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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from April 1, 2000 to
December 31, 2000
COMMISSION FILE NUMBER 0-27412
COTELLIGENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3173918
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 CALIFORNIA STREET, SUITE 2050
SAN FRANCISCO, CALIFORNIA 94111
(Address of principal executive offices) (Zip Code)
(415) 439-6400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.01 PAR VALUE
----------------------------
(Title of class)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $10,129,642 based on the closing price of $0.66 of
the registrant's Common Stock as reported on the New York Stock Exchange on
March 29, 2001.
The number of shares of the registrant Common Stock outstanding as of March 29,
2001 was 15,347,942.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Proxy Statement for the 2001 Annual Meeting of Stockholders are
incorporated by reference in Part III, Items 10, 11, 12 and 13, of this
Form 10-K. We anticipate that our Proxy Statement will be filed with the
Securities and Exchange Commission within 120 days after the end of our
fiscal year.
COTELLIGENT, INC.
TABLE OF CONTENTS
FORM 10-K
PAGE
PART I
ITEM 1 Business.................................................................................................. 3
ITEM 2 Properties................................................................................................ 12
ITEM 3 Legal Proceedings......................................................................................... 12
ITEM 4 Submission of Matters to a Vote of Security Holders....................................................... 12
PART II
Item 5 Market for the Registrant's Common Stock and Related Stockholder Matters.................................. 13
ITEM 6 Selected Financial Data................................................................................... 13
ITEM 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................................... 15
ITEM 8 Financial Statements and Supplementary Data............................................................... 20
ITEM 9 Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.................................................................................... 43
PART III
ITEM 10 Directors and Executive Officers of the Registrant........................................................ 44
ITEM 11 Executive Compensation.................................................................................... 44
ITEM 12 Security Ownership of Certain Beneficial Owners and Management............................................ 44
ITEM 13 Certain Relationships and Related Transactions............................................................ 44
PART IV
ITEM 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................................... 45
Signatures .......................................................................................................... 48
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PART I
------
ITEM 1. BUSINESS.
COMPANY OVERVIEW
Cotelligent is a national consulting firm, delivering end-to-end information
technology ("IT") solutions that power forward-looking businesses. Since 1996,
Cotelligent has positioned leading companies in major business sectors to
continue their competitive presence in newer emerging markets. Cotelligent's
expertise lies in creating scalable, strategic business solutions powered by
technology, intelligent resource planning and execution. Our experience is
evidenced by the 792 projects we completed for over 396 clients in calendar year
2000 alone.
We have expertise in a variety of industries, including financial services,
telecommunications, manufacturing and technology. Within these industries, we
have assembled a consulting staff with a broad range of skills, from business
analysts to network architects. Our experts not only have industry experience
but also are deeply connected to the world of technology.
We provide clients with IT solutions for complex business issues. We help
companies manage data, moving it, molding it, and making it accessible to them
in real-time, any time and through a variety of media or devices. As a result,
we believe we help our clients to become strategically positioned to take their
businesses, and their industries, to a higher standard. We are focusing on
delivering end-to-end eBusiness and Enterprise solutions and emerging mobile
data, or mBusiness, solutions.
COTELLIGENT CULTURE
In our five years as a public company, we have experienced and learned a great
deal. Both our successes and our business challenges have a direct bearing on
our relationships with colleagues and clients, our daily activities and our
overall environment and have molded the basic tenets of our culture:
. A cohesive company ethos and a fully integrated business model are
essential to the success and vitality of our business.
. Accountability equals integrity, reward equals retention, and education
equals leadership.
. Attending to and nurturing our client and business relationships helps us
succeed.
. Flexibility in approach and adaptability to change are paramount to survival.
With these in mind, we have adopted a business culture we believe well suited to
the variable nature of the industry in which we compete.
STRATEGY
Cotelligent's strategy is comprised of the following:
INFORMED ACTION.
Our underlying strategy is to help our clients employ information technology
solutions that are best suited to their company, industry, competitive
environment and culture. We attempt to do this by listening carefully to our
clients and working to understand their challenges. We conduct in-depth market
research to identify business requirements for current and future IT solutions.
We formulate an appropriate course of action giving due consideration to the
nature of our clients' businesses, time sensitivities, budget constraints and
resources.
END-TO-END TECHNOLOGY SOLUTIONS.
Cotelligent's emphasis on delivering end-to-end technology solutions is another
important element of our strategy. At Cotelligent, we believe our approach to IT
solutions differentiates us from our competitors.
As a part of our end-to-end technology solutions strategy, we focus on our
clients as an enterprise instead of merely evaluating one aspect of their
business. We consider the variety of components that shape our clients'
businesses including strategy, enterprise systems, customer relationships,
network connections, knowledge management functions and mobility needs. By
evaluating our clients as an enterprise, we believe we can provide solutions at
various stages of our clients' development, whether they are in the planning
stages for far-reaching process and technology enhancements, or are seeking to
extend into the eBusiness or mBusiness universe. We attempt to do this by
understanding each enterprise for all of its critical and interconnected parts.
When providing services to our clients, we offer an integrated set of technology
solutions. We combine the resources of our strategic alliances and partnerships
with our own internal capabilities to meet our clients' business requirements.
We believe we can take a project from start to finish with confidence and
competence.
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COLLABORATION.
. With Our Clients: Our approach to providing consulting services and
solutions focuses on strong, reciprocal relationships with our clients. We
believe it is important to understand our clients' business requirements
first then respond quickly based on their opportunity and priorities. We are
reliable, credible and responsive when conducting business. We work hard to
understand a client's needs so that our services can add significant value.
We believe that we provide quality assistance, support and solutions by
building productive, long-term relationships.
. With Our Industry Colleagues: 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 are at the center of the new business paradigm. We believe that the
benefits of these alliances permeate every service, arrangement, and project
we undertake. In dealing with the technology and tools of our leading
business partners, we have gained valuable experience at making our
relationships work in tandem together, delivering custom solutions designed
to meet our clients' business needs. Our business partners include: Aether
Systems, Cisco, Citrix, Compaq, Competix, Dell, IBM, icomXpress, Microsoft,
mySAP.com, PeopleSoft, Sprint, Vignette and White Horse Interactive.
THE COTELLIGENT SOLUTION
We help our clients to achieve the following:
. launch new ventures or products;
. enter new markets;
. introduce new industries;
. protect hard-won market share;
. maintain competitive edge;
. transition from a "bricks and mortar" model to an eCommerce model;
. enhance or overhaul customer service and support;
. improve the management of business data;
. implement Enterprise Resource Planning solutions; and
. drive business data to wired and wireless devices, any time, anywhere.
We help companies evaluate how new technologies fit within their business and
their industry, all in conjunction with their existing business model or in
advance of the introduction of a new business model. We have the domain
expertise, industry knowledge, technical capabilities and commitment to deliver
successful end-to-end enterprise, e-solutions and mobility solutions. Our
consultants employ a variety of hardware platforms/environments, operating
systems, databases, and development tools to suit a business strategy. We
believe our consultants can equip businesses with the means to make the right
decisions for today and for the future.
COTELLIGENT'S VALUE PROPOSITION
. Our track record is verifiable: We deliver results that work for our clients.
. Our solutions are designed for our clients' industries: We focus on their
needs and achieving their potentials.
. Our business experts' combine technical backgrounds with vertical industry
expertise: We provide our own teams of trained consultants and we believe
subcontractors or inexperienced consultants cannot match their performance.
. Our focus is on specific industries: We apply expertise in complex
environments to deliver solutions on time and within budget.
. Our partnerships are carefully managed: We choose and monitor these
relationships to ensure each delivers application and industry solutions that
best fit our clients' businesses.
. Our approach is to help our clients achieve self-sufficiency: We are
dedicated to knowledge transfer and remain accessible as our clients'
businesses evolve.
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We are confident in our approach to providing high-value services and solutions
and are particularly proud of our 55% rate of repeat business.
COTELLIGENT SERVICES
The integrated set of IT services and solutions we provide to our clients
includes:
. Strategic and Technical Assessments: We conduct strategic and technical
assessments across a variety of industries to help our clients understand
strengths and weaknesses inherent in their current environments. Our goal is
to make our clients more competitive in the markets in which they do
business. Our business focuses on leading our clients through strategy,
process, technology and personnel transformation.
We believe our many years of experience in a variety of industries make
Cotelligent consultants qualified to support companies seeking improvements
in operational efficiencies and marketplace performance. We believe our
consultants have had many successes in helping companies facilitate change in
their operating culture. Our experience provides insights for analyzing a
company's operating environment and uncovering opportunities for improvement.
Cotelligent works to strengthen our clients' competitive advantage.
. eBusiness Solutions: Cotelligent's eBusiness practice builds from experience
and expertise in all facets of eBusiness application design and creation.
Cotelligent can facilitate the development and execution of a viable plan
that integrates the Internet into new and/or existing business processes,
systems, and cultures. We apply strategy, analysis, design, and development
expertise to build smart eBusiness applications and infrastructure for our
clients, delivering solutions that leverage technology.
. Enterprise Solutions: Our extensive experience in Enterprise Solutions
distinguishes Cotelligent from its competitors, and we believe this aptitude
provides our clients with a reliable and scalable framework for managing and
moving business data across a variety of platforms. We help our clients
integrate systems across their organization, build better customer
relationships, improve back-office efficiencies, share knowledge, and
generally ensure that software applications in use by our clients work
together in form and function.
. mBusiness and Mobility Solutions: We are continuing to build our knowledge
and expertise in wireless data applications. We are enhancing our mBusiness
consulting practice through development of in-house courseware and processes
to train technical consultants on wireless applications. We have formed
strategic alliances with wireless data and middleware providers and are
pursuing additional relationships which we believe will strengthen our
mBusiness solution offerings and capabilities.
Cotelligent now offers its own MOBILE MANAGEMENT SOLUTION to our clients,
another service that distinguishes Cotelligent in the marketplace as a
premier provider of wired and wireless technology solutions.
COTELLIGENT'S MOBILE MANAGEMENT SOLUTION
MARKET CONDITIONS
The exponential growth of wireless and mobile networks has brought vast changes
in mobile devices, middleware development, standards and network implementation,
and user acceptance. According to a study by Iconixx, Inc., over the next five
years more than 80% of new corporate applications will be designed for non-PC
devices such as wireless phones or Personal Digital Assistants (PDAs). By the
end of that time, there will be more than 600 million users of mobile Internet
services. Other analysts project that by 2005, there will be one billion
wireless-data users globally. Robinson-Humphrey predicts that mCommerce will
grow at a five-year compounded annual growth rate of 200% worldwide from $0.5
billion in 2000 to $120 billion in 2005. IBM projects that the total mobile
Internet solutions and services market will exceed $83 billion in revenue by
2003.
Mobile Commerce consists of:
. Applications: Many new applications are becoming possible, and many existing
eCommerce applications can be modified for a mobile environment.
. User infrastructure: The design of new mobile commerce applications should
consider the capabilities of the user infrastructure - the mobile devices.
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. Network infrastructure: In mobile commerce, service quality primarily depends
on network resources and capacity. The framework also provides a developer-
provider plane, which addresses the different needs and views of application
developers, content providers and service providers.
