================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------------- -------------------
Commission File Number 0-27412
COTELLIGENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3173918
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
44 MONTGOMERY STREET, SUITE 4050
SAN FRANCISCO, CALIFORNIA 94104
(Address of principal executive offices) (Zip Code)
(415) 439-6400
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---------- -----------
At November 9, 2001 there were 14,815,475 shares of common stock outstanding.
================================================================================
COTELLIGENT, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
----
Cotelligent, Inc.
Consolidated Balance Sheets at September 30, 2001 and December 31, 2000 3
Consolidated Statements of Operations for the Three & Nine Months Ended
September 30, 2001 and 2000 4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COTELLIGENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 20,186 $ 26,500
Accounts receivable, including unbilled accounts of $1,709
and $4,043 and net of allowance for doubtful accounts
of $2,166 and $2,615, respectively................................. 6,739 19,229
Deferred income taxes..................................................... 1,435 1,435
Notes receivable from officers and related party............................ 1,761 1,703
Current portion of note receivable from acquirer of.........
discontinued operation............................................. 411 -
Prepaid expenses and other current assets................................... 1,578 1,916
-------- --------
Total current assets..................................................... 32,110 50,783
Property and equipment, net................................................... 4,593 6,761
Note receivable from acquirer of discontinued operation....................... 3,685 4,459
Equity investment in alliance partner......................................... 1,863 2,047
Other assets.................................................................. 172 664
-------- --------
Total assets............................................................. $ 42,423 $ 64,714
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt and current maturities of long-term debt.................... $ 250 $ 212
Accounts payable............................................................ 1,364 2,047
Accrued compensation and related payroll liabilities........................ 3,073 5,826
Income taxes payable........................................................ 735 748
Obligations related to acquired/sold businesses............................. 3,619 3,125
Restructuring liabilities................................................... 2,086 2,136
Other accrued liabilities................................................... 2,682 3,182
-------- --------
Total current liabilities................................................ 13,809 17,276
Long-term debt................................................................ 657 1,000
Deferred tax liabilities...................................................... 1,435 1,435
Other liabilities............................................................. 48 -
-------- --------
Total liabilities........................................................ 15,949 19,711
-------- --------
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, 15,460,075 and 15,349,630 shares
issued, respectively...................................................... 155 153
Additional paid-in capital.................................................. 86,879 86,866
Notes receivable from stockholders.......................................... (6,193) (6,368)
Retained earnings........................................................... (53,867) (35,648)
Common stock held in treasury, at cost (644,600 shares)..................... (500) -
-------- --------
Total stockholders' equity............................................... 26,474 45,003
-------- --------
Total liabilities and stockholders' equity............................... $ 42,423 $ 64,714
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
3
COTELLIGENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues............................................... $ 10,187 $ 22,475 $ 38,282 $ 73,528
Cost of services....................................... 7,035 14,904 27,373 50,141
----------- ----------- ----------- -----------
Gross profit....................................... 3,152 7,571 10,909 23,387
Selling, general and administrative expenses........... 7,221 11,440 24,706 35,452
Depreciation and amortization of goodwill.............. 689 987 2,065 2,882
Restructuring charge................................... 3,373 - 3,373 -
----------- ----------- ----------- -----------
Operating loss......................................... (8,131) (4,856) (19,235) (14,947)
Other income (expense):
Interest expense...................................... - (8) (2) (2,951)
Interest income....................................... 312 543 1,193 699
Other................................................. (86) (7) (143) 40
----------- ----------- ----------- -----------
Total other income (expense)....................... 226 528 1,048 (2,212)
----------- ----------- ----------- -----------
Loss from continuing operations before
income taxes...................................... (7,905) (4,328) (18,187) (17,159)
Benefit for income taxes............................... - 1,472 - 5,885
----------- ----------- ----------- -----------
Loss from continuing operations.................... (7,905) (2,856) (18,187) (11,274)
----------- ----------- ----------- -----------
Operating income (loss) from discontinued
operations, net of income taxes of $0,
$142, $0 and $2,901................................... (49) 148 (32) 4,007
Gain on sale of discontinued operations, net
of income taxes of $0 and $4,224...................... - - - 4,396
----------- ----------- ----------- -----------
Income (loss) from discontinued operations............ (49) 148 (32) 8,403
----------- ----------- ----------- -----------
