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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
(Amendment No. 3)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____
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Commission File Number 0-27412
COTELLIGENT, INC.
DELAWARE 94-3173918
(State of incorporation) (I.R.S. ID)
100 Theory, Suite 200, Irvine, CA 92612
(949) 823-1600
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)
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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [ ] NO [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $4,866,299 based on the closing price of $0.33 of
the registrant's Common Stock as reported on the OTC Bulletin Board on March 27,
2003.
The number of shares of the registrant Common Stock outstanding as of March 27,
2003 was 14,746,354.
DOCUMENTS INCORPORATED BY REFERENCE
None
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Explanatory Note
On March 31, 2003, Cotelligent, Inc. ("the Company") filed its Annual Report on
Form 10-K for the fiscal year ended December 31, 2002.
On April 30, 2003, the Company filed Amendment No. 1 to the Annual Report on
From 10-K for the fiscal year ended December 31, 2002 to include information
related to Items 10, 11, 12 and 13, expected to be incorporated by reference in
the Company's Proxy Statement for the 2003 Annual Meeting of Stockholders.
On May 14, 2003, the Company filed Amendment No. 2 to its Annual Report on Form
10-K for the fiscal year ended December 31, 2002 to amend and restate
information contained in Item 12.
This Amendment No. 3 to the Annual Report on Form 10-K for the fiscal year ended
December 31, 2002 is being filed in order to:
. Restate Item 6 for the presentation of earnings (loss) per share for
the years ended December 31, 2002, 2001, 2000, the nine months ended
December 31, 2000 and the year ended March 31, 2000.
. Restate the presentation of earnings (loss) per share included in the
consolidated financial statements and related disclosures for the
years ended December 31, 2002 and 2001, and the nine months ended
December 31, 2000, as more fully described in Note 2 to our
consolidated financial statements included in Item 8 (Financial
Statements and Supplementary Data).
The remaining disclosures contained within this Amendment consist of all other
disclosures originally contained in the Company's Annual Report on Form 10-K for
the year ended December 31, 2002 in the form filed with the Securities and
Exchange Commission ("SEC") on March 31, 2003, as amended by Amendment No. 1 and
Amendment No. 2 to the Annual Report on Form 10-K for the fiscal year ended
December 31, 2002 as filed with the SEC on April 30, 2003 and May 14, 2003,
respectively. These other disclosures as originally included in the Company's
Annual Report on Form 10-K and Amendment No. 1 and Amendment No. 2 to the
Company's Annual Report on Form 10-K are not amended hereby, but are included
for the convenience of the reader. In order to preserve the nature and character
of the disclosures set forth in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2002, as originally filed, except as expressly
noted herein, this report speaks as of the date of the original filing, and we
have not updated the disclosures in this report to speak as of a later date.
While this report primarily relates to the historical periods covered, events
may have taken place since the original filing that might have been reflected in
this report if they had taken place prior to the original filing. All
information contained in this Amendment No. 3 is subject to updating and
supplementing as provided in our reports filed with the Securities and Exchange
Commission subsequent to the date of the original filing of the Annual Report on
Form 10-K.
COTELLIGENT, INC.
FORM 10-K
For The Fiscal Year Ended December 31, 2002
INDEX
PART I
Item 1. Business............................................................ 3
Item 2. Properties.......................................................... 13
Item 3. Legal Proceedings................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders................. 13
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters................................. ........................... 14
Item 6. Selected Financial Data............................................. 15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations. ............................................. 16
Item 8. Financial Statements and Supplementary Data......................... 23
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure................................................ 44
PART III
Item 10. Directors and Executive Officers of the Registrant.................. 45
Item 11. Executive Compensation.............................................. 45
Item 12. Security Ownership of Certain Beneficial Owners and Management...... 45
Item 13. Certain Relationships and Related Transactions...................... 45
Item 14. Controls and Procedures............................................. 45
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.... 46
Signatures.......................................................... 48
PART I
Item 1. Business
COMPANY OVERVIEW
Cotelligent creates customized business solutions that enhance and integrate our
client's current systems and extends them throughout and outside the enterprise,
to provide access to information by and from mobile work forces, clients'
customers, vendors, partners and employees. Our solutions utilize broadly
accepted as well as cutting edge technologies. We also provide maintenance and
support for software products licensed to our clients in connection with the
solutions we develop.
As part of our complete solutions, we offer:
. Strategic IT consulting services
. Enterprise-wide application integration and implementation services
. Custom application development
. Sales and field force automation solutions
. Mobile middleware products
. Hardware and software products through partner relationships
. Application hosting
. Remote support services
. Help desk and education services
Expanding the capabilities of enterprise systems can benefit
Business-to-Business (B2B) and Business-to-Consumer (B2C) initiatives, while
providing Knowledge Management and Business Intelligence resources to employees
of the enterprise. This includes tools for mobile workers responsible for
functions like route sales, pre-sales, merchandising, route delivery,
distribution and field service/repair. The software and hardware used to
facilitate these functions include laptops, handheld PCs, Tablet PCs, PDAs and
Web-based applications that support Customer Relationship Management (CRM). Our
customized business solutions, which include software, hardware and information
services, are focused on extending information technology functionality to a
broad spectrum of users. These solutions allow mobile workers to do their jobs
more effectively from wherever they are located and whenever they require
access. They allow the client to receive more current and accurate information.
These solutions increase productivity from the field in ways not experienced by
the client before. We believe Cotelligent is different from traditional software
and services companies because we are able to provide the range of products and
services needed to develop customized business solutions that employ advanced
mobility and Web-based technologies.
We have expertise in a variety of industries, including consumer goods,
manufacturing, high-tech, financial services and automotive. We understand how
to build advanced technology systems that expand upon a client's existing
systems and complement the work conducted in their user environments. We have
assembled a technical staff with a broad range of skills and industry expertise,
including business analysts, network architects, account managers and others. We
believe the high level of technical expertise and business experience offered by
Cotelligent is an important differentiator in the markets in which we compete.
Over the past year, we have positioned ourselves to leverage our foundation of
experience in enterprise, systems integration and eBusiness solutions, along
with our varied industry experience, to take advantage of the emerging and
growing market for mobile and Web based solutions. Cotelligent has over fifteen
years of experience in delivering sales force automation solutions and mobile
middleware solutions to a variety of leading companies. We believe Cotelligent's
enterprise software, eBusiness, mobility and Web services solutions expertise,
provides our Company a competitive advantage. We use a proprietary consulting
project methodology to help ensure that our clients achieve a successful result
and help them make well-informed business and technology decisions.
While we continue to pursue opportunities in eBusiness, our focus on enterprise
solutions is directed toward linking eBusiness and mBusiness solutions in the
enterprise. Our goal is to continue growing the eBusiness revenue but outpace
that growth with mBusiness revenue, which we believe should become the dominant
part of our business over the next several years. For 2002, our largest client
accounted for approximately 14% of our revenue, while our ten largest clients
accounted for approximately 65% of our revenue.
3
STRATEGY
Our strategy is comprised of the following components:
BUILD SOLUTIONS USING ADVANCED TECHNOLOGY EMPOWERING THE MOBILE WORKFORCE
Cotelligent's strategy is to take advantage a growing market for Mobile
Enterprise Applications ("MEA") by leveraging its core competencies in
enterprise software, eBusiness and systems integration, and help our clients
take advantage of advances in mobile and Web services technologies. To that end,
we have already accumulated a base of client experience in moving information
seamlessly from back-end "connected" application systems to front-end
"semi-connected" and "disconnected" field force and customer relations
applications using our customer developed solutions and application hosting
services. Cotelligent has over fifteen years of experience in this market. Our
strategy is to use our reputation and record of success in this area to gain a
significant competitive position in the emerging market aimed at empowering the
mobile workforce.
We have also completed a number of engagements in connection with the
development and implementation of Web services solutions employing both
Microsoft(R) .NET and IBM open system technologies. As with our mobile computing
expertise, we help our clients achieve success in employing .NET and open system
technologies by leveraging our significant expertise in enterprise software and
systems integration. Our experience has led us to conclude that the effective
integration and utilization of Web services solutions require us to have an
in-depth knowledge of how enterprise software, and general business applications
and functions, interact from end-to-end. Our strategy is to continue to achieve
success in developing Web services solutions in our clients' complex business
environments and leveraging this success and our reputation as this market
continues to grow in the future.
PARTNERSHIPS
To successfully execute our business strategy, Cotelligent has determined that
we must be able to offer complete business solutions to our clients. We believe
that in the increasingly interconnected world, key alliances are important. We
leverage the resources and depth that come from having strategic partnerships
with the companies that complement our capabilities. Our partners include
Handspring, IBM, Microsoft, Symbol Technologies, Toshiba and White Horse
Interactive.
Cotelligent has partnered with companies that provide the best components for
solutions in our targeted markets. By carefully choosing which companies provide
the best technical solutions and the best partnership opportunities, Cotelligent
can offer the best solutions for the best value to our clients. Additionally,
our breadth of partners allow us to have an unbiased view of which solutions are
most appropriate to satisfy our client's needs. We have been recognized by our
partners for our value add in solution development. We are a Microsoft Gold
Certified Partner, we developed one of the first .NET applications in the
country and we are one of 20 companies in the Western region to be recognized as
a Managed Partner due to our stability and quality. Cotelligent was one of only
ten companies selected by IBM to develop applications for their WEA platform.
IBM demonstrated this solution at the CTIA show in October 2002. As we continue
to evolve to a software solution-centric company, we expect that our partnership
program will be expanded in order to enhance our ability to deliver advanced
mobile computing and Web services solutions.
DIFFERENTIATION
We intend to differentiate ourselves from our competitors in the following ways:
LISTEN TO AND COLLABORATE WITH OUR CLIENTS
We listen to our client's needs and then collaborate with them to enhance,
integrate and extend their existing systems to leverage and build upon their
existing investments. These are core values to Cotelligent because we do not
sell any specific package or solution.
INVEST IN PARTNERSHIPS
Strong partnerships will help us to further develop and execute our business
strategy:
. Using partner products and technologies to complement ours improves
"time to market" for Cotelligent solutions.
. Partners integrating our mobility and middleware solutions into their
offerings broaden revenue opportunities through channels.
. Cotelligent is able to improve gross and operating margins through
reduced costs of sales and solution delivery.
INVEST IN TECHNOLOGY
Cotelligent's ability to be competitive in mobility and Web services solutions
require us to make investments in technology. These investments will ensure that
our software solutions continue to advance our clients' capabilities and, at the
same time, keep Cotelligent competitive in the market.
4
LEVERAGE REPUTATION AND EXPERTISE IN ENTERPRISE SOFTWARE AND SYSTEMS INTEGRATION
Cotelligent's reputation for providing outstanding systems implementation and
integration services is key to our ability to ensure that new, more advanced
Cotelligent solutions are properly integrated across our clients' information
technology infrastructure. Underlying this ability is a dedication to a strategy
of reuse. Our extensive experience and library of solutions allows us to employ
successful components from various client solutions to improve the speed, time
and reliability of new solutions. This strategy of reuse is applied to design,
architecture and application development and in many cases reduces the
development time and costs by as much as 50%.
STRESS OPTIMIZATION IN OUR MARKETING MESSAGES
Our marketing messages will increasingly focus on how Cotelligent solutions
optimize business activities from end-to-end. We will demonstrate this by
employing return on investment ("ROI") analysis and specific factors residing in
each Cotelligent target market.
STRATEGIC ACQUISITIONS
In our opinion, the economic landscape has changed significantly resulting in an
emergence of businesses that have become interested in being acquired. We see
many of these companies have proprietary technology and long-term client
relationships, but have undergone severe downward pressure in revenue, profit,
cash and stock price leaving them with little or no cash to sustain operations.
We believe depressed valuations of these companies and their limited choices
have created opportunities for Cotellignet as an investor, merger partner and/or
acquirer. If we pursue these opportunities, we will be highly selective and
intend to completely integrate the businesses we merge or acquire immediately,
thereby realizing significant near-term cots savings. We believe the range of
potential acquirees will be influenced by our financial condition and market
capitalization, among other factors.
SOLUTIONS
Capitalizing on our experience in specific industries allows us to support
targeted companies seeking improvements in operational efficiencies and
marketplace performance ("optimization") using eBusiness, mBusiness and Web
services technology. The integration of our portfolio of products, services and
applications into specific industry areas combine to create:
. Sales Force Automation (SFA) solutions
. Field Force Automation (FFA) solutions
. eBusiness solutions
. Web services solutions
. Other specialized business software solutions (Strategic Business
Applications)
By implementing Cotelligent's solutions, our clients are able to:
. Cut costs by automating manual processes
. Improve productivity and timeliness of data throughput to and from
mobile workers
. Increase competitive advantage
At the center of our strategy is taking our most effective solutions to market.
In determining this, we use a variety of sources for market analysis and data,
including Gartner Group and IDC. This information has helped Cotelligent target
the most effective components that create the most value (for competitive
positioning) in an effort to maximize our profitability. In addition, this
approach allows us to combine solutions and services, price them competitively
and deliver them to the marketplace.
Below is a description of each of these areas:
ENTERPRISE SOLUTIONS
Our experience in this field distinguishes us from our competitors by giving us
expertise to offer our clients a reliable and scalable framework for managing
and moving business data across a variety of platforms. We integrate client
systems across their organizations, build better customer relationships, improve
back-office efficiencies, share knowledge and generally ensure that software
applications in their eBusiness and mBusiness environments work together in form
and function within their enterprise.
eBUSINESS SOLUTIONS
This portion of our business is built from our experience and expertise in many
facets of eBusiness application design and creation. We can facilitate the
development and execution of a viable plan that integrates the Internet into new
and/or existing business processes, systems and cultures.
5
WEB SERVICES SOLUTIONS
We have successfully completed a number of engagements involving the development
and deployment of Web services - most notably, IBM WebSphere (WEA)(R) and
Microsoft(R) .NET. As a new breed of pervasive applications, these Web services
and Cotelligent's highly skilled team help our clients promote the publication,
location and promotion of never before possible IT services to anyone with an
Internet connection.
mBUSINESS AND MOBILITY SOLUTIONS
This field continues to gain significant momentum from our knowledge and
expertise in wireless data applications. We are enhancing our portfolio of
mBusiness solutions through in-house development of our middleware and
framework. We continue to form strategic alliances with key hardware and
application development providers to strengthen our solution offerings and
capabilities.
VALUE PROPOSITION
We promote the following advantages when differentiating our solutions from
those of our competitors:
Our track record is verifiable: We apply expertise in complex environments to
deliver solutions on time and within budget.
Our solutions are designed for our clients' industries: We focus on our clients'
needs to achieve their potential.
Our business experts combine technical experience with varied industry
expertise: We combine high levels of expertise in both Microsoft-based and open
systems environment with years of experience in a variety of industry markets.
Our reuse approach shortens development life cycle: We reduce risk and
development time by using proven components and methodologies.
Our partnerships are carefully managed: We choose and monitor these
relationships in a way that ensures each delivers application and industry
solutions that best fit our clients' business needs.
Our approach is to help our clients achieve self-sufficiency: We are dedicated
to knowledge transfer and remain accessible as our clients' businesses evolve.
SERVICES
The integrated set of services we provide to our clients in connection with the
solutions described above include:
STRATEGIC IT CONSULTING SERVICES
Analysis of business organization and processes. After reviewing the technology
landscape to determine strengths and weaknesses inherent in our clients' current
environment, we provide a range of recommendations that address their
infrastructure to hardware needs. This assessment includes defining, analyzing,S
reviewing and affirming functional and non-functional requirements. We make our
clients more competitive in the markets in which they do business by focusing on
their business strategy and process, technology and personnel transformation.
ENTERPRISE COMMERCE MANAGEMENT, INTEGRATION AND IMPLEMENTATION SERVICES
Integration, optimization and implementation, of Enterprise Commerce Management
applications, including customization and configuration. We optimize all of the
applications that comprise the entire spectrum of Enterprise Commerce (or
Real-Time Enterprise) including manufacturing, order entry, accounting,
purchasing, warehousing, transportation and human resource systems to make
businesses more responsive and more profitable.
APPLICATION DEVELOPMENT
Custom Application Development
Development of open system or Microsoft architectured business applications. In
the Web environment, these include eBusiness, ePortal and Web services
solutions.
6
Industry Application Framework Solutions
Development of industry-specific and company-specific components layered onto
our application framework, which includes communication and mobile work force
management capabilities. The framework approach begins with a core application
of base functionality that is faster and less risky to complete compared with a
fully customized application.
MOBILE MIDDLEWARE PRODUCTS (JASWARE(TM))
Management of the synchronization and flow of information between a variety of
devices and/or host systems in a wired or unwired environment. Our middleware
product mobilizes enterprise systems while managing assets on the move.
HARDWARE AND SOFTWARE PRODUCTS (PARTNERS)
Partners' products, services and applications that complement and extend our
products, services and applications to create a more complete end-to-end
business solution.
APPLICATION HOSTING AND VERTICAL SOLUTION PROVIDER SERVICES
Our pervasive data center provides a suitable environment for the hosting and
operational support of Sales Force Automation, Field Force Automation, mobility
and eBusiness applications. Support is available 24 hours a day, 7 days a week,
to monitor and manage the accessibility and functionality of these applications.
REMOTE SUPPORT SERVICES
Staging, configuration, distribution and asset management services assist
clients with deployment of new mobile solutions. On-going help desk services are
available to support users around the clock.
EDUCATION AND TRAINING SERVICES
Education services offer our clients a variety of products and solutions that
can be bundled to meet any client's education and training needs, whether it is
training end users on a new field force application or training the trainers.
SPECIALIZED CONSULTING SERVICES
Our technological professionals provide the necessary skills to assist our
clients in the completion of their internal development projects or on-going
operational needs.
MARKETING
We initiated a number of important marketing initiatives during 2002. These
marketing initiatives were focused on helping the Company transform its identity
and build its brand in the markets in which it competes.
. The development of our strategic plan to guide our efforts and direction
over the next several years.
. Testing and validation of this strategy through focus groups.
. The development and launch (anticipated during 2003) of our new Web site
to reflect the re-branding of Cotelligent, our expression of our new
image and our overall message.
. Creation of a database that segments our focus on those accounts who can
receive the greatest benefit from our service.
. Brand building through a new tradeshow presence at partner, targeted
horizontal application market and similar technology events.
. Development of a complete and fully integrated marketing communications
plan that will increase our awareness and consideration within our
targeted market. A focused direct marketing campaign will be launched
in the second quarter of 2003 to ensure consistent and frequent
communications with our targeted audience.
. Development and execution of a series of national briefing events
(seminars) that position us along with our partners as thought leaders
within the industry.
. Regular internal communications to employees of Cotelligent announcing
events, client wins and successes to promote involvement and build
culture.
We employ an integrated marketing approach that links planning and the launch of
new solutions, products and service offerings with active marketing campaigns to
support them.
7
SALES
It is important to educate, orient and measure our sales force utilizing
consistent benchmarking procedures. The strategic plan mentioned in the previous
section is a foundation for everything that we do and all forms of
communication. Obviously, our direct sales force is at the forefront of our
interaction with the client. Therefore, it is critical to train the sales force
in the articulation of our strategy and to develop specific presentations for
them so our message to our clients is consistent. Every sales person has been
trained in our strategy, research findings, presentations and communications to
be as effective as possible in their interaction with our clients. Additionally,
we organize the personnel support structure to better support the technical
information requirements of the sales force and developed procedures to create
specific teams to understand and respond to the client needs. This realignment
of resources places our most knowledgeable people directly in contact with the
client.
Using this process, we have advanced the effectiveness of our sales force in the
following ways:
. Establishing a precise knowledge of Cotelligent, our core competencies,
market focus and value proposition. Our Account Executives are now
equipped to approach prospective clients with a greater understanding
of their issues, and articulate the Cotelligent value proposition.
. Aligning territories for each sales person and sharply focusing them on
specific targeted accounts and geographies.
. Utilizing our marketing efforts to connect our sales force with those
accounts that have the highest probability of need for our services.
. Building valued relationships with clients by solving today's problems
and providing them with a vision/strategy for the future.
. Accelerating sales opportunities by focusing our selling activities on
Cotelligent core competencies.
COMPETITION
In the emerging marketplace of the real-time enterprise and mobility solutions,
there are few standards established and a number of ways to extend the
functionality of the enterprise IT system. Therefore, each competitor has
determined the scope of the solution they provide and the components used to
build them. Cotelligent has sharply focused its areas of expertise and has a
number of competitors in part determined by the industry and/or technology niche
needed for the particular client's business. In other cases, the competitor is
left over from the days of a more traditional IT consulting model.
For example, mobilization often requires a middleware product. In this area, our
solutions compete with companies like Synchrologic and Aether Systems. The
development of the mobile business application requires in-depth knowledge and
the ability to customize applications. In the consumer goods market, we compete
with companies like SAP, MEI and Thinque. To make a mobile solution efficient,
it should be integrated into the legacy systems or added as an enterprise Web
service. In this area, we may compete with larger system integrators.