. Wireless middleware: With its ability to hide the underlying network's
details from applications while providing a uniform and easy-to-use
interface, middleware is extremely important for developing new mobile
commerce applications.
Wireless and Mobile Middleware:
Middleware unites different applications, tools, networks and technologies,
giving users a common interface. Mobile middleware is an enabling layer of
software that connects eCommerce applications with different mobile networks and
operating systems without introducing mobility awareness--the need to adjust to
wide variations in bandwidth and resulting delays, and changes in user
location--in the applications.
According to a March 2001 report from International Data Corp. (IDC), the market
for mobile middleware should increase from $137 million in 2000 to $1.5 billion
by 2005. Further, IDC predicts that by 2004, the number of mobile professionals
will reach 27 million while the number of workers out in the field collecting
information will reach 18 million.
OUR SOLUTION
Cotelligent believes the next phase of electronic business growth will be in the
extension of office applications to mobile and wireless applications. With this
in mind, we have introduced a new mobility solution that gives clients with
transient sales, field or delivery personnel the connectivity and executive
capabilities needed to gather, prepare, send and receive data anywhere, anytime
via wired and wireless devices. Our new solution is designed to facilitate the
collection and exchange of information to backend ERP (Enterprise Resource
Planning) and corporate systems and create a wireless online extension of a
company's enterprise-wide network.
Cotelligent's new product, JASware(C), is an integrated client server based,
web-enabled mobile management software. Our solution enables centralized
management of the mobile environment including software distribution, inventory
control, data collection and data synchronization. Clients can also receive
reports and real-time information to ensure the distributed environment is
operating as efficiently and cost effectively as possible. Cotelligent can
tailor this solution to fit a client's mobility requirements and position the
client for growth, expansion, and emerging technologies.
Cotelligent offers integration and hosting services in conjunction with this
innovative solution, providing clients with the data management infrastructure
for a complete mobility solution from point of collection to result
dissemination. Hosting services are designed to enable organizations to rapidly
deploy and reduce the total cost of ownership of mobility application solutions.
It is our belief that businesses utilizing a full service ASP to host their
wireless gateways can realize significant cost savings over time when compared
with implementing in-house. Most of the direct cost savings from the wireless
ASP approach derive from maintenance, manpower and connection charges to the
wireless carriers as well as middleware licenses. We believe our end-to-end
mobility solution enables clients to reduce the cost of owning and managing
mobile business systems while improving end-user productivity.
Businesses with mobile work forces not yet ready to employ wireless
communications can also benefit from this technology. Cotelligent can help
provide such businesses with a strategic vision and direction today for a future
move to a wireless environment by creating greater efficiencies in their
existing mobile communication systems and establishing a framework for a much
easier transition to an entirely wireless platform when the time comes.
OUR COMPETITIVE ADVANTAGE
. Central Management: Given estimated increases in the number of users and the
reduced cost in wireless connectivity, it is conceivable that the
cost/benefits will even be greater in the years to come. Many organizations
implement mobile business solutions only to find that the cost of managing
hundreds of disconnected workers outweighs the benefit. This can be overcome
by providing central management and an infrastructure that can add control,
improve service levels and raise user productivity. With Cotelligent's
mobility solution and services, organizations can control an entire chain of
remote systems from a central source.
. Targeting the Business Professional: Unfortunately, many middleware vendors
today support small-device platforms with much the same technology used
for the larger laptop and desktop market. To compound this, the technology
used
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for communications and the basic infrastructure is not designed specifically
for the mobile/wireless user, but rather the connected online user. We
believe it is important to consider the full system requirements when
adopting a mobile infrastructure, an area in which we believe we have
significant experience and expertise. Although there are vendors who support
the mobile environment, these companies are targeting the consumer or casual
user of PDAs and handhelds. Cotelligent believes that our focus on the
business professional helps set us apart and will make us a strong contender
in this market.
CLIENT BASE
The Company does business with a broad client base of over 300 clients. During
the nine months ended December 31, 2000, our largest client accounted for
approximately 9% of our revenues and our ten largest clients accounted for
approximately 39% of our revenues. During the twelve months ended December 31,
2000, we recognized at least $1.0 million in revenues from 19 of our clients.
MARKETING
We initiated extensive marketing initiatives during the year 2000. Among our
accomplishments were the successful re-branding of Cotelligent as an IT
solutions provider with an accompanying tagline, logo and literature; a
redesigned and revamped Web site to support this new brand; and an ongoing
public relations outreach program to build our brand awareness in the business
and investment community.
Our new tagline, "Structure Without Boundaries," is meant to demonstrate that we
provide the structure to excel in the information technology industry where we
believe traditional boundaries no longer exist. This applies in the work we do
every day for our clients, to the work we do internally to strengthen and build
our company, to the way we adapt to a dynamic business environment and to the
way we employ continuing advances in technology.
Cotelligent's new brand and corporate identity were developed through the
collaborative efforts of corporate marketing and our Cotelligent colleagues. In
support of our corporate identity, we produced an integrated communications
system which we continue to enhance and expand.
We believe that strengthening our corporate identity and brand awareness helps
us to:
. Communicate clearly and consistently who we are and what we do
. Differentiate Cotelligent from our competitors
. Establish corporate reputation and marketplace momentum
. Improve brand perception, prestige and credibility
We intend to continue building upon our brand and executing effective marketing
campaigns that will keep us competitive in the IT consulting industry.
These marketing campaigns will also focus on the product management of our new
mobile management solution. This includes overall coordination of the solution's
definition and market positioning as well as ensuring delivery of all necessary
components of this solution. Components encompass the software product itself,
internal and external training, documentation and collateral production, and a
complete sales strategy to bring the solution to market.
SALES
In 2000, we hired a new Vice President of Sales, who has led the ramp up and
reorganization of our sales and business development organizations. We believe,
by consistently educating, orienting and measuring our sales force utilizing
consistent benchmarking procedures, we will be successful. This year we
developed a number of sales kits, what we call client engagement guides, or
"CEGs." These kits help our sales people to better understand the solutions and
services we offer and articulate in various verticals.
The CEGs provide Cotelligent with market intelligence, enabling our sales teams
to focus on specific market niches. Further, these valuable documents accelerate
the knowledge of the new sales professionals joining our Company. Using these
guides, we believe we can accelerate the effectiveness of our sales force in the
following ways:
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. Establishing a working knowledge of Cotelligent, our core competencies,
market focus and value proposition. Our Account Executives are now equipped
to approach a sales call with a fuller understanding of the client's industry
and issues, and articulate Cotelligent's value proposition.
. Building valued relationships with clients by solving today's problems and
providing them with a vision/strategy for the future.
. Accelerating pipeline development by concentrating on our vertical segments
and our core competencies.
. Increasing revenue.
The Company sells its solutions and services to both end users and through
channel partners.
CONSULTANTS AND RECRUITING
Recruiting skilled IT professionals is integral to Cotelligent's success. Our
current staff of approximately ten full-time technical recruiters use a variety
of methods to recruit qualified IT professionals including networking,
attendance at user groups, Internet recruiting sites, World Wide Web page
advertisements, and targeting local and regional colleges and universities. We
also rely on internal employee referral programs, advertising in newspapers and
technical periodicals, and occasionally on out-placement agencies.
Each applicant is interviewed by our recruiting personnel as well as our in-
house technical staff, many of whom are certified developers and therefore
competent at determining the skill sets of our candidates. Technical applicants
are required to complete a questionnaire regarding skill level, past
professional experience, education and availability, and are asked to provide
technical references. Once we determine an applicant is qualified, the
candidate's profile, relevant skills and experience are scanned into our
resource management database which can be searched based on a number of
different criteria, including specific skills and qualifications. We constantly
update our database to reflect changes in employee skills, experience or
availability to ensure that our clients' projects are staffed with the most
appropriate and competent technical consultants.
We intend to use similar methods to recruit professionals going forward.
COMPETITION
Cotelligent competes in the broad information technology consulting market, a
very competitive and fluid market. Depending on the situation, geographic
region or particular client need, we compete against both large business
consulting firms and more local, niche Web design and consulting solutions
firms. Our primary competitors include Internet solution providers, such as
Proxicom, iXL and Viant; systems integrators, such as IBM, Sapient and Scient;
strategic consulting firms, such as certain "Big Five" accounting firms; and
general management consulting firms. Our competitors may have significantly
greater financial, technical and marketing resources and generate greater
revenues than Cotelligent.
We believe that 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 consultants. We believe we have the talent
and resources to continue to compete effectively. Our focus on mBusiness and
our new mobile management solution offerings further support our competitive
advantage in the marketplace.
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 101 California Street, Suite 2050, San
Francisco, California 94111 and our telephone number is (415) 439-6400. In May
2001, we will move our headquarters to 44 Montgomery Street, Suite 4050, San
Francisco, California 94104 and we will keep our phone number (415) 439-6400.
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EMPLOYEES
At December 31, 2000, we had approximately 650 employees, including technical
staff of approximately 450 IT professionals.
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 CANNOT EFFECTIVELY STREAMLINE THE OPERATIONS WHICH REMAIN AFTER THE
DIVESTITURE OF OUR IT STAFF AUGMENTATION BUSINESS, OUR FINANCIAL PERFORMANCE AND
LIQUIDITY COULD SUFFER.
By selling our IT staff augmentation business, we shifted the strategic focus of
our business from one that had both an IT staff augmentation and technology
solutions services focus to one that focuses principally on technology
solutions. We have and will continue to dedicate managerial, administrative and
financial resources to coordinate our new business direction and reduce
unnecessary expenditures that do not benefit our technology solutions services.
If we fail to streamline our current expenditures and implement our future plans
for our remaining operations, our on-going liquidity and financial performance
could be materially and adversely affected.
IF WE ARE UNABLE TO GENERATE POSITIVE CASH FLOW AND RETURN TO PROFITABILITY IN
THE NEAR TERM, OUR FINANCIAL PERFORMANCE COULD SUFFER.
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 and provide
sufficient cash to fund working capital needs as we restructure the business.
Nevertheless, we realize these cash resources are limited and that if our
business does not begin to generate a positive cash flow and return to
profitability in the near term, our on-going liquidity and financial performance
could be materially and adversely affected.
IF THE EBUSINESS AND MBUSINESS 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 and
mBusiness markets. The failure of these markets to develop, 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 and business applications. Critical issues
concerning the commercial use of the Internet, such as security, reliability,
cost, accessibility and quality of service remain unresolved and 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 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.
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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. In the past we have relied on our credit facility to satisfy our
liquidity needs. Since that date we have not secured additional financing as we
have had sufficient cash resources from which to operate. We plan to continue
operating over the next year 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 look for financing and we
might, as a result, have a short-term liquidity problem. Nevertheless, we may
not be successful in securing financing, or if successful, the terms may not be
advantageous to us.
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 and project managers who possess the necessary skills and experience
to service our clients. 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 technical services, systems integrators, providers of
outsourcing services, computer systems consultants and temporary staffing
companies in a variety of industry segments. 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 PERSONNEL AND OUR ABILITY TO HIRE ADDITIONAL
MANAGEMENT PERSONNEL AT REGIONAL AND CORPORATE LEVELS.
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 businesses acquired 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 do not currently maintain key person life
insurance covering any of our executive officers or other members of senior
management.