Net loss.............................................. $ (7,954) $ (2,708) $ (18,219) $ (2,871)
=========== =========== =========== ===========
Basic and diluted earnings (loss) per share:
Loss from continuing operations........................ $(0.54) $(0.19) $(1.20) $(0.75)
Income from discontinued operations.................... - 0.01 - 0.56
----------- ----------- ----------- -----------
Net loss............................................. $(0.54) $(0.18) $(1.20) $(0.19)
=========== =========== =========== ===========
Basic and diluted weighted average number
of shares outstanding................................. 14,824,310 15,235,827 15,150,770 15,120,503
=========== =========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
4
COTELLIGENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
-------- --------
2001 2000
-------- --------
Cash flows from operating activities:
Net loss.......................................................................... $(18,219) $ (2,871)
Adjustments to reconcile net loss to net cash
used for operating activities:
Operating income from discontinued operations................................... 32 (4,007)
Gain on sale of discontinued operations......................................... - (4,396)
Equity loss from investments.................................................... 166 11
Depreciation and amortization................................................... 2,065 2,882
Deferred income taxes, net...................................................... - 10,942
Loss on disposal of property and equipment...................................... - 17
Provision for doubtful accounts................................................. 1,552 1,522
Changes in current assets and liabilities:
Accounts receivable, net...................................................... 10,938 (6,203)
Prepaid expenses and other current assets..................................... 537 165
Accounts payable and accrued expenses......................................... (2,511) (7,757)
Income taxes payable.......................................................... (13) (1,106)
Changes in other assets......................................................... 12 105
-------- --------
Cash used for operating activities................................................ (5,441) (10,696)
Cash flows used for investing activities:
Proceeds from sale of investment.................................................. - (7,377)
Purchases of property and equipment............................................... (1,029) (2,141)
-------- --------
Cash used for investing activities................................................ (1,029) (9,518)
Cash flows provided by financing activities:
Borrowing under Credit Agreement.................................................. - 9,710
Payments on Credit Agreement...................................................... - (57,890)
Payments due sellers of acquired business......................................... (600) (8,534)
Payments on capital lease obligations............................................. (44) (61)
Payments long term debt........................................................... (293) -
Repayments on notes receivable from officers...................................... - 449
Net proceeds on issuance of stock................................................. 190 804
Repurchase of common stock........................................................ - (242)
Purchase of treasury stock........................................................ (500) -
-------- --------
Cash used for financing activities................................................ (1,247) (55,764)
Cash flows provided by discontinued operations:
Proceeds on sale of discontinued operations....................................... - 112,481
Cash flow from discontinued operations............................................ 1,403 (11,758)
-------- --------
Cash flow provided by discontinued operations..................................... 1,403 100,723
-------- --------
Net increase (decrease) in cash..................................................... (6,314) 24,745
Cash at beginning of period......................................................... 26,500 1,675
-------- --------
Cash at end of period............................................................... $ 20,186 $ 26,420
======== ========
Supplemental disclosures of cash flow information:
Interest paid..................................................................... $ 2 $ 3,071
Income taxes paid (refunded)...................................................... $ 14 $ (1,474)
Return of common stock previously issued to acquire business...................... $ - $ 2,695
Adjustment of purchase price of business acquired in prior year................... $ - $ 8,386
Fair value of Common Stock issued for notes receivable............................ $ - $ 852
Adjustment of note receivable from acquirer of discontinued
operation........................................................................ $ 400 $ -
Fair value of Common Stock issued to seller of acquired
Business......................................................................... $ - $ 572
Return of Common Stock previously issued to employee for
note receivable.................................................................. $ 175 $ 113
The accompanying notes are an integral part of these
consolidated financial statements.
5
COTELLIGENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
(Unaudited)
NOTE 1 - BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Cotelligent, Inc. ("Cotelligent" or the "Company"), a Delaware corporation,
provides software consulting services to businesses with complex information
technology ("IT") operations and maintenance, support and contract services on
software products it licenses. These financial statements include the accounts
of Cotelligent, Inc. and its subsidiaries.
In July 2000, the Company changed its fiscal year end to December 31 from
March 31. Consequently, the nine months ended September 30, 2001 is the third
quarter of the 2001 fiscal year.