To compete successfully, we must be able to deliver leading-edge solutions with
speed and competence, develop and market cost-effective offerings that meet
changing client needs, and respond rapidly to evolving technology by
continuously training our technical and sales consultants.
REGISTRANT INFORMATION
Cotelligent was incorporated in February 1993 under the laws of the State of
California as TSX, a California corporation. In November 1995, we changed our
jurisdiction of incorporation to Delaware and our name to Cotelligent Group,
Inc. In September 1998, we changed our name to Cotelligent, Inc. Unless the
context otherwise requires, references to "Cotelligent," "Company," "we," "us"
and "our" refer to Cotelligent, Inc., a Delaware corporation.
Our headquarters are located at 100 Theory, Suite 200, Irvine, California 92612
and our telephone number is (949) 823-1600. Our internet address is
www.cotelligent.com. We make available free of charge on our Internet website
our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and amendments to those reports filed or furnished pursuant to
Section 13(a)-15(d) of the Exchange Act of 1924 as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the Securities and Exchange Commission.
EMPLOYEES
At December 31, 2002 we had 168 employees, including a technical staff of
approximately 100 IT professionals.
8
RISK FACTORS
The following discussion contains certain cautionary statements regarding
Cotelligent, Inc.'s business and results of operations, which should be
considered by our stockholders or any reader of our business and results of
financial information disclosure. This information is provided to enable us to
avail ourselves of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. The following factors should be considered in
conjunction with any discussion of our operations or results, including any
forward-looking statements as well as comments contained in press releases,
presentations to securities analysts or investors and all other communications
made by us or our representatives. We intend to use the following words or
variations of the following words to identify forward-looking statements:
anticipates, believes, expects, estimates, intends, plans, projects and seeks.
In making these statements, we disclaim any intention or obligation to address
or update each factor in future filings or communications regarding our business
or results, and we do not undertake to address how any of these factors may have
caused changes to discussions or information contained in previous filings or
communications. In addition, any of the matters discussed below may have
affected our past results and may affect future results, so that our actual
results may differ materially from those expressed here and in prior or
subsequent communications.
If we are unable to generate positive cash flow and return to profitability in
the near term, we may exhaust our capital.
We have experienced a general reduction in demand for our services. At the same
time, we have taken action to divest non-strategic operations and have used the
cash proceeds from these divestitures to pay off debt obligations. As a result,
we have had adequate working capital to fund our needs as we restructured the
business. However, our business has incurred net losses and negative operating
cash flows in each of the past three years and our working capital and available
cash has also decreased in each of the past three years. Our cash resources are
limited and if our business does not begin to generate revenue, a positive cash
flow and return to profitability in the near term, our on-going liquidity and
financial viability would be materially and adversely affected and we may not be
able to pursue our business strategy.
If the eBusiness, mBusiness and Web services markets do not continue to develop,
or if their development is delayed, our business could be harmed.
Our future revenues will depend on the development of the eBusiness, mBusiness
and Web services markets. The failure of these markets to materialize, or a
delay in the development of these markets, could seriously harm our business.
The success of eBusiness depends substantially upon the widespread adoption of
the Internet as a primary medium for commerce, business applications and
communications. Critical issues concerning the commercial use of the Internet,
such as security, reliability, cost, accessibility and quality of service
continue to evolve and unforeseen factors may negatively affect the growth of
Internet use or the attractiveness of commerce and business communications over
the Internet. The success of mBusiness depends on acceptance of wireless data
applications for commercial use, the quality of telecommunications and
availability of devices supporting wireless applications. Critical issues in the
wireless industry include security, cost, accessibility and reliability of
service, and further development of wireless technology standards.
We have a limited operating history in the mBusiness and Web services markets.
The uncertainty of our future performance in these markets may impact our
ability to market and sell mBusiness and Web services solutions to prospective
clients, which would adversely affect our operating results.
We may make acquisitions, which if proven unsuccessful, could negatively affect
our future profitability and growth.
We believe the economic landscapes have created opporuntity for us to invest in,
or acquire businesses that have undergone severe downward pressure in revenues,
profit, cash and stock price. We may not be able to identify, acquire or
profitably manage additional businesses that we may invest in or acquire without
substantial costs, delays or other problems. In addition, acquisitions may
involve a number of special risks, including: (1) diversion of management's
attention; (2) failure to retain key acquired personnel; (3) risks associated
with unanticipated events, circumstances or legal liabilities; and (4)
amortization of acquired intangible assets. In addition, if the acquired
businesses have operating losses or negative operating cash flow, our ability to
achieve positive cash flow and profitability, as well as our liquidity, could be
adversely affected. Some or all of these risks could adversely affect our
operations and financial performance. For example, client satisfaction or
performance problems at a single acquired business could adversely affect our
reputation and financial results. Further, any businesses acquired in the future
may not achieve anticipated revenues and earnings.
9
Our future growth and ability to differentiate Cotelligent from its competition
is, in part, dependent upon our success in developing, marketing and selling our
mobile management solution services.
We are developing, marketing and selling mobile management solutions and
services. Some of these efforts in the past year have not been successful. In
addition, our resources in the mobile management solution area are limited.
Nevertheless, we continue to focus on this business as it represents significant
opportunity. If we are not able to stay abreast of technical advancements in the
market or deliver these solutions and services, our operating results could
suffer.
Our software applications may not work as intended.
Part of our strategy is to provide synchronization and transfer of information
between disparate systems, platforms and devices, and rapidly implement mobile
business solutions. If our software products, including our JASware(TM) products
and FastTrack(TM) framework, do not work as intended, we will be unable to
provide these solutions to our clients and our business would be adversely
affected.
We may need to invest heavily in research and development to keep our software
applications viable.
We may need to invest heavily in research and development to keep our software
applications and solutions viable in the rapidly changing markets in which we
operate. This research and development effort may require significant resources
and may not be successful. The investment of significant resources in research
and development could adversely affect our liquidity. In addition, our business
may be adversely affected if our investment does not result in the development
of software applications and solutions that can be used in providing IT
solutions to our clients.
We may be unable to protect our proprietary technology.
Our success in providing mBusiness and Web services solutions depends, in part,
upon our proprietary software applications and other intellectual property
rights. We rely on a combination of trade secrets, nondisclosure, other
contractual arrangements, copyright and trademark laws to protect our
proprietary rights. We enter into confidentiality agreements with our employees,
consultants and clients, and limit access to and distribution of our proprietary
information. We cannot be certain that the steps we take in this regard will be
adequate to deter misappropriation of our proprietary information or that we
will be able to detect unauthorized use and take appropriate steps to enforce
our intellectual property rights. In addition, although we believe that our
services and products do not infringe on the intellectual property rights of
others, infringement claims may be asserted against us in the future, and, if
asserted, these infringement claims may be successful. A successful claim
against us could materially adversely affect our business and results of
operations.
We may not be able to establish successful partnerships or strategic alliances,
and partnerships and strategic alliances we do establish may not be successful.
Part of our strategy is to form partnerships and strategic alliances with
entities that have complementary products, services or technologies which can
help us provide complete IT solutions to our clients. Even if we identify
suitable candidates, we may not be able to form partnerships or alliances on
reasonable commercial terms. In addition, any partnerships or alliances we do
establish may not complement our business or help us provide IT solutions to our
clients. If we fail to establish successful partnerships or strategic alliances,
our ability to provide clients with complete IT solutions could be adversely
affected.
We are subject to rapid changes in technology and client preferences.
Our market is characterized by rapidly changing technology, changes in client
requirements and preferences, frequent new product and service announcements,
and evolving new industry standards and practices that could render our existing
proprietary technology obsolete. Our success will depend, in part, on our
ability to acquire or license leading technologies useful in our business;
enhance our existing software solutions; develop new software solutions and
technology that address the increasingly sophisticated and varied needs of
existing and prospective clients; and respond to technological advances and
evolving industry standards and practices on a cost-effective and timely basis.
The development of proprietary technology entails significant technical,
financial and business risks. To be successful, we must adapt to the rapidly
changing market by continually improving the performance and reliability of our
software applications. We could also incur substantial costs to modify our
software applications to adapt to these changes. Our business could be adversely
affected if we incurred significant costs without adequate results.
10
Capacity constraints may restrict the use of the Internet as a commercial
marketplace, resulting in decreased demand for our products.
The Internet infrastructure may not be able to support the demands placed on it
by increased usage or by the transmission of large quantities of data. Other
risks associated with commercial use of the Internet could slow its growth,
including:
. Outages and other delays resulting from inadequate network
infrastructure;
. Slow development of enabling technologies and complementary products;
. Limited availability of cost-effective, high-speed access.
Delays in the development or adoption of new equipment standards or protocols
required to handle increased levels of Internet activity, or increased
governmental regulation, could cause the Internet to lose its viability as a
means of communication among participants in the supply chain, resulting in
decreased demand for our services and products.
We are dependent on continued expansion of the Internet infrastructure.
The recent growth in Internet traffic has caused frequent periods of decreased
performance, requiring Internet service providers and users of the Internet to
upgrade their infrastructures. If Web usage continues to grow rapidly, the
Internet infrastructure may not be able to support the demands placed on it by
this growth and its performance and reliability may decline. If these outages or
delays on the Internet occur frequently, overall Web usage could grow more
slowly or decline. Our ability to increase the speed and scope of our services
to customers is ultimately limited by and dependent upon the speed and
reliability of both the Internet and the capacity of the computer equipment used
by our customers. Consequently, the emergence and growth of the market for our
services is dependent on improvements being made to the entire Internet and to
computer equipment in general to alleviate overloading and congestion.
We are subject to government regulation and legal uncertainties.
The Internet is rapidly changing and federal and state regulation relating to
the Internet is evolving. Currently, there are few laws or regulations directly
applicable to access to the Internet. Due to the increasing popularity of the
Internet, it is possible that laws and regulations may be enacted covering
issues such as user privacy, pricing, taxation, content and quality of products
and services. The adoption of such laws or regulations could reduce the rate of
growth of the Internet, which could materially and adversely affect our
business.
Our clients may cancel or delay spending on IT solution initiatives because of
the current economic climate.
Since the second half of 2000, many companies have experienced financial
difficulties or uncertainty and have begun to cancel or delay spending on
technology consulting initiatives as a result. Furthermore, the severe financial
difficulties which many start-up Internet companies have experienced have
further reduced the perceived urgency by larger companies to begin or continue
technology initiatives. If large companies continue to cancel or delay their
technology consulting initiatives because of the current economic climate, or
for other reasons, our business and results of operations could be adversely
affected.
Our revenues and financial condition may be adversely affected by the loss of
business from significant clients.
Our revenues are primarily derived from services provided in response to client
requests or on an assignment-by-assignment basis. A significant portion of our
revenues come from engagements, which are terminable at any time by our clients,
generally without penalty. In addition, for the year ended December 31, 2002,
our largest client and our ten largest clients accounted for approximately 14%
and 65%, respectively, of our revenues. Our clients may not continue to engage
us for projects or use our services at historical levels, if at all. If we lose
a major client or suffer a reduction in business, our revenues and financial
condition may be adversely affected.
If we fail to continue to attract and retain qualified IT professionals, it
could harm our business.
Our success depends upon our ability to attract, hire and retain technical
consultants, software developers, software engineers and project managers who
possess the necessary skills and experience to conduct our business. We
continually identify, screen and retain qualified IT professionals to keep pace
with client demand for rapidly evolving technologies and varying client needs.
We compete for these professionals with our clients, other providers of software
solutions and services, systems integrators, providers of outsourcing services,
computer systems consultants and temporary staffing companies in a variety of
industry segments.
11
Competition for individuals with proven technical skills is intense. In the
past, we have experienced difficulties in identifying and retaining qualified IT
professionals and, in some instances, we were unable to meet requests for
services. We cannot assure that qualified IT professionals will continue to be
available to us in sufficient numbers.
Our success is dependent on our key management personnel.
Our operations are dependent on the continued efforts of our executive officers
and senior management. In addition, we will likely depend on the senior
management of any business we may merge with or acquire in the future. If any of
these people are unable or unwilling to continue in his or her present role, or
if we are unable to hire, train and integrate new management personnel
effectively, our business could be adversely affected. We maintain key person
life insurance on our President and Chief Operating Officer, but do not
currently maintain key person life insurance on our Chief Executive Officer or
Chief Financial Officer or other members of senior management.
We face intense competition that could adversely affect our ability to generate
revenue and profitability.
We compete with companies that seek to provide solutions to extend the
functionality of a company's enterprise IT system and those that provide
mobility solutions. On any project, our competitors will depend, in part, on the
industry and/or technology niche needed for the particular client's business.
Our competitors include local, regional and national software firms, IT
consulting firms, system integration firms, professional service divisions of
applications software firms and the professional service groups of computer
equipment companies. We may also compete with larger system integrators. Many of
our competitors have greater technical, financial or marketing resources than we
have. In addition, we intend to enter new markets and expand our solutions and
services offerings through internal growth and acquisitions, and we expect to
encounter additional competition from established companies in these areas. If
we cannot compete effectively in our industry, our revenues and profitability
could be adversely affected.
We do not have a credit facility in place as we operate from existing cash
resources.
When we paid off our bank loan on June 30, 2000, our credit facility was
terminated. Prior to June 30, 2000, we have relied on our credit facility and
positive cash flow to satisfy our liquidity needs. We have not secured
additional financing and plan to continue operating using our existing cash
resources and cash resources generated from the collection of our accounts
receivable. Should we find ourselves in need of more cash, we would have to seek
financing and might, as a result, have a short-term liquidity problem.
Additionally, we may not be successful in securing financing, or if successful,
the terms may not be advantageous to us.
If we are unable to increase our revenues through the deployment of our sales
and business development organization, our future growth could suffer.
We re-organized our sales force in 2002, which resulted in significant turnover
and the hiring of a number of new sales people. Although we feel this new sales
team is better suited than our prior sales force to develop the business we are
targeting, we recognize there is an extensive ramp-up time associated with a new
sales force and market conditions for our services are competitive. If this new
team is not successful in growing the number of profitable client engagements in
the near term, our revenues and profitability may not improve. Consequently, our
financial performance could be materially and adversely affected.
We face potential liability due to the project nature of our business which
often requires our IT professionals to work at our clients' place of business.
Our IT professionals are often deployed in the workplace of other businesses. As
a result of this activity, we could be subject to possible claims of
discrimination and harassment, employment of illegal aliens or other similar
claims. These types of claims could result in negative publicity for us and
money damages or fines. Although we have not had any significant problems in
this area, we could encounter these problems in the future.
We are also exposed to liability for actions of our IT professionals while on
assignment, including damages caused by employee errors, misuse of
client-proprietary information or theft of client property. Because of the
nature of our assignments and the related potential liability, we cannot assure
that insurance we maintain, if continually available, will be sufficient in
amount or scope to cover a loss.
12
Item 2. Properties
We currently operate out of four locations including Irvine and San Diego,
California, Philadelphia, Pennsylvania and Atlanta, Georgia. Our operations are
located in facilities with an aggregate of approximately 60,500 square feet and
are leased at aggregate current monthly rents of approximately $0.1 million with
no lease commitment for these properties extending past the year 2005. The
Company has lease commitments for certain properties from which it no longer
operates which extend past 2005. We believe that our properties are adequate for
our needs. Furthermore, we believe that suitable additional or replacement space
will be available when required on terms we believe will be acceptable.
Item 3. Legal Proceedings
We are, from time to time, a party to litigation arising in the normal course of
our business. We are not presently subject to any material litigation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders.
13
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The following table sets forth, for the periods indicated, the high and low
sales prices for the Common Stock. The Common Stock was listed on the NYSE under
the symbol "CGZ", until October 11, 2001, when it was listed on the OTC Bulletin
Board, and then moved to the OTC Pink Sheets on September 25, 2002. The Common
Stock has been listed on the OTC under the symbol "CGZT".
Quarter End
--------------------------------------------------------------------------------------
Nine Months Ended Dec 31, 2000 June 30 Sept 30 Dec 31 Mar 31
--------------------------------------------------------------------------------------
Common stock price per share:
High $ 7.25 $ 5.56 $ 3.44
Low 3.75 3.06 0.63
--------------------------------------------------------------------------------------
Fiscal Year Ended Dec 31, 2001 Mar 31 June 30 Sept 30 Dec 31
--------------------------------------------------------------------------------------
Common stock price per share:
High $ 5.00 $ 0.95 $ 0.99 $ 0.32
Low 0.58 0.40 0.12 0.10
--------------------------------------------------------------------------------------
FISCAL YEAR ENDED DEC 31, 2002 MAR 31 JUNE 30 SEPT 30 DEC 31
--------------------------------------------------------------------------------------
COMMON STOCK PRICE PER SHARE:
High $ 0.50 $ 0.75 $ 0.65 $ 0.62
Low 0.25 0.40 0.11 0.16
On March 27, 2003, the last reported sales price of the Common Stock, as
reported on the OTC Bulletin Board, was $0.33 per share. On March 27, 2003,
there were 745 stockholders of record of the Common Stock.
Item 6. Selected Financial Data
The Company historically operated on an April 1 to March 31 fiscal year. In July
2000, the Company announced a change in its fiscal year end to December 31 from
March 31, resulting in a nine-month transition period from April 1, 2000 through
December 31, 2000.
The selected financial data have been derived from Cotelligent's audited
financial statements.
As discussed in Item 8 of this Annual Report on Form 10-K/A and in Note 2 of our
consolidated financial statements, we have restated the presentation of earnings
(loss) per share in our previously audited consolidated financial statements for
the years ended December 31, 2002 and 2001, and the nine months ended December
31, 2000. The computational error that caused this restatement also occurred
during the year ended March 31, 2000. Therefore, the selected consolidated
financial data below has been restated for all periods, except the year ended
March 31, 1999. The following selected financial data should be read in
conjunction with the financial statements, related notes and other financial
information of the Company included elsewhere herein. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations".