WE FACE INTENSE COMPETITION THAT COULD ADVERSELY AFFECT OUR REVENUES AND
PROFITABILITY.
The IT consulting services industry is highly competitive, fragmented and
subject to rapid change. Our competitors include local, regional and national
consulting firms, system integration firms, professional service divisions of
applications software firms and the professional service groups of computer
equipment companies. We also compete with management information outsourcing
companies, "Big Five" accounting firms and general management consulting firms.
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
solution and service offerings through internal growth and acquisitions and we
expect to encounter additional competition from established companies in these
areas. Further, many large end user companies have recently consolidated their
vendor lists to a smaller number of preferred service providers. If we are
unable to service these companies adequately and become a preferred consulting
service provider, our ability to acquire new clients and retain existing clients
could be adversely affected. If we cannot compete effectively in our industry,
our revenues and profitability could be adversely affected.
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 intend to develop, market and sell 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 ahead of technical advancements in the market or
deliver these solutions and services, our operating results could suffer.
10
IF WE ARE UNABLE TO INCREASE OUR REVENUES THROUGH THE DEPLOYMENT OF OUR NEW
SALES AND BUSINESS DEVELOPMENT ORGANIZATION, OUR FUTURE GROWTH COULD SUFFER.
We have recently re-organized our sales force which has resulted in significant
turnover and the hiring of a large 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.
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. Our engagements, generally
billed on a time and materials basis, are terminable at any time by our clients,
generally without penalty. In addition, for the nine months ended December 31,
2000, our largest client and our ten largest clients accounted for approximately
9% and 39%, 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.
WE MAY MAKE ACQUISITIONS, WHICH IF PROVEN UNSUCCESSFUL, COULD NEGATIVELY AFFECT
OUR FUTURE PROFITABILITY AND GROWTH.
Although our strategy is focused on internal growth, it is possible that we
might make acquisitions. We may not be able to identify, acquire or profitably
manage additional businesses 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. 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.
WE MAY HAVE DIFFICULTY FINANCING OUR FUTURE ACQUISITIONS, WHICH COULD LIMIT OUR
GROWTH.
We expect to finance future acquisitions by using cash, notes and/or shares of
our common stock for all or a portion of the consideration to be paid. To the
extent that we issue shares of our common stock as payment for an acquisition, a
material decline in the market price of our common stock could make our stock
less attractive consideration. We may not have sufficient cash resources to
make acquisitions and we may need to obtain additional capital through debt or
equity financing to sustain our growth. We may not be able to obtain additional
financing when needed on satisfactory terms, if at all.
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; and
. 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.
11
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 FINANCIAL RESULTS ARE SUBJECT TO QUARTERLY FLUCTUATIONS.
Our revenues, gross margins and operating margins for any particular quarter are
generally affected by business mix and billing rates, resource requirements,
marketing activities, retention rates, the timing and size of client projects
and fluctuations in demand as a result of the technology market. Consequently,
our results for any quarter may not be indicative of future results.
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.
ITEM 2. PROPERTIES.
Our principal executive offices and our continuing operating subsidiaries are
located in 12 facilities with an aggregate of approximately 234,000 square feet
and are leased at aggregate current monthly rents of approximately $0.3 million
with no lease commitment extending past the year 2006. 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.
12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
PRICE RANGE OF COMMON STOCK
The following table sets forth, for the periods indicated, the high and low
sales prices for the Common Stock as reported on the NYSE under the symbol
"CGZ".
HIGH LOW
-------- ---------
FISCAL YEAR ENDED MARCH 31, 1999
April 1, 1998 through June 30, 1998........................... $29.63 $17.69
July 1, 1998 through September 30, 1998....................... $23.13 $10.75
October 1, 1998 through December 31, 1998..................... $21.31 $12.50
January 1, 1999 through March 31, 1999........................ $21.50 $ 8.88
FISCAL YEAR ENDED MARCH 31, 2000
April 1, 1999 through June 30, 1999........................... $15.31 $ 5.63
July 1, 1999 through September 30, 1999....................... $ 7.81 $ 3.50
October 1, 1999 through December 31, 1999..................... $ 6.94 $ 2.88
January 3, 2000 through March 31, 2000 ....................... $ 6.69 $ 4.25
NINE MONTHS ENDED DECEMBER 31, 2000
April 1, 2000 through June 30, 2000........................... $ 7.25 $ 3.75
July 1, 2000 through September 30, 2000....................... $ 5.56 $ 3.06
October 1, 2000 through December 31, 2000..................... $ 3.44 $ 0.63
FISCAL YEAR ENDED DECEMBER 31, 2001
January 1, 2001 through March 29, 2001........................ $ 1.19 $ 0.58
On March 29, 2001, the last reported sales price of the Common Stock, as
reported on the NYSE, was $0.66 per share. On March 29, 2001, there were
230 stockholders of record of the Common Stock.
ITEM 6. SELECTED FINANCIAL DATA.
In July 2000, the Company announced a change in its fiscal year end to
December 31 from March 31. Consequently, the Company's most recently
completed fiscal period is a nine-month transition period ended December 31,
2000.
The selected financial data with respect to Cotelligent's consolidated
statements of operations for the nine months ended December 31, 2000 and years
ended March 31, 1997, 1998, 1999 and 2000 and with respect to the consolidated
balance sheets as of December 31, 2000 and March 31, 1997, 1998, 1999 and 2000
have been derived from Cotelligent's financial statements which have been
audited by Ar thur Andersen LLP.
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".
13
SELECTED FINANCIAL DATA
COTELLIGENT, INC.
(In thousands, except share data)
Nine Months Ended
December 31, Year Ended March 31,
------------------------ ------------------------------------------------
(Unaudited)
STATEMENT OF OPERATIONS DATA (1)(2): 2000 1999 2000 1999 1998 1997
---------- ---------- --------- ---------- --------- ---------
Revenues........................................... $ 66,292 $ 78,264 $ 105,564 $ 88,739 $ 59,202 $ 43,523
Cost of services................................... 44,884 51,258 69,995 55,730 39,303 29,394
---------- ---------- --------- ---------- --------- ---------
Gross profit.................................... 21,408 27,006 35,569 33,009 19,899 14,129
Selling, general and administrative expenses....... 36,742 30,374 41,860 25,641 20,619 13,486
Depreciation and amortization of goodwill ......... 3,035 2,413 3,266 1,838 654 409
Impairment of long-lived assets.................... 41,478 - - - - -
Restructuring charge............................... 4,200 - - - - -
Non-recurring transaction costs..................... - - - - 214 1,107
---------- ---------- --------- ---------- --------- ---------
Operating income (loss) ............................ (64,047) (5,781) (9,557) 5,530 (1,588) (873)
Other income (expense).............................. (323) (2,474) (3,756) 128 (684) (16)
---------- ---------- --------- ---------- --------- ---------
Income (loss) before provision for income taxes..... (64,370) (8,255) (13,313) 5,658 (2,272) (889)
Provision (benefit) for income taxes................ (9,334) (2,890) (4,660) 2,268 (1,201) (446)
---------- ---------- --------- ---------- --------- ---------
Income (loss) from continuing operations............ (55,036) (5,365) (8,653) 3,390 (1,071) (443)
---------- ---------- --------- ---------- --------- ---------
Income (loss) from discontinued operations.......... 2,889 (12,234) (9,990) 11,926 7,502 4,153
Gain on sale of discontinued operations, net of
taxes of income $14,464............................. 9,963 - - - - -
---------- ---------- --------- ---------- --------- ---------
Income (loss) from discontinued operations.......... 12,852 (12,234) (9,990) 11,926 7,502 4,153
---------- ---------- --------- ---------- --------- ---------
Net income (loss).................................. $ (42,184) $ (17,599) $ (18,643) $ 15,316 $ 6,431 $ 3,710
========== ========== ========= ========== ========= =========
Earnings per share
Basic -
Income (loss) from continuing operations............ $ (3.61) $ (0.38) $ (0.60) $ 0.24 $ (0.09) $ (0.03)
Income (loss) from discontinued operations.......... 0.84 (0.87) (0.70) 0.85 0.65 0.36
---------- ---------- --------- ---------- --------- ---------
Net income (loss)................................... $ (2.77) $ (1.25) $ (1.30) $ 1.09 $ 0.56 $ 0.33
========== ========== ========= ========== ========= =========
Diluted -
Income (loss) from continuing operations............ $ (3.61) $ (0.38) $ (0.60) $ 0.24 $ (0.09) $ (0.03)
Income (loss) from discontinued operations.......... 0.84 (0.87) (0.70) 0.84 0.64 0.36
---------- ---------- --------- ---------- --------- ---------
Net income (loss) $ (2.77) $ (1.25) $ (1.30) $ 1.08 $ 0.55 $ 0.33
========== ========== ========= ========== ========= =========
Weighted average number of shares outstanding
Basic............................................... 15,230,969 14,060,481 14,298,693 14,078,068 11,485,393 11,328,518
Diluted............................................. 15,230,969 14,060,481 14,298,693 14,236,786 11,610,339 11,402,513
MARCH 31,
DECEMBER 31, -----------------------------------
2000 2000 1999 1998 1997
---------- --------- ---------- --------- ---------
BALANCE SHEET DATA:
Working capital................................... 33,507 43,047 97,614 79,025 18,191
Total assets...................................... 67,714 159,527 158,374 103,335 32,127
Long-term debt less current portion............... 1,000 52 28,191 171 326
Stockholders' equity.............................a 45,003 85,980 107,833 90,339 23,137
..........................................
(1) During fiscal 1997 and 1998, the Company acquired ten businesses accounted
for under the pooling-of-interests method (the "Pooled Companies") and has
restated its financial statements for all periods to present financial data
as if Cotelligent and the Pooled Companies had always been members of the
same operating group. In addition, during the fiscal years ended March 31,
1997, 1998, 1999 and 2000, the Company acquired twelve 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 and joint
control. 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.
14
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. Consequently, the Company's most
recently completed fiscal period is a nine-month transition period ended
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 and joint
control. 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.
The Company derives substantially all of its revenues from IT consulting and
outsourcing service activities. The majority of these activities are provided
under time and materials billing arrangements, and revenues are recorded as work
is performed. Revenues are directly related to the total number of hours billed
to clients and the associated hourly billing rates. Hourly billing rates are
established for each service 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 are directly related to the total number
of users of the software and is recognized over the period in which the software
is licensed to the client.
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 (which historically have not
constituted a significant portion of total revenues) are not properly priced, if
consultant cost increases exceed bill rate increases or if there are high levels
of un-utilized 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 significant 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 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.
15
RESULTS OF OPERATIONS
NINE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1999
Revenues. Revenues decreased in the nine months ended December 31, 2000 by
$12.0 million, or 15%, to $66.3 million from $78.3 million in the nine months
ended December 31, 1999. The decrease was primarily due to three factors (1) a
general reduction in demand for the Company's services, (2) a reorganization of
the Company's sales force resulting in significant turnover of sales personnel
and therefore, associated ramp-up time with the new evolving sales force, (3)
discontinuation of revenues from the Company's Philadelphia-based operations
from August 8, 2000 through December 6, 2000 while contributed to the bSmart.to
joint venture and accounted for on the equity method of accounting. Partially
offsetting the decrease in revenues was a 21% increase in the average billing
rate to $110.02 from $91.17 in the comparable period.