During the fiscal year ended March 31, 2000, the Company was organized into 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 has suffered significant operating losses as well as negative
operating cash flows in the last two fiscal periods as it works through its
repositioning in the market, 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 effects 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 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying interim financial statements do not include all disclosures
included in the financial statements in Cotelligent's Annual Report on Form 10-K
for the year ended December 31, 2000 ("Form 10-K"), and therefore these
financial statements should be read in conjunction with the financial statements
included on Form 10-K.
In the opinion of management, the interim financial statements filed as part of
this Quarterly Report on Form 10-Q reflect all adjustments necessary for a fair
presentation of the financial position and the results of operations and of cash
flows for the interim periods presented. Certain balances of the prior year
have been reclassified to conform to the current presentation.
NOTE 3 - CHANGES IN STOCKHOLDERS' EQUITY
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE
-------------------- PAID-IN FROM RETAINED
SHARES AMOUNT CAPITAL STOCKHOLDERS EARNINGS
---------- ------ --------- ------------ --------
Balance at December 31, 2000...... 15,349,630 $153 $86,866 $(6,368) $(35,648)
Issuance of Common Stock.......... 160,445 3 187 - -
Cancellation of LSPP Note ........ (50,000) (1) $ (174) $ 175 -
Purchase of treasury shares ......
Net loss.......................... - - - - $(18,219)
---------- ---- ------- ------- --------
Balance at September 30, 2001.... 15,460,075 $155 $86,879 $(6,193) $(53,867)
========== ==== ======= ======= ========
TREASURY STOCK TOTAL
---------------- STOCKHOLDERS'
SHARES AMOUNT EQUITY
------ ------ -------------
Balance at December 31, 2000...... $ 45,003
Issuance of Common Stock.......... 190
Cancellation of LSPP Note ........ -
Purchase of treasury shares ...... 644,600 $(500) (500)
Net loss.......................... $(18,219)
------- ----- --------
Balance at September 30, 2001.... 644,600 $(500) $ 26,474
======= ===== ========
6
COTELLIGENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
(Unaudited)
NOTE 4 - PRO FORMA STATEMENT OF OPERATIONS
During the quarter ended September 30, 2001, the Company took action to
streamline operations in line with revenues. The following pro forma statement
of operations for the quarter ended September 30, 2001 excludes the one-time
restructuring charge, salary expense for non-billable staff terminated during
the quarter, salary expense for billable staff terminated during the quarter
(for the portion of time these billable people did not generate revenues), and
occupancy expense for locations included in the restructuring charge.
THREE MONTHS ENDED
SEPTEMBER 30, 2001
------------------
PRO FORMA
Revenues........................................................................................... $ 10,187
Cost of services................................................................................... 6,374
-----------
Gross profit................................................................................... 3,813
Selling, general and administrative expenses....................................................... 6,168
Depreciation and amortization of goodwill.......................................................... 689
-----------
Operating loss..................................................................................... (3,044)
Other income, net.................................................................................. 226
-----------
Loss from continuing operations before income taxes............................................ (2,818)
Income tax benefit................................................................................. -
-----------
Loss from continuing operations................................................................ (2,818)
-----------
Operating income (loss) from discontinued operations, net of income tax (benefit) of $0............ (49)
-----------
Net loss....................................................................................... $ (2,867)
===========
Basic and diluted earnings (loss) per share:
Loss from continuing operations.................................................................. $ (0.19)
Income from discontinued operations.............................................................. -
-----------
Net loss....................................................................................... $ (0.19)
===========
Basic and diluted weighted average number of shares outstanding.................................... 14,824,310
===========
NOTE 5 - DISCONTINUED OPERATIONS
The following financial data reflects a summary of operating results for the
Company's discontinued operations for the three and nine months ended September
30, 2001 and 2000.
