related to this plan for the years ended
March 31, 1994 and 1995 and the period April 1, 1995 through February 19, 1996,
respectively.
NOTE 10--PREFERRED AND COMMON STOCK
In 1990, the Company's articles of incorporation were amended to allow for
new classes of stock. Holders of the Company's previously issued common stock
exchanged their shares for newly issued Series A voting preferred stock. Holders
of the Company's outstanding and exercisable stock options exchanged their
options for newly issued Series C voting preferred stock in conjunction with the
termination of the Company's stock option plan.
Holder of Series C preferred stock are required to convert their shares to
Series A common stock (voting) upon the termination of employment with the
Company.
The Company has authorized Series B and D preferred stock and Series B common
stock; each series of stock is unissued and has different rights. Series B and D
preferred and Series B common stock are nonvoting. The following summarizes the
authorized shares for each series of stock:
Preferred stock:
Series B, 100,000 shares authorized
Series D, 150,000 shares authorized
Common stock:
Series B, 150,000 shares authorized
NOTE 11--DISCONTINUED OPERATIONS
As discussed in Note 2, CyberSAFE was previously a separate business
division of FDSI, which developed and marketed security system software for a
separate group of customers. In December 1993, CyberSAFE was incorporated and
became a wholly-owned subsidiary of the Company. Revenues for this business were
approximately $861,000 and $84,000 for the fiscal years ended March 31, 1994 and
1995, respectively. Net assets of approximately $446,000 were transferred by
FDSI to the subsidiary. Management of FDSI subsequently decided to discontinue
this business segment and, accordingly, distributed the net assets to its
stockholders in a tax-free reorganization in June 1994.
Accordingly, the operating results of this business have been presented as
discontinued operations, net of applicable income taxes, for all periods
presented. The assets and liabilities of CyberSAFE have been presented as "Net
assets from discontinued business" on the March 31, 1994 balance sheet. These
March 31, 1994 assets consisted of the following:
Cash ............................. $ 4,660
Accounts receivable .............. 209,892
Prepaid expenses and other 28,797
current assets ..................
Other assets ..................... 39,234
Capitalized software ............. 497,203
Property and equipment ........... 144,284
Accounts payable and accrued
liabilities ..................... (164,855)
Deferred income taxes ............ (103,300)
Long-term debt ................... (172,285)
-----------
Net .......................... $ 483,630
===========
64
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The net assets of CyberSAFE at June 1994, which approximated $103,000, were
distributed to its shareholders and this distribution has been reflected
appropriately in stockholders' equity.
NOTE 12--SIGNIFICANT CLIENTS
During the year ended March 31, 1994, two clients accounted for 14% and 11%
of revenues, respectively, one client accounted for 26% of revenues for the year
ended March 31, 1995, and two clients accounted for 12% and 24% of revenue,
respectively, for the period April 1, 1995 through February 19, 1996.
Additionally, these clients accounted for approximately 22% and 23% of the
accounts receivable balance as of March 31, 1994 and 1995, respectively.
65
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
BFR Co., Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of BFR Co., Inc. at March 31, 1995 and
1994, and the results of its operations and cash flows for the years ended March
31, 1995 and 1994 and for the period April 1, 1995 through February 19, 1996, in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Minneapolis, Minnesota
April 20, 1996
66
BFR CO., INC.
BALANCE SHEET
MARCH 31, MARCH 31,
1994 1995
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ............ $ 210,442 $ 466,885
Accounts receivable .................. 3,388,164 3,263,436
Prepaid expenses and other
current assets ...................... 167,819 13,411
------------- ------------
Total current assets .............. 3,766,425 3,743,732
------------- ------------
Property and equipment, net ............ 184,352 140,818
Other assets ........................... 119,567 138,723
------------- ------------
Total assets ...................... $4,070,344 $4,023,273
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt ...................... $ 584,650 $ 35,659
Accounts payable ..................... 191,448 71,840
Accrued payroll liabilities .......... 159,865 836,972
Deferred revenue ..................... -- 168,405
Deferred income taxes ................ 271,000 250,000
Other accrued liabilities ............ 243,764 255,962
------------- ------------
Total current liabilities ......... 1,450,727 1,618,838
------------- ------------
Capital lease obligations .............. 176,172 140,189
Commitments (Notes 6 and 9) ............ -- --
Stockholders' equity:
Common stock, no par value; 1,000,000
shares of Class A and
1,000,000 shares of Class B
authorized, 300,000 and 700,000
shares, issued and outstanding....... 1,000 1,000
Retained earnings .................... 2,442,445 2,263,246
------------- ------------
Total stockholders' equity ........ 2,443,445 2,264,246
------------- ------------
Total liabilities and stockholders'
equity ........................... $4,070,344 $4,023,273
============= ============
The accompanying notes are an integral part of these financial statements.
67
BFR CO., INC.
STATEMENT OF OPERATIONS
APRIL 1, 1995
FISCAL YEAR ENDED MARCH 31, FEBRUARY 19,
---------------------------------- ---------------
1994 1995 1996
--------------- --------------- ---------------
Revenues................................ $14,440,051 $ 15,220,645 $ 15,622,785
Cost of services ...................... 10,813,662 11,239,778 11,494,132
------------ ------------- -------------
Gross margin ..................... 3,626,389 3,980,867 4,128,653
Selling, general and administrative
expenses........................... 2,832,816 4,173,345 3,589,339
------------ ------------- -------------
Operating income (loss) .......... 793,573 (192,478) 539,314
Other (income) expense:
Interest expense ...................... 53,228 33,109 181,713
Interest income ....................... (20,770) (25,388) (20,694)
Other, net ............................ 3,934 -- --
------------ ------------- -------------
36,392 7,721 161,019
------------ ------------- -------------
Income (loss) before provision
(benefit) for income taxes ........... 757,181 (200,199) 378,295
Provision (benefit) for income..........
taxes.................................. 76,000 (21,000) 1,080,162
------------ ------------- -------------
Net income (loss) ................ $ 681,181 $ (179,199) $ (701,867)
============ ============= =============
The accompanying notes are an integral part of these financial statements.
68
BFR CO., INC.
STATEMENT OF STOCKHOLDERS' EQUITY
UNEARNED TOTAL
RETAINED ESOP STOCKHOLDERS
COMMON STOCK EARNINGS SHARES EQUITY
------------------------------------- ------------- ------------- -------------
SHARES AMOUNT
----------------- ------------------
CLASS A CLASS B CLASS A CLASS B
-------- ------- -------- --------
Balance at March 31, 1993........ 300,000 700,000 $300 $700 $ 1,761,264 $ -- $ 1,762,264
Net income ...................... -- -- -- -- 681,181 -- 681,181
------- ------- ---- ---- ----------- ----------- ------------
Balance at March 31, 1994 ....... 300,000 700,000 300 700 2,442,445 -- 2,443,445
Net loss ........................ -- -- -- -- (179,199) -- (179,199)
------- ------- ---- ---- ----------- ----------- ------------
Balance at March 31, 1995 ....... 300,000 700,000 300 700 2,263,246 -- 2,264,246
Purchase of ESOP shares ......... -- -- -- -- -- (3,150,000) (3,150,000)
Release of unearned shares
to ESOP ....................... -- -- -- -- -- 1,114,286 1,114,286
Conversion of ESOP to defined
contribution plan.............. -- -- -- -- -- 2,035,714 2,035,714
Dividends........................ -- -- -- -- (138,723) -- (138,723)
Net loss ........................ -- -- -- -- (701,867) -- (701,867)
------- ------- ---- ---- ----------- ----------- ------------
Balance at February 19, 1996..... 300,000 700,000 $300 $700 $ 1,422,656 $ 0 $ 1,423,656
------- ------- ---- ---- ----------- ----------- ------------
The accompanying notes are an integral part of these financial statements.
69
BFR CO., INC.