14
SELECTED FINANCIAL DATA
(In thousands, except share data)
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------- ------------------------------
STATEMENT OF OPERATIONS DATA (1)(2): 2002 2001 2000
------------- ------------- -------------
(Unaudited)
Restated Restated Restated
Revenues......................................... $ 16,956 $ 46,843 $ 96,689
Cost of services................................. 10,507 33,372 66,843
------------- ------------- -------------
Gross profit................................... 6,449 13,471 29,846
Research and development costs................... 1,887 862 -
Selling, general and administrative expenses..... 19,279 32,332 53,577
Impairment of long-lived assets.................. - 4,562 42,450
Restructuring charge............................. 691 2,436 1,620
Non-recurring transaction costs.................. - - -
------------- ------------- -------------
Operating income (loss).......................... (15,408) (26,721) (67,801)
Other income (expense)........................... (1,784) (73) (2,642)
------------- ------------- -------------
Income (loss) before provision for income taxes.. (17,192) (26,794) (70,443)
Benefit (provision) for income taxes............. 7,493 3,455 9,447
------------- ------------- -------------
Income (loss) from continuing operations......... (9,699) (23,339) (60,996)
------------- ------------- -------------
Operating income (loss) from discontinued
operations, net of income taxes of $ -, $ -,
$1,208, $ -, $5,379, $7,951..................... - - 2,244
Gain (loss) on sale of discontinued operations,
net of income taxes of $ -, $ -, $12,744,
$12,744......................................... 976 (190) 19,541
------------- ------------- -------------
Income (loss) from discontinued operations....... 976 (190) 21,785
------------- ------------- -------------
Net income (loss)................................ $ (8,723) $ (23,529) $ (39,211)
============= ============= =============
Earnings per share
Basic -
Income (loss) from continuing operations......... $ (0.73) $ (1.75) $ (4.51)
Income (loss) from discontinued operations....... 0.07 (0.01) 1.61
------------- ------------- -------------
Net income (loss)................................ $ (0.66) $ (1.76) $ (2.90)
============= ============= =============
Diluted -
Income (loss) from continuing operations ........ $ (0.73) $ (1.75) $ (4.51)
Income (loss) from discontinued operations ...... 0.07 (0.01) 1.61
------------- ------------- -------------
Net income (loss) ............................... $ (0.66) $ (1.76) $ (2.90)
============= ============= =============
Weighted average number of shares outstanding
Basic ........................................... 13,201,532 13,379,320 13,503,675
Diluted ......................................... 13,201,532 13,379,320 13,503,675
NINE MONTHS
ENDED YEAR ENDED
DECEMBER 31, MARCH 31,
------------- ------------------------------
Statement of Operations Data (1)(2): 2000 2000 1999
------------- ------------- -------------
Restated Restated
Revenues ........................................ $ 68,444 $ 109,164 $ 90,119
Cost of services ................................ 47,161 73,595 57,110
------------- ------------- -------------
Gross profit .................................. 21,283 35,569 33,009
Research and development costs .................. - - -
Selling, general and administrative
expenses ....................................... 41,238 45,126
27,479
Impairment of long-lived assets ................. 42,450 - -
Restructuring charge ............................ 1,620 - -
Non-recurring transaction costs ................. - - -
------------- ------------- -------------
Operating income (loss) ......................... (64,025) (9,557) 5,530
Other income (expense) .......................... (1,360) (3,756) 128
------------- ------------- -------------
Income (loss) before provision for income
taxes .......................................... (65,385) (13,313) 5,658
Benefit (provision) for income taxes ............ 7,677 4,660 (2,268)
------------- ------------- -------------
Income (loss) from continuing operations......... (57,708) (8,653) 3,390
------------- ------------- -------------
Operating income (loss) from
discontinued operations, net of
income taxes of $ -, $ -, $1,208,
$ -, $5,379, $7,951 ............................ - (9,990) 11,926
Gain (loss) on sale of discontinued
operations, net of income
taxes of $ -, $ -, $12,744, $12,744 ............ 19,541 - -
------------- ------------- -------------
Income (loss) from discontinued
operations ..................................... 19,541 (9,990) 11,926
------------- ------------- -------------
Net income (loss) ............................... $ (38,167) $ (18,643) $ 15,316
============= ============= =============
Earnings per share
Basic -
Income (loss) from continuing
operations ..................................... $ (4.26) $ (0.64) $ 0.24
Income (loss) from discontinued
operations ..................................... 1.44 (0.74) 0.85
------------- ------------- -------------
Net income (loss) ............................... $ (2.82) $ (1.38) $ 1.09
============= ============= =============
Diluted -
Income (loss) from continuing operations......... $ (4.26) $ (0.64) $ 0.24
Income (loss) from discontinued
operations ..................................... 1.44 (0.74) 0.84
------------- ------------- -------------
Net income (loss) ............................... $ (2.82) $ (1.38) $ 1.08
============= ============= =============
Weighted average number of shares
outstanding
Basic ........................................... 13,537,927 13,536,775 14,078,068
Diluted ......................................... 13,537,927 13,536,775 14,236,780
DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
2002 2001 2000 2000 1999
---------- ---------- ---------- ---------- ----------
Balance Sheet Data:
Working capital ...................... $ 15,904 $ 26,197 $ 36,861 $ 43,047 $ 97,614
Total assets ......................... $ 25,033 $ 36,080 $ 65,805 $ 159,527 $ 158,374
Long-term debt ....................... $ - $ - $ - $ 52 $ 28,191
Stockholders' equity ................. $ 16,205 $ 24,964 $ 48,794 $ 85,980 $ 107,833
(1) During the fiscal years ended March 31, 2000 and 1999, the Company acquired
six businesses accounted for under the purchase method (the "Purchased
Companies"). The consolidated financial statements include the operating
results of the Purchased Companies subsequent to their respective acquisition
dates. Prior to March 31, 2000, the Company entered into a plan to divest its
IT staff augmentation business. Accordingly, the accompanying financial data
have been prepared to present as discontinued operations the Company's IT
staff augmentation business for all periods presented.
(2) On August 8, 2000, the Company contributed cash and its Philadelphia-based
operation to a joint venture, bSmart.to LLC for 50% ownership. On December 6,
2000, the Company exercised its right to terminate the relationship under the
joint venture agreement, and consequently, the net assets of the
Philadelphia-based operation, including cash and another subsidiary of the
joint venture, JAS Concepts, reverted back to the Company. Accordingly,
during the period of August 8 through December 6, 2000, the Company's
investment in the joint venture was accounted for on the equity method of
accounting. Prior to August 8, 2000 and after December 6, 2000, the results
of the Philadelphia-based operation were consolidated with the accounts of
the Company.
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cotelligent was formed in February 1993 to acquire, own and operate IT
consulting services businesses. Cotelligent was a non-operating entity until
1996 when it first began to acquire businesses. The Company historically
operated on an April 1 to March 31 fiscal year. In July 2000, the Company
changed its fiscal year to December 31, resulting in a nine-month transition
period from April 1, 2000 through December 31, 2000.
Prior to March 31, 2000, the Company entered into a plan to divest its IT staff
augmentation business. Accordingly, the Selected Financial Data of Cotelligent
has been restated to present as discontinued operations the Company's IT staff
augmentation business for all periods presented.
On August 8, 2000, the Company contributed cash and its Philadelphia-based
operation to a joint venture, bSmart.to LLC, for 50% ownership. On December 6,
2000, the Company exercised its right to terminate the relationship under the
joint venture agreement, and consequently, the net assets of the Philadelphia-
based operation, including cash and another subsidiary of the joint venture, JAS
Concepts, reverted back to the Company. Accordingly, during the period of August
8 through December 6, 2000, the Company's investment in the joint venture was
accounted for on the equity method of accounting. Prior to August 8, 2000 and
after December 6, 2000, the results of the Philadelphia-based operation were
consolidated with the accounts of the Company.
Cotelligent provides IT consulting and also provides maintenance, support and
hosting on software products it licenses. The IT consulting services are either
provided under time and materials billing arrangements or on a fixed-fee basis.
For time and materials arrangements, 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 provided and are a function of the type of work performed and the
related skill level of the consultant. Revenues pursuant to fixed-fee contracts
are generally recognized as services are rendered on the percentage-of-
completion method of accounting based on hours incurred to total estimated labor
hours to complete. In addition, the Company has developed complete mobile
workforce management solutions for industries that have medium to large
transient sales, field or delivery personnel. A component of these solutions may
be software that has been developed by the Company. For each element in a
software arrangement (e.g., license, maintenance, and services), revenue is
recognized once there is evidence of an arrangement, delivery has been made, the
fee is fixed or determinable, and collectibility is probable. The amount of
revenue recognized for each element is based upon vendor specific objective
evidence of fair value using the residual method. Maintenance and service
revenue is recognized as the Company performs the services.
The Company's principal costs are professional compensation directly related to
the performance of services and related expenses. Gross profits (revenues after
professional compensation and related expenses) are primarily a function of
hours billed to clients per professional employee or consultant, hourly billing
rates of those employees or consultants, the percentage of effort complete with
respect to fixed-fee contracts and employee or consultant compensation. Gross
profits can be adversely impacted if services provided cannot be billed, if the
Company is not effective in managing its service activities, if fixed-fee
engagements are not properly priced, if consultant costs increase beyond
relative increases in pricing, or if there are high levels of unutilized time
(work activities not chargeable to clients or unrelated to client services) of
full-time salaried service professional employees.
Operating income can be adversely impacted by increased administrative staff
compensation and expenses related to streamlining or expanding the Company's
business, which may be incurred before revenues or economies of scale are
generated from such investment. Solution development activities require a higher
level of selling, general and administrative activities as well as investment in
research and development activities.
As a service and software 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 (IN THOUSANDS)
For comparability purposes, the following discussion will make reference to
comparisons between the year ended December 31, 2001 and the year ended December
31, 2000. The Company believes that these comparisons are meaningful as they
represent identical period-over-period comparisons.
Results for the year ended December 31, 2000, are unaudited. The Company changed
its year end to December 31 from March 31 and reported audited results for the
nine month transition period ended December 31, 2000 in its Transition Report on
Form 10-K.
16
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
REVENUES
Revenues decreased during the year ended December 31, 2002 by $29,887, or 64%,
to $16,956 from $46,843 in the year ended December 31, 2001. The decrease was
due to a general reduction in demand for services due to softening in the market
coupled with the Company's evolution from providing general IT consulting
services towards offering mobile workforce management and Web services and its
associated ramp-up time.
GROSS PROFIT
Gross profit decreased in the year ended December 31, 2002 by $7,022, or 52%, to
$6,449 from $13,471 in the year ended December 31, 2001. The decrease was due to
a general reduction in demand for services due to softening in the market
coupled with the Company's evolution from providing general IT consulting
services towards offering mobile workforce management and Web services and its
associated ramp-up time. Gross profit as a percentage of revenues increased to
38% from 29% due to better pricing, a mix shift to higher margin projects,
caused in part by the end of some long-term, lower margin, legacy system
development engagements, and reductions in underutilized billable staff.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs were $1,887 for the year ended December 31, 2002
compared to $862 for the year ended December 31, 2001. The Company has a
dedicated team of people solely focused on the research and development
activities associated with mobile workforce management and Web services
solutions. The higher spending level during the year ended December 31, 2002 was
due to research and development costs incurred for the development of a software
solution for a business partner.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $13,053, or 40%, to
$19,279 in the year ended December 31, 2002 from $32,332 for the year ended
December 31, 2001. The decrease was primarily the result of reductions in
operating staff as well as the effects of other reductions in staff to
streamline operations in line with revenue, offset by litigation and proxy
solicitation costs in connection with the Company's 2002 annual meeting, fees
associated with the re-audit of the Company's financial statements for the nine
months ended December 31, 2000 and the year ended December 31, 2001 and legal
and investment banking costs associated with an investment in a marketable
security.
IMPAIRMENT OF LONG-LIVED ASSETS
During the year ended December 31, 2001, the Company recognized an impairment of
long-lived assets charge for $4,562 representing a $3,430 property and equipment
impairment charge and a further $1,132 property and equipment impairment charge
associated with locations where the Company ceased operations.
RESTRUCTURING CHARGE
In the fourth quarter of 2002, as part of the Company's effort to reorganize its
marketing approach and delivery of client services, the Company identified
opportunities to reduce its cost structure by reducing headcount. Accordingly,
the Company adopted a restructuring plan in accordance with EITF 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)" and Staff
Accounting Bulletin No. 100, "Restructuring and Impairment Charges." The
restructuring charge of $691 included provisions for severance of approximately
27 management and operating staff. The entire amount of severance was paid in
the fourth quarter of 2002.
In September 2001, as part of the Company's efforts to streamline its operations
commensurate with its revenue base, the Company identified opportunities to
reduce its cost structure by reducing headcount and closing certain operating
facilities to conform to the Company's new operating structure. Accordingly, the
Company adopted a restructuring plan in accordance with EITF 94-3 and Staff
Accounting Bulletin No. 100. The restructuring charge of $2,436 during the year
ended December 31, 2001 included provisions for severance of approximately 145
management and operating staff ($1,034) as well as closure costs associated with
a plan to dispose of certain locations ($1,402).
17
OTHER INCOME (EXPENSE)
Other income (expense) primarily consists of interest income, interest expense,
equity method losses on an investment in an alliance partner and the change in
market value associated with an investment in a marketable security. Interest
income, net of interest expense was $183 for the year ended December 31, 2002
compared to $826 for the year ended December 31, 2001. The decrease in net
interest income was the result of a decrease in interest rates offered on
investment vehicles and lower cash balances on hand during the year ended
December 31, 2002. Other expense for the year ended December 31, 2002 was
$1,967, and was principally the change in market value associated with an
investment in a marketable security and equity method losses on an investment in
an alliance partner. Other expense for the year ended December 31, 2001 was $899
and was principally equity method losses on an investment in an alliance
partner.
PROVISION (BENEFIT) FOR INCOME TAXES
The Company realized an income tax benefit of $7,493, or an effective tax rate
of 44% of pre-tax loss for the year ended December 31, 2002, compared to an
income tax benefit of $3,455, or an effective tax rate of 13% for the year ended
December 31, 2001. The income tax benefit of $7,493 for the year ended December
31, 2002 was the result of the Job Creation and Worker Assistance Act of 2002,
approved by Congress on March 9, 2002, allowing net operating losses for the
Company's fiscal tax year ended March 31, 2002 to be carried back five years. In
accordance with SFAS No. 109, the effect of this change in tax law was reflected
in the December 31, 2002 financial statements as changes in tax law must be
reflected in the period of enactment. The income tax benefit of $3,455 for the
year ended December 31, 2001 resulted from a decrease in a valuation allowance
previously established against a goodwill deduction that was written off on the
March 31, 2001 tax return.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
Discontinued operations comprised operations associated with the IT staff
augmentation portion of the Company's business and the gain on the sale of the
discontinued operations.
The gain on sale of discontinued operations of $976 for the year ended December
31, 2002 was the result of cash collected on trade accounts receivable in 2002
written off in prior years to bad debt expense and proceeds from a lawsuit
against the predecessor owners of one of the discontinued operations.
The loss on sale of the discontinued operations of $190 for the year ended
December 31, 2001 consists of the operating results of the discontinued
operations, which only included one remaining component from the original plan.
This loss was not anticipated under the original plan and, therefore, was not
accrued for as of June 30, 2000. In addition, during the year ended December 31,
2001, the Company abandoned its plan to sell the one remaining component, and
consequently, closed the business.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
REVENUES
Revenues decreased during the year ended December 31, 2001 by $49,846, or 52%,
to $46,843 from $96,689 in the year ended December 31, 2000. The decrease was
due to a general reduction in demand for services due to softening in the market
coupled with the Company's evolution from providing general IT consulting
services towards offering mobile workforce management solutions.
GROSS PROFIT
Gross profit decreased in the year ended December 31, 2001 by $16,375, or 55%,
to $13,471 from $29,846 in the year ended December 31, 2000. The decrease was
due to a general reduction in demand for services due to softening in the market
coupled with the Company's evolution from providing general IT consulting
services towards offering mobile workforce management solutions. Gross profit as
a percentage of revenues decreased to 29% from 31% primarily due to lower
utilization of salaried billable staff caused by a downturn in demand for
services.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs were $862 for the year ended December 31, 2001.
During the year ended December 31, 2001, the Company created a dedicated team of
people solely focused on research and development activities associated with
mobile workforce management and Web services solutions.
18
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased in the year ended
December 31, 2001 by $21,245, or 40%, to $32,332 from $53,577 in the year ended
December 31, 2000. The decrease was primarily due to the closure of three
operating locations in the latter part of 2000, reductions in operating staff
following the divestiture of the majority of the IT staff augmentation business,
as well as the effects of other reductions in staff to streamline operations in
line with revenue, a decrease in the provision for doubtful accounts receivable
(which in the year ended December 31, 2000 primarily related to dot.com
customers where venture capital funding had not materialized), valuation
allowance established for notes receivable from officers of the Company in 2000.
Selling, general and administrative expenses as a percent of revenues were 69%
for the year ended December 31, 2001 compared to 55% for the same period of the
prior year. Although the Company has streamlined operations, the Company
continues to invest heavily in sales, marketing and business development
activities as it shifts away from general IT consulting services towards
offering mobile workforce management solutions.
IMPAIRMENT OF LONG-LIVED ASSETS
During the year ended December 31, 2001, the Company recognized an impairment of
long-lived assets charge for $4,562 representing a $3,430 property and equipment
impairment charge and a further $1,132 property and equipment impairment charge
associated with locations where the Company ceased operations.
During the year ended December 31, 2000, the Company recognized an impairment of
long-lived assets charge for $42,450 representing a $37,831 goodwill impairment
charge, a $2,519 write-off of investment costs associated with the bSmart.to
joint venture and a $2,100 property and equipment impairment charge associated
with locations where the Company ceased operations.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
the Company considered, among other factors, deterioration of operating
performance or a general reduction in demand for services for a sustainable
period to be indicators of potential impairment of long-lived assets. The
Company has experienced a reduction in demand for its services. As a result of
this reduction in demand for its services, the Company recognized a $37,831
goodwill impairment charge in the nine months ended December 31, 2000, as the
future discounted cash flows (fair value) of its certain long-lived assets were
estimated to be less than the asset's related carrying value. In addition, in
the same fiscal period, the Company ceased operating at certain locations as
part of a plan to streamline operations and took a $2,100 impairment charge of
property and equipment.
In December 2000, the Company exercised its right to terminate the bSmart.to
joint venture when the Company believed that the wireless venture would require
a substantial additional investment to remain viable and that making such an
investment would not be in the best interest of the Company. As a result of
termination of the joint venture, the Company recognized a $2,519 impairment
charge related to investment costs associated with the formation of and the
investment in the bSmart.to joint venture.
During the year ended December 31, 2001, the Company continued to experience a
further decline in demand for its services and in September 2001, entered into a
restructuring plan to further streamline operations in line with its existing
revenue stream. In connection with this restructuring, the Company ceased
operations at several operating locations and recognized a $1,132 property and
equipment impairment charge. This restructuring caused the Company to further
test for impairment of long-lived assets, which resulted in a $3,430 property
and equipment impairment charge as the future discounted cash flows of its
certain long-lived assets were estimated to be less than the asset's related
carrying value.
RESTRUCTURING CHARGE
In September 2001 and December 2000, as part of the Company's efforts to
streamline its operations commensurate with its revenue base, the Company
identified opportunities to reduce its cost structure by reducing headcount and
closing certain operating facilities to conform to the Company's new operating
structure. Accordingly, the Company adopted a restructuring plan in accordance
with EITF 94-3 "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)" and Staff Accounting Bulletin No. 100, "Restructuring and
Impairment Charges." The restructuring charge of $2,436 during the year ended
December 31, 2001 included provisions for severance of approximately 145
management and operating staff ($1,034) as well as closure costs associated with
a plan to dispose of certain locations ($1,402). The restructuring charge of
$1,620 during the year ended December 31, 2000 included provisions for severance
of approximately 90 management and operating staff ($707) as well as closure
costs associated with a plan to consolidate or dispose of certain locations
($913).
19
OTHER INCOME (EXPENSE)
Other income (expense) primarily consists of interest income, interest expense
and equity method losses on an investment in an alliance partner. Other expense
was $73 for the year ended December 31, 2001 as compared to other expense of
$2,642 for the year ended December 31, 2000 due to a reduction in interest
expense. Interest expense decreased due to the pay-off of all debt due under the
Company's Credit Agreement and an interest bearing earn-out agreement from
proceeds generated on the Company's sale of the majority of the IT staff
augmentation business on June 30, 2000. Subsequent to June 30, 2000, interest
expense was reduced and the Company also earned interest income on the cash
proceeds received from the sale on June 30, 2000 during the years ended December
31, 2000 and 2001. The benefit of reduced interest expense was offset by an
increase in equity loss on an investment in an alliance partner during the year
ended December 31, 2001.
PROVISION (BENEFIT) FOR INCOME TAXES
The Company realized an income tax benefit of $3,455, or an effective tax rate
of 13% of pre-tax loss for the year ended December 31, 2001, compared to an
income tax benefit of $9,447, or an effective tax rate of 13% for the year ended
December 31, 2000. The effective tax rate was consistent between years and the
difference between the effective rates and statutory rates is primarily the
result of a valuation allowance against the tax benefit associated with the net
operating loss generated in the year ended December 31, 2001, due to the
uncertainty of realization, as it is only available to carry forward against
future years' income, and the result of the valuation allowance and
non-deductible impairment charges in the year ended December 31, 2000.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
Discontinued operations is comprised of operations associated with the IT staff
augmentation portion of the Company's business and the gain on the sale of the
discontinued operations.
The income from discontinued operations of $2,244 for the year ended December
31, 2000 includes the results of the discontinued operations through March 31,
2000, the date the Company entered into a plan to discontinue such operations.
In accordance with Accounting Principles Board Opinion No. 30, the results of
the discontinued operations were classified as operating income (loss) from
discontinued operations up through the date the Company entered into a plan to
discontinue such operations, March 31, 2000. Subsequent to March 31, 2000, the
results of the discontinued operations were classified together with the gain on
sale of discontinued operations.
The loss on sale of the discontinued operations of $190 for the year ended
December 31, 2001 consists of the operating results of the discontinued
operations, which only included one remaining component from the original plan.
This loss was not anticipated under the original plan and, therefore, was not
accrued for as of June 30, 2000. In addition, during the year ended December 31,
2001, the Company abandoned its plan to sell the one remaining component, and
consequently, closed the business.
The gain on sale of the discontinued operations of $19,541 for the year ended
December 31, 2000 consists of four separate components, including: 1) the sale
of the majority of the IT staff augmentation business on June 30, 2000 for
proceeds of $116,495 and the assumptions of approximately $10,000 in
liabilities, 2) the sale of the IT staff augmentation operations in Orlando on
July 14, 2000 for $650 and the assumption of $385 of assumed liabilities and 3)
the operating results from the discontinued operations subsequent to March 31,
2000 totaling $1,455.
20
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations principally through cash
flows from operations, borrowing under its credit facilities and the use of net
proceeds from its public offerings.
Prior to June 30, 2000, the Company maintained a credit facility ("Credit Line")
with a consortium of banks (the "Lenders") under which it borrowed to fund
working capital needs. On June 30, 2000, the Company completed the sale of the
majority of the IT staff augmentation business for $116,495. The Company used a
portion of the cash proceeds from the sale to pay off all obligations under the
Credit Line and to pay an earn-out obligation due sellers of an acquired
business. Upon settlement of all obligations under the Credit Line, the Credit
Line was terminated. Subsequent to June 30, 2000, the Company maintained no
credit facility.