SUMMARY OF OPERATING RESULTS OF DISCONTINUED OPERATIONS:
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- ---------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenues...................................... $ 323 $7,688 $3,453 $121,019
Cost of services.............................. 339 5,974 2,693 89,145
----- ------ ------ --------
Gross profit.............................. (16) 1,714 760 31,874
Selling, general and administrative expenses. 33 1,424 792 23,205
Depreciation and amortization of goodwill..... - - - 1,752
----- ------ ------ --------
Operating income ............................ (49) 290 (32) 6,917
Other expense................................ - - - (9)
----- ------ ------ --------
Operating income before provision for taxes... (49) 290 (32) 6,908
Provision for income taxes....................... - 142 - 2,901
----- ------ ------ --------
Operating income from discontinued operations.... $ (49) $ 148 $ (32) $ 4,007
===== ====== ====== ========
On June 30, 2000, the Company sold the majority of its IT staff augmentation
business and on July 14, 2000 and October 31, 2000 sold other components of the
IT staff augmentation business. During the quarter ended September 30, 2001,
the Company continued to hold one remaining component of its IT staff
augmentation business. The Company anticipates that it will dispose of this
remaining component by the end of 2001 at a loss and consequently has written
down the value of the net assets to zero during the nine month fiscal year ended
December 31, 2000.
7
COTELLIGENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
(Unaudited)
NOTE 6 - EARNINGS (LOSS) PER SHARE
Earnings (loss) per share were as follows:
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
--------------------------------------------------------
PER SHARE
INCOME (LOSS) SHARES AMOUNT
------------- ------ ---------
Basic and diluted earnings (loss) per share-
Loss from continuing operations......................... $(7,905) 14,824,310 $(0.54)
Loss from discontinued operations....................... (49) 14,824,310 -
------- -----
Net loss available to common stockholders............... $(7,954) 14,824,310 $(0.54)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
--------------------------------------------------------
PER SHARE
INCOME (LOSS) SHARES AMOUNT
------------- ------ ---------
Basic and diluted earnings (loss) per share-
Loss from continuing operations......................... $(2,856) 15,235,827 $(0.19)
Income from discontinued operations..................... 148 15,235,827 0.01
------- ------
Net loss available to common stockholders............... $(2,708) 15,235,827 $(0.18)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
--------------------------------------------------------
PER SHARE
INCOME (LOSS) SHARES AMOUNT
------------- ------ ---------
Basic and diluted earnings (loss) per share-
Loss from continuing operations......................... $(18,187) 15,150,770 $(1.20)
Loss from discontinued operations....................... (32) 15,150,770 -
-------- ------
Net loss available to common stockholders............... $(18,219) 15,150,770 $(1.20)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
--------------------------------------------------------
PER SHARE
INCOME (LOSS) SHARES AMOUNT
------------- ------ ---------
Basic and diluted earnings (loss) per share-
Loss from continuing operations......................... $(11,274) 15,120,503 $(0.75)
Income from discontinued operations..................... 8,403 15,120,503 0.56
-------- ------
Net loss available to common stockholders............... $ (2,871) 15,120,503 $(0.19)
8
COTELLIGENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
(Unaudited)
NOTE 7 - 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 pre-tax 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 charge 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.
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 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, which
resulted in a pre-tax restructuring charge of $4,200 during the nine months
ended December 31, 2000 and $3,373 during the nine months ended September 30,
2001. The December 2000 charge included provisions for severance of
approximately 90 management and operating staff ($1,100), as well as closure
costs associated with a plan to consolidate or dispose of certain locations
including the write-down of associated property and equipment ($3,100). The
September 2001 charge included provisions for severance of approximately 145
management and operating staff ($1,059) as well as closure costs associated with
a plan to consolidate or dispose of certain locations including the write-down
of associated property and equipment ($2,314).
The following summarizes the activity and balances in each restructuring program
for the nine months ended September 30, 2001:
JUNE 1999 DECEMBER 2000 SEPTEMBER 2001
RESTRUCTURING PROGRAM RESTRUCTURING PROGRAM RESTRUCTURING PROGRAM TOTAL
----------------------- ----------------------- ---------------------- --------
FACILITIES FACILITIES FACILITIES
SEVERANCE CLOSURE SEVERANCE CLOSURE SEVERANCE CLOSURE
--------- ---------- --------- ---------- --------- ---------
Balance at December 31, 2000.... $ 57 $179 $ 900 $1,000 $ 2,136
Restructuring charge............ - - - - $1,059 2,314 $ 3,373
Spending and adjustments........ (57) (10) (900) (463) (637) (1,356) (3,423)
--------- ---- --------- ------ ------ ------- -------
Balance at June 30, 2001........ $ - $169 $ - $ 537 $ 422 $ 958 $ 2,086
========= ==== ========= ====== ====== ======= =======
NOTE 8 - INCOME TAXES
The Company did not record an income tax benefit for the nine months ended
September 30, 2001 due to the uncertainty of its realization. Management will
continue to assess the adequacy of and the need for a valuation allowance. To
the extent it is determined that such allowance is no longer required,
principally by achieving sustained profitability, a tax benefit may be
recognized in the future.