Gross Profit. Gross profit decreased in the nine months ended December 31,
2000 by $5.6 million, or 21%, to $21.4 million from $27.0 million in the nine
months ended December 31, 1999. The decrease was primarily due to a general
reduction in demand for the Company's services, a reorganization of the
Company's sales force resulting in significant turnover of sales personnel, and
the contribution of the Company's Philadelphia-based operations to the joint
venture from August 8, 2000 through December 6, 2000. Gross profit as a
percentage of revenues decreased due to lower utilization of salaried billable
staff caused by a downturn in demand for services and the exclusion of the
Philadelphia -based operations while contributed to the bSmart.to joint venture,
which had inherently higher gross profit as a percentage of revenue. The
decrease was partially offset by an increase in the average billing rate.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased in the nine months ended December 31, 2000 by
$6.4 million, or 21%, to $36.7 million from $30.4 million in the nine months
ended December 31, 1999. The increase was primarily due to increases in
employee wages and benefits incurred in the Company's effort to move towards a
centralized business model which required a more robust infrastructure and was
put into place prior to management's decision to divest the majority of its IT
staff augmentation business. In addition, the Company increased the provision
for doubtful accounts receivable (primarily related to dot.com customers where
venture capital funding has not materialized), paid termination benefits to
employees at locations closed, and increased marketing efforts associated with
the re-branding of the Company. Selling, general and administrative expenses as
a percent of revenues were 55.4% for the nine months ended December 31, 2000
compared to 38.8% for the same period of the prior year. Although the Company
was in the process of divesting of its discontinued operations during the nine
months ended December 31, 2000, selling, general and administrative expenses did
not decrease as the Company continued to provide the infrastructure and support
for the divested operations.
Depreciation and Amortization of Goodwill. Depreciation and amortization
increased in the nine months ended December 31, 2000 by $0.6 million, or 26%, to
$3.0 million from $2.4 million in the nine months ended December 31, 1999. The
increase was primarily due to the spending on new state-of-the art technology
equipment and related depreciation.
Impairment of long-lived assets. During the nine months ended December 31,
2000, the Company recognized an impairment of long-lived assets charge for $41.5
million representing a $37.4 million goodwill impairment charge and a $4.1
million write-off of investment costs associated with the bSmart.to joint
venture.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
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 $37.4
million impairment of goodwill during the nine months ended December 31, 2000 as
the future undiscounted cash flows of certain of its long-lived assets were
estimated to be less than the asset's related carrying value.
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 $4.1 million
impairment of long-lived assets charge related to investment costs associated
with the formation of and the investment in the bSmart.to joint venture.
16
Restructuring Charge. During the nine months ended December 31, 2000, the
Company recognized a $4.2 million restructuring charge resulting from a thorough
review of its cost structure in order to streamline its operations commensurate
with its revenue base. The charge includes provisions for severance of
approximately 90 management and operating staff ($1.1 million) as well as
closure costs associated with a plan to consolidate or discontinue certain
operating locations ($3.1 million).
Other Income (Expense). Other income (expense) primarily consists of interest
expense, net of interest income. Interest expense, net of interest income, was
$0.4 million for the nine months ended December 31, 2000 as compared to interest
expense, net of interest income of $2.4 million for fiscal 1999. The decrease
in net interest expense 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 during the
nine months ended December 31, 2000.
Provision (Benefit) for Income Taxes. The Company realized a benefit of $9.3
million, or an effective tax rate of 15% of pre-tax income loss for the nine
months ended December 31, 2000, compared to an income tax benefit of $2.9
million, or an effective tax rate of 35% for the nine months ended December 31,
1999. The decrease in the effective tax rate reflects recognition of a
valuation allowance against the current year benefit.
Income (Loss) from Discontinued Operations. Discontinued operations is
comprised of operations associated with the IT staff augmentation segment of the
Company's business and the gain on the sale of the discontinued operations.
The net income from discontinued operations of $2.9 million for the nine months
ended December 31, 2000 compares to a net loss of $12.2 million for the nine
months ended December 31, 1999. The increase in profitability was the result of
one-time non-recurring charges in the nine months ended December 31, 1999 of
$20.0 million related to goodwill impairment and $4.9 million for restructuring.
These charges were offset by lower revenues in the nine months ended December
31, 2000 resulting from the sale of the majority of the discontinued operations
on June 30, 2000.
The gain on sale of the discontinued operations of $10.0 million for the nine
months ended December 31, 2000 consists of three separate transactions including
1) the sale of the majority of the IT staff augmentation business on June 30,
2000 for proceeds of $116.5 million and the assumption of approximately $10.0
million in liabilities, 2) the sale of the IT staff augmentation operations in
Orlando on July 14, 2000 for $0.7 million and the assumption of $0.4 million of
assumed liabilities and 3) the sale of the international IT staff augmentation
operation, Global Resources, for $4.5 million, consisting of a secured
promissory note bearing interest at 9.5% payable over five years.
YEAR ENDED MARCH 31, 2000 COMPARED TO YEAR ENDED MARCH 31, 1999
Revenues. Revenues increased during the year ended March 31, 2000 by $16.8
million, or 19%, to $105.6 million from $88.7 million for during the year ended
March 31, 1999. This increase was primarily due to a 13.6% increase in the
average billing rate to $91.17 from $80.59 in the during the year ended March
31, 1999 and the full year effect of the inclusion of revenues of the companies
acquired under the purchase method of accounting during fiscal during the year
ended March 31, 1999 ("Fiscal Year 1999 Purchases").
Gross Profit. Gross profit increased during the year ended March 31, 2000 by
$2.6 million, or 8%, to $35.6 million from $33.0 million in the year ended March
31, 1999 primarily as a result of the 13.6% increase in the average billing rate
and the full year effect of the inclusion of the Fiscal Year 1999 Purchases.
Gross profit as a percentage of revenues decreased to 34% from 37% primarily due
to lower utilization of salaried billable staff caused by a downturn in demand
for services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased during the year ended March 31, 2000 by $16.3
million, or 63%, to $41.9 million from $25.6 million in the year ended March 31,
1999. The increase was primarily due to staff added to support company-wide
growth anticipated at the beginning of the fiscal year, the development of the
eBusiness practice, the development and launch of a new marketing campaign and
the full year effect of the inclusion of the Fiscal Year 1999 Purchases.
Selling, general and administrative expenses increased as a percentage of
revenues to 39.7% of revenues in during the year ended March 31, 2000 from 28.9%
in the year ended March 31, 1999.
17
Depreciation and Amortization of Goodwill. Depreciation and amortization
increased during the year ended March 31, 2000 by $1.4 million, or 78%, to $3.3
million from $1.8 million in the year ended March 31, 1999 primarily due to the
full year effect of amortization of the inclusion of the Fiscal Year 1999
Purchases together with an increase in amortization of goodwill related to the
purchase of a business during the year ended March 31, 2000.
Other Income (Expense). Other income (expense) primarily consists of interest
expense, net of interest income. Interest expense, net of interest income, was
$3.6 million for the year ended March 31, 2000 as compared to interest income,
net of interest expense, of $0.1 million for during the year ended March 31,
1999.
Provision (Benefit) for Income Taxes. The Company realized a benefit of $4.7
million, or an effective tax rate of 35.0% of pre-tax income loss for the year
ended March 31, 2000, compared to income tax expense of $2.3 million, or an
effective tax rate of 40.1% for the year ended March 31, 1999. The decrease in
the effective tax rate, as compared to the prior year, reflects a reduced
federal statutory rate and reduced state income taxes.
Income (Loss) from Discontinued Operations. Discontinued operations is
comprised of operations associated with the IT staff augmentation segment of the
Company's business. The net loss from discontinued operations of $10.0 million
during the year ended March 31, 2000 compares to net income of $11.9 million for
the year ended March 31, 1999. The decrease in profitability was the result of
recognizing charges of $20.0 million related to goodwill impairment, $4.9
million for restructuring as well as an increase in selling, general and
administrative expenses due to the full year effect of the inclusion of the
Fiscal Year 1999 Purchases. These costs were partially offset by an income tax
benefit of $5.4 million to reflect the future tax benefits of net operating
losses generated in the year ended March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its growth principally through cash flows
from operations, borrowing under its credit facilities and the use the net
proceeds from its public offerings.
Most recently, the Company maintained a credit facility ("Credit Line") with a
consortium of banks (the "Lenders") under which it borrowed to fund working
capital needs. The Credit Line included covenants under which the Company was
in violation beginning in December 1999, yet the Lenders agreed to waive the
covenant violations until the sale of the majority of the Company's IT staff
augmentation business was completed. Accordingly, amounts due under the Credit
Line were classified as current liabilities at March 31, 2000. On June 30,
2000, the Company completed the sale of the majority of the IT staff
augmentation business for $116.5 million and the assumption of certain
liabilities. On June 30, 2000 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. During the
remainder of the nine months ended December 31, 2000, the Company maintained no
credit facility.
Cash used in operating activities was $9.8 million for the nine months ended
December 31, 2000. The primary sources of liquidity for the Company going
forward are the collection of its accounts receivable and the cash balances
resulting from the sale of the discontinued operations. Total receivables were
82 and 78 days of quarterly revenue at December 31, 2000 and March 31, 2000,
respectively (after reflecting a reclassification between accounts receivable
and net assets of discontinued operations from amounts previously reported on
the March 31, 2000 balance sheet). The Company looks to improve collections in
the near term. Shortly after December 31, 2000, the Company completed a
detailed forecast of the Company's operations that includes a plan to achieve a
positive cash flow and return to profitability prior to December 31, 2001.
Based on this forecast and the Company's operations through March 2001,
management believes that the remaining cash on hand will provide adequate cash
to fund its anticipated cash working capital needs at least through next year.
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.
18
RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
modified the method of accounting for derivative instruments. This statement is
effective for periods beginning after June 15, 2000. The Company does not
believe that adoption of SFAS No. 133 will have a material impact on its
financial position, results of operations or disclosures.
In March 2000, the FASB released Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation, an interpretation of APB No. 25,"
which provides clarification of Opinion No. 25 for certain issues, such as the
determination of who is an employee, the criteria for determining whether a plan
qualifies as a non-compensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business
combination. The Company believes that its practices are in conformity with this
guidance, and therefore Interpretation No. 44 will not have a material impact on
its financial statements.
SUBSEQUENT EVENTS
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 exchange existing
stock option grants for a new option grant. Election to participate in the
program had to be made by March 16, 2001. New option grants will be issued,
with the exercise price of the new grant based on the closing price of the
Company's Common Stock, on September 21, 2001.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cotelligent, Inc.:
We have audited the accompanying consolidated balance sheets of Cotelligent,
Inc. and subsidiaries as of December 31, 2000 and March 31, 2000, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the nine months ended December 31, 2000, and for each of the two years
in the period ended March 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cotelligent, Inc. and
subsidiaries as of December 31, 2000 and March 31, 2000, and the results of
their operations and their cash flows for the nine months ended December 31,
2000, and for each of the two years in the period ended March 31, 2000, in
conformity with accounting principles generally accepted in the United States.