Cash provided by operating activities was $484 for the year ended December 31,
2002 compared to cash used in operating activities of $9,438 for the year ended
December 31, 2001. In 2002 the benefit of refundable income taxes, reductions in
accounts receivable and the add back of non-cash depreciation, equity loss on
investment in alliance partner and change in market value associated with an
investment in a marketable security were the primary sources of cash, partially
offset by reductions in accounts payable and deferred revenue. In 2001,
reductions in accounts receivable, the add back of depreciation and impairment
of long-lived assets, equity loss on investment and provision for doubtful
accounts were the primary sources of cash, partially offset by an increase in
income taxes and accounts payable. The primary sources of liquidity for the
Company going forward are the collection of its accounts receivable and the cash
balances at December 31, 2002. Total receivables were 75 and 73 days of
quarterly revenue at December 31, 2002 and December 31, 2001, respectively.
Other cash used in investing activities was $2,670 for the year ended December
31, 2002 compared to $10 for the year ended December 31, 2001. In 2002, the
Company used $3,000 for an investment in a marketable security and $486 for the
purchase of property and equipment, principally for continuous upgrades to
computer software and equipment offset by $816 of payments received on a note
from the acquirer of a discontinued operation. In 2001 the Company used $410 for
the purchase of property and equipment, principally for continuous upgrades to
computer software and equipment offset by $430 of payments received on a note
from the acquirer of a discontinued operation.
Cash provided by financial activities was $4 for the year ended December 31,
2002 compared to cash used in financing activities of $913 for the year ended
December 31, 2001. In 2001, the Company used $500 to repurchase common shares
and $600 for a payment due the seller of an acquired business offset by $199 of
proceeds from the issuance of common stock under the Employee Stock Purchase
Plan, which was terminated in early 2002 due to reduced participation in light
of a continuous decline in the number of employees remaining with the Company.
Management of the Company believes that the remaining cash on hand will provide
adequate cash to fund its anticipated needs at least through 2003.
The following table reflects our contractual cash obligations as of December 31,
2002, excluding interest, due over the indicated periods.
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------------------------------------------------------------
LESS THAN 1 TO 3 4 TO 5 AFTER 5
Contractual Cash Obligations: TOTAL 1 YEAR YEARS YEARS YEARS
--------------------------------------------------------------------------------------------------------------------
Obligations due sellers of an acquired business $ 418 $ 418 $ - $ - $ -
--------------------------------------------------------------------------------------------------------------------
Operating leases, net of sublet arrangements $ 4,447 $ 1,483 $ 2,813 $ 151 $ -
--------------------------------------------------------------------------------------------------------------------
Total contractual obligation $ 4,865 $ 1,901 $ 2,813 $ 151 $ -
--------------------------------------------------------------------------------------------------------------------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the year ended March 31, 2000 and through the quarter ended June 30,
2000, the Company was exposed to market risk related to changes in interest
rates on its Credit Line. The interest rate for the Credit Line was tied to the
Agent's prime rate and LIBOR. The Credit Line was terminated on June 30, 2000
upon the complete payment of all of the Company's obligations under the Credit
Agreement.
On August 19, 2002, the Company acquired Convertible Redeemable Preferred Stock
in Bluebook International Holding Company ("Bluebook"). The Company accounts for
the preferred stock as a trading security with changes in fair value recorded in
the consolidated statements of operations. Accordingly, subsequent to August 19,
2002, the Company was exposed to market risk related to changes in the market
price of the common stock in Bluebook.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements.
21
CRITICAL ACCOUNTING POLICIES
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company provides an allowance for potentially uncollectible accounts
receivable under the provisions of SFAS No. 5, "Accounting for Contingencies",
in the ordinary course of business. The allowance is derived as the result of
periodic and thorough reviews of aged and known problem accounts during each
quarter. In addition the Company reserves for unknown issues in its receivables
at the balance sheet date using a formula consistent from quarter to quarter.
Management believes that its approach is appropriate to reserve for potentially
uncollectible receivables. Should management have taken another approach to
developing its reserve, the allowance for doubtful accounts may have been
different than that reported.
REVENUE RECOGNITION
The Company accounts for time and materials revenue under the provisions of SAB
101, "Staff Accounting Bulletin No. 101: Revenue Recognition in Financial
Statements", which requires revenue to be recorded when there is evidence of an
agreement, a fixed or determinable fee, collectibility is reasonably assured,
and delivery has occurred. Revenues exclude reimbursable expenses charged to and
collected from clients. Revenues pursuant to fixed-fee contracts are generally
recognized as services are rendered on the percentage-of-completion method of
accounting based on hours incurred to total estimated labor hours to complete.
Revenues earned for software license sales and service contracts are recorded
based on the provisions of AICPA SOP 97-2, "Software Revenue Recognition", which
shares the basic criteria of SAB No. 101.
RESTRUCTURING LIABILITIES
As part of the Company's efforts to streamline its operations commensurate with
its revenue base, the Company identified opportunities to reduce its cost
structure by reducing headcount and closing certain operating facilities to
conform to the Company's changing operating structure over the prior three
fiscal periods. These restructuring obligations were calculated using
information known at the date of the respective accruals based on the provisions
of EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity" and Staff Accounting Bulletin No. 100,
"Restructuring and Impairment Charges". Management has adjusted these
obligations over the payment periods of each restructuring plan as liabilities
have been settled and payments have been made.
ACCOUNTING FOR LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amount of those items. Management judgment is required in
evaluating whether an impairment event has occurred. Furthermore, our estimated
cash flow is based on historical results adjusted to reflect our best estimate
of future market and operating conditions. Any material change affecting the
assumptions used to project the estimated undiscounted cash flows or our
expectation of future market conditions could result in a different conclusion.
Assets for which the carrying value is not fully recoverable are reduced to fair
value.
ACCOUNTING FOR INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes". This pronouncement requires using an asset and liability approach to
recognize deferred tax assets and liabilities for the tax consequences of
temporary differences by applying enacted statutory tax rates to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities. The Company has not given benefit to any deferred tax
assets or net operating losses in the previous three fiscal years due to
uncertainty of realizing these assets in future periods. In addition, the
financial statements have provided reserves for certain tax positions taken by
the Company in the March 31, 2002, 2001 and 2000 tax returns based on enacted
tax laws during those periods.
22
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Cotelligent, Inc.:
We have audited the accompanying consolidated balance sheets of Cotelligent,
Inc. and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 2002 and 2001, and the nine months ended December
31, 2000. 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 in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cotelligent, Inc.
and subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for the years ended December 31, 2002 and 2001,
and the nine months ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 2 to the accompanying consolidated financial statements,
the Company has restated the presentation of earnings (loss) per share in the
consolidated statements of operations for the years ended December 31, 2002
and 2001, and the nine months ended December 31, 2000.
/s/ KPMG LLP
Costa Mesa, California
March 26, 2003, except as to
Notes 2 and 17, which are as of
November 25, 2003
23
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 17,683 $ 18,778
Refundable income taxes 197 7,008
Accounts receivable, including unbilled accounts of $354 and $1,627 and net
of allowance for doubtful accounts of $124 and $533, respectively .......... 2,399 5,693
Current assets of discontinued operations ................................... - 151
Notes receivable from officers and stockholder, net of valuation allowance of
$1,703 and $1,703, respectively ............................................ - -
Current portion of note receivable from acquirer of discontinued operation .. 480 835
Prepaid expenses and other current assets ................................... 526 806
------------ ------------
Total current assets ...................................................... 21,285 33,271
Property and equipment, net .................................................... 451 -
Note receivable from acquirer of discontinued operation ........................ 1,103 1,564
Investment in marketable security .............................................. 1,543 -
Equity investment in alliance partner .......................................... 335 847
Other assets ................................................................... 316 398
------------ ------------
Total assets .............................................................. $ 25,033 $ 36,080
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................... $ 1,353 $ 1,651
Accrued compensation and related payroll liabilities ........................ 1,435 2,144
Restructuring liabilities ................................................... 117 331
Deferred revenue ............................................................ 247 874
Other accrued liabilities ................................................... 2,229 2,074
------------ ------------
Total current liabilities ................................................. 5,381 7,074
Restructuring liabilities, net of current portion .............................. 805 959
Other long-term liabilities .................................................... 24 465
Income tax payable ............................................................. 2,618 2,618
------------ ------------
Total liabilities ......................................................... 8,828 11,116
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.01 par value; 500,000 shares authorized, no shares issued
or outstanding ............................................................. - -
Common Stock, $0.01 par value; 100,000,000 shares authorized, 15,390,954 and
15,514,757 shares issued, respectively ..................................... 154 155
Additional paid-in capital .................................................. 86,374 86,662
Notes receivable from stockholders .......................................... (5,940) (6,193)
Accumulated deficit ......................................................... (63,883) (55,160)
Treasury stock............................................................... (500) (500)
------------ ------------
Total stockholders' equity ................................................ 16,205 24,964
------------ ------------
Total liabilities and stockholders' equity ................................ $ 25,033 $ 36,080
============ ============
See accompanying notes to consolidated financial statements.
24
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
--------------- --------------- -----------------
(Restated) (Restated) (Restated)
Revenues ................................................... $ 16,956 $ 46,843 $ 68,444
Cost of services ........................................... 10,507 33,372 47,161
--------------- --------------- -----------------
Gross profit .......................................... 6,449 13,471 21,283
Research and development costs ............................. 1,887 862 -
Selling, general and administrative expenses ............... 19,279 32,332 41,238
Impairment of long-lived assets ............................ - 4,562 42,450
Restructuring charge ....................................... 691 2,436 1,620
--------------- --------------- -----------------
Operating loss ............................................. (15,408) (26,721) (64,025)
Other income (expense):
Interest expense ........................................ (112) (119) (2,237)
Interest income ......................................... 295 945 1,123
Other ................................................... (1,967) (899) (246)
--------------- --------------- -----------------
Total other income (expense) .......................... (1,784) (73) (1,360)
--------------- --------------- -----------------
Loss from continuing operations before income taxes ........ (17,192) (26,794) (65,385)
Benefit for income taxes ................................... 7,493 3,455 7,677
--------------- --------------- -----------------
Loss from continuing operations ............................ (9,699) (23,339) (57,708)
--------------- --------------- -----------------
Gain (loss) on sale of discontinued operations, net
of income taxes of $-, $-, and $12,744 ................. 976 (190) 19,541
--------------- --------------- -----------------
Income (loss) from discontinued operations .............. 976 (190) 19,541
--------------- --------------- -----------------
Net loss
........................................................... $ (8,723) $ (23,529) $ (38,167)
=============== =============== =================
Earnings per share:
Basic and diluted -
Loss from continuing operations .......................... $ (0.73) $ (1.75) $ (4.26)
Income (loss) from discontinued operations ............... 0.07 (0.01) 1.44
--------------- --------------- -----------------
Net loss ................................................... $ (0.66) $ (1.76) $ (2.82)
=============== =============== =================
Basic and diluted weighted average number of shares
outstanding ............................................... 13,201,532 13,379,320 13,537,927
=============== =============== =================
See accompanying notes to consolidated financial statements.
25
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE
------------------------------ PAID-IN FROM
SHARES AMOUNT CAPITAL STOCKHOLDERS
------------- ------------- ------------- -------------
Balance at March 31, 2000 .... 15,065,400 151 85,442 (6,149)
Issuance of Common Stock,
net of costs ................ 209,230 2 739 (332)
Shares issued in connection
with earn-out to sellers
of acquired businesses ...... 100,000 1 571 -
Cancellation of LSPP note .... (25,000) (1) (112) 113
Warrants issued in
connection with
investment in joint
venture ..................... - - 900 -
Warrants cancelled in
connection with
dissolution of joint
venture ..................... - - (900) -
Net loss ..................... - - - -
------------- ------------- ------------- -------------
Balance at December 31, 2000.. 15,349,630 153 86,640 (6,368)
Issuance of Common Stock,
net of costs ................ 215,127 3 196 -
Cancellation of LSPP Note .... (50,000) (1) (174) 175
Purchase of Treasury Shares .. - - - -
Net loss ..................... - - - -
------------- ------------- ------------- -------------
Balance at December 31, 2001.. 15,514,757 $ 155 $ 86,662 $ (6,193)
Issuance of Common Stock,
net of costs ................ 31,197 1 3 -
Cancellation of LSPP Note .... (55,000) (1) (252) 253
Return of shares issued in
connection with earn-out
to sellers of acquired
business .................... (100,000) (1) (39) -
Net loss ..................... - - - -
------------- ------------- ------------- -------------
Balance at December 31,
2002 ........................ 15,390,954 $ 154 $ 86,374 $ (5,940)
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
RETAINED
EARNINGS TREASURY STOCK TOTAL
(ACCUMULATED ------------------------------ STOCKHOLDERS'
DEFICIT) SHARES AMOUNT EQUITY
------------- ------------- ------------- -------------
Balance at March 31, 2000 .... 6,536 - - 85,980
Issuance of Common Stock,
net of costs ................ - - - 409
Shares issued in connection
with earn-out to sellers
of acquired businesses ...... - - - 572
Cancellation of LSPP note .... - - - -
Warrants issued in
connection with
investment in joint
venture ..................... - - - 900
Warrants cancelled in
connection with
dissolution of joint
venture - - - (900)
Net loss ..................... (38,167) - - (38,167)
------------- ------------- ------------- -------------
Balance at December 31, 2000.. (31,631) - - 48,794
Issuance of Common Stock,
net of costs ................ - - - 199
Cancellation of LSPP Note .... - - - -
Purchase of Treasury Shares .. - 644,600 (500) (500)
Net loss ..................... (23,529) - - (23,529)
------------- ------------- ------------- -------------
Balance at December 31, 2001.. $ (55,160) 644,600 $ (500) $ 24,964
Issuance of Common Stock,
net of costs ................ - - - 4
Cancellation of LSPP Note .... - - - -
Return of shares issued in
connection with earn-out
to sellers of acquired
business .................... - - - (40)
Net loss ..................... (8,723) - - (8,723)
------------- ------------- ------------- -------------
Balance at December 31,
2002 ........................ $ (63,883) 644,600 $ (500) 16,205
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
26
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------ ------------ -----------------
Cash flows from operating activities:
Loss from continuing operations ............................................. $ (9,699) $ (23,339) $ (57,708)
Adjustments to reconcile net loss from continuing
operations to net cash provided by (used in) operating
activities:
Depreciation and amortization ........................................... 35 2,634 3,035
Impairment of long-lived assets ......................................... - 4,562 42,450
Fair value of common stock issued to seller of acquired business in
connection with forbearance agreement .................................. - - 572
Equity loss from investments ............................................ 512 919 234
Unrealized loss on investment in marketable security .................... 1,457 - -
Deferred income taxes, net .............................................. (7,493) 2,745 (2,181)
Loss on disposal of property and equipment .............................. - 5 12
Provision for doubtful accounts ......................................... (409) 904 3,610
Valuation allowance on notes receivable from officers ................... - - 1,703
Loss on forgiveness of note receivable from acquirer of
discontinued operation ................................................. - 400 -
Changes in current assets and liabilities:
Accounts receivable ................................................... 3,703 12,896 572
Prepaid expenses and other current assets ............................. 280 581 464
Accounts payable and accrued liabilities .............................. (1,661) (6,280) (439)
Deferred revenue ...................................................... (627) 781 -
Income taxes, net ..................................................... 14,304 (6,264) (83)
Other assets .......................................................... 82 18 440
------------ ------------ -----------------
Net cash provided by (used in) operating activities ......................... 484 (9,438) (7,319)
Cash flows from investing activities:
Proceeds from sale of assets ................................................ - - 525
Investments in alliance partners ............................................ - - (8,092)
Cash acquired upon dissolution of joint venture ............................. - - 1,281
Payments received on note from acquirer of discontinued
operation .................................................................. 816 430 71
Purchase of businesses, net of cash of acquired ............................. - - (600)
Purchases of property and equipment ......................................... (486) (440) (1,778)
Investment in marketable security ........................................... (3,000) - -
------------ ------------ -----------------
Net cash used in investing activities ....................................... (2,670) (10) (8,593)
Cash flows from financing activities:
Borrowing under credit agreement ............................................ - -- 9,111
Payments under credit agreement ............................................. - -- (57,890)
Payments on capital lease obligations ....................................... - (12) (201)
Payments on amounts due sellers of acquired businesses ...................... - (600) (8,534)
Net repayments (borrowings) on notes receivable from
officers .................................................................. - - 100
Net proceeds from issuance of common stock .................................. 4 199 409
Repurchase of common stock .................................................. - (500) -
------------ ------------ -----------------
Net cash provided by (used in) financing activities ......................... 4 (913) (57,005)
------------ ------------ -----------------
Cash flows provided by discontinued operations:
Cash provided by discontinued operations .................................... 1,087 2,639 94,623
------------ ------------ -----------------
Net increase (decrease) in cash and cash equivalents ........................... (1,095) (7,722) 21,706
Cash and cash equivalents at beginning of period ............................... 18,778 26,500 4,794
------------ ------------ -----------------
Cash and cash equivalents at end of period ..................................... $ 17,683 $ 18,778 $ 26,500
============ ============ =================
See accompanying notes to consolidated financial statements.
27
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands, except share data)
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------------ ------------------ ------------------
Supplemental disclosures of cash flow information:
Interest paid ................................................. $ 102 $ 2 $ 1,914
Income taxes paid (Refunded) .................................. (14,304) 74 32
Significant non-cash financing and investing activities:
Return of shares previously issued in connection with leveraged
stock purchase plan .......................................... 253 - -
Return shares previously issued in connection with earn-out to
sellers of acquired business ................................. 40 - -
Common stock issued to employees for notes receivable ......... - - 332
Return of Common Stock previously issued to employee
for note receivable .......................................... - 175 113
Sale of discontinued operation for note receivable ............ - - 3,300
Services exchanged for preferred stock of third party ......... 2,100 - -
See accompanying notes to consolidated financial statements.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1 - BUSINESS ORGANIZATION
Cotelligent, Inc. ("Cotelligent" or the "Company"), a Delaware corporation,
provides software consulting services to businesses with complex information
technology ("IT") operations and provides maintenance, support and contract
services on software products it licenses. These financial statements include
the accounts of Cotelligent, Inc. and its subsidiaries.
During the fiscal year ended March 31, 2000, the Company was organized in two
practice groups, Technology Solutions and Professional Services (also known as
its IT staff augmentation business), and operated across the United States along
with international consultant recruiting offices in Brazil and the Philippines.
Prior to March 31, 2000, the Company entered into a plan to divest its IT staff
augmentation business. Accordingly, the accompanying consolidated financial
statements and related footnotes have been prepared to present as discontinued
operations the Company's IT staff augmentation business for all periods
presented.
The Company historically operated on an April 1 to March 31 fiscal year. In July
2000, the Company changed its fiscal year to December 31, resulting in a
nine-month transition period from April 1, 2000 through December 31, 2000.
The Company has suffered significant operating losses as well as negative
operating cash flows in the last three fiscal periods and continues to be
subject to certain risks common to companies in this industry. These
uncertainties include the availability of financing, the retention of and
dependence on key individuals, the affects of intense competition, the ability
to develop and successfully market new product and service offerings, and the
ability to streamline operations and increase revenues. There can be no
assurance the Company will be profitable in the future.
NOTE 2-Restatement of Earnings (Loss) Per Share
Earnings (loss) per share (EPS) in our previously issued consolidated statements
of operations for the years ended December 31, 2002 and 2001, and the nine
months ended December 31, 2000 has been restated to exclude shares issued in
connection with our Leveraged Stock Purchase Plan (LSPP), which were previously
included in the basic and diluted weighted average number of shares outstanding
for those periods. All EPS information in these consolidated financial
statements has been restated for this computational error, which did not change
loss from continuing operations or net loss for any periods.
Under the LSPP, certain employees were able to purchase shares of the Company's
common stock through the execution of notes payable to the Company that are
considered nonrecourse for accounting purposes. In accordance with SFAS No. 128,
"Earnings Per Share", the LSPP shares, combined with the LSPP notes, are
considered equivalent to stock options for purposes of computing EPS and should
be reflected in diluted EPS, when dilutive, using the treasury stock method, but
are excluded from the number of basic shares outstanding until the notes are
settled (see "Stock-Based Computation" in NOTE 3). The LSPP shares were
antidilutive in all periods presented in the accompanying consolidated
statements of operations.
The following tables present the changes that have been made to EPS in the
consolidated statements of operations for the years ended December 31, 2002 and
2001, and the nine months ended December 31, 2000.