STATEMENT OF CASH FLOWS
FISCAL YEARS ENDED APRIL 1, 1995 -
MARCH 31, FEBRUARY 19,
------------------------------------------
1994 1995 1996
------------------------------------------
Cash flows from operating activities:
Net income (loss) ..................... $ 681,181 $(179,199) $(701,867)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization ........ 44,625 43,534 41,704
Deferred income taxes, net ........... 76,000 (21,000) 407,651
Changes in current assets and
liabilities:
Accounts receivable ................ (893,938) 124,728 (99,222)
Prepaid expenses and other current
assets ............................ (5,327) 154,408 331,860
Accounts payable and accrued
expenses .......................... (260,851) 569,697 356,642
Income taxes payable ............... -- -- 376,224
Deferred revenue ................... -- 168,405 (168,405)
Changes in other assets .............. (25,463) (19,156) (307,298)
--------- -------- ---------
Net cash provided by (used in)
operating activities............. (383,773) 841,417 237,289
--------- -------- ---------
Cash flows from investing activities:
Purchases of property and equipment ... (8,126) -- (121,757)
Net repayments from related
parties .............................. 127,673 -- --
Deferred transaction costs............. -- -- (274,355)
Investment in Cotelligent ............. -- -- (40,000)
Advances to Cotelligent................ -- -- (136,000)
--------- -------- ---------
Net cash flows provided by (used in)
investing activities................... 119,547 -- (572,112)
--------- -------- ---------
Cash flows from financing activities:
Net borrowings (repayments) on
short-term debt ...................... 150,000 (550,000) 300,000
Payments on capital lease obligations.. (30,927) (34,974) (30,244)
--------- -------- ---------
Net cash provided by (used in)
financing activities.............. 119,073 (584,974) 269,756
--------- -------- ---------
Net increase (decrease) in cash and cash
equivalents............................ (145,153) 256,443 (65,067)
Cash and cash equivalents at beginning
of period ............................. 355,595 210,442 466,885
--------- -------- ---------
Cash and cash equivalents at end of
period................................. $ 210,442 $ 466,885 $ 401,818
========= ========= =========
Supplemental disclosures of cash flow
information:
Interest paid ......................... $ 28,784 $ 12,495 $ 181,713
Income taxes paid ..................... $ 25 $ 25 $ 439,500
The accompanying notes are an integral part of these financial statements.
70
BFR CO., INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--BUSINESS ORGANIZATION
BFR Co., Inc. ("BFR" or the "Company"), a New Jersey corporation, was
incorporated and commenced operations in 1985. The Company is a professional
services firm that provides computer consulting and contract programming
services.
The Company and its stockholders entered into a definitive agreement with
Cotelligent Group, Inc. ("Cotelligent") pursuant to which the Company merged
with Cotelligent (the "Acquisition"). All outstanding shares of the Company were
exchanged for cash and shares of Cotelligent's common stock concurrent with the
consummation of the initial public offering of the common stock of Cotelligent.
Cotelligent completed the initial public offering on February 14, 1996, and on
February 20, 1996, completed the Acquisition of the Company.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 reporting 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.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided over the
estimated useful lives of the related assets (generally ranging from five to ten
years) on an accelerated basis.
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.
Allowance for Doubtful Accounts
The Company does not maintain an allowance for doubtful accounts as accounts
receivable amounts are deemed fully collectible and historical write-offs have
been insignificant.
Revenue Recognition
Revenue is recognized as services are performed.
Deferred revenue at March 31, 1995 represents billings to clients under fixed
price contracts that have not been earned by the Company under its revenue
recognition policy.
Earnings Per Share
Historical earnings per share has not been presented because it is not
considered to be meaningful as a result of the Acquisitions and the offering as
discussed in Note 1.
71
BFR CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). The asset and liability approach used in SFAS 109 requires 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.
The Company was an S corporation through March 31, 1995 for federal income tax
purposes and, accordingly, any federal income tax liabilities through this date
are the responsibility of the stockholders. Appropriate provisions were made for
these periods for state income taxes. Effective April 1, 1995 the Company
terminated its S status and will be taxed as a C Corporation. See further
discussion in Note 5, Income Taxes.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
MARCH 31,
--------------------------
1994 1995
---------- --------
Computer equipment .............. $292,001 $292,001
Office equipment ................ 349,476 349,476
Leasehold improvements .......... 24,818 24,818
---------- --------
666,295 666,295
Less: Accumulated depreciation and
amortization..................... 481,943 525,477
---------- --------
$184,352 $140,818
========== ========
Depreciation and amortization for the years ended March 31, 1994 and 1995 and
for the period April 1, 1995 through February 19, 1996 was $44,625,
$43,534 and $41,704, respectively.
Included in office equipment is approximately $307,000 of gross assets under
capital leases as of March 31, 1994.
NOTE 4--CREDIT FACILITIES
Short-Term Debt
Short-term debt consists of the following:
MARCH 31,
--------------------------
1994 1995
--------- --------
Line of credit ................... $550,000 $ --
Current portion of capital lease
obligation ...................... 34,650 35,659
--------- --------
$584,650 $ 35,659
========= ========
The Company's line of credit agreement with a bank provides for borrowings of
up to $1,500,000. The line of credit is secured by all of the Company's assets
not specifically pledged. The interest rate on this line of credit was 6.75%
(prime plus .50 %) and 9% (prime) at March 31, 1994 and 1995, respectively.
72
BFR CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--INCOME TAXES
The provision (benefit) for income taxes is as follows.
YEAR ENDED MARCH 31, APRIL 1, 1995-
----------------------------- FEBRUARY 19,
1994 1995 1996
----------------------------- --------------
Current:
Federal ...................... $ -- $ -- $ 192,879
State ........................ 76,000 (21,000) 117,968
------------- ------------- ------------
76,000 (21,000) 310,847
Deferred:
Federal ...................... -- -- 847,604
State ........................ -- -- (78,289)
------------- ------------- -----------
-- -- 769,315
------------- ------------- -----------
$ 76,000 $ (21,000) $1,080,162
============= ============= ===========
Deferred tax assets (liabilities) are comprised of the following.
MARCH 31,
-----------------------------------
1994 1995
-------------- -------------
Current:
Cash to accrual ..................... $ -- $ --
Accounts receivable ................. (318,000) (293,700)
Accounts payable and accrued
expenses ........................... 43,000 24,700
Unearned revenue .................... -- 15,200
Other................................. 4,000 3,800
------------- ------------
Total ............................ $(271,000) $(250,000)
============= ============
The Company's effective income tax rate varied from the statutory tax rate as
a result of the following:
YEAR ENDED APRIL 1, 1995 -
MARCH 31, FEBRUARY 19,
---------------------- -----------------
1994 1995 1996
---------- ---------- -----------------
U.S. Federal statutory rate.......... 34.0% 34.0% 34.0%
State statutory rate................. 9.0 9.0 6.9
Officers life insurance and other
nondeductible expenses.............. 1.0 1.5 (6.9)
Conversion to C corporation.......... -- -- 244.5
Other................................ -- -- (10.2)
----------- --------- ------------------
Effective tax rate................. 44.0% 44.5% 268.3%
=========== ========= ==================
Also, in connection with the conversion from an S corporation (cash basis)
to a C corporation (accrual basis), approximately $925,000 of federal and state
income taxes is expected to be paid pro rata over the next four years. See Note
11 for Unaudited Pro Forma Income Tax Information.
73
BFR CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--LEASE COMMITMENTS
The Company leases its general offices, and certain computer and
transportation equipment under operating leases from an affiliate, which is
under common control. Rental expense under these leases was $175,814, $176,104
and $174,874 for the years ended March 31, 1994 and 1995 and for the period
April 1, 1995 through February 19, 1996, respectively.
Future minimum rental payments under such leases for the years ending March 31
are as follows.
CAPITAL OPERATING
LEASES LEASES
----------------------
1997 ............................ $ 51,000 $205,000
1998 ............................ 51,000 196,000
1999 ............................ 51,000 196,000
2000 ............................ 51,000 206,000
2001 ............................ 43,000 191,000
---------- --------
Total minimum lease payments. 247,000 $994,000
========
Less: Future interest ........... (71,152)
----------
Present value of net minimum lease
payments ........................ 175,848
Less: Current maturities ......... (35,659)
----------
$140,189
==========
NOTE 7--COMMON STOCK
Effective March 31, 1995, the Company amended its Certificate of Incorporation
to provide for two classes of voting common stock (Class A and Class B) with the
authority to issue 1,000,000 shares of each class of common stock with no par
value. The existing shares outstanding were classified as Class B shares.