Arthur Andersen LLP
San Francisco, California
February 5, 2001
20
COTELLIGENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
DECEMBER 31, 2000 MARCH 31, 2000
------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 26,500 $ 4,794
Accounts receivable, including unbilled accounts of $4,043
and $5,716 and net of allowance for doubtful accounts
of $2,615 and $1,880, respectively................................ 19,229 23,435
Deferred tax assets................................................ 1,435 681
Current portion of notes receivable from officers ................. 1,703 505
Prepaid expenses and other......................................... 1,916 2,289
Net assets of discontinued operations ............................. - 84,721
------------------- -------------------
Total current assets............................................. 50,783 116,425
Property and equipment, net.......................................... 6,761 5,697
Goodwill, net of accumulated amortization of $0 and
$1,913, respectively................................................. - 35,236
Notes receivable from officers....................................... - 1,119
Note receivable from acquirer of discontinued operations............. 4,459 -
Investment........................................................... 2,047 -
Other assets......................................................... 664 1,050
------------------- -------------------
Total assets..................................................... $ 64,714 $ 159,527
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt and current maturities of long-term debt........... $ 212 $ 48,958
Accounts payable................................................... 2,047 2,055
Accrued compensation and related payroll liabilities............... 5,826 6,312
Income taxes payable............................................... 748 1,957
Obligations related to acquired/sold businesses.................... 3,125 9,011
Restructuring liabilities.......................................... 2,136 1,875
Other accrued liabilities.......................................... 3,182 3,210
------------------- -------------------
Total current liabilities........................................ 17,276 73,378
Long-term debt....................................................... 1,000 52
Deferred tax liabilities............................................. 1,435 117
------------------- -------------------
Total liabilities................................................ 19,711 73,547
------------------- -------------------
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,
15,349,630 and 15,065,400 shares issued and outstanding,
respectively..................................................... 153 151
Additional paid-in capital......................................... 86,866 85,442
Notes receivable from stockholders................................. (6,368) (6,149)
Retained earnings (deficit)........................................ (35,648) 6,536
------------------- -------------------
Total stockholders' equity....................................... 45,003 85,980
------------------- -------------------
Total liabilities and stockholders' equity....................... $ 64,714 $ 159,527
=================== ===================
The accompanying notes are an integral part of these consolidated financial
statements.
21
COTELLIGENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
NINE MONTHS ENDED YEAR ENDED MARCH 31,
DECEMBER 31, -----------------------------------------
2000 2000 1999
-------------------- -------------------- -----------------
Revenues....................................................... $ 66,292 $ 105,564 $ 88,739
Cost of services............................................... 44,884 69,995 55,730
-------------------- -------------------- -----------------
Gross profit........................................... 21,408 35,569 33,009
Selling, general and administrative expenses................... 36,742 41,860 25,641
Depreciation and amortization of goodwill...................... 3,035 3,266 1,838
Impairment of long-lived assets................................ 41,478 - -
Restructuring charge........................................... 4,200 - -
-------------------- -------------------- -----------------
Operating income (loss)........................................ (64,047) (9,557) 5,530
Other income (expense):
Interest expense............................................ (1,564) (3,915) (523)
Interest income............................................. 1,194 278 667
Other....................................................... 47 (119) (16)
-------------------- -------------------- -----------------
Total other income (expense).............................. (323) (3,756) 128
-------------------- -------------------- -----------------
Income (loss) from continuing operations before income taxes .. (64,370) (13,313) 5,658
Provision (benefit) for income taxes........................... (9,334) (4,660) 2,268
-------------------- -------------------- -----------------
Income (loss) from continuing operations....................... (55,036) (8,653) 3,390
Income (loss) from discontinued operations less
provision (benefit) for income taxes of $1,556,
($5,379), and $7,989...................................... 2,889 (9,990) 11,926
Gain on sale of discontinued operation, net of income taxes
of $14,464................................................ 9,963 - -
-------------------- -------------------- -----------------
Income (loss) from discontinued operations................ 12,852 (9,990) 11,926
-------------------- -------------------- -----------------
Net income (loss).............................................. $ (42,184) $ (18,643) $ 15,316
==================== ==================== =================
Earnings per share:
Basic -
Income (loss) from continuing operations..................... $ (3.61) $ (0.60) $ 0.24
Income (loss) from discontinued operations 0.84 (0.70) 0.85
-------------------- -------------------- -----------------
Net income (loss).............................................. $ (2.77) $ (1.30) $ 1.09
==================== ==================== =================
Diluted -
Income (loss) from continuing operations..................... $ (3.61) $ (0.60) $ 0.24
Income (loss) from discontinued operations................... 0.84 (0.70) 0.84
-------------------- -------------------- -----------------
Net income (loss).............................................. $ (2.77) $ (1.30) $ 1.08
==================== ==================== =================
Weighted average number of shares outstanding
Basic ................................................. 15,230,969 14,298,693 14,078,068
==================== ==================== =================
Diluted ............................................... 15,230,969 14,298,693 14,236,786
==================== ==================== =================
The accompanying notes are an integral part of these consolidated financial
statements.
22
COTELLIGENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
NOTES
ADDITIONAL RECEIVABLE RETAINED
PAID-IN FROM EARNINGS TOTAL
SHARES AMOUNT CAPITAL STOCKHOLDERS (DEFICIT) EQUITY
---------- --------- ----------- ------------ --------- ----------
Balance at March 31, 1998.................... 14,057,884 $141 $ 80,335 $ - $ 9,863 $ 90,339
Issuance of Common Stock, net of costs....... 1,359,747 14 24,271 - - 24,285
Tax benefit on stock options exercised....... - - 140 - - 140
Repurchase of Common Stock................... (1,761,600) (18) (22,229) - - (22,247)
Net income................................... - - - - 15,316 15,316
---------- -------- ------------ ------------ --------- ---------
Balance at March 31, 1999.................... 13,656,031 137 82,517 - 25,179 107,833
Issuance of Common Stock, net of costs ...... 2,116,978 21 8,052 (6,149) 1,924
Tax benefit on stock options exercised....... - - 38 - - 38
Repurchase of Common Stock................... (238,400) (2) (2,475) - - (2,477)
Return of Common Stock previously issued to
acquire purchased company ................... (469,209) (5) (2,690) - - (2,695)
Net loss..................................... - - - - (18,643) (18,643)
---------- -------- ------------ ------------ --------- ---------
Balance at March 31, 2000.................... 15,065,400 151 85,442 (6,149) 6,536 85,980
Issuance of Common Stock, net of costs ...... 209,230 2 739 (332) - 409
Shares issued in connection with earnout to
sellers of acquired businesses.................. 100,000 1 571 - - 572
Return of shares issued under note
receivable from stockholder..................... (25,000) (1) (112) 113 - -
Warrants received in connection with
investment in joint venture..................... - - 900 - - 900
Warrants cancelled in connection with
dissolution of joint venture.................... - - (900) - - (900)
Warrants issued in connection with
investment in joint venture..................... - - 226 - - 226
Net loss........................................ - - - - (42,184) (42,184)
---------- -------- ------------ ------------ --------- ---------
Balance at December 31, 2000................... 15,349,630 $153 $ 86,866 $(6,368) $(35,648) $ 45,003
========== ======== ============ ============ ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
23
COTELLIGENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS ENDED YEAR ENDED MARCH 31,
DECEMBER 31, ------------------------------------
2000 2000 1999
-------------------- -------------- ---------------
Cash flows from operating activities:
Net income (loss).......................................... $(42,184) $(18,643) $ 15,316
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Gain on sale of discontinued operations.................. (9,963) - -
Loss (income) from discontinued operations .............. (2,889) 9,990 (11,926)
Depreciation and amortization............................ 3,035 3,266 1,838
Impairment of long-lived assets.......................... 41,478 - -
Equity loss from investments............................. 13 - -
Deferred income taxes, net............................... 564 (425) (642)
Loss on disposal of property and equipment............... 11 10 16
Provision for doubtful accounts.......................... 3,845 818 1,525
Changes in current assets and liabilities:
Accounts receivable.................................... 435 (931) (5,042)
Prepaid expenses and other current assets.............. (65) 980 (3,389)
Accounts payable and accrued expenses.................. (2,981) (1,079) 1,031
Income taxes payable................................... (1,209) (3,745) 2,165
Changes in other assets.................................. 128 63 1,436
Changes in long-term liabilities......................... - - (18)
------------- ---------------- -----------------
Net cash provided by (used in) operating activities........ (9,782) (9,696) 2,310
Cash flows from investing activities:
Proceeds from sale of assets............................... - 603 -
Investments, net........................................... (6,097) (253) -
Purchase of businesses, net of cash of acquired companies.. - (2,756) (18,152)
Purchases of property and equipment........................ (1,778) (3,892) (1,021)
------------- ---------------- -----------------
Net cash used in investing activities...................... (7,875) (6,298) (19,173)
Cash flows from financing activities:
Borrowing under credit agreement........................... 9,111 20,668 27,864
Payments under credit agreement............................ (57,890) - -
Payments on capital lease obligations...................... (122) (82) (246)
Payments on amounts due sellers of acquired
businesses............................................... (8,534) (730) -
Net borrowings (repayments) on short-term debt............. - 9 238
Net repayments (borrowings) on notes receivable from
officers................................................. 100 (1,433) 49
Net proceeds from issuance of common stock................. 409 1,462 1,989
Repurchase of common stock................................. - (2,477) (22,247)
------------- ---------------- -----------------
Net cash provided by (used in) financing activities........ (56,926) 17,417 7,647
------------- -------------- ---------------
Cash flows provided by (used for) discontinued operations:
Cash provided by (used for) discontinued operations........ (21,192) 2,399 (30,340)
Proceeds from sale of IT staff augmentation business....... 117,481 - -
------------- ---------------- -----------------
Cash provided by (used for) discontinued operations........ 96,289 2,399 (30,340)
------------- ---------------- -----------------
Net increase (decrease) in cash and cash equivalents....... 21,706 3,822 (39,556)
Cash and cash equivalents at beginning of period........... 4,794 972 40,528
------------- ---------------- -----------------
Cash and cash equivalents at end of period................. $ 26,500 $ 4,794 $ 972
============= ================ =================
The accompanying notes are an integral part of these consolidated financial
statements.
24
COTELLIGENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
NINE MONTHS
ENDED YEAR ENDED MARCH 31,
DECEMBER 31, ------------------------------------
2000 2000 1999
-------------- -------------- ----------------
Supplemental disclosures of cash flow information:
Interest paid.................................................... $1,914 $3,338 $ 444
Income taxes paid................................................ 32 788 8,744
Significant non-cash transactions:
Fair market value of Common Stock issued to acquire business... - 500 21,336
Return of shares previously issued to acquire business ........ - 2,695 -
Adjustments to purchase price of businesses acquired in prior
years.......................................................... 1,018 8,386 3,160
Fair value of Common Stock issued to seller of acquired
business....................................................... 572 - -
Common stock issued to employees for notes receivable ......... 332 6,149 -
Return of Common Stock previously issued to employee for note 113 - -
receivable.....................................................