As Previously As
Reported Restated
-------- --------
For the Year Ended
December 31, 2002
Earnings (loss) per share:
Basic and diluted -
Loss from continuing operations ........ $ (0.65) $ (0.73)
Income from discontinued operations .... 0.06 0.07
----------------- ---------------
Net loss $ (0.59) $ (0.66)
================= ===============
Weighted average shares:
Basic and diluted 14,879,511 13,201,532
================= ===============
As Previously As
Reported Restated
-------- --------
For the Year Ended
December 31, 2001
Loss per share:
Basic and diluted -
Loss from continuing operations ....... $ (1.55) $ (1.75)
Loss from discontinued operations ..... (0.01) (0.01)
---------------- ---------------
Net loss $ (1.56) $ (1.76)
================ ===============
Weighted average shares:
Basic and diluted 15,075,546 13,379,320
================ ===============
As Previously As
Reported Restated
-------- --------
For the Nine Months Ended
December 31, 2000
Earnings (loss) per share:
Basic and diluted -
Loss from continuing operations ........ $ (3.79) $ (4.26)
Income from discontinued operations .... 1.28 1.44
---------------- ---------------
Net loss $ (2.51) $ (2.82)
================ ===============
Weighted average shares:
Basic and diluted 15,230,969 13,537,927
================ ===============
NOTE 3-SIGNIFICANT ACCOUNTING POLICIES
SIGNIFICANT ACCOUNTING POLICIES -
Basis of Presentation
The accompanying consolidated financial statements and related notes to the
consolidated financial statements include the accounts and results of
Cotelligent, Inc. and its subsidiaries. In addition, the consolidated financial
statements and related notes include those companies acquired utilizing the
purchase method of accounting from their respective acquisition dates. All
significant intercompany transactions and accounts have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
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 and provides a reserve for potentially uncollectible
accounts. In addition, the Company has a high concentration of its accounts
receivable in a few clients.
Software Development Costs
Costs incurred in the research and development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility has been established. After technological feasibility
is established, any additional costs are capitalized in accordance with SFAS No.
86, "Accounting for the Costs of Computer Software to Be Sold, Leased or
otherwise Marketed". Because the Company believes that its current process for
developing software is essentially completed concurrently with the establishment
of technological feasibility, no software development has been capitalized as of
December 31, 2002 and 2001.
29
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided over the
estimated useful lives of the respective assets on a straight-line basis.
Leasehold improvements are amortized over the shorter of the lease term or the
estimated useful life of the respective assets.
Goodwill
In prior periods, goodwill represented the excess of cost over fair value of net
tangible assets acquired through acquisitions and was previously amortized on a
straight-line basis over a period of 30 years.
Investments
Investments in other businesses where ownership is less than 20% are accounted
for using the cost basis of accounting. Investments where ownership is between
20% and 50%, and where the Company has the ability to exercise significant
influence, are accounted for using the equity method of accounting. Any
difference between the cost of an investment and the amount of underlying equity
in net assets of an investee is amortized to the consolidated statement of
operations over the expected life of the investment, currently three years.
Investments in other businesses that meet the definition of a debt security
under the provisions of SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" are classified as a trading security and reported at
fair value, with unrealized gains and losses recorded in other income (expense)
in the consolidated statement of operations.
Long-Lived Assets
The Company accounts for the impairment and disposition of long-lived assets in
accordance with SFAS No. 144, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of". Prior to the adoption of
SFAS No. 144, the Company accounted for long-lived assets in accordance with
SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". In accordance with SFAS No. 144, long-lived assets to
be held are reviewed for events or changes in circumstances, which indicate that
their carrying value may not be recoverable. The Company periodically reviews
the carrying amount of long-lived assets to determine whether or not impairment
to such amount has occurred.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, marketable securities,
refundable income taxes, short-term accounts receivable, a note receivable,
accounts payable, accrued liabilities and income taxes payable for which current
carrying amounts are equal to or approximate fair market value.
Revenue Recognition
The Company accounts for time and materials revenue under
the provisions of SAB 101, "Staff Accounting Bulletin No. 101 Revenue
Recognition in Financial Statements," which requires revenue to be recorded when
there is evidence of an agreement, a fixed or determinable fee, collectibility
is reasonably assured, and delivery has occurred. Revenues include reimbursable
expenses charged to and collected from clients. Revenues pursuant to fixed-fee
contracts are generally recognized as services are rendered on the
percentage-of-completion method of accounting based on hours incurred to total
estimated labor hours to complete. Revenues earned for software license sales
and service contracts are recorded based on the provisions of AICPA SOP 97-2,
"Software Revenue Recognition," which shares the basic criteria of SAB No. 101.
For each element in a software arrangement (e.g., license, maintenance, and
services), the amount of revenue recognized is based upon vendor specific
objective evidence of fair value using the residual method. Maintenance and
service revenue is recognized as the Company performs the services.
Cost of Services
Cost of services consist primarily of compensation and benefits of Cotelligent's
employees engaged in the delivery of consulting services.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes.
Provision is made in the Company's consolidated financial statements for current
income taxes payable and deferred income taxes arising primarily from net
operating loss carryforwards and temporary differences. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
realized or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The Company recorded a valuation allowance to reduce deferred
tax assets to an amount whose realization is more likely than not. Refer to Note
11 - Income Taxes.
30
Repurchase of Common Stock
The Company records the repurchase of Common Stock as a reduction of
stockholders' equity at cost. When common shares are reissued, the Company uses
a first-in, first-out method.
Stock-Based Compensation
The Company has adopted the disclosure provisions of SFAS No.123, "Accounting
for Stock-Based Compensation" and as amended by SFAS No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure". As permitted by the
provisions of SFAS No. 123, the Company continues to apply the provision of APB
Opinion 25 and related interpretations in accounting for its employee stock
option plans.
Accordingly, the Company measures compensation expense for its employee
stock-based compensation awards using the intrinsic value method and provides
pro forma disclosures of net income (loss) and earnings (loss) per share as
if a fair value method had been applied. Therefore, compensation cost for
employee stock awards is measured as the excess, if any, of the fair value of
our common stock at the grant date or re-measurement date over the amount an
employee must pay to acquire the stock and is amortized over the related
service periods using the straight-line method. Compensation expense
previously recorded for unvested employee stock-based compensation awards
that are forfeited upon employee termination is reversed in the period of
forfeiture.
The Company stock option awards are typically accounted for as fixed awards
because the number of shares that an individual employee is entitled to receive,
and the option price, if any, are known at the grant date. However, awards under
the Company's LSPP, where the Company issues shares in exchange for a note
considered nonrecourse for accounting purposes, are treated as variable awards
because the Company cannot determine the ultimate purchase price of the shares
at the issuance date. For variable awards, the Company estimates total
compensation cost for each period from the issuance date to the final
measurement date based on the quoted market price of the Company's stock at the
end of each period. No compensation expense has been reported during the periods
presented for LSPP awards.
The LSPP awards resulted in outstanding common shares of 1,677,979, 1,696,226
and 1,693,042 at December 31, 2002, 2001, and 2000, respectively, that are
reflected in the applicable accompanying consolidated balance sheets and
consolidated statements of stockholders equity. However, these shares are
equivalent to stock options for purposes of calculating earning (loss) per share
(see NOTE 2).
Earnings Per Share
Basic earnings per share is calculated by dividing net income by the weighted
average number of shares of Common Stock outstanding for accounting purposes
during the period. Diluted earnings per share includes the impact of Common
Stock options and LSPP shares outstanding, when dilutive.
Discontinued Operations
Discontinued operations consist of the Company's IT staff augmentation business.
The Company entered into a plan to divest of these operations prior to March 31,
2000. The operating results of these operations subsequent to April 1, 2000,
have been reflected in the accompanying consolidated financial statements as
gain or loss on the sale of discontinued operations. Subsequent to June 30,
2000, the net assets of the remaining component of the segment are reflected in
the accompanying consolidated financial statements as current assets and current
liabilities of discontinued operations.
Restructuring Charges
Restructuring charges are recognized in the period when management enters into a
plan to reorganize or streamline the operations. The charges include costs
associated with the termination of employees and the closure of operating
locations. Restructuring charges not resulting in a future benefit that do not
qualify for accrual under EITF 94-3 or SAB No. 100 are recorded when due and
payable.
Reimbursement for Out-of-Pocket Expenses
A Financial Accounting Standards Board ("FASB") staff announcement was issued in
November 2001 regarding "Income Statement Characterization of Reimbursement
Received for `Out-of-Pocket' expenses Incurred." In this announcement, the FASB
staff concluded that amounts billed by service providers for reimbursement of
out-of-pocket expenses incurred should be characterized as revenue in the
Company's income statement. Currently, the Company records revenue received on
such arrangements as an offset to the expenses incurred, as these arrangements
are billed at zero margin. In accordance with this announcement, the Company
reclassified amounts received for reimbursement of out-of-pocket expenses as
revenues for all periods presented in the accompanying consolidated statement of
operations
Reclassifications
Certain reclassifications have been made in the prior years' financial
statements to conform to the presentation in the current period.
NOTE 4 - ALLOWANCE FOR DOUBTFUL ACCOUNTS
Allowance for doubtful accounts activity is presented below.
Balance, March 31, 2000 .................. $ 1,880
Charges to costs and expenses .......... 3,610
Write-offs ............................. (2,249)
----------------------
Balance, December 31, 2000 ............... 3,241
Charges to costs and expenses .......... 904
Write-offs ............................. (3,612)
----------------------
Balance, December 31, 2001 ............... 533
Charges to costs and expenses .......... (276)
Write-offs ............................. (133)
----------------------
Balance, December 31, 2002 ............... $ 124
======================
31
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
USEFUL LIVES DECEMBER 31, DECEMBER 31,
(IN YEARS) 2002 2001
------------ --------------- -------------
Computer and office equipment ............................ 3-5 $ 420 $ -
Furniture and fixtures ................................... 5 3 -
Leasehold improvements ................................... 2 63 -
--------------- -------------
486 -
Less: Accumulated depreciation ........................... (35) -
--------------- -------------
Property and equipment, net of accumulated depreciation .. $ 451 $ -
=============== =============
Depreciation expense of property and equipment, included in selling, general and
administrative expense, for the twelve months ended December 31, 2002 and 2001,
and the nine months ended December 31, 2002 was $35 $2,634 and $1,839,
respectively.
The Company recognized a $4,562 impairment of property and equipment charge
during the year ended December 31, 2001, under the provisions of SFAS No. 121.
NOTE 6 - INVESTMENTS
During the last three fiscal periods, the Company made the following
investments:
Investment in White Horse Interactive
On July 18, 2000, the Company paid $2,000 to acquire a 35% ownership interest in
White Horse Interactive, an integrated media agency, which resulted in a
difference between the cost of the investment and the amount of underlying
equity in net assets totaling $1,300. The Company uses the equity method of
accounting for this investment and recorded an equity loss, including the
amortization of the difference between the cost of the investment and the amount
of underlying equity in the net assets, of $510 for the year ended December 31,
2002, $919 for the year ended December 31, 2001 and $234 for the nine months
ended December 31, 2000.
Investment in bSmart.to LLC
On August 8, 2000, the Company executed a definitive joint venture agreement
with bSmart.to Technologies, Inc. The Company contributed: (1) cash of $5,000,
of which $2,500 was paid directly to the joint venture and $2,500 was
distributed to the developer of certain technology, and (2) its
Philadelphia-based IT solutions staff and ASP data center and, accordingly,
reclassified $1,200 of working capital and property and equipment as well as
$10,073 of goodwill, in exchange for a 50% interest in the joint venture. In
addition, the Company incurred approximately $2,040 in transaction costs that
were capitalized as a part of its investment in the joint venture. In connection
with the investment in the joint venture with bSmart.to Technologies, Inc., the
Company issued to and received from bSmart.to Technologies, Inc. warrants for
the purchase of common shares. Accordingly, the Company recognized an additional
investment of $900 for the warrants issued to bSmart.to Technologies, Inc., and
a corresponding amount in additional paid-in capital.
On December 6, 2000, the Company exercised its right under the joint venture
agreement to terminate the relationship. As a result, the Company regained
complete ownership of the Philadelphia-based operation, including $1,281 in cash
and more working capital than originally contributed, 100% ownership in JAS
Concepts, Inc., an investment made by the joint venture prior to its
dissolution, and consequently, recognized a charge of $2,519 to reduce the
investment in the joint venture to its realizable value (zero). The charge is
included in impairment of long-lived assets in the statement of operations for
the nine months ended December 31, 2000.
During the period August 8, 2000 through December 6, 2000 the Company used the
equity method of accounting for this investment and recorded an equity loss of
$33 for the nine months ended December 31, 2000. The Company commenced
consolidating the results from the Philadelphia-based operation upon regaining a
controlling financial interest on December 6, 2000.
Investment in Bluebook International Holding Company, Inc.
On August 19, 2002, the Company acquired 3,055,540 shares of Series C
Convertible Redeemable Preferred Stock ("Series C") of Bluebook International
Holding Company, Inc. ("Bluebook"), representing an approximately 9% ownership
interest (assuming conversion of all outstanding preferred stock) in exchange
for $1,000 in cash, conversion of a $500 bridge loan from Cotelligent to
Bluebook, advanced earlier in the third quarter of 2002. In accordance with the
purchase and development agreement, management of the Company expects
Cotelligent to be a preferred provider of implementation services for Bluebook's
future software products.
32
Under the Series C purchase and development agreement, the Company contributed
additional services and funded an additional $1,500 in cash, due upon Bluebook's
first sale of certain software associated with the purchase and development
agreement in the fourth quarter of 2002. Upon payment of the additional $1,500
and delivery of the remaining services, the Company received an additional
2,261,164 shares of Series C, which increased the Company's ownership interest
in Bluebook to 15% (assuming conversion of all outstanding preferred stock, and
assuming no further stock issuances on behalf of Bluebook).
The value of the Series C was initially recorded at $3,000, the amount of cash
paid to Bluebook. The cost of the contributed services was recorded as research
and development costs in the accompanying consolidated statements of operations.
Under the certificate of designation of the Series C stock, Bluebook is
required, at the Company's option, to either a) convert the Series C shares to
common stock at any time or b) redeem the Series C shares for cash beginning
four years and up through six years after the date of initial issuance.
The Series C meets the definition of a debt security under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." In accordance with SFAS No. 115, the Company classified the Series
C as a trading security and consequently reports the investment at fair value,
with unrealized gains and losses recorded in other income (expense) in the
consolidated statements of operations. Accordingly, the investment was reduced
by $1,457 during the year ended December 31, 2002 due to the decrease in fair
value since the acquisition date.
During the year ended December 31, 2002, the Company delivered and contributed
software development services to Bluebook, in connection with the investment and
for which no revenue was recognized. Cost of $1,048 associated with this
development project was recorded as research and development costs.
NOTE 7 - OTHER CURRENT LIABILITIES
DECEMBER 31, DECEMBER 31,
2002 2001
------------- ------------
Obligation due sellers of an acquired business, net of discount for imputed
interest ...................................................................... $ 418 $ 330
Obligations due sellers of acquired businesses ................................. 492 492
Legal .......................................................................... 287 63
Audit .......................................................................... 468 244
Other accrued liabilities ...................................................... 564 945
------------- ------------
Total other current liabilities ................................................ $ 2,229 $ 2,074
============= ============
NOTE 8 - OTHER LONG-TERM LIABILITIES
DECEMBER 31, DECEMBER 31,
2002 2001
------------- ------------
Long-term portion of obligation due sellers of an acquired business, net of
discount for imputed interest, net of current portion ......................... $ - $ 426
Lease deposits on sublet properties 24 39
------------- ------------
Total other long-term liabilities .............................................. $ 24 $ 465
============= ============
NOTE 9 - IMPAIRMENT OF LONG-LIVED ASSETS
The Company considers, among other factors, deterioration of operating
performance or a general reduction in demand for services for a sustainable
period to be indicators of potential impairment of long-lived assets. The
Company has experienced a reduction in demand for its services. As a result of
this reduction in demand for its services, the Company recognized a $37,831
goodwill impairment charge in the nine months ended December 31, 2000, as the
future discounted cash flows (fair value) of its certain long-lived assets were
estimated to be less than the asset's related carrying value. In addition, in
the same fiscal period, the Company ceased operating at certain locations as
part of a plan to streamline operations and took a $2,100 impairment charge of
property and equipment and also took a $2,519 write-off of its investment in
bsmart to (see Note 6).
33
During the year ended December 31, 2001, the Company continued to experience a
further decline in demand for its services and in September 2001, entered into a
restructuring plan to further streamline operations in line with its existing
revenue stream. In connection with this restructuring, the Company ceased
operations at several operating locations and recognized a $1,132 property and
equipment impairment charge. This restructuring caused the Company to further
test for impairment of long-lived assets, which resulted in a $3,430 property
and equipment impairment charge as the future discounted cash flows (fair value)
of its property and equipment were estimated to be less than the related
carrying value.
NOTE 10 - RESTRUCTURING PROGRAMS
In June 1999, as part of the Company's reorganization into practice groups, the
Company identified opportunities to align its operating structure by closing
certain of its redundant facilities and rationalizing headcount to conform to
the Company's new operating structure. Accordingly, the Company adopted a
restructuring plan, which resulted in a restructuring charge of $4,920. The
charge included provisions for severance of approximately 60 management and
operating staff ($3,510) as well as closure costs related to a plan of
consolidating certain operating locations ($1,410). The change was originally
recorded as an operating expense in June 1999. Upon the Company's decision to
discontinue its IT staff augmentation segment the amount was reclassified to
discontinued operations, as all charges related to severance or other activities
of the discontinued operations (see Note 12).
In December 2000 and September 2001, as part of the Company's efforts to
streamline its operations commensurate with its revenue base, the Company
identified additional opportunities to reduce its cost structure. Accordingly,
the Company adopted a exit plan in accordance with EITF 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)" and Staff
Accounting Bulletin No. 100, "Restructuring and Impairment Charges" which
resulted in a restructuring charge of $1,620 during the nine months ended
December 31, 2000 and $2,436 during the year ended December 31, 2001. The
December 2000 charge included provisions for severance of approximately 90
management and operating staff ($707) as well as closure costs associated with a
plan to consolidate or dispose of certain locations ($913). The September 2001
plan included provisions for severance of approximately 145 management and
operating staff ($1,034) as well as closure costs associated with a plan to
consolidate or dispose of certain locations ($1,402). The September 2001 plan
did not meet the requirements of the aforementioned standards in order to accrue
costs as of a commitment date. Therefore, the September 2001 plan costs that did
not provide a future benefit were charged to operations when due and payable.
The following summarizes the activity and balances in each of these
restructuring programs for the past three fiscal periods through December 31,
2002:
JUNE 1999 DECEMBER 2000 SEPTEMBER 2001
---------------------- --------------------- ----------------------
Facilities Facilities Facilities
Severance Closure Severance Closure Severance Closure Total
--------- ---------- --------- ---------- ---------- ---------- -------
Balance - March 31, 2000 .............. $ 874 $ 1,001 $ - $ - $ - $ - $ 1,875
Restructuring charge .................. - - 707 913 - - 1,620
Spending and write-downs .............. (505) - (200) - - - (705)
Release of excess
restructuring liability .............. (312) (1,001) - - - - (1,313)
--------- ---------- --------- ---------- ---------- ---------- -------
Balance - December 31, 2000 ........... 57 - 507 913 - - 1,477
Restructuring charge .................. - - - - 1,034 1,402 2,436
Spending and write-downs .............. (57) - (507) (913) (1,034) (112) (2,623)
--------- ---------- --------- ---------- ---------- ---------- -------
Balance - December 31, 2001 ........... - - 1,290 1,290
Spending and write-downs .............. - - - - - (368) (368)
--------- ---------- --------- ---------- ---------- ---------- -------
Balance - December 31, 2002 $ - $ - $ - $ - $ - $ 922 $ 922
========= ========== ========= ========== ========== ========== =======
In the fourth quarter of 2002, the Company developed a new approach to marketing
and delivering its service offerings, and consequently, created a plan to
reorganize and streamline the organization responsible for the delivery of the
client services. This reorganization resulted in a headcount reduction of 27
people. Accordingly, the Company classified $691 of one-time termination
benefits paid during the fourth quarter as a restructuring charge. At December
31, 2002, there was no remaining liability related to this restructuring
program.
34
Note 11 - Income Taxes
The income tax provision (benefit) from continuing operations consists of the
following:
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------ ------------ -----------------
Current:
Federal .............................. $ 7,493 $ (6,264) $ (12,918)
State ................................ - 64 232
------------ ------------ -----------------
7,493 (6,200) (12,686)
------------ ------------ -----------------
Deferred:
Federal .............................. - 2,745 4,728
State ................................ - - 281
------------ ------------ -----------------
- 2,745 5,009
------------ ------------ -----------------
Total provision (benefit) for income taxes. $ 7,493 $ (3,455) $ (7,677)
============ ============ =================
In addition to the benefit recorded on continuing operations for the nine months
ended December 31, 2000, the Company recorded a tax provision associated with
discontinued operations and the gain on the sale of its discontinued operations
of $12,744.