On April 20, 1995 the Company declared and effected a stock split of 3,000
shares of Class A common stock for each share of Class B common stock in the
form of a stock dividend. On April 20, 1995, the Company declared and effected a
7,000-for-1 stock split of the Class B common stock. This stock split has been
retroactively reflected in the Company's Balance Sheet and Statement of
Stockholders' Equity.
On April 20, 1995, the Employee Stock Ownership Plan and the Money Purchase
Plan (the Plan) purchased from the shareholders of the Company all of the
300,000 shares of Class A common stock for $3,150,000. In connection with the
transaction, the Plan received a $900,000 cash contribution from the Company and
assumed a $2,250,000 liability to a bank. The Company guaranteed this
obligation. Approximately 214,000 Class A shares are pledged to the bank, and
the loan will be repaid in 84 monthly installments plus interest at the banks
prime rate less .10%. See further discussion regarding this Plan in Note 8--
Retirement Plans.
NOTE 8--RETIREMENT PLANS
401(k)
The Company has a 401(k) plan for the benefit of all employees after 30 days
of service. The plan is non-contributory and is funded by the amounts used to
reduce employee salaries. In addition, the Company has the option to contribute
to the plan on the employee's behalf. The Company did not make any contributions
to the plan for the years ending March 31, 1994 and 1995 and for the period
April 1, 1995 through February 19, 1996.
74
BFR CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Employee Stock Ownership and Money Purchase Plan
The Company previously maintained an Employee Stock Ownership (ESOP) and Money
Purchase Plan (the Plan) which covered substantially all salaried employees.
Annual contributions to the ESOP were made at the discretion of the Company's
Board of Directors. The Plan required fixed minimum annual contributions of 10%
of eligible payroll for the initial year ending March 31, 1995 and 5% of
eligible payroll for subsequent years. Employees' scheduled vesting of these
benefits occurs over seven years. In April 1995, the Plan incurred a $2,250,000
liability to a bank with respect to the ESOP portion of the Plan, which,
together with a $900,000 cash contribution from the Company, enabled the Plan to
purchase all of the 300,000 outstanding shares of Class A common stock for
$3,150,000 from the stockholders. The ESOP shares were allocated to participants
as contributions were made to the Plan. During the year ended March 31, 1995,
the Company made contributions of $900,000 to this Plan. As the debt was repaid,
shares were released from collateral and allocated to active employees based
upon the proportion of debt service paid in the year. The Company recorded
compensation expense equal to the market value of the shares at the release
date. On December 7, 1995, the Plan was converted to a profit sharing plan.
Contributions to the Plan are made at the discretion of the Company. The
Company did not make any contributions to the Plan for the period from December
7, 1995 through February 19, 1996.
NOTE 9--COMMITMENTS
Employment Agreements
Effective April 20, 1995, the Company entered into employment agreements with
the four shareholders and officers of the Company. The agreements provided for
minimum annual compensation of $464,000 in addition to directors compensation,
potential salary increases and bonuses. The Agreements included non-compete
clauses and continued through years ranging between 2001 and 2021, assuming the
maintenance of certain ownership percentages. These employment agreements were
terminated in connection with the merger with Cotelligent and certain of the
officers entered into new employment contracts.
NOTE 10--MAJOR CLIENTS
During the year ended March 31, 1994, three major clients accounted for
approximately 33%, 25% and 13% of revenues, respectively, during 1995 three
clients accounted for approximately 34%, 25% and 12% of revenues, respectively,
and during the period April 1, 1995 through February 19, 1996 four clients
accounted for 27%, 23%, 21% and 15% respectively.
Additionally, these clients accounted for approximately 28%, 22% and 13% of
the accounts receivable balance as of March 31, 1994 and 34%, 24% and 18% of the
accounts receivable balance as of March 31, 1995, respectively.
75
BFR CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--UNAUDITED PRO FORMA INCOME TAX INFORMATION
The following unaudited pro forma income tax information is presented in
accordance with Statement of Financial Accounting Standards No. 109 ("SFAS 109")
as if the Company had been a C corporation subject to federal and state income
taxes throughout the periods presented.
FISCAL YEAR ENDED APRIL 1, 1995 -
MARCH 31, FEBRUARY 19,
-----------------------------------------
1994 1995 1996
----------- ---------- ----------------
Income (loss) before provision
(benefit) for income taxes ......... $757,181 $(200,199) $378,295
Provision (benefit) for income taxes.. 302,872 (80,080) 151,318
----------- ---------- ---------------
Pro forma net income (loss) ......... $454,309 $(120,119) $226,977
=========== =========== ===============
76
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Data Arts & Sciences, Inc.
and Data Personnel, Inc.
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the combined financial position of
Data Arts & Sciences, Inc. and Data Personnel, Inc. at March 31, 1995 and 1994,
and the results of their operations and cash flows for each of the years ended
March 31, 1995 and 1994 and for the period April 1, 1995 through February 19,
1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the companies' management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Minneapolis, Minnesota
April 20, 1996
77
DATA ARTS & SCIENCES, INC.
COMBINED BALANCE SHEET
MARCH 31, MARCH 31,
1994 1995
----------- -----------
ASSETS
Current assets:
Accounts receivable, less allowance
for doubtful accounts of $30,000 ... $1,431,730 $2,043,211
Income taxes receivable ............ 26,635 --
Deferred income taxes .............. 12,081 12,081
Prepaid expenses and other current
assets ............................ 64,794 51,630
--------- -----------
Total current assets ............ 1,535,240 2,106,922
--------- -----------
Property and equipment, net .......... 112,918 79,531
Deferred income taxes ................ 11,341 12,599
Other assets........................... 137,675 228,166
--------- -----------
Total assets .................... $1,797,174 $2,427,218
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt .................... $ 179,138 $ 408,983
Accounts payable ................... 247,682 396,747
Accrued compensation ............... 323,669 401,116
Income taxes payable................. -- 55,290
---------- ----------
Total current liabilities ....... 750,489 1,262,136
---------- ----------
Long-term debt, including notes payable
to related parties of $440,000........ 556,259 440,000
---------- ----------
Total liabilities ................ 1,306,748 1,702,136
---------- ----------
Commitments and contingencies (Notes 7
and 9) .............................. -- --
Stockholders' equity:
Common stock--DASI, no par value;
12,500 shares authorized,
300 shares issued and outstanding.. 2,000 2,000
Common stock--DPI, no par value;
10,000 shares authorized,
2,000 shares issued and outstanding. 2,000 2,000
Retained earnings ................... 486,426 721,082
---------- ----------
Total stockholders' equity ....... 490,426 725,082
---------- ----------
Total liabilities and
stockholders' equity ............ $1,797,174 $2,427,218
========== ==========
The accompanying notes are an integral part of these combined financial
statements.
78
DATA ARTS & SCIENCES, INC.
COMBINED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED APRIL 1, 1995 -
MARCH 31, FEBRUARY 19,
------------------------- ---------------
1994 1995 1996
------------- ---------- ---------------
Revenue................................. $10,065,043 $12,436,865 $14,455,636
Cost of services ....................... 7,971,100 9,740,902 11,254,223
----------- ----------- --------------
Gross margin ........................ 2,093,943 2,695,963 3,201,413
Selling, general and administrative.....
expenses ............................. 1,861,838 2,194,932 2,344,165
----------- ----------- --------------
Operating income ................. 232,105 501,031 857,248
Other (income) expense:
Interest expense .................... 80,013 80,150 109,318
Other, net............................ -- -- (22,719)
----------- ----------- --------------
80,013 80,150 86,599
----------- ----------- --------------
Income before provision for income
taxes ............................... 152,092 420,881 770,649
Provision for income taxes ........... 71,658 186,225 328,288
----------- ----------- --------------
Net income ........................... $ 80,434 $ 234,656 $ 442,361
=========== =========== ==============
The accompanying notes are an integral part of these combined financial
statements.