Warrants issued in connection with joint venture............... 226 - -
Note receivable issued in connection with sale of Global
Resources...................................................... 4,459 - -
The accompanying notes are an integral part of these consolidated financial
statements.
25
COTELLIGENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 1 - BUSINESS ORGANIZATION
Cotelligent, Inc. ("Cotelligent" or the "Company"), a Delaware corporation, was
formed to acquire, own and operate software consulting businesses specializing
in providing information technology ("IT") consultants on a contract basis and
consulting and outsourcing services to businesses with complex IT operations.
The Company has acquired 22 IT consulting businesses. 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.
In July 2000, the Company changed its fiscal year end to December 31 from March
31. Consequently, the Company's most recently completed fiscal period is a nine-
month transition period ended December 31, 2000.
The Company has suffered significant operating losses as well as negative
operating cash flows in the last two 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 - SUMMARY OF 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 and give
retroactive effect to the results of companies acquired utilizing the pooling-
of-interests method of accounting for all periods presented. All significant
intercompany transactions and accounts have been eliminated.
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.
26
COTELLIGENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Property and Equipment
Property and equipment are stated at cost. Depreciation, including amounts
recorded for property and equipment acquired under capitalized leases, is
provided over the estimated useful lives of the respective assets (generally
ranging from three to ten years) 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
Goodwill represents the excess of cost over fair value of net tangible assets
acquired through acquisitions and is being amortized on a straight-line basis
over the period of 30 years. On a periodic basis, management reviews goodwill
to assess potential impairment. Impairment is measured by comparing the
undiscounted cash flows expected to be generated by the underlying asset to the
asset's carrying value. If the undiscounted cash flow is less than the carrying
value, an impairment charge is recognized and the asset is reduced to its fair
value.
Investments
Investments in other businesses where ownership is less than 20% are accounted
for on 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 on the equity method of accounting.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, short-term accounts
receivable and accounts payable for which current carrying amounts are equal to
or approximate fair market value. Additionally, interest rates on outstanding
debt are at market rates for debt with similar terms and average maturities;
therefore, the carrying value of debt approximates its fair value.
Revenue Recognition
Revenues pursuant to time and materials contracts are generally recognized as
services are performed and collectibility is determined. Revenues pursuant to
fixed-fee contracts are generally recognized as services are rendered on the
percentage-of-completion method of accounting based on labor hours incurred to
total estimated labor hours to complete. Revenues exclude reimbursable expenses
charged to and collected from clients.
Cost of Services
Cost of services expenses consist primarily of compensation and benefits of
Cotelligent's employees engaged in the delivery of consulting services.
Income Taxes
The Company accounts for income taxes using an asset and liability approach
requiring the recognition of deferred tax assets and liabilities for the tax
consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities.
Certain businesses acquired by the Company elected to be treated as S
corporations for federal and state income tax purposes prior to acquisition by
the Company. Accordingly, any tax liabilities of these businesses were the
responsibility of the respective stockholders. These S corporation elections
terminated upon merger with Cotelligent.
Return of Common Stock
The return of Common Stock previously issued to acquire purchased companies is
recorded at the market price of the Common Stock on the day the shares were
returned and resulted in a decrease to both goodwill and stockholders' equity.
27
COTELLIGENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Earnings Per Share
Basic earnings per share was calculated by dividing net income by the weighted
average number of shares of common stock outstanding during the period. Diluted
earnings per share includes the impact of common stock options 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 and the net assets of these operations are
reflected in the accompanying consolidated financial statements as discontinued
operations and net assets of discontinued operations, respectively.
Recent Accounting Pronouncements
In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
modified the method of accounting for derivative instruments. This statement is
effective for financial statements for periods beginning after June 15, 2000.
The Company does not believe that adoption of SFAS No. 133 will have a material
impact on its financial position, results of operations or disclosures.
In March 2000, the FASB released Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation, an interpretation of APB No. 25,"
which provides clarification of Opinion No. 25 for certain issues, such as the
determination of who is an employee, the criteria for determining whether a plan
qualifies as a non-compensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business
combination. The Company believes that its practices are in conformity with this
guidance, and therefore Interpretation No. 44 will not have a material impact on
its financial statements.
Reclassifications
Certain reclassifications have been made in the prior years' financial
statements to conform to the presentation in the current period.
NOTE 3 - BUSINESS COMBINATIONS
The Company has acquired 22 IT consulting businesses over the four fiscal years
ended March 31, 2000. The accompanying financial statements include the
operating results of five purchase acquisitions and three pooling-of-interests
acquisitions made since 1997. The remainder of the 22 acquisitions have been
discontinued, pursuant to the Company's divestiture of the IT staff augmentation
business.
During the year ended March 31, 2000, Cotelligent acquired one company accounted
for under the purchase method for aggregate consideration of $2,800 (100,758
shares issued at fair market value of $500 and $2,300 of cash). Total assets
acquired related to this acquisition were $1,481 which resulted in the
recognition of goodwill of $2,085. During the year ended March 31, 1999,
Cotelligent acquired three companies accounted for under the purchase method for
aggregate consideration of $25,323 (324,657 shares issued at fair market value
of $5,627 and $19,696 of cash). Total assets acquired related to these
acquisitions were $5,796 and resulted in the recognition of $27,192 of goodwill.
The results of these acquisitions have been included in the Company's results
from their respective acquisition dates.
Prior to December 31, 2000, the goodwill was amortized over a 30-year period. On
December 31, 2000, the Company recognized an impairment charge which reduced the
remaining goodwill to zero (see Note 8).
28
COTELLIGENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Pro forma Statement of Operations
The following pro forma consolidated statement of operations for the year ended
March 31, 2000 gives effect to the acquisition of the business during that
fiscal year as if this acquisition was made on April 1, 1999. The pro forma
consolidated income statement reflects adjustments for interest expense on cash
consideration and amortization of goodwill for the Company accounted for under
the purchase method of accounting.
(Unaudited)
Year Ended March 31,
2000
--------------------
Revenues.............................................. $ 108,608
Cost of services...................................... 72,152
---------------
Gross profit........................................ 36,456
Selling, general and administrative expenses.......... 43,017
Depreciation and amortization of goodwill............. 3,322
---------------
Operating income (loss)............................... (9,883)
Other expense......................................... 3,922
---------------
Income (loss) before provision for income taxes....... (13,805)
Provision (benefit) for income taxes.................. (4,660)
---------------
Net income (loss)..................................... $ (9,145)
===============
Earnings (loss) per share-
Basic............................................... $ (0.64)
===============
Diluted............................................. $ (0.64)
===============
Weighted average shares-
Basic............................................... 14,340,538
===============
Diluted............................................. 14,340,538
===============
NOTE 4 - ALLOWANCE FOR DOUBTFUL ACCOUNTS
Allowance for doubtful accounts activity is as follows.
Balance, March 31, 1998............................................................................. $ 2,123
Balance of newly acquired companies' allowance for doubtful accounts at acquisition................ 229
Charges to costs and expenses..................................................................... 1,525
Write-offs......................................................................................... (2,428)
-------
Balance, March 31, 1999............................................................................. $ 1,449
Balance of newly acquired companies' allowance for doubtful accounts at acquisition................ 174
Charges to costs and expenses...................................................................... 818
Write-offs......................................................................................... (561)
-------
Balance, March 31, 2000............................................................................. 1,880
Charges to costs and expenses...................................................................... 3,845
Write-offs......................................................................................... (3,110)
-------
Balance, December 31, 2000.......................................................................... $ 2,615
=======
29
COTELLIGENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following.
DECEMBER 31, MARCH 31,
2000 2000
------------------------- -------------------------
Computer and office equipment................................... $10,720 $ 7,930
Furniture and fixtures.......................................... 1,759 1,891
Leasehold improvements.......................................... 1,154 909
------------------------- -------------------------
13,633 10,730
Less: Accumulated depreciation.................................. (6,872) (5,033)
------------------------- -------------------------
Total property and equipment.................................... $ 6,761 $ 5,697
========================= =========================
Depreciation expense of property and equipment for the nine months ended
December 31, 2000 and the year ended March 31, 2000 was $1,839 and $1,590,
respectively.
Note 6 - Investments
During the nine months ended December 31, 2000, the Company made two investments
as follows:
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. The Company uses the equity method of accounting for
this investment and recorded equity income of $20 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 $1,500 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 investment of $900 for the warrants in bSmart.to
Technologies, Inc. stock received, and a corresponding amount in additional
paid-in capital for the warrants issued on the Company's stock.
On December 6, 2000, the Company exercised its right under the joint venture
agreement to terminate the relationship after determining the joint venture was
not proceeding along the lines initially envisioned and believing the venture
would require substantial additional investment. As a result, the Company
regained complete ownership of the Philadelphia-based operation, including
$1,400 in cash and more working capital than originally contributed, and
consequently recognized a charge of $4,107 to reduce the investment in the joint
venture to its realizable value. The charge is included in Impairment of long-
lived assets in the Statement of Operations for the nine months ended December
31, 2000. In addition, the warrants exchanged between the venturers in
connection with the formation of the joint venture were cancelled.
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
complete ownership on December 6, 2000.
30
COTELLIGENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 7 - CREDIT FACILITIES
The Company maintained a credit facility ("Credit Line") with a consortium of
banks (the "Lenders") up through June 30, 2000. The Credit Line included
covenants under which the Company was in violation beginning December 1999, yet
the Lenders agreed to waive the covenant violations until the sale of the
majority of the Company's IT staff augmentation business was completed.
Accordingly, amounts due under the Credit Line were classified as current
liabilities at March 31, 2000. On June 30, 2000, the Company completed the sale
of the majority of the IT staff augmentation business for $116,495 and the
assumption of certain liabilities. On June 30, 2000 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 related to an acquired business. Upon
settlement of all obligations under the Credit Line, the Credit Line was
terminated. During the remainder of the nine months ended December 31, 2000, the
Company maintained no credit facility.
DECEMBER 31, MARCH 31,
2000 2000
---------------------- ------------------
Credit line with borrowings derived from covenant ratios secured by
accounts receivable and other assets of the Company, interest at the bank's
lending rate plus applicable margin (9.25% at March 31, 2000), payable on
March 12, 2004.............................................................. $ - $ 48,807
Notes payable with due dates of $200 in 2001, $400 in 2002 and $600 in
2003........................................................................ 1,200
Other notes payable, with interest rates from 8.0% to 11.0%, with due dates
through March 2001.......................................................... 12 86
Capital lease obligations..................................................... - 117
Less: current maturities...................................................... (212) (48,958)
-------------------- ---------------
Total long-term debt.......................................................... $1,000 $ 52
===================== ===============
Note 8 - Impairment of Long-Lived Assets
During the nine months ended December 31, 2000, the Company recognized an
impairment of long-lived assets charge for $41,478, representing a $37,371
goodwill impairment charge and a $4,107 write-off of investment costs associated
with the bSmart.to joint venture (see Note 6).
In accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
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 $37,371
impairment of goodwill during the nine months ended December 31, 2000 as the
future undiscounted cash flows of certain of its long-lived assets were
estimated to be less than the asset's related carrying value.
Note 9 - 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 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 11).