Significant components of deferred tax assets and liabilities of the Company are
as follows:
DECEMBER 31, DECEMBER 31,
2002 2001
------------ --------------
Current
Deferred tax assets:
Allowance for doubtful accounts ................. $ 47 $ 207
Allowance for officer notes ..................... 637 684
Restructuring liabilities ....................... 43 129
Accrued vacation ................................ 142 138
Accrued liabilities ............................. 270 484
Other ........................................... - 9
Valuation allowance ................................ (1,139) (1,651)
------------ --------------
Net current deferred tax assets ............. - -
Non-current
Deferred tax assets:
Net operating loss carry forwards ............... 8,426 5,318
Goodwill ........................................ 1,115 3,717
Contract obligations ............................ 278 428
Depreciation and amortization ................... 703 1,353
Restructuring liabilities ....................... 301 373
Other ........................................... 1,160 812
Valuation allowance ................................ (11,983) (12,001)
------------ --------------
Net non-current deferred tax assets ......... - -
Net deferred taxes .......................... $ - $ -
============ ==============
During the year ended March 31, 2000, the Company decided to dispose of its IT
staff augmentation business and recorded a deferred tax asset for $7,190 on the
books of its discontinued operations. Upon the ultimate sale of the majority of
these operations during the nine months ended December 31, 2000, the Company
reclassified this deferred tax asset to continuing operations. During the year
ended December 31, 2001, the Company utilized a portion of its net operating
losses in a carryback claim, thus resulting in a current benefit. At December
31, 2002 and 2001, the Company has fully reserved for all net deferred tax
assets generated from continuing operations, including net operating losses, due
to management's uncertainty of their realizability.
35
The Company will continue to assess the adequacy of and need for the valuation
allowance and to the extent it is determined that such allowance is no longer
required, the tax benefit of the remaining net deferred tax assets will be
recognized in the future. The Company had approximately $21,900 of net operating
losses carryforwards for U.S. federal tax purposes that will begin expiring in
the 2021 tax year.
In the first quarter of 2002, Congress approved the Job Creation and Worker
Assistance Act of 2002 (the Act) allowing net operating losses for the Company's
fiscal tax year ending March 31, 2002 to be carried back five years. In
accordance with SFAS No. 109, the effect of this change in tax law was reflected
in the December 31, 2002 financial statements as changes in tax law must be
reflected in the period of enactment.
The Company's effective income tax rate for its continuing operations varied
from the U.S. federal statutory tax rate as follows:
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------ ----------- -----------------
U.S. federal statutory rate .................... (34.0%) (34.0%) (34.0%)
State income taxes, net of federal benefit ..... (3.2%) (6.0%) 0.8%
Effects on deferred assets and liabilities due
to change in state tax.......................... 1.8% - -
Non-deductible items ........................... .4% 2.3% 11.4%
Change in valuation allowance .................. (3.1%) 24.7% 10.4%
Other .......................................... (5.5%) 0.1% (0.3%)
------------ ----------- -----------------
Effective tax rate .......................... (43.6%) (12.9%) (11.7%)
============ =========== =================
NOTE 12 - DISCONTINUED OPERATIONS
Prior to March 31, 2000, the Company entered into a plan to divest its IT staff
augmentation business. The following financial data reflects the net assets at
December 31, 2001, and the summary of operating results for the year ended
December 31, 2002 and 2001, and the nine months ended December 31, 2000.
NET ASSETS OF DISCONTINUED OPERATIONS:
DECEMBER 31,
2001
------------
ASSETS
Accounts receivable ........................................................... $ 151
Prepaid expenses and other .................................................... -
------------
Total assets ............................................................. 151
------------
LIABILITIES
Accounts payable .............................................................. -
Accrued compensation .......................................................... -
Other current liabilities ..................................................... -
------------
Total liabilities ........................................................ -
------------
Net assets of discontinued operations ......................................... $ 151
============
36
SUMMARY OF OPERATING INCOME (LOSS) FROM DISCONTINUED OPERATIONS:
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------ ------------ -----------------
Revenues ................................................................ $ - $ 3,453 $ 69,528
Cost of services ........................................................ - 2,692 51,464
------------ ------------ -----------------
Gross profit ........................................................ - 761 18,064
Restructuring charge .................................................... - - (1,313)
Selling, general and administrative expenses ............................ (461) 951 17,124
------------ ------------ -----------------
Operating income (loss) ............................................. (461) (190) 2,253
Other income ............................................................ 515 - 18
------------ ------------ -----------------
Income (loss) before provision for income taxes ......................... 976 (190) 2,271
Provision (benefit) for income taxes .................................... - - 816
------------ ------------ -----------------
Income (loss) from discontinued operations before reclassification to
gain on sale of discontinued operations ................................ 976 (190) 1,455
Reclassification to gain on sale of discontinued operations ............. (976) 190 (1,455)
------------ ------------ -----------------
Operating income (loss) from discontinued operations .................... $ - $ - $ -
============ ============ =================
On March 31, 2000, the Company committed to a plan to discontinue its IT staff
augmentation segment, which was comprised of operating locations throughout the
United States of America. The Company's initial intent was to sell the entire
segment to one buyer on or about June 30, 2000. Ultimately, the Company sold the
segment in three components and abandoned any unsold operations as more fully
described below.
On June 30, 2000, the Company sold the majority of its IT staff augmentation
business for $116,495 and approximately $10,000 of assumed liabilities. The
Company also took responsibility and has reserves for certain aged receivables
greater than 90 days.
On July 14, 2000, the Company sold its staff augmentation operations in Orlando
for a cash payment of $650 and approximately $385 of assumed liabilities. As of
June 30, 2000, the Company has written down goodwill to zero and accrued the
anticipated loss on sale as a component of the gain on sale of discounted
operations, during the quarter ended June 30, 2000.
On October 31, 2000, the Company sold its international IT staff augmentation
business for a secured promissory note with a face value of $4,459 bearing
interest at the prime rate of interest, plus one percent and payable over five
years. The Company recorded the secured promissory note at fair value ($3,300),
using a market interest rate. Collections under the note agreement will first
reduce principal as the ultimate collectibility is uncertain. The goodwill
related to this operation was written down to zero during the quarter ended June
30, 2000 based on the preliminary estimate of the entity's net realizable value
prior to the sale.
The net gain on the disposal of the IT staff augmentation businesses was $19,541
for the nine months ended December 31, 2000 which includes the proceeds, less
the asset value of the businesses sold and the expense of sale, together with
the operating income from discontinued operations subsequent to the date
management entered into a plan to dispose of the discontinued operations, March
31, 2000.
From March 31, 2000 until the fourth quarter of 2001, the Company held one
remaining component in discontinued operations. The Company could not find a
buyer for this component and therefore closed the business in the fourth quarter
of 2001.
37
NOTE 13 - LEASE COMMITMENTS
Cotelligent leases various office space and certain equipment under
noncancelable lease agreements which expire at various dates. Future minimum
rental payments under such leases at December 31, 2002 for the Company's
continuing operations are as follows.
OPERATING LEASES
----------------
2003 ........................................ $ 2,487
2004 ........................................ 1,858
2005 ........................................ 1,143
2006 ........................................ 612
2007 ........................................ 151
----------------
Total minimum lease payments ................ 6,251
Less: Sublease payments due Cotelligent ..... (1,804)
----------------
Net minimum lease payments .................. $ 4,447
================
Rental expense under these leases for the year ended December 31, 2002 and 2001,
the nine months ended December 31, 2000 was $1,957, $2,601 and $3,061,
respectively. The rental expense in fiscal 2002, 2001 and 2000 is net of
sublease income totaling approximately $1,124, $355 and $67, respectively.
NOTE 14 - EMPLOYEE BENEFIT PLANS
Long-term Incentive Plan
The Company maintains the 1998 Long-Term Incentive Plan (the "1998 Plan") and
the 2000 Long-Term Incentive Plan (the "2000 Plan"). The 1998 Plan was adopted
as a replacement to the Company's 1995 Long-Term Incentive Plan (the "1995
Plan"). No further awards may be granted under the 1995 Plan, although awards
granted prior to the adoption of the 1998 Plan remain outstanding under the 1995
Plan in accordance with their terms. The 2000 Plan is similar to the 1998 Plan,
except that (i) awards under the 2000 Plan are to be made primarily to employees
who are not officers or directors, (ii) the 2000 Plan does not contain a limit
as to the number of shares that may be subject to outstanding awards granted
either individually or in the aggregate (whereas the 1998 Plan contains 750,000
per individual annual limit, and aggregate limit of 18% of total outstanding
shares), and (iii) incentive stock options (ISOs) cannot be granted under the
2000 Plan. Of the non-qualified options granted to date, a majority are
generally exercisable beginning one year from the date of the grant in
cumulative yearly amounts of 25% to 33% of the shares under option and all
expire ten years from the date of the grant. Under the provisions of the plans,
stock-based awards are granted at terms and prices determined by the
Compensation Committee of the Board of Directors as defined in each plan.
A summary of option transactions is described in the table below. All options
described below are non-qualified and were granted with exercise prices no less
than the fair market value of the underlying stock on the date of the grant,
except for options issued and exchanged on January 4, 1999 in connection with
one of the Company's acquisitions. The difference between the grant price and
the market value of these options was recorded as purchase price.
WEIGHTED
OPTION PRICE AVERAGE
NUMBER OF RANGE PER EXERCISE EXPIRATION
SHARES SHARE PRICE DATE
---------- ------------ --------- ----------
Outstanding at March 31, 2000 ........... 1,890,293 $1.54-$29.00 $ 13.99 2010
Granted ............................ 1,459,965 $2.56-$6.69 $ 4.25 2010
Exercised .......................... (900) $1.54 $ 1.54 2009
Cancelled .......................... (1,150,642) $3.44-$29.00 $ 10.32 2006-2010
---------- ------------ --------- ---------
Outstanding December 31, 2000 ........... 2,198,716 $1.54-$29.00 $ 9.37 2006-2010
Granted ............................ 5,097,732 $0.14-$1.13 $ 0.23 2011
Exercised .......................... - - - -
Cancelled .......................... (2,215,994) $0.17-$29.00 $ 9.02 2006-2011
---------- ------------ --------- ---------
Outstanding at December 31, 2001 ........ 5,080,454 $0.14-$27.50 $ 0.35 2006-2011
Granted ............................ 458,900 $0.20-$0.66 $ 0.37 2012
Exercised .......................... - - - -
Cancelled .......................... (1,080,828) $0.17-$27.25 $ 0.87 2008-2012
---------- ------------ --------- ---------
Outstanding at December 31, 2002 ........ 4,458,526 $0.14-$17.81 $ 0.33 2006-2012
On March 9, 2001, the Company notified all option holders under the Long-Term
Incentive Plan of a stock option exchange program. The exchange program was
developed as a way to bring the option exercise prices back in line with the
market price for the Company's Common Stock. Completely voluntary on the part of
the option holder, the program allows the option holder to
38
exchange existing stock option grants for a new option grant of the same number
of options at an exercise price equal to the fair value of the Company's Common
Stock as of the date of grant, September 21, 2001. The vesting schedule was not
interrupted as a result of the exchange program. The number of options cancelled
in the year ended December 31, 2001 include 1,229,714 options surrendered and
cancelled on March 16, 2001 in order to participate in the option exchange
program. These options surrendered had an option price range per share of
$1.04-$23.06. The number of options issued in the year ended December 31, 2001
include 1,169,446 new options granted on September 21, 2001 at $0.25 per share
as part of the option exchange program.
The following table summarizes information concerning outstanding and
exercisable options at December 31, 2002:
WEIGHTED
AVERAGE WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER OF WEIGHTED
RANGE OF OPTIONS CONTRACTUAL EXERCISE OPTIONS AVERAGE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE EXERCISE PRICE
-------------- ----------- ----------- --------- ------------- --------------
$0.14-$0.25 3,727,585 8.74 $ 0.19 1,772,077 $ 0.22
$0.26-$4.81 711,141 8.70 $ 0.90 145,823 $ 1.96
$4.94-$17.81 19,800 6.93 $ 6.27 12,800 $ 6.86
-------------- ----------- ----------- --------- ------------- --------------
$0.14-$17.81 4,458,526 8.73 $ 0.33 1,930,700 $ 0.39
============== =========== =========== ========= ============= ==============
Exercisable options at December 31, 2002, December 31, 2001, and December 31,
2000 were 1,930,700, 1,191,706, and 1,004,512 at exercise prices between $0.14
and $17.81, and weighted average exercise prices of $0.39, $0.50, and $13.72,
respectively.
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," and the Company continues to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25 and FASB Interpretation No. 44 in
accounting for its employee stock option plans. The fair value of these options
was estimated at the date of grant using a Black-Scholes option pricing
("Black-Scholes") model with the following weighted average assumptions for the
years ended December 31, 2002, December 31, 2001 and the nine months ended
December 31, 2000, respectively: (1) risk-free interest rates of 3.49%, 4.67%,
and 4.77%, (2) a dividend yield of 0%, (3) volatility factors of the expected
market price of the Company's common stock of 188%, 193%, and 106%, and (4) a
weighted average expected life of 4.75, 4.76, and 4.61 years. The weighted
average fair values of options granted during the years ended December 31, 2002
and December 31, 2001, the nine months ended December 31, 2000 were $0.42,
$0.23, and $2.74 per share, respectively.
The Black-Scholes model was developed for use in estimating the fair value of
traded options that have no vesting restriction and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions, including the expected volatility of the Company's Common Stock.
For purposes of pro forma disclosure, the estimated fair value of options is
amortized to expense over the options' vesting period. If the Company had
elected to recognize compensation expense for options granted during the years
ended December 31, 2002, December 31, 2001, and the nine months ended December
31, 2000, based on the fair value as described in SFAS No. 123, net loss and
earnings per share would have been changed to the pro forma amounts indicated
below.
Year Ended Year Ended Nine Months Ended
December 31, 2002 December 31, 2001 December 31, 2000
------------------------------ ------------------------------- -----------------------------
Restated Restated Restated
As Pro As Pro As Pro
Reported (1) Forma Reported (1) Forma Reported (1) Forma
---------- ------ ---------- ----------- ------ --------- -----------------------------
Loss from continuing operations .... $(9,699) (345) $(10,044) $(23,339) (572) $(23,911) $(57,708) 32 $ (57,676)
Net loss ........................... (8,723) (345) (9,068) (23,529) (572) (24,101) (38,167) 32 (38,135)
Loss per share:
Basic and diluted -
Loss from continuing
operations .................. (0.73) (0.76) (1.75) (1.79) (4.26) (4.26)
Net loss ........................... (0.66) (0.69) (1.76) (1.80) (2.82) (2.82)
(1) Deduct: Total stock-based employee compensation expense determined under
fair value based methods for all awards, net of related tax benefits.
39
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (the "ESPP") allows eligible
employees to purchase shares of the Company's Common Stock at a price equal to
85% of the lower of the closing market price on the first or last trading day of
the ESPP's quarter. A total of 950,000 shares of Common Stock have been reserved
for issuance under the ESPP. During the years ended December 31, 2002 and 2001,
and the nine months ended December 31, 2000, employees purchased 30,734,
215,127, and 101,719 and for aggregate proceeds to the Company of $2, $199, and
$395, respectively.
On February 1, 2002, the Company terminated the Employee Stock Purchase Plan
(ESPP). Because the number of employees in the Company had decreased
significantly over the prior two fiscal years, the administrative costs of the
plan were out of line with the remaining number of active participants. The
Company terminated the plan as a means to streamline its operating expenses
going forward.
401(k) Plan The Company sponsors the Cotelligent, Inc. 401(k) Retirement Saving
Plan (the "401(k) Plan") for the benefit of all employees upon date of hire. The
401(k) Plan is funded by employee payroll deductions and a matching program
whereby the Company contributes 25% of an employee's first 4% of salary deferral
to the 401(k) Plan. Matching contributions vest over a four-year period. During
the year ended December 31, 2002, the Company used forfeited matching funds
available in the 401K trust account to fund current year matching obligations.
The Company expensed $245 and $345, respectively, in connection with the
matching program during the year ended December 31, 2001 and the nine months
ended December 31, 2000.
Leveraged Stock Purchase Plan
In 1999, the stockholders approved the Cotelligent, Inc. 1999 Leveraged Stock
Purchase Plan (the "LSPP") which authorizes the purchase of shares of Common
Stock by eligible employees who are selected by the Compensation Committee of
the Board of Directors (the "Committee") to participate in the LSPP on terms and
conditions determined by the Committee.
At December 31, 2002, 1,636,842 shares are outstanding under the LSPP resulting
in notes receivable from stockholders for $5,940 which is included as a
reduction of stockholders' equity. The notes receivable (1) include varying
rates of interest; (2) are secured by the pledge of Cotelligent stock issued;
(3) are full recourse as to the employee, except that in the case of death,
disability, termination by the Company without cause or a change of control of
the Company, where recourse against the employees is limited to the pledged
stock; and (4) have a term of five years from date of issuance, provided that if
the stock is sold, the loan shall be prepaid, and if the stock is not sold, the
loan may not be prepaid. The stock issued under the LSPP is restricted from sale
in the open market for a period of two years from the date of issuance,
provided, however, that in the case of death, disability, termination by the
Company without cause or change of control of the Company, the stock may be sold
and the proceeds used to repay the loan.
NOTE 15 - BUSINESS AND CREDIT CONCENTRATION
For the year ended December 31, 2002, two clients individually accounted for
more than 10% of the Company's revenues. In addition, four clients individually
accounted for more than 10% of accounts receivable at December 31, 2002.
For the year ended December 31, 2001, and the nine months ended December 31,
2000, no single client accounted for more than 10% of the Company's revenues,
nor accounts receivable at December 31, 2001.
NOTE 16 - STOCKHOLDERS' EQUITY
Preferred Stock
The Company has authorized 500,000 shares of one class of $0.01 par value
Preferred Stock. The Board of Directors has authority, without further vote or
action by stockholders, to issue the shares, fix the number of shares and change
the number of shares constituting any series, and to provide for or change the
voting powers, designations, preferences and relative, participating, optional
or other special rights, qualifications, limitations or restrictions thereof,
including dividend rights (and whether dividends are cumulative), dividend
rates, terms of redemption (including sinking fund provisions), a redemption
price or prices, conversion rights and liquidation preferences of the shares
constituting any class or series of the Preferred Stock. No Preferred Stock was
outstanding at December 31, 2002 or 2001. The Company has no current plans to
issue any shares of Preferred Stock.
Common Stock
The Company has authorized 100,000,000 shares of one class of $0.01 par value
Common Stock. The holders of Common Stock are entitled to one vote for each
share on all matters voted upon by stockholders, including the election of the
directors. At December 31, 2002 and 2001, there were 15,390,954 and 15,514,757
shares of Common Stock outstanding, respectively. In May 1998, the Company
registered 4 million shares of its Common Stock to be used in connection with
merger and acquisition activities. The Company repurchased 644,600 shares of its
Common Stock during the year ended December 31, 2001.
40
Anti-takeover Provisions
The Company has a stockholder rights plan in effect (the "Rights Plan"). Under
the terms of the Rights Plan, the holders of the Common Stock received one
preferred share purchase right (each, a "Right") as a dividend for each share of
Common Stock held as of the close of business on September 24, 1997. Each Right
entitles the holder to buy 1/10,000 of a share of Series A Junior Preferred
Stock of the Company at an exercise price of $90.00. Further, each Right gives
the holder the right to buy Common Stock of the Company having twice the value
of the exercise price of the Rights if a person or group acquires beneficial
ownership of 20% or more of the Common Stock or commences a tender or exchange
offer that would result in such a person or group owning 20% or more of the
Common Stock. In addition, the Board of Directors of the Company is empowered to
issue up to 500,000 shares of Preferred Stock, and to determine the price,
rights, preferences and privileges of such shares, without any further
stockholder action. The existence of the Rights Plan and this "blank check"
preferred stock may have the effect of delaying, discouraging, inhibiting,
preventing or rendering more difficult an attempt to obtain control of the
Company by means of a tender offer, merger, proxy contest or otherwise. In
addition, this "blank check" preferred stock, or any issuance thereof, may have
an adverse effect on the market price of the Common Stock. The Company's
Certificate of Incorporation provides for a "staggered" Board of Directors,
which may also have the effect of inhibiting a change of control of the Company
and may have an adverse effect on the market price of the Common Stock.