79
DATA ARTS & SCIENCES, INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
TOTAL
COMMON STOCK COMMON STOCK RETAINED STOCKHOLDERS
DASI DPI EARNINGS EQUITY
---------------- --------------- ---------- -------------
SHARES AMOUNT SHARES AMOUNT
---------------- ---------------
Balance at March 31, 1993. 300 $2,000 2,000 $ 2,000 $ 405,992 $ 409,992
Net income .............. -- -- -- -- 80,434 80,434
------ ------ ----- ------- ---------- ----------
Balance at March 31, 1994. 300 2,000 2,000 2,000 486,426 490,426
Net income .............. -- -- -- -- 234,656 234,656
------ ------ ----- ------- ---------- ----------
Balance at March 31, 1995. 300 2,000 2,000 2,000 721,082 725,082
Dividends ................ -- -- -- -- (20,745) (20,745)
Redemption................ -- -- (2,000) (2,000) -- (2,000)
Contributed Capital........ -- 2,000 -- -- -- 2,000
Net Income ............... -- -- -- -- 442,361 442,361
------ ------ ----- ------- ---------- ----------
Balance at February 19,
1996 .................... 300 $4,000 0 $ 0 $1,142,698 $1,146,698
====== ====== ===== ======= ========== ==========
The accompanying notes are an integral part of these combined financial
statements.
80
DATA ARTS & SCIENCES, INC.
COMBINED STATEMENT OF CASH FLOWS
FISCAL YEAR ENDED APRIL 1, 1995-
MARCH 31, FEBRUARY 19,
----------------------- -------------
1994 1995 1996
----------------------- -------------
Cash flows from operating activities:
Net income ........................... $ 80,434 $ 234,656 $ 442,361
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation ........................ 38,909 43,289 28,943
Gain on disposal of equipment ....... -- -- (22,719)
Deferred income taxes, net .......... (35,555) (1,258) (21,480)
Changes in current assets and
liabilities:
Accounts receivable ............... 50,713 (611,481) (463,964)
Prepaid expenses and other current
assets ........................... (44,324) 13,164 (15,418)
Accounts payable and accrued
expenses ......................... 35,724 226,512 (64,564)
Income taxes payable .............. (81,602) 81,925 30,517
Changes in other assets ............. -- (50,000) --
-------- -------- --------
Net cash provided by (used in)
operating activities.............. 44,299 (63,193) (86,324)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment ... (66,916) (9,902) (40,600)
Proceeds from sale of equipment........ -- -- 11,000
Deferred transaction costs............. -- -- (25,119)
Investment in Cotelligent ............ -- (25,000) --
Advances to Cotelligent .............. -- -- (73,000)
Investment in cash surrender value of
life insurance ....................... (16,146) (15,491) (22,325)
-------- -------- --------
Net cash used in investing
activities ...................... (83,062) (50,393) (150,044)
-------- -------- --------
Cash flows from financing activities:
Net borrowings (payments) on
short-term debt....................... (82,000) 230,000 242,356
Payments on long-term debt ........... (9,268) (116,414) (5,988)
Payments on loan from related parties.. (25,000) -- --
-------- -------- --------
Net cash provided by (used in)
financing activities .............. (116,268) 113,586 236,368
-------- -------- --------
Net decrease in cash and cash
equivalents ........................... (155,031) -- --
Cash and cash equivalents at beginning
of period ............................. 155,031 -- --
-------- -------- --------
Cash and cash equivalents at end of
period ................................ $ -- $ -- $ --
======== ======== ========
Supplemental disclosures of cash flow
information:
Interest paid.......................... $ 80,013 $ 80,150 $ 109,318
Income taxes paid .................... $ 188,815 $ 105,558 $ 254,402
The accompanying notes are an integral part of these combined financial
statements.
81
DATA ARTS & SCIENCES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1--BUSINESS ORGANIZATION
Data Arts & Sciences, Inc. ("DASI" or the "Company"), a Massachusetts
corporation, commenced operations in 1975. The Company is a professional
services firm that provides computer consulting and contract programming
services.
The Company and its stockholders entered into a definitive agreement with
Cotelligent Group, Inc. ("Cotelligent") pursuant to which the Company merged
with Cotelligent (the "Acquisition"). All outstanding shares of the Company were
exchanged for cash and shares of Cotelligent's common stock concurrent with the
consummation of an initial public offering of the common stock of Cotelligent.
Cotelligent completed the initial public offering on February 14, 1996, and on
February 20, 1996, completed the Acquisition of the Company.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 reporting period.
Actual results could differ from those estimates.
Basis of Combination
The accompanying financial statements include the accounts of Data Personnel,
Inc. ("DPI") which is owned and controlled by the stockholders of Data Arts &
Sciences, Inc. and which will also be included in the Acquisition by
Cotelligent. Accordingly, these entities have been combined and presented in the
accompanying financial statements. All intercompany balances and transactions
have been eliminated. On December 27, 1995, DPI was merged with DASI.
Cash and Cash Equivalents
The Company considers all highly liquid debt investments purchased with an
original maturity of three months or less to be cash equivalents. No such
investments were held at March 31, 1995 or 1994.
Property and Equipment
Property and equipment are recorded at cost. Maintenance and repair costs are
expensed as incurred. Depreciation of property and equipment is calculated using
the double declining balance method over the estimated useful lives of the
respective assets (generally over 5 years).
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.
82
DATA ARTS & SCIENCES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition
Revenue is recognized as services are performed.
Earnings Per Share
Historical earnings per share has not been presented because it is not
considered to be meaningful as a result of the Acquisitions and the offering as
discussed in Note 1.
Revenue Recognition
Revenue is recognized as services are performed.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). The asset and liability approach used in SFAS 109 requires the
recognition of deferred tax assets and liabilities for the tax consequences 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.
NOTE 3-ALLOWANCE FOR DOUBTFUL ACCOUNTS AND NOTES RECEIVABLE:
The activity in the allowance for doubtful accounts and notes receivable is
as follows.
BALANCE BALANCE
AT AT END
BEGINNING CHARGED TO OF
OF PERIOD EXPENSE WRITE-OFFS PERIOD
--------- ---------- ---------- ------
Year ended
March 31, 1994........ $30,000 $ - $ - $30,000
======= ======== ======== =======
Year ended
March 31, 1995........ $30,000 $ 21,368 $(21,368) $30,000
======= ======== ======== =======
NOTE 4-PROPERTY AND EQUIPMENT
Property and equipment consists of the following.
MARCH 31,
--------------------
1994 1995
-------- --------
Equipment................................... $187,016 $195,891
Furniture and fixtures...................... 80,301 81,328
Automobiles................................. 64,150 64,150
Leasehold improvements...................... 11,721 11,721
-------- --------
343,188 353,090
Less: Accumulated depreciation.............. 230,270 273,559
-------- --------
$112,918 $ 79,531
======== ========
Depreciation expense for the years ended March 31, 1994 and 1995 and for
the period April 1, 1995 through February 19, 1996 was $38,909, $43,289 and
$28,943, respectively.
83
DATA ARTS & SCIENCES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5-CREDIT FACILITIES
Short-Term Debt
Short-term debt consists of the following.
MARCH 31,
------------------
1994 1995
-------- --------
Revolving line of credit.................................... $168,000 $398,000
Current maturities on long-term debt........................ 11,138 10,983
-------- --------
$179,138 $408,983
======== ========
The Company's line of credit agreement with a bank expires May 31, 1996.
Borrowings under the line are limited to the lesser of $1,300,000 or 70% of the
Company's eligible accounts receivable, as defined in the line of credit
agreement, and are secured by all assets of the Company, as well as the personal
guarantees of the Company's stockholders. Borrowings bear interest at the rate
of 1.25% above the bank's base lending rate (8.754% at March 31, 1995), payable
monthly in arrears. Prior to January 31, 1995, borrowings under the line of
credit bore interest at the rate of 2% above the bank's base lending rate (6.25%
at March 31, 1994). Additionally, a fee of .50% per annum is payable quarterly
on the unused portion of the line of credit.
The line of credit agreement contains certain restrictive covenants,
including a limitation on incurrence of additional debt (unless subordinated to
the line of credit), restrictions on the amount of distributions which can be
made to the Company's stockholders, as well as the maintenance of certain
financial ratios and net worth requirements. The Company is currently in
compliance with such covenants.
Long-Term Debt
Long-term debt consists of the following.