NOTE 9 - COMMON STOCK REPURCHASE PROGRAM
On May 3, 2001, the Company announced its plan to repurchase up to 15% of its
then outstanding shares of common stock. Purchases under the program were made
in the open market or in privately negotiated transactions, depending on market
conditions and other factors. The New York Stock Exchange, the exchange the
Company's Common Stock traded on at the time required that the Company maintain
a certain average closing price of its Common Stock, calculated over a 30
consecutive trading day period. The primary reason the Company undertook its
share repurchase program was to meet this requirement. On September 27, 2001,
the Company announced it would no longer purchase any additional shares under
the program.
Between May 3, 2001 and September 27, 2001, the Company purchased 644,600 shares
of its common stock for $500. The purchases were recorded at cost and reported
in stockholders' equity as common stock held in treasury.
9
COTELLIGENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
(Unaudited)
NOTE 10 - LONG-TERM INCENTIVE PLAN
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 allowed the option holder to exchange existing
stock option grants for a new option grant. On March 16, 2001, the date by
which option holders were required to elect to participate in the program,
1,399,638 options were cancelled. On September 21, 2001, 1,169,446 new option
grants were issued, based on that day's closing price of the Company's Common
Stock. The number of new option grants were less than the number of options
initially cancelled, due to option holders who were terminated from the Company
between March 16, 2001 and September 21, 2001. On September 30, 2001, the total
number of options issued or approved by the Board of Directors for issuance was
4,403,251.
NOTE 11 - SUBSEQUENT EVENT
On October 11, 2001, the Company announced that it began trading its Common
Stock on the OTC Bulletin Board under the symbol "CGZT". The Company had
previously traded its Common Stock on the New York Stock Exchange under the
symbol "CGZ" and announced on September 27, 2001, that the New York Stock
Exchange had determined that trading in the Company's Common Stock would be
suspended after close of market on October 10, 2001, and that the issue would be
removed from the New York Stock Exchange's trading list as a result of failing
to meet the New York Stock Exchange's continued listing requirements.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for statements of historical fact contained herein, any statements
contained in this report may be deemed to be forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. For example,
words such as "may," "will," "should," "estimates," "predicts," "potential,"
"continue," "strategy," "believes," "anticipates," "plans," "expects," "intends"
and similar expressions are intended to identify forward-looking statements.
All such forward-looking statements are based upon current expectations that
involve risks and uncertainties. Cotelligent's actual results and the timing of
certain events may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause or contribute to such a
discrepancy include, but are not limited to, those discussed under "Risk
Factors" in Cotelligent's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000, other filings made with the Securities and Exchange
Commission and Cotelligent's press release announcing earnings for the quarter
ended September 30, 2001, which was issued on October 30, 2001. The following
discussion is qualified in its entirety by, and should be read in conjunction
with, the more detailed information set forth in our financial statements and
the notes thereto included elsewhere in this filing. All forward-looking
statements included in this report are based upon information available to
Cotelligent as of the date thereof, and Cotelligent assumes no obligation to
update any of such forward-looking statements.
OVERVIEW
Cotelligent provides IT consulting and maintenance and support on software
product it licenses. The Company historically operated on an April 1 to March
31 fiscal year. In July 2000, the Company changed its fiscal year end to
December 31. Consequently, the Company's most recently completed fiscal period
is a nine-month transition period ended December 31, 2000. The three months
ended September 30, 2001 is the third quarter of the 2001 fiscal year.
Prior to March 31, 2000, the Company entered into a plan to divest its IT staff
augmentation business. Accordingly, the financial statements of Cotelligent
have been restated to present as discontinued operations the Company's IT staff
augmentation business for all periods presented.
Cotelligent provides IT consulting and maintenance and support on software
product it licenses. The majority of these activities are provided under time
and materials billing arrangements, and revenues are recorded as work is
performed. Revenues are directly related to the total number of hours billed to
clients and the associated hourly billing rates. Hourly billing rates are
established for each service provided and are a function of the type of work
performed and the related skill level of the consultant. In addition, the
Company is designing and marketing client server-based, web-enabled mobile
management software for industries that have medium to large transient sales,
field or delivery personnel. Revenues associated with software licensing and
the related maintenance and consulting services are recognized once a contract
is signed, delivery has been made and collectibility is probable.