NOTE 17 - EARNINGS PER SHARE
Earnings per share is as follows:
For the Year Ended
December 31, 2002
-----------------------------------------
Per Share
Income (Loss) Shares Amount
------------- ------------ ----------
Restated Restated
Basic/diluted earnings (loss) per share-
Loss from continuing operations $ (9,699) 13,201,532 $ (0.73)
Income from discontinued operations 976 13,201,532 0.07
------------- ----------
Net loss applicable to common shareholders $ (8,723) 13,201,532 $ (0.66)
============= ==========
For the Year Ended
December 31, 2001
-----------------------------------------
Per Share
Income (Loss) Shares Amount
------------- ------------ ----------
Restated Restated
Basic/diluted earnings (loss) per share-
Loss from continuing operations $ (23,339) 13,379,320 $ (1.75)
Loss from discontinued operations (190) 13,379,320 (0.01)
------------- ----------
Net loss applicable to common shareholders $ (23,529) 13,379,320 $ (1.76)
============= ==========
For the Nine Months Ended
December 31, 2000
-----------------------------------------
Per Share
Income (Loss) Shares Amount
------------- ------------ ----------
Restated Restated
Basic/diluted earnings (loss) per share-
Loss from continuing operations $ (57,708) 13,537,927 $ (4.26)
Income from discontinued operations 19,541 13,537,927 1.44
------------- ----------
Net loss applicable to common shareholders $ (38,167) 13,537,927 $ (2.82)
============= ==========
Options to purchase common shares of 2,205,399, 5,080,454, and 2,198,716 were
excluded from the computation of diluted earnings per share for the years ended
December 31, 2002 and 2001, and the nine months ended December 31, 2000,
respectively, due to the loss position of the Company's continuing operations.
Additionally, 1,677,979, 1,696,226 and 1,693,042 LSPP shares, collateralized by
LSPP notes, were excluded from diluted EPS for the years ended December 31, 2002
and 2001, and the nine months ended December 31, 2000, respectively because they
were antidilutive.
41
NOTE 18 - COMMITMENTS AND CONTINGENCIES
Employment Agreements
The executive officers have entered into employment agreements with the Company
which contain provisions for compensation upon termination without cause or
changes in control. Pursuant to such employment agreements, each such officer is
eligible to earn bonus compensation payable out of a bonus pool determined by
the Board of Directors or its Compensation Committee. Bonuses will be determined
by measuring, among other objective and subjective measures, such officer's
performance, the performance of the local operation for which such officer has
primary responsibility and the Company's performance against targets.
Legal Matters
The Company is involved in various legal matters in the normal course of
business. In the opinion of management, these matters are not anticipated to
have a material adverse effect on the financial position or results of
operations or cash flows of the Company.
NOTE 19 - SEGMENT INFORMATION
During the year ended March 31, 2000, the Company streamlined its operations
into two operating segments, Professional Services, also known as the IT staff
augmentation business, and Technology Solutions. The Company subsequently
discontinued the IT staff augmentation business. Accordingly, assets,
liabilities, results of operations and cash flows have been segregated and
reported as discontinued operations for all periods presented and previously
reported results have been restated (see Note 11). Within the Technology
Solutions segment, the Company continues to provide licensed software,
consulting services including custom application software development and
outsourcing solutions, solutions in conjunction with national partnerships with
leading enterprise application software companies, network design, intranet and
internet application design and development, hosting and support service, and IT
Education. Management has considered the requirements of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", and has
determined that the Company has one continuing operating segment; therefore, no
additional disclosure has been provided.
NOTE 20 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The information in this footnote has been revised from the information
previously reported to reflect the Company's restatement of its EPS presentation
for the years ended December 31, 2002 and 2001, and the nine months ended
December 31, 2000, as more fully described in Note 2. The previously reported
information has been included in the table below in order to reconcile our
previously filed quarterly financial data to the restated quarterly financial
data.
For the Year Ended December 31, 2002
----------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------ ------------ ------------
Restated Restated Restated Restated
Revenues ................................................. $ 5,873 $ 4,302 $ 3,824 $ 2,957
Gross profit ............................................. 2,105 1,627 1,649 1,068
Income (loss) from continuing operations ................. 4,544 (3,952) (4,471) (5,820)
Income (loss) from discontinued operations ............... - 82 379 515
Net income (loss) ........................................ 4,544 (3,870) (4,092) (5,305)
Earnings per share:
Basic -
Income (loss) from continuing operations ............. $ 0.34 $ (0.30) $ (0.34) $ (0.44)
Income (loss) from discontinued operations ........... - 0.01 0.03 0.04
------------- ------------- ------------- -------------
Net income (loss) .................................. $ 0.34 $ (0.29) $ (0.31) $ (0.40)
============= ============= ============= =============
Diluted -
Income (loss) from continuing operations ............. $ 0.30 $ (0.30) $ (0.34) $ (0.44)
Income (loss) from discontinued operations ........... - 0.01 0.03 0.04
------------- ------------- ------------- -------------
Net income (loss) .................................. $ 0.30 $ (0.29) $ (0.31) $ (0.40)
============= ============= ============= =============
Weighted average shares:
Basic ................................................ 13,198,804 13,209,212 13,209,512 13,188,860
============= ============= ============= =============
Diluted .............................................. 15,233,472 13,209,212 13,209,512 13,188,860
============= ============= ============= =============
As Previously As Previously As Previously As Previously
Reported Reported Reported Reported
------------- ------------- ------------- -------------
Earnings per share:
Basic -
Income (loss) from continuing operations ............. $ 0.31 $ (0.26) $ (0.30) $ (0.39)
Income (loss) from discontinued operations ........... - - 0.03 0.03
------------- ------------- ------------- -------------
Net income (loss) .................................. $ 0.31 $ (0.26) $ (0.27) $ (0.36)
============= ============= ============= =============
Diluted -
Income (loss) from continuing operations ............. $ 0.27 $ (0.26) $ (0.30) $ (0.39)
Income (loss) from discontinued operations ........... - - 0.03 0.03
------------- ------------- ------------- -------------
Net income (loss) .................................. $ 0.27 $ (0.26) $ (0.27) $ (0.36)
============= ============= ============= =============
Weighted average shares:
Basic ................................................ 14,890,646 14,901,054 14,901,354 14,825,702
============= ============= ============= =============
Diluted .............................................. 16,925,314 14,901,054 14,901,354 14,825,702
============= ============= ============= =============
For the Year Ended December 31, 2001
----------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------- ------------- -------------
Restated Restated Restated Restated
Revenues ................................................. $ 16,596 $ 12,460 $ 10,444 $ 7,343
Gross profit ............................................. 4,740 3,017 3,152 2,562
Income (loss) from continuing operations ................. (1,451) (6,776) (9,739) (5,373)
Income (loss) from discontinued operations ............... (120) 1 (154) 83
Net income (loss) ........................................ (1,571) (6,775) (9,893) (5,290)
Earnings per share:
Basic -
Income (loss) from continuing operations ............. $ (0.11) $ (0.50) $ (0.74) $ (0.41)
Income (loss) from discontinued operations ........... (0.01) - (0.01) .01
------------- ------------- ------------- -------------
Net income (loss) .................................. $ (0.12) $ (0.50) $ (0.75) $ (0.40)
============= ============= ============= =============
Diluted -
Income (loss) from continuing operations ............. $ (0.11) $ (0.50) $ (0.74) $ (0.41)
Income (loss) from discontinued operations (0.01) - (0.01) 0.01
------------- ------------- ------------- -------------
Net income (loss) .................................. $ (0.12) $ (0.50) $ (0.75) $ (0.40)
============= ============= ============= =============
Weighted average shares:
Basic ................................................ 13,639,996 13,581,874 13,132,468 13,160,484
============= ============= ============= =============
Diluted .............................................. 13,639,996 13,581,874 13,132,468 13,160,484
============= ============= ============= =============
As Previously As Previously As Previously As Previously
Reported Reported Reported Reported
------------- ------------- ------------- -------------
Earnings per share:
Basic -
Income (loss) from continuing operations ............. $ (0.09) $ (0.44) $ (0.66) $ (0.36)
Income (loss) from discontinued operations ........... (0.01) - (0.01) 0.01
------------- ------------- ------------- -------------
Net income (loss) .................................. $ (0.10) $ (0.44) $ (0.67) $ (0.35)
============= ============= ============= =============
Diluted -
Income (loss) from continuing operations ............. $ (0.09) $ (0.44) $ (0.66) $ (0.36)
Income (loss) from discontinued operations ........... (0.01) - (0.01) 0.01
------------- ------------- ------------- -------------
Net income (loss) .................................. $ (0.10) $ (0.44) $ (0.67) $ (0.35)
============= ============= ============= =============
Weighted average shares:
Basic ................................................ 15,349,060 15,273,716 14,824,310 14,852,326
============= ============= ============= =============
Diluted .............................................. 15,349,060 15,273,716 14,824,310 14,852,326
============= ============= ============= =============
42
NOTE 21 - RELATED PARTY TRANSACTIONS
Notes Receivable From Officers and Stockholder
The Company has notes receivable due from certain Officers and a former Officer
of the Company. At December 31, 2000, the notes included $683 due from the Chief
Executive Officer to cover margin calls, $516 due from the Chief Operating
Officer for relocation assistance ($83) and to cover margin calls ($433), and
$504 due from a former Chief Operating Officer to cover margin calls. The notes
are unsecured except for the notes due from the former Officer of the Company,
which are secured by the principal residence of that individual. The notes,
although due on demand, were issued with original due dates in 2000 and 2001.
The notes due from the Chief Executive Officer and the Chief Operating Officer
were extended by a vote of the Compensation Committee of the Board of Directors
on October 29, 2001 for three years to October 29, 2004. There is also
acceleration on payment of the Chief Executive Officer's and Chief Operating
Officer's notes should the Company's stock reach certain sustained target
values.
During the nine months ended December 31, 2000, the Company provided a valuation
allowance against all the notes receivable related to the margin calls because
the Company's market price for its Common Stock has remained beneath levels that
would result in repayment for an extended period of time. In addition, a
valuation allowance was provided against a relocation loan upon extension of the
due date of the loan.
43
Investment in Alliance Partner
During the past three fiscal periods, the Company engaged White Horse
Interactive, to provide design services in connection with the Company's website
and paid White Horse Interactive $96, $182 and $204 in 2002, 2001 and 2000,
respectively.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure None.
44
PART III
Item 10 - Directors and Executive Officers of the Registrant.
The number of directors on the Board of Directors is currently fixed at three.
Pursuant to the Company's Certificate of Incorporation and By-laws, the Board of
Directors is divided into three classes, Class I, Class II and Class III,
serving staggered three-year terms. One class of directors is elected at each
annual meeting of stockholders to serve for the following three years. Currently
there is one Class I director whose term expires in 2005, one Class III director
whose term expires in 2004 and one Class II director whose term will expire at
the Annual Meeting.
Class I Director
Debra J. Richardson is 48 years old, and joined the Company as a director on
August 8, 2001. Dr. Richardson joined the faculty at UC Irvine in 1987, where
she researches formal quality analysis and testing methods, has developed
leading edge tools, and worked with several companies in adopting technology to
improve the quality of critical software systems. She is currently director of
the Microelectronics Innovation and Computer Research Opportunities (MICRO), one
of the University of California's Industry-Cooperative Research Programs, and is
a founding member of the UC Institute for Software Research. Dr. Richardson
holds the Ted and Janice Smith Family Foundation Endowed Chair. Dr. Richardson
earned a Doctorate of Philosophy and a Master of Science in Computer and
Information Science from the University of Massachusetts, Amherst, and received
a Bachelor of Arts degree in mathematics from Revelle College of the University
of California, San Diego.
Class II Director
James R. Lavelle is 52 years old and is the founder, Chairman of the Board and
Chief Executive Officer of the Company. Mr. Lavelle has served as Chief
Executive Officer since he founded the Company in 1993. From inception of the
Company until August 1995, Mr. Lavelle was also Chairman of the Board of the
Company, a position that he reassumed in April 1996. From 1985 to 1993, he was a
business consultant specializing in strategic marketing and organization
development. From 1983 to 1985, Mr. Lavelle was Senior Manager and Director of
Management Consulting Services for the San Francisco office of KPMG Main
Hurdman, an international accounting firm. Prior to that, he was Manager of
Management Consulting Services in the San Francisco office of Price Waterhouse
LLP, an international accounting firm. Mr. Lavelle has a bachelor's degree from
University of California at Santa Barbara and a Master of Business
Administration degree from Santa Clara University.
Class III Director
Anthony M. Frank is 71 years old and is a director of the Company. He joined the
Company in that capacity in March 1993. In September 1994, Mr. Frank became
co-founding General Partner and Chairman of Belvedere Capital Partners, the
general partner of the California Community Financial Institutions Fund, the
primary purpose of which is investing in California community banks. From 1992
to 1994, Mr. Frank was an independent financial consultant and venture
capitalist. From March 1988 to March 1992, Mr. Frank served as the Postmaster
General of the United States. From 1971 until 1988, he served as Chairman and
Chief Executive Officer of First Nationwide Bank. Mr. Frank is a graduate of
Dartmouth College and was an overseer of the Tuck School of Business. He is also
a director of several companies, including The Charles Schwab Corporation,
Crescent Real Estate Equities Ltd., General American Investors, Temple Inland
Corporation and Bedford Properties Investors.
Other Executive Officers
Daniel E. Jackson is 42 years old and is President and Chief Operating Officer
of the Company. Mr. Jackson served as a director of the Company from September
1999 until May 2002. Mr. Jackson was promoted to the position of Chief Operating
Officer and President in July 2000. Mr. Jackson served as Executive Vice
President, Chief Financial Officer and Treasurer from June 1999 until July 2000.
From September 1995 until June 1999, Mr. Jackson served in the capacities of
Executive Vice President, Corporate Development and General Counsel. Mr. Jackson
served as Secretary from September 1996 until September 1997 and as Chief
Financial Officer from November 1996 until January 1998. From 1994 to 1995, Mr.
Jackson served as Vice President and General Counsel of an affiliate of Notre
Venture Capital, Ltd., a partnership specializing in industry consolidation
transactions. Prior to that, he was Corporate Counsel and Secretary of Sanifill,
Inc., an environmental services company, from its founding in 1990 through 1994.
From 1986 until 1990, Mr. Jackson was an associate at Morgan, Lewis & Bockius
LLP in New York, where he practiced law in
the areas of securities and mergers and acquisitions. Mr. Jackson received a
Bachelor of Science degree in business administration from The Ohio State
University and a Juris Doctor degree from the University of Pennsylvania.
Curtis J. Parker is 48 years old and is Executive Vice President, Chief
Financial Officer, Treasurer & Assistant Secretary of the Company. From November
1996 until December 2000, Mr. Parker served as Vice President and Chief
Accounting Officer. From January 1996 until March 1996, he served as a
consultant to the Company and was appointed Corporate Controller in March 1996.
From 1988 through 1995, Mr. Parker was employed by Burns Philp Food Inc., a
manufacturer of food products, where he rose to the position of Vice President -
Finance for the Industrial Products Division. Mr. Parker has a Bachelor of
Commerce degree from the University of British Columbia and is a Certified
Public Accountant licensed in Washington State.
Compliance With Section 16(a) of The Exchange Act
Section 16(a) of the Exchange Act requires the Company's officers and directors,
and persons who own more than 10% of a registered class of the Company's equity
securities, to file initial reports of ownership and reports of changes in
ownership with the Securities and Exchange Commission (the "SEC"). Such persons
are required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on its review of the copies of such forms received by the Company
with respect to the fiscal year ended December 31, 2002, James R. Lavelle and
Daniel E. Jackson each filed a late Form 5 reporting a single transaction under
a Company stock option exchange program. Curtis J. Parker also filed late a Form
5 reporting six transactions: one related to the grant of common stock, four
related to the grant of stock options and one related to the exchange of stock
options. Edward E. Faber, formerly a director of the Company, filed late a Form
5 reporting three transactions: two related to the grant of stock options and
one related to the exchange of stock options. Anthony M. Frank filed late a Form
5 reporting four transactions: three related to the grant of stock options and
one related to the exchange of stock options. Debra J. Richardson also filed
late a Form 3 and a Form 5 reporting two transactions related to the grant of
stock options. Except for these late filings, to the best of the Company's
knowledge, all other Section 16(a) filing requirements have been satisfied.
Item 11 - Executive Compensation.
The following table sets forth certain information regarding the compensation
earned by or awarded to the Chief Executive Officer and remaining executive
officers of the Company for the fiscal year ended December 31, 2002, the fiscal
year ended December 31, 2001 and the twelve month period ended December 31,
2000.
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
Fiscal Options/
Name and Principal Position Year Salary($) (1) Bonus($) Other($) SARs(#)
------------------------------------------------------------------------------------------------------------------------------------
James R. Lavelle...................... 2002 353,207 0 1,700 (2) 0
Chairman and Chief Executive Officer 2001 379,166 0 1,700 (2) 400,000
2000 450,000 0 1,700 (2) 0
18,000 (3)
------------------------------------------------------------------------------------------------------------------------------------
Daniel E. Jackson..................... 2002 298,405 0 1,700 (2) 0
President and Chief Operating Officer 5,470 (4)
2001 320,120 0 1,700 (2) 250,000
5,470 (4)
2000 375,000 0 1,700 (2) 0
18,000 (3)
5,470 (4)
------------------------------------------------------------------------------------------------------------------------------------
Curtis J. Parker...................... 2002 142,489 0 1,425 (2) 0
Executive Vice President, Chief 2001 166,500 0 1,665 (2) 275,000
Financial Officer, Treasurer and 2000 175,000 100,000 1,600 (2) 25,000
Assistant Secretary
------------------------------------------------------------------------------------------------------------------------------------
(1) Base salary earned.
(2) Represents matching contributions by the Company under the Company's 401(k)
Plan.
(3) Represents payments made as an automobile allowance.
(4) Imputed interest on below market loans. See Item 13, "Certain Relationships
and Related Transactions."
Stock Option Grants Table
The following table sets forth, as to the executive officers named in the
Summary Compensation Table, information related to the grant of stock options
pursuant to the Company's 1998 Long-Term Incentive Plan during the fiscal year
ended December 31, 2002.
OPTIONS GRANTED IN THE FISCAL YEAR ENDED DECEMBER 31, 2002
Individual Grants
----------------------------------------------------------------------------------------------
Number of Percentage of Total Exercise or Base Potential Realizable Value
Securities Options Granted to Price Per Share At Assumed Annual Rates of
Underlying Employees in the ($/Share) Stock Price Appreciation For
Name Options Granted fiscal year ended Option Term ($)
December 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
5% 10%
-----------------------------
James R. Lavelle 0 0% 0 0 0
Daniel E. Jackson 0 0% 0 0 0
Curtis J. Parker 0 0% 0 0 0
Stock Option Exercises and Year End Values Table
The following table shows, as to the executive officers named in the Summary
Compensation Table, information with respect to the unexercised options to
purchase Common Stock granted under the 1995 and 1998 Long-Term Incentive Plans
and held as of December 31, 2002.
VALUE OF OPTIONS AT DECEMBER 31, 2002
Number of Number of Securities Underlying
Shares Value Unexercised Options Held Value of Unexercised
Acquired Realized at December 31, 2002 In-the-Money Options
On Exercise ($) at December 31, 2002 ($) (1)
----------------------------------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
-------------------------------- ------------------------------------------------------------------------
James R. Lavelle 0 0 400,000 0 48,000 0
Daniel E. Jackson 0 0 250,000 0 30,000 0
Curtis J. Parker 0 0 129,375 170,625 15,700 30,000
(1) Options are "in-the-money" if the closing market price of the Company's
Common Stock exceeds the exercise price of the options. The value of the
unexercised options represents the difference between the exercise price of
such options and the closing market price ($0.37) of the Company's Common
Stock on the OTC Bulletin Board on December 31, 2002.
Equity Compensation
The following table sets forth, as of December 31, 2002, outstanding awards and
shares remaining available for future issuance under the Company's compensation
plans under which equity securities are authorized for issuance (excluding
401(k) plans and similar tax-qualified plans).
(a) (b) (c)
Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance under
Plan Category warrants and rights warrants and rights equity compensation plans
------------- ------------------- ------------------- -------------------------
Equity compensation plans approved by
security holders....... 1,201,028 $0.37 1,816,473 (1)
Equity compensation plans not
approved by security holders (2)... 3,257,498 $0.32 not determinable
---------
Total................................ 4,458,526 $0.33 not determinable
=========
-------------------------
(1) Includes 1,453,315 shares of Company Common Stock remaining available for
future issuance under the Company's 1998 Long-Term Incentive Plan. Under
the 1998 Long-Term Incentive Plan, an aggregate of 18% of the then
outstanding shares of the Company's Common Stock are available for awards
under such plan. The number of securities remaining available for future
issuance also includes 363,158 shares of Company Common Stock remaining
available for future issuance under the Company's 1999 Leveraged Stock
Purchase Plan.