MARCH 31,
------------------
1994 1995
-------- --------
Loans from officers and stockholders........................ $440,000 $440,000
Autombile loan.............................................. 22,121 10,983
Loan against cash surrender value of life insurance
policies................................................... 105,276 -
-------- --------
567,397 450,983
Less: Current portion....................................... 11,138 10,983
-------- --------
$556,259 $440,000
======== ========
Loans from Officers
The Company has various loans payable to the officers and stockholders of
DASI. A total of $440,000 is outstanding at March 31, 1995 and 1994, $220,000 to
each stockholder. All of the loans bear interest at the rate of 10%, and
interest only is payable monthly until the maturity date, at which time all of
the principal is due. The loans contain no financial or restrictive covenants
and have the following maturity dates:
Due October 25, 1996................... $ 100,000
Due December 25, 1997.................. 140,000
Due October 25, 2006................... 200,000
---------
$ 440,000
=========
84
DATA ARTS & SCIENCES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The $200,000 loan due October 25, 2006 is subordinated to repayment of the
Company's revolving line of credit.
Additionally, the Company had borrowed $50,000 from one stockholder on
January 22, 1992 and again on March 10, 1993 under similar arrangements. All of
these loans were repaid during fiscal years 1993 and 1994.
Automobile Loan
The Company purchased an automobile in fiscal year 1992 for $4,000 in cash
and a loan of $42,005. The loan bore interest at the rate of 9.75% and required
monthly principal and interest payments of $1,060 through maturity in March
1996. The loan was secured by the automobile. The loan and the automobile were
transferred to a stockholder of the Company in September 1995.
Loan on Officers' Life Insurance Policies
In fiscal year 1992, the Company had borrowed approximately $105,000
against the cash surrender value of its officers' life insurance policies. These
loans bore interest rates which adjusted based on the Moody's Corporate Bond
Index. The loans were repaid in August 1994.
Total maturities of long-term debt are as follows.
YEAR ENDING
MARCH 31,
------------
1997.................. $ 10,983
1998.................. 100,000
1999.................. 140,000
2000.................. -
2001.................. -
Thereafter............ 200,000
--------
450,983
Less: Current
portion.............. 10,983
--------
Total long term debt.. $440,000
========
NOTE 6-INCOME TAXES
The provision (benefit) for income taxes is as follows.
YEAR ENDED APRIL 1, 1995
MARCH 31, FEBRUARY 19,
------------------------- --------------
1994 1995 1996
--------- -------- ---------
Current:
Federal........................ $ 81,921 $143,255 $259,207
State.......................... 25,292 44,229 77,555
--------- -------- --------
107,213 187,484 336,762
--------- -------- ---------
Deferred:
Federal........................ (30,019) (1,063) (6,551)
State.......................... (5,536) (196) (1,778)
--------- -------- --------
(35,555) (1,259) (8,329)
--------- -------- --------
Provisions for income taxes....... $ 71,658 $186,225 $328,433
========= ======== ========
85
DATA ARTS & SCIENCES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Deferred tax assets are comprised of the following.
MARCH 31,
----------------------
1994 1995
---------- ----------
Accounts receivable reserves.................... $ 12,081 $12,081
Accumulated depreciation........................ 11,341 12,599
-------- -------
Total deferred tax assets.................... $ 23,422 $24,680
======== =======
The Company's effective income tax rate varied from the U.S. federal
statutory rate as follows.
YEAR ENDED APRIL 1, 1995
MARCH 31, FEBRUARY 19,
------------------------- --------------
1994 1995 1996
--------- -------- ---------
U.S. federal statutory rate....... 34.0% 34.0% 34.0%
State income taxes, net of federal
income tax benefit............... 7.3 6.8 6.5
Officers' life insurance and
nondeductible meals and
entertainment expenses........... 5.2 3.1 1.1
Other............................. 0.6 0.3 1.0
---- ---- ----
Effective tax rate................ 47.1% 44.2% 42.6%
==== ==== ====
NOTE 7-LEASE COMMITMENTS
The Company leases certain automobiles under noncancelable operating leases
that expire at various dates through fiscal year 1998. Future minimum lease
payments are as follows.
YEAR ENDING
MARCH 31,
------------
1997.................. $17,766
1998.................. 4,584
1999.................. 2,292
-------
$24,642
=======
The Company also leases its office space from a related party trust (see
Note 8). Rental payments on this office space are based upon the principal and
interest payments required under the trust's mortgage loans and the operating
expenses of the facility. The lease agreement was renegotiated in November of
1995. The provisions of the agreement allow for a five year fixed term, with one
successive option to extend the term for a period of five years. The annual
rental amount is $104,400, triple net, with a variable provision for escalation.
Total rent and lease expense recorded by the Company in fiscal years 1994
and 1995 and for the period April 1, 1995 through February 19, 1996 was
$112,864, $114,136 and $96,284, respectively.
NOTE 8-RELATED PARTY TRANSACTIONS
As described in Note 7, the Company leases its office space from the
Strathmore Realty Trust. The stockholders of DASI are the sole trustees and
beneficiaries of the Strathmore Realty Trust. Rental expense recorded for this
office space was $96,831, $97,462 and $92,700 for the years ended March 31, 1994
and 1995 and for the period April 1, 1995 through February 19, 1996,
respectively.
As described in Note 5, the Company has loans outstanding to its
stockholders totaling $440,000 at March 31, 1994 and 1995.
86
DATA ARTS & SCIENCES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Pursuant to the definitive agreement referenced in Note 1, the Company
invested $5,000 and $25,000 during fiscal 1994 and 1995, respectively, in
Cotelligent's common stock. The investment is recorded at cost and included in
"Other assets" in the accompanying Combined Balance Sheet.
NOTE 9-COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal matters in the normal course of
business. As of March 31, 1995, as a result of a pending legal matter involving
a former employee of the Company, a court order required the Company to set
aside $50,000 in a restricted cash account, which is included in "Other assets".
The former employee claims that his relationship with the Company entitled him
to share in the profits of one of the divisions of the Company, and has asserted
damages of $200,000.
In the opinion of management, the resolution of the above matters will not
have a material adverse effect on the financial position or results of
operations or cash flows of the Company.
NOTE 10-EMPLOYEE BENEFIT PLANS
The Company maintains an unfunded profit sharing plan which includes
substantially all full-time employees who have at least one year of continuous
service. Contributions to the plan are made at the discretion of the Board of
Directors, based on earning levels. No contributions have been made for the
years ended March 31, 1994, 1995 or for the period April 1, 1995 through
February 19, 1996. The Company previously maintained a pension plan for certain
of its employees. This plan was terminated in 1988 and no further contributions
have been made.
NOTE 11-STOCK PURCHASE AGREEMENT
The Company and its stockholders were parties to a stock purchase agreement
which was effective upon the death of a stockholder. The terms of the agreement
required the Company to buy $350,000 of the Company's stock held by the deceased
stockholder's estate and required the surviving stockholder to buy from the
stockholder's estate all of the remaining shares owned by the stockholder at
that time. In the event of a stockholder's death, the "fair market value" of
the outstanding stock of the Company was to be equal to 60% of the average gross
sales of the Company for the three most recent years preceding the stockholder's
death; however, the value of such stock shall not be less than the proceeds of
the life insurance contracts maintained on that stockholder. Since the Company's
obligation to purchase common stock from a deceased stockholders' estate will be
fully funded by a life insurance policy maintained by the Company, the related
common stock has been classified as permanent equity. This agreement was
terminated upon the Acquisition by Cotelligent (see Note 1).
NOTE 12-SIGNIFICANT CLIENTS
Two clients each accounted for approximately 10% and 14% of revenues in
1994 and 1995. In addition, these clients accounted for approximately 26% and
19% of the accounts receivable balance at March 31, 1994 and 1995, respectively.
During the period April 1, 1995 through February 19, 1996 these two clients
accounted for approximately 16% and 10% of revenue, respectively.
NOTE 13-OTHER ASSETS
Included in "Other assets" on the accompanying Combined Balance Sheet is
the cash surrender value of certain life insurance policies held by the Company
on its officers. This cash surrender value totaled $132,675 and $148,166 at
March 31, 1994 and 1995, respectively. Increases in cash surrender value are
recorded as a reduction of annual insurance premium expense.