31
COTELLIGENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
In 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 Staff Accounting
Bulletin No. 100, "Restructuring and Impairment Charges", which resulted in a
pre-tax restructuring charge of $4,200 during the nine months ended December 31,
2000. The charge includes 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 following summarizes the activity and balances in each restructuring program
from inception through December 31, 2000:
June 1999 December 2000
Restructuring Program Restructuring Program Total
--------------------- ----------------------------- ----------
Facilities Facilities
Severance Closure Severance Closure
--------- ---------- ------------ ----------
Restructuring charge, June 1999... $ 3,510 $1,410 $ - $ - $ 4,920
Spending and write-downs.......... (2,636) (409) - - (3,045)
------- ------ ------ ------- -------
Balance, March 31, 2000........... 874 1,001 - - 1,875
Restructuring charge, December - - 1,100 3,100 4,200
2000..............................
Spending and write-downs.......... (351) (498) (200) (2,100) (3,149)
Release of excess restructuring
liability......................... (466) (324) - - (790)
------- ------ ------ ------- -------
Balance, December 31, 2000........ $ 57 $ 179 $ 900 $ 1,000 $ 2,136
======= ====== ====== ======= =======
NOTE 10 - INCOME TAXES
The income tax provision (benefit) from continuing operations consists of the
following:
NINE MONTHS YEAR ENDED MARCH 31,
ENDED DECEMBER 31, --------------------------------------
2000 2000 1999
------------------ ------------------ -------------
Current:
Federal............................... $ - $(1,164) $2,095
State................................. - - 322
------------------ ------------------ ------------
- (1,164) 2,417
------------------ ------------------ ------------
Deferred:
Federal................................ (8,815) (3,059) (128)
State.................................. (519) (437) (21)
------------------ ------------------ ------------
(9,334) (3,496) (149)
------------------ ------------------ ------------
Total provision (benefit) for income taxes $(9,334) $(4,660) $2,268
================== ================== ============
The tax benefits associated with nonqualified stock options reduce taxes
currently payable as shown above to zero for the nine months ended December 31,
2000, $38 for the year ended March 31, 2000, and $140 for the year ended March
31, 1999. Such tax benefits are credited to capital when realized. In addition
to the above benefit recorded on continuing operations,
32
COTELLIGENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
the Company recorded a tax provision associated with discontinued operations and
the gain on the sale of its discontinued operations of $16,020 for the nine
months ended December 31, 2000.
Significant components of deferred tax assets and liabilities of the Company are
as follows:
December 31, March 31,
2000 2000
---------------- ----------------
Deferred Tax Assets:
Current
Allowance for doubtful accounts........................ $ 514 $ 247
Accrued vacation....................................... 401 434
Accrued liabilities.................................... 1,064 -
-------------- ------------------
Subtotal............................................... 1,979 681
Non Current
Net operating loss carryforwards....................... 1,165 2,382
Goodwill............................................... 7,209 -
Other.................................................. - 147
-------------- ------------------
Subtotal............................................... 8,374 2,529
Valuation allowance...................................... (8,918) -
-------------- ------------------
Total Deferred Tax Assets............................ 1,435 3,210
-------------- ------------------
Deferred Tax Liabilities:
Non Current
Cash to accrual........................................ (8) (1,165)
Capital Lease.......................................... (921) -
Goodwill............................................... - (399)
Other.................................................. (506) (1,082)
-------------- ------------------
Total Deferred Tax Liabilities....................... (1,435) (2,646)
-------------- ------------------
Net Deferred Tax Assets.............................. $ - $ 564
============== ==================
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 (see Note 11). 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. The
Company also had approximately $3,500 of net operating loss carryforwards for
U.S. federal and state income tax purposes that will begin expiring in the 2020
tax year.
At December 31, 2000, the Company has fully reserved for the tax benefit of the
$7,190 timing difference, as well as all net operating losses and other net
deferred tax assets generated from continuing operations due to management's
uncertainty of their realizability. 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.
33
COTELLIGENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
The Company's effective income tax rate for its continuing operations varied
from the U.S. federal statutory tax rate as follows:
Nine Months Ended Year Ended March 31,
December 31, ------------------------------------
2000 2000 1999
-------------------- -------------------- -----------
U.S. federal statutory rate........................... (34.0%) (34.0%) 35.0%
State income taxes, net of federal benefit............ (2.0) (2.0) 5.7
Non-deductible acquisition costs...................... 15.0 - -
Tax exempt income..................................... - - (1.0)
Change in valuation allowance......................... 4.9 - -
Other,................................................ 1.6 1.0 0.4
------------- ------------ ---------
Effective tax rate.................................... (14.5%) (35.0%) 40.1%
============= ============ =========
The Company's effective tax rate for its continuing operations for the nine
months ended December 31, 2000 was significantly impacted by the write-down of
non-deductible goodwill during the fiscal period, as well as additional
valuation allowances established on its deferred tax assets.
The Company's effective tax rate for its combined continuing and discontinued
operations of 18.8% represents the Company's full provision for taxes on the
activities of its discontinued operations, without fully benefiting the
operating losses generated by its continuing operations through December 31,
2000.
NOTE 11 - 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, 2000 and March 31, 2000 and the summary of operating results for
the nine months ended December 31, 2000 and for the years ended March 31, 2000
and 1999 for these discontinued operations.
NET ASSETS OF DISCONTINUED OPERATIONS:
DECEMBER 31, MARCH 31,
2000 2000
---------------- ----------------
ASSETS
Accounts receivable, including unbilled accounts of $375 and $13,114............ $ 4,095 $ 40,604
Prepaid expenses and other...................................................... 52 1,124
Property and equipment, net of accumulated depreciation of $286 and $6,099...... 296 8,032
Deferred income taxes........................................................... - 7,190
Goodwill, net of accumulated amortization of $2,511............................. - 46,240
Other assets.................................................................... - 2
------------- ------------
Total Assets................................................................ 4,443 103,192
------------- ------------
LIABILITIES
Short term debt................................................................. - 3
Accounts payable................................................................ 293 7,505
Accrued compensation............................................................ 1,348 10,601
Other current liabilities....................................................... 2,802 362
------------- ------------
Total Liabilities .......................................................... 4,443 18,471
------------- ------------
Net assets of discontinued operations........................................... $ - $ 84,721
============= ============
34
COTELLIGENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
SUMMARY OF OPERATING RESULTS OF DISCONTINUED OPERATIONS:
NINE MONTHS ENDED YEAR ENDED MARCH 31,
DECEMBER 31, ---------------------------------
2000 2000 1999
---------------------- ----------------- -------------
Revenues.............................................. $ 69,528 $ 233,278 $ 238,496
Cost of services...................................... 51,464 174,289 175,529
--------- ---------- ----------
Gross profit...................................... 18,064 58,989 62,967
Impairment of long-lived assets....................... - 20,000 -
Restructuring charge.................................. (790) 4,920 -
Selling, general and administrative expenses.......... 13,511 46,182 40,686
Depreciation and amortization of goodwill............. 916 3,293 2,319
--------- ---------- ----------
Operating income (loss)........................... 4,427 (15,406) 19,962
Other income (expense)................................ 18 37 (47)
--------- ---------- ----------
Income (loss) before provision for income taxes....... 4,445 (15,369) 19,915
Provision (benefit) for income taxes.................. 1,556 (5,379) 7,989
--------- ---------- ----------
Income (loss) from discontinued operations............ $ 2,889 $ (9,990) $ 11,926
========= ========== ==========
On June 30, 2000, the Company sold the majority of its IT staff augmentation
business for $116,495 and the assumption of certain liabilities totaling
approximately $10,000. The Company agreed to assist the acquiring company for up
to one year following the close of the sale, which includes maintaining certain
computer systems. The Company also took responsibility and has reserves for
certain aged receivables greater than 90 days. In addition, Cotelligent is
still the lessee under certain leases on property.
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. The
Company has written down the remaining net assets related to this sale,
including goodwill, to zero during the quarter ended June 30, 2000.
On October 31, 2000, the Company sold its international IT staff augmentation
business, Global Resources, for a secured promissory note of $4,459 bearing
interest at 9.5% and payable over five years. Management has written down the
net assets related to this operation, including goodwill, 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 Company anticipates that it will dispose of the remaining IT staff
augmentation business in discontinued operations prior to December 31, 2001.
The Company has written down the remaining value of the net assets, including
goodwill, of this discontinued business to zero based on management's estimate
of the entity's on-going net realizable value during the quarter ended June 30,
2000.
The net gain on the disposal of the IT staff augmentation businesses was $9,963
for the nine months ended December 31, 2000.
35
COTELLIGENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
In connection with accounting for the sale of the discontinued operations the
Company accrued costs related to the divestiture program including expense of
sale, estimated closure costs and the write-down of operating assets to zero. A
summary of the originally accrued liabilities and activities through December
31, 2000 is as follows:
DIVESTITURE ACCRUED
LIABILITIES
Accrued liabilities established upon recording the sale of the majority of
the IT staff augmentation business........................................ $ 5,084
Change in book value of discontinued operations through December 31,
2000...................................................................... (676)
Expenses paid out subsequent to June 30 related to divestiture............. (2,908)
----------------
Balance, December 31, 2000................................................. $ 1,500
================
NOTE 12 - 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, 2000 for the
Company's continuing operations are as follows.
OPERATING LEASES
----------------
2001................................................ $ 3,844
2002................................................ 2,823
2003................................................ 2,258
2004................................................ 1,730
2005................................................ 773
Thereafter.......................................... 33
-------
Total minimum lease payments........................ 11,461
Less: Sublease payment due Cotelligent.............. (2,377)
-------
Net minimum lease payments.......................... $ 9,084
=======
Rental expense under these leases for the nine months ended December 31, 2000
and the years ended March 31, 2000 and 1999 was $3,061, $3,126 and $2,418, and
respectively.
NOTE 13 - 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
36
COTELLIGENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
yearly amounts of 25% to 33% of the shares under option and generally 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 Long-Term Incentive
Plan Committee 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
NUMBER OF OPTION PRICE AVERAGE EXPIRATION
SHARES RANGE PER SHARE EXERCISE PRICE DATE
---------------- ------------------- ------------------- ---------------
Outstanding at March 31, 1998....... 1,411,427 $2.70 -$29.00 $16.41 2006 - 2008
Granted............................ 1,339,680 $1.54 -$29.00 $15.97 2008 - 2009
Exercised ......................... (51,207) $1.54 -$20.00 $11.12 2006 - 2008
Cancelled ......................... (125,008) $1.54 -$29.00 $19.10 2006 - 2008
---------------
Outstanding at March 31, 1999....... 2,574,892 $1.54 -$29.00 $16.16 2006 - 2009
Granted............................ 341,425 $4.00 - $6.13 $ 5.02 2006 - 2010
Exercised ......................... (45,808) $1.54 - $9.00 $ 2.60 2006 - 2009
Cancelled ......................... (980,216) $1.54 -$29.00 $17.09 2006 - 2010
----------------
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 at Dec. 31, 2000........ 2,198,716 $1.54 -$29.00 $ 9.37 2006 - 2010
The following table summarizes information concerning outstanding and
exercisable options at December 31, 2000:
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------- ----------- ----------- --------- ----------- ---------
$ 1.54-$10.00 1,286,929 9.13 $ 4.49 274,514 $ 6.14
$11.88-$18.81 524,923 7.45 $13.89 376,238 $13.98
$19.00-$29.00 386,864 6.30 $19.50 353,760 $19.34
------------- --------- ---- ------ --------- ------
$ 1.54-$29.00 2,198,716 8.23 $ 9.37 1,004,512 $13.72
========= =========
Exercisable options at December 31, 2000, March 31, 2000 and 1999 were
1,004,512, 943,571 and 1,061,258 at exercise prices between $1.54 and $29.00,
and weighted average exercise prices of $13.72, $15.79 and $15.43, 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 APB Opinion
25 and
37
COTELLIGENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
FASB interpreted 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 nine months ended December 31, 2000 and the years
ended March 31, 2000 and 1999, respectively: (1) risk-free interest rates of
4.77%, 6.04% and 4.65%, (2) a dividend yield of 0%, (3) volatility factors of
the expected market price of the Company's common stock of 106%, 89% and 58% and
(4) a weighted average expected life of 4.61 years, 4.8 years and 4.8 years. The
weighted average fair values of options granted during the nine months ended
December 31, 2000 and the years ended March 31, 2000 and 1999 were $2.74, $3.62
and $10.37 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.