The Company's principal costs are professional compensation directly related to
the performance of services and related expenses. Gross profits (revenues after
professional compensation and related expenses) are primarily a function of
hours billed to clients per professional employee or consultant, hourly billing
rates of those employees or consultants and employee or consultant compensation
relative to those billing rates. Gross profits can be adversely impacted if
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 cost increases exceed increases in revenue or if there are high
levels of unutilized time (work activities not chargeable to clients or
unrelated to client services) of full-time salaried service professional
employees.
Operating income (gross profit less selling, general and administrative
expenses) can be adversely impacted by increased administrative staff
compensation and expenses related to streamlining or expanding the Company's
business, which may be incurred before revenues or economies of scale are
generated from such investment. Historically, a majority of the Company's
revenues were generated from IT staff augmentation activities. Following the
disposition of the IT staff augmentation business, the majority of the Company's
revenues has been generated by solutions activities, which require a higher
level of selling, general and administrative infrastructure to generate
revenues, including research and development related to mobility solutions.
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.
11
CONSOLIDATED RESULTS OF OPERATIONS
(In Thousands)
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2000
REVENUES
Revenues decreased $12,288, or 55%, to $10,187 in the three months ended
September 30, 2001 from $22,475 in the three months ended September 30, 2000.
The decrease was due to a general reduction in demand for its services due to
softening in the market coupled with a shift away from general IT consulting
services towards offering mobile workforce management solutions and its
associated ramp-up time.
GROSS PROFIT
Gross profit decreased $4,419, or 58%, to $3,152 in the three months ended
September 30, 2001 from $7,571 in the three months ended September 30, 2000.
The decrease was due to lower revenues following a general reduction in demand
for its services due to softening in the market coupled with a shift away from
general IT consulting services towards offering mobile workforce management
solutions and its associated ramp-up time. The gross profit margin decreased to
31% from 34%, due to a drop in utilization of salaried employees during a period
of declining revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $4,219, or 37%, to $7,221
in the three months ended September 30, 2001 from $11,440 in the three months
ended September 30, 2000. The decrease was primarily due to the closure of
three operating locations subsequent to March 31, 2000 and prior to January 1,
2001, and 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 revenues.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased $298, or 30%, to $689 in the three
months ended September 30, 2001 from $987 in the three months ended September
30, 2000. The decrease was due to the elimination of amortization related to
goodwill following the complete write-off of goodwill in the quarter ended
December 31, 2000, offset by increased depreciation on new technology equipment.
OTHER INCOME (EXPENSE)
Other income (expense) primarily consists of interest income. Interest income
was $312 for the three months ended September 30, 2001 compared to interest
income of $543 for the three months ended September 30, 2000. The decrease in
interest income was due to a lower cash balance on hand during the three months
ended September 30, 2001.
BENEFIT FOR INCOME TAXES
The Company did not record an income tax benefit for the three months ended
September 30, 2001 due to the uncertainty of its realization. For the quarter
ended September 30, 2000, the Company recorded an income tax benefit of $1,472
because the operating losses of that period were available for carry back
against taxable income of prior years.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
Discontinued operations is comprised of the Company's IT staff augmentation
business. The loss from discontinued operations of $49 for the three months
ended September 30, 2001 compares to income of $148 for the three months ended
September 30, 2000. The decrease in income from discontinued operations is the
result of the sale of all components of discontinued operations, except one
component, by October 31, 2000.
12
CONSOLIDATED RESULTS OF OPERATIONS
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
REVENUES
Revenues decreased $35,246, or 48%, to $38,282 in the nine months ended
September 30, 2001 from $73,528 in the nine months ended September 30, 2000.
The decrease was due to a general reduction in demand for its services due to
softening in the market coupled with a shift away from general IT consulting
services towards offering mobile workforce management solutions and its
associated ramp-up time.
GROSS PROFIT
Gross profit decreased $12,478, or 53%, to $10,909 in the nine months ended
September 30, 2001 from $23,387 in the nine months ended September 30, 2000.