87
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Chamberlain Associates, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Chamberlain Associates, Inc. at
March 31, 1995 and 1994, and the results of its operations and cash flows for
the years ended March 31, 1995 and 1994 and for the period April 1, 1995 through
February 19, 1996, in conformity with generally accepted accounting principles.
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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
April 20, 1996
88
CHAMBERLAIN ASSOCIATES, INC.
BALANCE SHEET
MARCH 31, MARCH 31,
1994 1995
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents..................... $ 15,446 $ 46,118
Accounts receivable........................... 520,755 1,265,176
---------- ----------
Total current assets....................... 536,201 1,311,294
Property and equipment, net..................... 39,214 32,535
Other assets.................................... 20,049 10,250
---------- ----------
Total assets............................... $ 595,464 $1,354,079
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt, including notes payable to
related parties of $0 and $100,000,
respectively................................ $ - $ 385,000
Accounts payable, including overdraft of
$89,278 in 1994.............................. 126,473 99,862
Accrued compensation.......................... 85,196 238,092
Other accrued liabilities..................... 26,664 21,492
Deferred income taxes......................... 98,147 203,487
---------- ----------
Total current liabilities................. 336,480 947,933
---------- ----------
Commitments (Note 6)............................ - -
Stockholders' equity:
Common stock, $1.00 par value; 10,000 shares
authorized; 780 shares outstanding........... 780 780
Additional paid-in capital.................... 24,500 24,500
Retained earnings............................. 233,704 380,866
---------- ----------
Total stockholders' equity................ 258,984 406,146
---------- ----------
Total liabilities and stockholders'
equity................................... $595,464 $1,354,079
========== ==========
The accompanying notes are an integral part of these financial statements.
89
CHAMBERLAIN ASSOCIATES, INC.
STATEMENT OF OPERATIONS
APRIL 1, 1995
YEAR ENDED MARCH 31, FEBRUARY 19,
------------------------- --------------
1994 1995 1996
---------- ---------- ----------
Revenues.......................... $3,738,117 $6,563,487 $9,199,763
Cost of services.................. 2,920,184 5,241,584 7,460,097
---------- ---------- ----------
Gross margin.................. 817,933 1,321,903 1,739,666
Selling, general and
administrative expenses.......... 773,799 1,054,474 1,273,862
---------- ---------- ----------
Operating income.............. 44,134 267,429 465,804
Other (income) expense:
Interest expense................ 351 15,804 13,999
Interest income................. (1,989) (439) (2,062)
Other, net...................... (1,181) (438) (515)
---------- ---------- ----------
(2,819) 14,927 11,422
---------- ---------- ----------
Income before provision for
income taxes..................... 46,953 252,502 454,382
Provision for income taxes........ 21,445 105,340 179,494
---------- ---------- ----------
Net income.................... $ 25,508 $ 147,162 $ 274,888
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
90
CHAMBERLAIN ASSOCIATES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
ADDITIONAL TOTAL
PAID IN RETAINED STOCKHOLDERS'
COMMON STOCK CAPITAL EARNINGS EQUITY
--------------------- ---------- -------- -------------
SHARES AMOUNT
----------- -------
Balance at
March 31, 1993.... 780 $780 $24,500 $208,196 $233,476
Net income......... - - - 25,508 25,508
--- ---- ------- -------- --------
Balance at
March 31, 1994.... 780 780 24,500 233,704 258,984
Net income......... - - - 147,162 147,162
--- ---- ------- -------- --------
Balance at
March 31, 1995.... 780 780 24,500 380,866 406,146
Net income......... - - - 274,888 274,888
--- ---- ------- -------- --------
Balance at
February 19, 1996. 780 $780 $24,500 $655,754 $681,034
=== ==== ======= ======== ========
The accompanying notes are an integral part of these financial statements.
91
CHAMBERLAIN ASSOCIATES, INC.
STATEMENT OF CASH FLOWS
FISCAL YEARS ENDED APRIL 1, 1995
MARCH 31, FEBRUARY 19,
------------------------- --------------
1994 1995 1996
---------- ---------- ----------
Cash flows from operating activities:
Net income................................................ $ 25,508 $ 147,162 $ 274,888
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation............................................ 14,596 17,035 13,867
Loss (gain) on disposal of property and
equipment.............................................. (2,032) - -
Deferred income taxes, net.............................. 87,647 220,520 156,238
Changes in current assets and liabilities:
Accounts receivable................................... (236,031) (744,421) (263,213)
Income tax payable.................................... (66,202) (115,180) 23,256
Accounts payable and accrued liabilities.............. 111,835 121,113 259,548
Changes in other assets................................. - (5,190) (27,486)
--------- --------- ---------
Net cash provided by (used in) operating activities. (64,679) (358,961) 437,098
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment....................... (15,802) (10,356) (32,530)
Deferred transaction costs................................ - - (25,660)
Proceeds from sale of investments......................... - 14,989 -
Advances to Cotelligent................................... - - (52,800)
--------- --------- ---------
Net cash used in investing activities............... (15,802) 4,633 (110,990)
--------- --------- ---------
Cash flows from financing activities:
Net borrowings (repayments) on short-term debt............ - 235,000 -
Repayments on long-term debt.............................. - - (235,000)
Borrowings from related parties........................... - 150,000 (50,000)
--------- --------- ---------
Net cash provided by (used in) financing
activities......................................... - 385,000 (285,000)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ (80,481) 30,672 41,108
Cash and cash equivalents at beginning of period............ 95,927 15,446 46,118
--------- --------- ---------
Cash and cash equivalents at end of period.................. $ 15,446 $ 46,118 $ 87,226
========= ========= =========
Supplemental disclosures of cash flow information:
Interest paid............................................. $ 351 $ 15,804 $ 13,465
The accompanying notes are an integral part of these financial statements.
92
CHAMBERLAIN ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1-BUSINESS ORGANIZATION
Chamberlain Associates, Inc. ("CAI" or the "Company"), a California
corporation, was incorporated and commenced operations in 1980. The Company is a
professional services firm that provides computer consulting and contract
programming services.
The Company and its stockholders entered into a definitive agreement with
Cotelligent Group, Inc. ("Cotelligent") pursuant to which the Company merged
with Cotelligent (the "Acquisition"). All outstanding shares of the Company were
exchanged for cash and shares of Cotelligent's common stock concurrent with the
consummation of the initial public offering of the common stock of Cotelligent.
Cotelligent completed the initial public offering on February 14, 1996, and on
February 20, 1996, completed the Acquisition of the Company.
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 reporting
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.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided over
the estimated useful lives of the respective assets (5 years for office
equipment and 7 years for furniture and equipment) on a straight-line basis.
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.
Allowance for Doubtful Accounts
The Company does not maintain an allowance for doubtful accounts as
accounts receivable amounts are deemed fully collectible and historical
write-offs have been insignificant.
Revenue Recognition
Revenue is recognized as services are performed.
Earnings Per Share
Historical earnings per share has not been presented because it is not
considered to be meaningful as a result of the Acquisitions and the offering as
discussed in Note 1.
93
CHAMBERLAIN ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). The asset and liability approach used in SFAS 109 requires 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.
NOTE 3-PROPERTY AND EQUIPMENT
The property and equipment is comprised of the following.
MARCH 31,
-----------------------
1994 1995
---------- ----------
Furniture and fixtures......................... $ 30,033 $ 32,298
Office equipment............................... 76,212 77,259
-------- --------
106,245 109,557
Less: Accumulated depreciation................. (67,031) (77,022)
-------- --------
$ 39,214 $ 32,535
======== ========
Depreciation expense for the years ended March 31, 1994 and 1995 and for
the period April 1, 1995 through February 19, 1996 was $14,596, $17,035 and
$13,867, respectively.
NOTE 4-CREDIT FACILITIES
Short-Term Debt
Short-term debt consists of the following.
MARCH 31,
-----------------------
1994 1995
---------- ----------
Line of credit................................. $ - $235,000
Notes payable to related party................. - 150,000
-------- --------
$ - $385,000
======== ========
The Company's line of credit agreement with a bank provides for borrowings
of up to $300,000 at a rate of 2% plus prime and is guaranteed by the President
and Vice President of the Company. The interest rate was 11% at March 31, 1995.