(2) The 2000 Long-Term Incentive Plan (the "2000 Plan") was adopted by the
Company's Board of Directors on August 11, 2000, but was not approved by
stockholders. Awards under the 2000 Plan may be granted by the Compensation
Committee of the Board of Directors (or such other committee designated by
the Board of Directors to administer the 2000 Plan) and may include: (i)
non-qualified options to purchase shares of Common Stock; (ii) stock
appreciation rights ("SARs"), whether in conjunction with the grant of
stock options or independent of such grant, or stock appreciation rights
that are only exercisable in the event of a change in control of the
Company or upon other events; (iii) restricted stock, consisting of shares
that are subject to forfeiture based on the failure to satisfy
employment-related restrictions; (iv) deferred stock, representing the
right to receive shares of stock in the future; (v) bonus stock and awards
in lieu of cash compensation; (vi) dividend equivalents, consisting of a
right to receive cash, other awards, or other property equal in value to
dividends paid with respect to a specified number of shares of Common
Stock, or other periodic payments; or (vii) other awards not otherwise
provided for, the value of which are based in whole or in part upon the
value of the Common Stock. Unless otherwise determined by the Compensation
Committee, all outstanding awards under the 2000 Plan will generally become
fully exercisable or vested upon a "change in control" of the Company. The
Compensation Committee has the discretion to establish all of the terms and
conditions of awards under the 2000 Plan and to interpret the terms of the
2000 Plan. There is no limit on the maximum number of shares of Common
Stock that may be awarded under the 2000 Plan. The 2000 Plan may be
amended, altered, suspended, discontinued, or terminated by the Board of
Directors at any time.
Item 12 - Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth as of May 13, 2003 information regarding the
beneficial ownership of the Common Stock of the Company by (i) each person known
to beneficially own more than 5% of the outstanding shares of Common Stock, (ii)
each of the Company's directors, (iii) each named executive officer and each
officer named in the Summary Compensation Table and (iv) all executive officers
and directors as a group. As of May 13, 2003, there were 15,068,855 shares of
Common Stock outstanding. All persons listed have an address c/o the Company's
principal executive offices and have sole voting and investment power with
respect to their shares unless otherwise indicated.
Shares Beneficially Owned
------------------------------
Name Number Percent
---- ------------ -------------
James R. Lavelle (1) 1,305,308 8.4%
Daniel E. Jackson (2) 1,099,473 7.2%
Anthony M. Frank (3) 182,156 1.2%
Curtis J. Parker (4) 142,242 *
Debra J. Richardson (5) 10,000 *
Skiritai Capital LLC (6) 807,000 5.4%
All executive officers and directors as a group (5 persons) (7) 2,739,179 17.1%
-----------------------
* Less than 1%
(1) Includes 400,000 shares issuable upon exercise of options exercisable
within 60 days of May 13, 2003.
(2) Includes 250,000 shares issuable upon exercise of options exercisable
within 60 days of May 13, 2003.
(3) Includes 110,000 shares issuable upon exercise of options exercisable
within 60 days of May 13, 2003.
(4) Includes 136,250 shares issuable upon exercise of options exercisable
within 60 days of May 13, 2003.
(5) Includes 10,000 shares issuable upon exercise of options exercisable within
60 days of May 13, 2003.
(6) The address of the stockholder is 655 Montgomery Street, Suite 1438, San
Francisco, California, 94111. Data obtained from the stockholder's Schedule
13D filed with the Securities and Exchange Commission on June 24, 2002.
(7) Includes 906,250 shares issuable upon exercise of options exercisable
within 60 days of May 13, 2003.
Item 13 - Certain Relationships and Related Transactions.
The following is information with respect to certain relationships and related
transactions between directors and officers, on the one hand, and the Company,
on the other hand.
Employment Agreements; Covenants-Not-To-Compete
Mr. James R. Lavelle, Cotelligent's Chairman and Chief Executive Officer, is a
party to a three-year employment agreement effective January 5, 2000 which,
unless terminated or not renewed by him, continues thereafter on a year-to-year
basis on the same terms and conditions. Mr. Lavelle's employment agreement
provides that, in the event of termination of employment by the Company without
cause, he shall be entitled to receive from the Company an amount equal to (i)
three times the minimum base salary, as defined in the employment agreement,
plus (ii) three times his most recent annual bonus (not including any payments
made under Cotelligent's Long-Range Bonus Incentive Plan), without regard to
whether he obtains subsequent employment. His employment agreement provides
that, in the event of a change in control of the Company where he has not
received at least five days' notice of such change in control, he will be deemed
to have been terminated without cause and shall be entitled to compensation as
described in the preceding sentence. Additionally, in such event he will not be
bound by any non-compete terms in his employment agreement, as discussed below.
If given at least five days notice of such change in control, he may elect to
terminate his employment agreement and collect the respective compensation
provided above.
Mr. Daniel E. Jackson, Cotelligent's President and Chief Operating Officer, is a
party to a two-year employment agreement effective January 25, 2000 which,
unless terminated or not renewed by him, continues thereafter on a year-to-year
basis on the same terms and conditions. Mr. Jackson's employment agreement
provides that, in the event of termination of employment by the Company without
cause, he shall be entitled to receive from the Company an amount equal to (i)
two times the minimum base salary, as defined in the employment agreement, plus
(ii) two times his most recent annual bonus (not including any payments made
under Cotelligent's Long-Range Bonus Incentive Plan), without regard to whether
he obtains subsequent employment. On October 2, 2002, the Compensation Committee
approved an increase in the amount of severance Mr. Jackson would be entitled to
receive under his employment agreement in the event of termination of employment
by the Company without cause to an amount equal to (i) three times the minimum
base salary, as defined in the employment agreement, plus (ii) three times his
most recent annual bonus (not including any payments made under Cotelligent's
Long-Range Bonus Incentive Plan), without regard to whether he obtains
subsequent employment. His employment agreement provides that, in the event of a
change in control of the Company where he has not received at least five days'
notice of such change in control, he will be deemed to have been terminated
without cause and shall be entitled to compensation as described in the
preceding sentence. Additionally, in such event he will not be bound by any
non-compete terms in his employment agreement, as discussed below. If given at
least five days notice of such change in control, he may elect to terminate his
employment agreement and collect the respective compensation provided above.
In the event of a change in control, Mr. Lavelle and Mr. Jackson are entitled to
reimbursement for any excise taxes the employee incurs under Section 4999 of the
Internal Revenue Code, as well as any interest or penalties related to the
excise tax and any entitlements outside of the employment agreement that are
described in Section 280G(b)(2)(A)(i) of the Internal Revenue Code. In the
employment agreements of both, a "Change in Control" is deemed to occur if: (1)
any person or entity, other than the Company, a corporation owned directly or
indirectly by the stockholders of the Company in substantially the same
proportions as their ownership of the Common Stock of the Company, or an
employee benefit plan of Company or a subsidiary of Company, acquires directly
or indirectly Beneficial Ownership (as defined in Rule 13d-3 of the Exchange
Act) of any voting security of the Company and immediately after such
acquisition such person or entity is, directly or indirectly, the Beneficial
Owner of voting securities representing 30% or more of the total voting power of
all of the then-outstanding voting securities of the Company; (2) a change in
the composition of the individuals on the Board of Directors as a result of
which fewer than one-half of the incumbent directors are directors who either
(a) had been directors of Company on the date 24 months prior to the date of the
event that constitutes a change in control (the "original directors") or (b)
were elected, or nominated with the affirmative votes of at least a majority of
the aggregate of the original directors who were still in office at the time of
the election or nomination and the directors whose election or nomination was
previously so approved; (3) the consummation of a merger or consolidation of
Company with or into another entity or any other corporate reorganization, if
more than 50% of the combined voting power of the continuing or surviving
entity's securities outstanding immediately after such merger, consolidation or
other reorganization is owned by persons who were not stockholders of Company
immediately prior to such merger, consolidation or other reorganization; or (4)
the sale, transfer or other disposition of all or substantially all of the
Company's assets.
The employment agreements of Mr. Lavelle and Mr. Jackson contain a
covenant-not-to-compete with the Company for a period of two years immediately
following the termination of employment; or, in the case of a termination
without cause, for a period of one year following the termination of his
employment; or, in the case of a Change in Control in which he is not given at
least five days' notice of such Change in Control, the covenant not-to-compete
does not apply for any period of time. 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 Mr. Lavelle or
Mr. Jackson is entitled, as the case may be, shall nonetheless be paid to him.
Mr. Lavelle's employment agreement calls for a minimum base salary of $450,000.
With Mr. Lavelle's consent, annual base salary paid for the fiscal year ended
December 31, 2002 was $353,207. For the fiscal year ended December 31, 2002, he
was eligible for, but did not receive, a bonus based upon achieving certain
performance objectives and upon the operating results of the Company, which
objectives and results had been established by the Compensation Committee.
Pursuant to the Long-Range Bonus Incentive Plan, Mr. Lavelle is eligible for
bonuses in fiscal years 2003 and 2006 based upon the operating results of the
Company.
Mr. Jackson's employment agreement calls for a minimum base salary of $375,000.
With Mr. Jackson's consent, annual base salary paid for the fiscal year ended
December 31, 2002 was $298,405. For the fiscal year ended December 31, 2002, he
was eligible for, but did not receive, a bonus based upon achieving certain
performance objectives and upon the operating results of the Company, which
objectives and results had been established by the Compensation Committee.
Pursuant to the Long-Range Bonus Incentive Plan, Mr. Jackson is eligible for
bonuses in fiscal years 2003 and 2006 based upon the operating results of the
Company.
Mr. Curtis J. Parker, as Cotelligent's Executive Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary, is a party to a one-year employment
agreement effective December 19, 2000 which was extended for a two-year period
as of December 19, 2001 and then, unless terminated by either party or not
renewed by him, continues thereafter on a year-to-year basis, in each case on
the same terms and conditions. Mr. Parker's employment agreement provides that,
in the event of termination of employment by the Company without cause, he shall
be entitled to receive from the Company an amount equal to (i) one times the
Market Based Salary, as defined in the employment agreement, plus (ii) one times
his most recent annual bonus, without regard to whether he obtains subsequent
employment. His employment agreement provides that, in the event of a Change in
Control of the Company where he has not received at least five days' notice of
such change in control, he will be deemed to have been terminated without cause
and shall be entitled to compensation as described in the preceding sentence.
Additionally, in such event he will not be bound by any non-compete terms in his
employment agreement, as discussed below. If given at least five days' notice of
such change in control, he may elect to terminate his employment agreement and
collect the respective compensation provided above.
The employment agreement of Mr. Parker contains a covenant-not-to-compete with
the Company for a period of one year immediately following the termination of
employment; or, in the case of a termination without cause, for a period of six
months following the termination of his employment; or, in the case of a Change
in Control in which the he is not given at least five days' notice of such
Change in Control, the covenant not-to-compete does not apply for any period of
time. 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 Mr. Parker is entitled shall nonetheless be
paid to him.
Mr. Parker's employment agreement provides for a minimum base salary of $180,000
per year. With Mr. Parker's consent, annual base salary paid for the fiscal year
ended December 31, 2002 was $142,489. For the fiscal year ended December 31,
2002, he was eligible for, but did not receive, a discretionary bonus of up to
fifty percent (50%) of the amount of his base salary provided by the
Compensation Committee.
Certain Transactions
From May 1996 through early July 1996, the Company advanced to Daniel E.
Jackson, President and Chief Operating Officer, $250,000 to facilitate
relocation of his residence to Northern California. Of the amount due, there is
a remaining balance of $82,500. The remaining balance is evidenced by a demand
note. The note is non-interest bearing and the principal balance was originally
due July 15, 2001 or upon termination of employment if prior to the due date.
The note to cover relocation was extended by a vote of the Compensation
Committee of the Board of Directors on October 29, 2000 for three years to July
15, 2004. Since the beginning of the 2000 fiscal year, the Company has also
advanced to Mr. Jackson an aggregate amount of approximately $480,000, evidenced
by five separate unsecured demand promissory notes, three dated August 11, 1999,
one dated September 30, 1999, and one dated November 23, 1999. The purpose of
such advances was to cover margin calls made on brokerage accounts held by Mr.
Jackson. On May 5, 2000, Mr. Jackson repaid $68,270 of principal and $31,730 of
interest. The notes, although due on demand, were issued with original due dates
in 2001. These notes were also extended by a vote of the Compensation Committee
of the Board of Directors on October 29, 2001 for three years to October 29,
2004. The interest rates on these notes remained unchanged at rates between
7.75% and 8.75%. Payment of the notes is accelerated if the Company's Common
Stock reaches certain sustained target levels.
On March 31, 1996, the Company advanced to James R. Lavelle, Chairman of the
Board and Chief Executive Officer of the Company, $37,902, evidenced by an
unsecured demand promissory note bearing interest annually at a rate of 6%. The
entire amount of such advance remains outstanding. Since the beginning of the
2000 fiscal year, the Company has also advanced to Mr. Lavelle an aggregate
amount of $619,000, evidenced by seven separate unsecured demand promissory
notes. The purpose of such advances was to cover margin calls made on brokerage
accounts held by Mr. Lavelle. On May 1, 2000, Mr. Lavelle repaid $15,330 of
principal and $34,670 of interest. The notes, although due on demand, were
issued with original due dates in 2001. The notes were extended by a vote of the
Compensation Committee of the Board of Directors on October 29, 2001 for three
years to October 29, 2004. The interest rates on these notes remain unchanged at
rates between 7.75% and 8.25%. Payment of the notes is accelerated if the
Company's Common Stock reaches certain sustained target levels.
On September 8, 1999, the stockholders approved the Cotelligent, Inc. 1999
Leveraged Stock Purchase Plan (the "LSPP") which authorizes the purchase of
shares of Common Stock by eligible employees who are selected by the
Compensation Committee of the Board to participate in the LSPP on terms and
conditions determined by the Compensation Committee. Since the LSPP's inception
through March 31, 2000, Mr. Lavelle has been issued 750,000 shares of Common
Stock and Mr. Jackson has been issued 736,842 shares of Common Stock. Shares
issued under the LSPP resulted in notes receivable from Mr. Lavelle for
$2,671,875 at 5.93% interest, and from Mr. Jackson for $2,625,000 at 5.93%
interest. The total principal amount of the notes remains outstanding. The notes
(1) are secured by the pledge of Common Stock issued; (2) are full recourse as
to the employee, except that in the case of death, disability, termination by
the Company without cause or a change of control of the Company, recourse
against the employees is limited to the pledged stock; and (3) have a term of
five years from date of issuance, provided that if the stock is sold, the loan
shall be prepaid, and if the stock is not sold, the loan may not be prepaid. The
Common Stock issued under the LSPP is restricted from sale in the open market
for a period of two years from the date of issuance, provided, however, that in
the case of death, disability, termination by the Company without cause or
change of control of the Company, the Common Stock may be sold and the proceeds
used to repay the loan.
Item 14 - Controls and Procedures
An evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of a date within 90 days of this annual
report was carried out by the Company under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and Chief Financial Officer. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures have been designed and are effective to provide
reasonable assurance that the information required to be disclosed by the
Company in reports filed under the Securities and Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. A controls system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the controls
system are met, and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected. Subsequent to the date of the most recent evaluation of the
Company's internal controls, there were no significant changes in the Company's
internal controls or in the other factors that could significantly affect the
internal controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
45
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as a part of the Annual Report on
Form 10-K:
1. Financial Statements Form 10-K Page No.
------------------
Report of Independent Public Accountants' 23
Condensed Consolidated Balance Sheets at December 31, 2002 and 2001 24
Condensed Consolidated Statements of Operations for the years ended December 31, 2002 and
December 31, 2001 and the nine months ended December 31, 2000 25
Condensed Consolidated Statements of Stockholders' Equity for the years ended December 31, 2002 and
December 31, 2001 and the nine months ended December 31, 2000 26
Condensed Consolidated Statements of Cash Flows for the years ended December 31, 2002 and
December 31, 2001 and the nine months ended December 31, 2000 27-28
Notes to Condensed Consolidated Financial Statements 28-44
2. The following is a list of all Exhibits filed as part of this report. Exhibit
11.1 is omitted because the information is included in Note 16 to Consolidated
Financial Statements, page 41.
EXHIBIT NO. DESCRIPTION
----------- ----------------------------------------------------------------
3.1 Certificate of Incorporation of Cotelligent, Inc. (Exhibit 3.1
of the Company's Registration Statement on Form S-1 (File No.
33-80267), effective February 9, 1996, is hereby incorporated by
reference)
3.2 Certificate of Amendment of Certificate of Incorporation of
Cotelligent, Inc. (Exhibit 3.3 of the Company's Annual Report on
Form 10-K (File No. 0-27412), filed with the SEC on June 29,
1999, is hereby incorporated by reference)
3.3 Amended and Restated By-Laws of Cotelligent, Inc. (Exhibit 3 of
the Company's Current Report on Form 8-K (File No. 0-27412),
filed with the SEC on May 9, 2002, is hereby incorporated by
reference)
4.1 Form of certificate evidencing ownership of Common Stock of
Cotelligent, Inc. (Exhibit 4.1 of the Company's Registration
Statement on Form S-1 (File No. 33-80267), effective February 9,
1996, is hereby incorporated by reference)
4.2 Rights Agreement, dated as of September 24, 1997, between
Cotelligent, Inc. and BankBoston, N.A. (Exhibit 4.1 of the
Company's Current Report on Form 8-K (File No. 0-27412), filed
with the SEC on September 24, 1997, is hereby incorporated by
reference)
4.3 Amendment No. 1 to Rights Agreement, dated June 13, 2002,
amending Rights Agreement, dated as of September 24, 1997,
between Cotelligent, Inc. and BankBoston, N.A. (Exhibit 4 of the
Company's Current Report on Form 8-K (File No. 0-27412), filed
with the SEC on June 13, 2002, is hereby incorporated by
reference)
10.1 Amended and Restated Employment Agreement, dated as of January
5, 2000, between Cotelligent, Inc. and James R. Lavelle (Exhibit
10.1 of the Company's Annual Report on Form 10-K (File No.
0-27412), filed with the SEC on July 14, 2000, is hereby
incorporated by reference)*
10.2 Amended and Restated Employment Agreement, dated as of January
25, 2000, between Cotelligent, Inc. and Daniel E. Jackson
(Exhibit 10.2 of the Company's Annual Report on Form 10-K (File
No. 0-27412), filed with the SEC on July 14, 2000, is hereby
incorporated by reference)*
46
10.3 Employment Agreement, dated as of December 19, 2000, between
Cotelligent, Inc. and Curtis J. Parker (Exhibit 10.3 of the
Company's Annual Report on Form 10-K (File No. 0-27412), filed
with the SEC on March 29, 2002, is hereby incorporated by
reference)*
10.4 Long-Range Bonus Incentive Plan, effective as of November 18,
1999, among Cotelligent, Inc., James R. Lavelle and Daniel E.
Jackson (Exhibit 10.6 of the Company's Annual Report on Form
10-K (File No. 0-27412), filed with the SEC on July 14, 2000, is
hereby incorporated by reference)*
10.5 Cotelligent 1995 Long-Term Incentive Plan (Exhibit 10.9 of the
Company's Registration Statement on Form S-1/A (File No.
33-80267), filed with the SEC on January 24, 1996, is hereby
incorporated by reference)*
10.7 Cotelligent 1998 Long-Term Incentive Plan (Exhibit 10.13 of the
Company's Annual Report on Form 10-K (File No. 0-27412), filed
with the SEC on June 29, 1999, is hereby incorporated by
reference)*
10.8 Cotelligent, Inc. 1999 Leveraged Stock Purchase Plan (Exhibit 2
of the Company's Schedule 13D (File No. 5-47567), filed with the
SEC on January 31, 2000, is hereby incorporated by reference)*
10.13 Cotelligent 2000 Long-Term Incentive Plan (Exhibit 10.19 of the
Company's Annual Report on Form 10-K (File No. 0-27412), filed
with the SEC on April 2, 2001 is hereby incorporated by
reference)
10.14 Series C Convertible Redeemable Preferred Stock Purchase
Agreement, dated as of August 19, 2002, by and between The
Bluebook International Holding Company, Mark A. Josipovich,
Daniel E. Josipovich, Daniel T. Josipovich, Dorothy E.
Josipovich and Cotelligent, Inc. (Exhibit A of the Company's
Schedule 13D (File No. 005-61801), filed with the SEC on January
17, 2003, is hereby incorporated by reference)
21.1 Subsidiaries of the registrant **
23.1 Consent of KPMG LLP **
24.1 Power of attorney as reflected on signatures page included
herewith **
31.1 Rule 13(a)-14(a) Certification of Chief Executive Officer**
31.2 Rule 13(a)-14(a) Certification of Chief Financial Officer**
32.1 Certification pursuant to 18 U.S.C. Section 1350, or adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
(b) Reports on Form 8-K
Current Report on Form 8-K dated May 8, 2002, filed with the SEC
on May 9, 2002
Current Report on Form 8-K dated June 13, 2002, filed with the
SEC on June 13, 2002
Current Report on Form 8-K dated July 10, 2002, filed with the
SEC on July 16, 2002
* Management contracts and compensatory plans or arrangements
required to be filed as exhibits to this Form 10-K.
** Filed herewith.
47
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 Irvine,
State of California on the 24th day of November, 2003.
COTELLIGENT, INC.
By: /s/ Curtis J. Parker
-----------------------
Curtis J. Parker
Chief Financial Officer