The decrease was due to a general reduction in demand for its services due to
softening in the market coupled with a shift away from general IT consulting
services toward offering mobile workforce management solutions and its
associated ramp-up time. The gross profit margin decreased to 28% from 32%, due
to a drop in utilization of salaried employees during a period of declining
revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $10,746, or 30%, to
$24,706 in the nine months ended September 30, 2001 from $35,452 in the nine
months ended September 30, 2000. The decrease was primarily due to the closure
of three operating locations subsequent to March 31, 2000 and prior to January
1, 2001, and 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.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased $817, or 28%, to $2,065 in the nine
months ended September 30, 2001 from $2,882 in the nine months ended September
30, 2000. The decrease was due to the elimination of amortization related to
goodwill following the complete write-off of goodwill in the quarter ended
December 31, 2000.
OTHER INCOME (EXPENSE)
Other income (expense) primarily consists of net interest income (expense). Net
interest income was $1,191 for the nine months ended September 30, 2001 compared
to net interest expense of $2,252 for the nine months ended September 30, 2000.
This change was due to the elimination of all obligations due under the
Company's Credit Agreement and an earn-out agreement resulting from the
Company's sale of the majority of the IT staff augmentation business on June 30,
2000 which reduced interest expense. The Company also earned additional
interest income on the cash proceeds received from the sale on June 30, 2000 of
the majority of its IT staff augmentation business during the nine months ended
September 30, 2001.
BENEFIT FOR INCOME TAXES
The Company did not record an income tax benefit for the nine months ended
September 30, 2001 due to the uncertainty of its realization. For the nine
months ended September 30, 2000, the Company recorded an income tax benefit of
$5,885 because the operating losses of that period were available for carry back
against taxable income of prior years.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
Discontinued operations is comprised of the Company's IT staff augmentation
business. The loss from discontinued operations of $32 for the nine months
ended September 30, 2001, compares to income of $8,403 for the nine months ended
September 30, 2000. The decrease in income from discontinued operations is the
result of the sale of all components of discontinued operations, except one
component, by October 31, 2000.
13
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed itself principally through cash flows from operations,
periodic borrowing under its credit facilities, net proceeds from its public
offerings and net proceeds from the sale of its IT staff augmentation business.
Most recently, the Company maintained a credit facility with a consortium of
banks under which it borrowed to fund working capital needs. On June 30, 2000,
the Company used a portion of the cash proceeds from the sale of its IT staff
augmentation business to pay off all obligations under the credit facility and
to pay existing earn-out obligations to sellers of an acquired business. Upon
settlement of all obligations under the credit facility, the credit facility was
terminated. Since June 30, 2000, the Company has not maintained a credit
facility.
Cash used for operating activities was $5,441 for the nine months ended
September 30, 2001 and the average cash balance during the quarter was $21,259.
Historically, the Company's primary sources of liquidity have been the
collection of accounts receivable and borrowings under the credit facility.
Total receivables were 61 days of quarterly revenues at September 30, 2001 and
82 days at December 31, 2000.
With the termination of its borrowing arrangements under the Credit Agreement,
the Company's primary sources of liquidity going forward will be its existing
cash balances, the collection of accounts receivable, and any cash resulting
from the sales of the components of the remaining discontinued IT staff
augmentation business. The Company believes that the remaining cash from the
consummated divestiture transactions and any funds generated from operations
will provide adequate cash to fund its anticipated cash working capital needs at
least through the next twelve months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Cotelligent has invested its existing cash in highly liquid money market
accounts and does not use derivative financial instruments, derivative commodity
instruments or other market risk sensitive instruments, positions or
transactions. Accordingly, the Company believes that it is not subject to any
material risks arising from changes in interest rates, foreign currency exchange
rates, commodity prices, equity prices or other market changes that affect
market risk sensitive instruments. Cotelligent's policy is to invest its cash
in a manner that provides Cotelligent with the appropriate level of liquidity to
enable the Company to meet its current obligations, primarily accounts payable,
capital expenditures and payroll, recognizing that the Company does not
currently have outside bank funding available.
14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None
15
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
COTELLIGENT, INC.
DATE: NOVEMBER 13, 2001 /S/ CURTIS J. PARKER
----------------- ---------------------
CURTIS J. PARKER
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER AND TREASURER
16