The line of credit was renewed on September 15, 1995 with the same provisions.
Notes payable is comprised of a $100,000 and $50,000 note to the Company's
President (also a stockholder) and his son, respectively. These notes, which
mature on December 31, 1995, bear an interest rate of 2% plus prime, which was
11% at March 31, 1995.
94
CHAMBERLAIN ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5-INCOME TAXES
The provision (benefit) for income taxes is as follows.
APRIL 1,
YEAR ENDED MARCH 31, 1995-FEB. 19,
------------------------- --------------
1994 1995 1996
--------- -------- ---------
Current:
Federal........................ $ - $ - $ 799
State.......................... - - 40,720
------- -------- --------
- - 41,519
Deferred:
Federal........................ 16,586 81,472 137,439
State.......................... 4,859 23,868 536
------- -------- --------
21,445 105,340 137,975
------- -------- --------
Total provision (benefit)
for income taxes........... $21,445 $105,340 $179,494
======= ======== ========
Deferred tax assets (liabilities) are comprised of the following.
MARCH 31,
---------------------
1994 1995
--------- ---------
Current:
Accounts receivable........................ $(213,744) $(519,291)
Accounts payable........................... 16,088 40,988
Accrued compensation....................... 34,969 97,725
Other current liabilities.................. 10,944 8,821
Net operating loss carryforward............ 52,659 167,839
Other...................................... 937 431
--------- ---------
Total.................................... $ (98,147) $(203,487)
========= =========
The Company's effective income tax rate varied from the U.S. federal
statutory rate as follows.
YEAR ENDED APRIL 1,
MARCH 31, 1995-FEB. 19,
------------------------- --------------
1994 1995 1996
--------- -------- ---------
U.S. federal statutory rate....... 34.0% 34.0% 34.0%
State income taxes, net of
federal income tax benefit....... 6.8 6.2 6.0
Nondeductible expenses............ 4.9 1.5 .3
Rate differentials................ - - .9
---- ---- ----
Effective tax rate................ 45.7% 41.7% 41.2%
==== ==== ====
Prior to the merger with Cotelligent, the Company reported results of
operations on the cash basis of accounting for income tax purposes. Upon
completion of the Merger with Cotelligent, the Company will convert to an
accrual basis taxpayer as part of the Cotelligent combined entity. Accordingly,
cash to accrual differences that exist at the time of the Acquisition will be
recognized ratably over the next four years.
95
CHAMBERLAIN ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6-LEASE COMMITMENTS
The Company maintains an operating lease for its office space and an
automobile. The future minimum lease payments under these operating leases are
as follows.
YEAR
ENDING
MARCH 31,
---------
1997...................................... $ 47,078
1998...................................... 48,523
1999...................................... 37,206
2000...................................... -
2001...................................... -
--------
$132,807
========
For the years ended March 31, 1994, and 1995 and for the period
April 1, 1995 through February 19, 1996, the Company incurred expenses of
$54,831, $63,482 and $38,262 respectively, relating to the office and automobile
leases.
NOTE 7-SIGNIFICANT CLIENTS
During the year ended March 31, 1994, two clients accounted for
approximately 30% and 11% of revenue, respectively, and in 1995 three clients
accounted for approximately 13%, 12% and 10% of revenues, respectively. During
the period April 1, 1995 through February 19, 1996 three clients accounted for
approximately 24%, 12%, and 12% of revenues, respectively.
Additionally, these clients accounted for approximately 32% and 34% of the
accounts receivable balance at March 31, 1994 and 1995, respectively.
96
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
- - ---------------------
Not applicable.
97
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
---------------------------------------------------
(a) 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 caption "Election of Directors" in the
Company's Proxy Statement for its 1996 Annual Meeting of Shareholders which will
be filed with the Securities and Exchange Commission within 120 days after the
end of the registrant's fiscal year (the "1996 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
-----------------------
The information called for by Item 11 with respect to management
remuneration and transactions is incorporated herein by reference to the
material under the caption "Executive Compensation" in the 1996 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 owners and management is incorporated herein by reference
to the material under the caption "Certain Holders of Voting Securities" in the
1996 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information called for by Item 13 with respect to security ownership of
certain beneficial owners and management is incorporated herein by reference to
the material under the caption "Certain Holders of Voting Securities" in the
1996 Proxy Statement.
98
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
-----------------------------------------------------------------
(a) 1. Financial Statements required by Item 14 are included and indexed
in Part II, Item 8.
(a) 2. Financial Statement Schedule
Included in Part IV of this report
Schedule II is omitted because the information is included in
the Notes to Consolidated Financial Statements.
(a) 3. EXHIBITS
1. The following is a list of all Exhibits filed as part of this report.
The Exhibits designated by an asterisk are management contracts and
compensatory plans and arrangements required to be filed as Exhibits
to this Form 10-K.
EXHIBIT NO. DESCRIPTION
- - ----------- -----------
2.1 Agreement and Plan of Reorganization dated as of December 8, 1995,
by and among Cotelligent Group, Inc., James R. Lavelle, BFR Co.,
Inc., BFR Acquisition Corporation, and the Stockholders named
therein (Exhibit 2.1 of the Registration Statement of Form S-1 (File
No. 33-80267) effective February 16, 1996, is hereby incorporated by
reference)
2.2 Agreement and Plan of Reorganization dated as of December 8, 1995,
by and among Cotelligent Group, Inc., James R. Lavelle, Chamberlain
Associates, Inc., Chamberlain Acquisition Corporation, and the
Stockholders named therein (Exhibit 2.2 of the Registration
Statement of Form S-1 (File No. 33-80267) effective February 16,
1996, is hereby incorporated by reference)
2.3 Agreement and Plan of Reorganization dated as of December 8, 1995,
by and among Cotelligent Group, Inc., James R. Lavelle, BFR Co.,
Inc., Data Arts & Sciences, Inc., DASI Acquisition Corporation, and
the Stockholders named therein (Exhibit 2.3 of the Registration
Statement of Form S-1 (File No. 33-80267) effective February 16,
1996, is hereby incorporated by reference)
2.4 Agreement and Plan of Reorganization dated as of December 8, 1995,
by and among Cotelligent Group, Inc., James R. Lavelle, Financial
Data Systems, Inc., FDSI Acquisition Corporation, and the
Stockholders named therein (Exhibit 2.4 of the Registration
Statement of Form S-1 (File No. 33-80267) effective February 16,
1996, is hereby incorporated by reference)
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 Form of Employment Agreement between Cotelligent and James R.
Lavelle (Exhibit 10.1 of the Registration Statement on Form S-1
(File No. 33-80267) effective February 16, 1996, is hereby
incorporated by reference)*
10.2 Form of Employment Agreement between Cotelligent and Michael L.
Evans (Exhibit 10.2 of the Registration Statement on Form S-1 (File
No. 33-80267) effective February 16, 1996, is hereby incorporated by
reference)*
99
10.3 Form of Employment Agreement between Cotelligent and Duane W. Bell
(Exhibit 10.3 of the Registration Statement on Form S-1 (File No.
33-80267) effective February 16, 1996, is hereby incorporated by
reference)*
10.4 Form of Employment Agreement between Cotelligent and Daniel E.
Jackson (Exhibit 10.4 of the Registration Statement on Form S-1
(File No. 33-80267) effective February 16, 1996, is hereby
incorporated by reference)*
10.5 Form of Employment Agreement between BFR, Cotelligent and Jeffrey J.
Bernardis (contained in Exhibit 2.1) (Exhibit 10.5 of the
Registration Statement on Form S-1 (File No. 33-80267) effective
February 16, 1996, is hereby incorporated by reference)*
10.6 Form of Employment Agreement between CAI, Cotelligent and John E.
Chamberlain (contained in Exhibit 2.2) (Exhibit 10.6 of the
Registration Statement on Form S-1 (File No. 33-80267) effective
February 16, 1996, is hereby incorporated by reference)*
10.7 Form of Employment Agreement between CAI, Cotelligent and Linda M.
Cassell (contained in Exhibit 2.2) (Exhibit 10.7 of the Registration
Statement on Form S-1 (File No. 33-80267) effective February 16,
1996, is hereby incorporated by reference)*
10.8 Cotelligent 1995 Long-Term Incentive Plan (Exhibit 10.9 of the
Registration Statement on Form S-1 (File No. 33-80267) effective
February 16, 1996, is hereby incorporated by reference)*
10.9 Lease Agreement between BFR Properties and BFR Co., Inc. effective
April 1, 1995, at 7 Clyde Road.
10.10 Lease Agreement between BFR Properties and BFR Co., Inc. effective
April 1, 1995, at 31 Clyde Road.
10.11 Lease Agreement between Quinlan Properties, L.P. and BFR Co., Inc.
effective December 29, 1995.
10.12 Sublease Agreement between San Francisco Satellite Center and
Cotelligent Group, Inc. effective March 1, 1996.
10.13 Business Loan Agreement between Cotelligent Group, Inc. and U.S.
Bank of Washington, National Association effective May 1, 1996.
11.1 Statement re: computation of per share earnings, reference is made
to Note 3 of the Cotelligent Group, Inc. consolidated financial
statements contained in this Form 10-K.
21.1 Subsidiaries of the registrant
23.1 Consent of Price Waterhouse LLP
27.1 Financial Data Schedule
(b) There were no reports on Form 8-K filed by the registrant during the last
quarter of the period covered by this report.
100
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 28TH DAY OF JUNE, 1996.
COTELLIGENT GROUP, INC.
BY: /S/ JAMES R. LAVELLE
----------------------------------
JAMES R. LAVELLE
CHIEF EXECUTIVE OFFICER
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:
/S/ JAMES R. LAVELLE CHAIRMAN OF THE JUNE 28, 1996
- - ------------------------ BOARD OF DIRECTORS
JAMES R. LAVELLE AND CHIEF EXECUTIVE
OFFICER (PRINCIPAL
EXECUTIVE OFFICER)
/S/ EDWARD E. FABER VICE CHAIRMAN OF THE JUNE 28, 1996
- - ------------------------ BOARD OF DIRECTORS
EDWARD E. FABER
/S/ MICHAEL L. EVANS PRESIDENT AND CHIEF JUNE 28, 1996
- - ------------------------ OPERATING OFFICER AND
MICHAEL L. EVANS DIRECTOR
/S/ DUANE W. BELL SENIOR VICE PRESIDENT AND JUNE 28, 1996
- - ------------------------ CHIEF FINANCIAL OFFICER
DUANE W. BELL (PRINCIPAL FINANCIAL
OFFICER) (PRINCIPAL
ACCOUNTING OFFICER)
/S/ DANIEL M. BEALS DIRECTOR JUNE 28, 1996
- - ------------------------
DANIEL M. BEALS
/S/ JEFFREY J. BERNARDIS DIRECTOR JUNE 28, 1996
- - ------------------------
JEFFREY J. BERNARDIS
/S/ LINDA M. CASSELL DIRECTOR JUNE 28, 1996
- - ------------------------
LINDA M. CASSELL
/S/ JOHN E. CHAMBERLAIN DIRECTOR JUNE 28, 1996
- - ------------------------
JOHN E. CHAMBERLAIN
/S/ ANTHONY M. FRANK DIRECTOR JUNE 28, 1996
- - ------------------------
ANTHONY M. FRANK
/S/ B. TOM GREEN DIRECTOR JUNE 28, 1996
- - ------------------------
B. TOM GREEN
/S/ BJORN E. NORDEMO DIRECTOR JUNE 28, 1996
- - ------------------------
BJORN E. NORDEMO
/S/ HARVEY L. POPPEL DIRECTOR JUNE 28, 1996
- - ------------------------
HARVEY L. POPPEL
101
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- - ----------- -----------
2.1 Agreement and Plan of Reorganization dated as of December 8, 1995,
by and among Cotelligent Group, Inc., James R. Lavelle, BFR Co.,
Inc., BFR Acquisition Corporation, and the Stockholders named
therein (Exhibit 2.1 of the Registration Statement of Form S-1 (File
No. 33-80267) effective February 16, 1996, is hereby incorporated by
reference)
2.2 Agreement and Plan of Reorganization dated as of December 8, 1995,
by and among Cotelligent Group, Inc., James R. Lavelle, Chamberlain
Associates, Inc., Chamberlain Acquisition Corporation, and the
Stockholders named therein (Exhibit 2.2 of the Registration
Statement of Form S-1 (File No. 33-80267) effective February 16,
1996, is hereby incorporated by reference)
2.3 Agreement and Plan of Reorganization dated as of December 8, 1995,
by and among Cotelligent Group, Inc., James R. Lavelle, BFR Co.,
Inc., Data Arts & Sciences, Inc., DASI Acquisition Corporation, and
the Stockholders named therein (Exhibit 2.3 of the Registration
Statement of Form S-1 (File No. 33-80267) effective February 16,
1996, is hereby incorporated by reference)
2.4 Agreement and Plan of Reorganization dated as of December 8, 1995,
by and among Cotelligent Group, Inc., James R. Lavelle, Financial
Data Systems, Inc., FDSI Acquisition Corporation, and the
Stockholders named therein (Exhibit 2.4 of the Registration
Statement of Form S-1 (File No. 33-80267) effective February 16,
1996, is hereby incorporated by reference)
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 Form of Employment Agreement between Cotelligent and James R.
Lavelle (Exhibit 10.1 of the Registration Statement on Form S-1
(File No. 33-80267) effective February 16, 1996, is hereby
incorporated by reference)*
10.2 Form of Employment Agreement between Cotelligent and Michael L.
Evans (Exhibit 10.2 of the Registration Statement on Form S-1 (File
No. 33-80267) effective February 16, 1996, is hereby incorporated by
reference)*
10.3 Form of Employment Agreement between Cotelligent and Duane W. Bell
(Exhibit 10.3 of the Registration Statement on Form S-1 (File No.
33-80267) effective February 16, 1996, is hereby incorporated by
reference)*
10.4 Form of Employment Agreement between Cotelligent and Daniel E.
Jackson (Exhibit 10.4 of the Registration Statement on Form S-1
(File No. 33-80267) effective February 16, 1996, is hereby
incorporated by reference)*
10.5 Form of Employment Agreement between BFR, Cotelligent and Jeffrey J.
Bernardis (contained in Exhibit 2.1) (Exhibit 10.5 of the
Registration Statement on Form S-1 (File No. 33-80267) effective
February 16, 1996, is hereby incorporated by reference)*
10.6 Form of Employment Agreement between CAI, Cotelligent and John E.
Chamberlain (contained in Exhibit 2.2) (Exhibit 10.6 of the
Registration Statement on Form S-1 (File No. 33-80267) effective
February 16, 1996, is hereby incorporated by reference)*
10.7 Form of Employment Agreement between CAI, Cotelligent and Linda
M. Cassell (contained in Exhibit 2.2) (Exhibit 10.7 of the
Registration Statement on Form S-1 (File No. 33-80267) effective
February 16, 1996, is hereby incorporated by reference)*
102
10.8 Cotelligent 1995 Long-Term Incentive Plan (Exhibit 10.9 of the
Registration Statement on Form S-1 (File No. 33-80267) effective
February 16, 1996, is hereby incorporated by reference)*
10.9 Lease Agreement between BFR Properties and BFR Co., Inc. effective
April 1, 1995, at 7 Clyde Road.
10.10 Lease Agreement between BFR Properties and BFR Co., Inc. effective
April 1, 1995, at 31 Clyde Road.
10.11 Lease Agreement between Quinlan Properties, L.P. and BFR Co., Inc.
effective December 29, 1995.
10.12 Sublease Agreement between San Francisco Satellite Center and
Cotelligent Group, Inc. effective March 1, 1996.
10.13 Business Loan Agreement between Cotelligent Group, Inc. and U.S.
Bank of Washington, National Association effective May 1, 1996.
11.1 Statement re: computation of per share earnings , reference is made
to Note 3 of the Cotelligent Group, Inc. consolidated financial
statements contained in this Form 10-K.
21.1 Subsidiaries of the registrant
23.1 Consent of Price Waterhouse LLP
27.1 Financial Data Schedule
103