In management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimated.
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 nine
months ended December 31, 2000 and the years ended March 31, 2000 and 1999 based
on the fair value as described in SFAS No. 123, net income (loss) and earnings
per share would have been changed to the pro forma amounts indicated below.
NINE MONTHS ENDED YEAR ENDED MARCH 31,
DECEMBER 31, -----------------------------------------------
2000 2000 1999
------------------------------ ---------------------- ----------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
------------ ----------- ---------- ------- ---------- -------
Income (loss) from continuing
operations $(55,036) $(61,166) $ (8,653) $(12,771) $ 3,390 $ (208)
Net income (loss) (42,184) (48,314) (18,643) (22,761) 15,316 11,718
Earnings (loss) per share:
Basic --
Income (loss) from
continuing operations (3.61) (4.02) (0.60) (0.89) 0.24 (0.01)
Net income (loss) (2.77) (3.17) (1.30) (1.59) 1.09 0.83
Diluted --
Income (loss) from
continuing operations (3.61) (4.02) (0.60) (0.89) 0.24 (0.01)
Net income (loss) (2.77) (3.17) (1.30) (1.59) 1.08 0.83
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 nine months ended December 31, 2000
and the years ended March 31, 2000 and 1999 employees purchased 101,719, 318,802
and 71,689 shares for aggregate proceeds to the Company of $395, $1,251 and
$1,080, respectively.
38
COTELLIGENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
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. The Company has the option to
contribute to the 401(k) Plan on the employee's behalf, and on October 1, 1999,
it commenced 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. The Company contributed $152 and
$503, respectively, in connection with the matching program during the nine
months ended December 31, 2000 and the year ended March 31, 2000. The Company
did not make contributions to the 401(k) Plan for the fiscal year ended March
31, 1999.
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.
Subsequent to the LSPP's inception through December 31, 2000, 1,741,842 shares
were issued under the LSPP resulting in notes receivable from stockholders for
$6,368, which is included as a component 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 14 - 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, 2000 or March 31, 2000. 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, 2000 and March 31, 2000, there were respectively
15,349,630 and 15,065,400 shares of Common Stock outstanding. 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 238,400 and
1,761,600 shares of its Common Stock during the fiscal years ended March 31,
2000 and 1999, respectively. In addition, the Company negotiated the return of
469,209 shares of Common Stock from the original seller of its Orlando
operations pursuant to terms in the original purchase agreement.
39
COTELLIGENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
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 15 - EARNINGS PER SHARE
Earnings per share is as follows:
FOR THE NINE MONTHS ENDED DECEMBER 31, 2000
----------------------------------------------------------------
PER SHARE
INCOME SHARES AMOUNT
----------------------------------------------------------------
BASIC/DILUTED EARNINGS (LOSS) PER SHARE-
Loss from continuing operations $(55,036) 15,230,969 $(3.61)
Income from discontinued operations 12,852 15,230,969 0.84
--------- ---------- ------
Net loss applicable to common stockholders $(42,184) 15,230,969 $(2.77)
The effect of options issued to directors and employees has not been
considered in the diluted earnings per share calculation due to the loss
position of the Company's continuing operations for the nine months ended
December 31, 2000. As such, there is no difference between the basic and
diluted loss per share calculations.
FOR THE YEAR ENDED MARCH 31, 2000
----------------------------------------------------------------
PER SHARE
INCOME SHARES AMOUNT
----------------------------------------------------------------
BASIC/DILUTED EARNINGS (LOSS) PER SHARE-
Loss from continuing operations $ (8,653) 14,298,693 $(0.60)
Loss from discontinued operations (9,990) 14,298,693 (0.70)
-------- ------
Net loss applicable to common stockholders $(18,643) 14,298,693 $(1.30)
The effect of options issued to directors and employees has not been
considered in the diluted earnings per share calculation due to the loss
position of the Company's continuing operations for the year ended March
31, 2000. As such, there is no difference between the basic and diluted
loss per share calculations.
40
COTELLIGENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
FOR THE YEAR ENDED MARCH 31, 1999
----------------------------------------------------------------
PER SHARE
INCOME SHARES AMOUNT
----------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE-
Income from continuing operations $ 3,390 14,078,068 $0.24
Income from discontinued operations 11,926 14,078,068 $0.85
------- -----
Net income available to common stockholders $15,316 14,078,068 $1.09
DILUTED EARNINGS (LOSS) PER SHARE-
Income from continuing operations $ 3,390 14,236,786 $0.24
Income from discontinued operations 11,926 14,236,786 0.84
------- -----
Net income available to common stockholders
Plus assumed conversions $15,316 14,236,786 $1.08
Share amounts used in the diluted earnings per share calculation reflect
the effect of options issued to directors and employees.
Options to purchase common shares of 2,198,716, 1,544,843 and 1,255,057 were
excluded from the computation of diluted earnings per share for the nine months
ended December 31, 2000 and for the fiscal years ended March 31, 2000 and 1999,
respectively, as the options' exercise price was greater than the market price
of the common shares for the respective periods.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
Employment Agreements
Certain executive officers and certain principals of the Company's subsidiaries
have entered into employment agreements with the Company which contain
provisions for compensation upon termination without cause or changes in
control. Pursuant to such employment agreements, each such officer is eligible
to earn bonus compensation payable out of a bonus pool determined by the Board
of Directors or its Compensation Committee. Bonuses will be determined by
measuring, among other objective and subjective measures, such officer's
performance, the performance of the local operation for which such officer has
primary responsibility and the Company's performance against targets.
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 17 - 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 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
41
COTELLIGENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
and development 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 18-QUARTERLY FINANCIAL DATA (UNAUDITED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 2000
FIRST SECOND THIRD
QUARTER QUARTER QUARTER
----------------- ----------------- ----------------
Revenues.......................................... $ 23,753 $ 22,475 $ 20,064
Gross profit...................................... 7,253 7,571 6,584
Income (loss) from continuing operations.......... (5,130) (2,856) (47,050)
Income (loss) from discontinued operations........ 6,011 148 6,693
Net income (loss)................................. 881 (2,708) (40,357)
Earnings per share:
Basic -
Income (loss) from continuing operations ....... $ (0.34) $ (0.19) $ (3.07)
Income (loss) from discontinued operations...... 0.40 0.01 0.44
----------- ----------- -----------
Net income (loss)................................. $ 0.06 $ (0.18) $ (2.63)
=========== =========== ===========
Diluted -
Income (loss) from continuing operations........ $ (0.34) $ (0.19) $ (3.07)
Income (loss) from discontinued operations...... 0.40 0.01 0.44
----------- ----------- -----------
Net income (loss)............................. $ 0.06 $ (0.18) $ (2.63)
=========== =========== ===========
Weighted average shares:
Basic............................................. 15,123,639 15,235,827 15,332,273
=========== =========== ===========
Diluted........................................... 15,124,960 15,235,827 15,332,273
=========== =========== ===========
FOR THE YEAR ENDED MARCH 31, 2000
-------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------- -------------- ---------- --------
Revenues.......................................... $ 26,806 $ 26,162 $ 25,296 $ 27,300
Gross profit...................................... 9,750 8,945 8,311 8,563
Income (loss) from continuing operations.......... (940) (1,672) (2,753) (3,288)
Income (loss) from discontinued operations........ (15,394) 1,751 1,409 2,244
Net income (loss)................................. (16,334) 79 (1,344) (1,044)
Earnings per share:
Basic -
Income (loss) from continuing operations ....... $ (0.07) $ (0.12) $ (0.18) $ (0.22)
Income (loss) from discontinued operations...... (1.14) 0.13 0.09 0.15
----------- ----------- ----------- -----------
Net income (loss)................................. $ (1.21) $ 0.01 $ (0.09) $ (0.07)
=========== =========== =========== ===========
Diluted -
Income (loss) from continuing operations........ $ (0.07) $ (0.12) $ (0.18) $ (0.22)
Income (loss) from discontinued operations...... (1.14) 0.13 0.09 0.15
----------- ----------- ----------- -----------
Net income (loss)............................. $ (1.21) $ 0.01 $ (0.09) $ (0.07)
=========== =========== =========== ===========
Weighted average shares:
Basic........................................... 13,461,007 13,565,326 15,167,742 15,001,429
=========== =========== =========== ===========
Diluted......................................... 13,461,007 13,573,264 15,167,742 15,001,429
=========== =========== =========== ===========
42
COTELLIGENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 19 - RELATED PARTY TRANSACTIONS
Notes Receivable. The Company has notes receivable from certain Officers of the
Company, primarily to accommodate relocation assistance and to cover margin
calls made on brokerage accounts that are secured by shares in the Company. The
notes include varying rates of interest and terms of repayment. The notes are
due on demand and the notes covering the margin calls are subject to a repayment
schedule indexed to the market price of the Company's Common Stock.
NOTE 20 - EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT
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 exchange existing
stock option grants for a new option grant. Election to participate in the
program must be made by March 16, 2001. New option grants will be issued, based
on the closing price of the Company's Common Stock on September 21, 2001.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
43
PART III
--------
Item 10 - Directors and Executive Officers of the Registrant.
The information called for by Item 10 with respect to identification of
directors and executive officers of the Company is incorporated herein by
reference to the material under the captions "Election of Directors" and "Other
Executive Officers of the Company" in the Company's Proxy Statement for its 2001
Annual Meeting of Stockholders which will be filed with the Securities and
Exchange Commission within 120 days after the end of the Company's fiscal year
(the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by Item 11 with respect to executive compensation is
incorporated herein by reference to the material under the caption "Executive
Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information called for by Item 12 with respect to security ownership of
certain beneficial owners and management is incorporated herein by reference to
the material under the caption "Security Ownership of Certain Beneficial Owners
and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by Item 13 with respect to certain relationships and
related transactions is incorporated herein by reference to the material under
the caption "Certain Transactions" in the Proxy Statement.
44
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of the Annual Report on
Form 10-K:
1. Financial Statements Form 10-K Page No.
-------------------- ------------------
Report of Independent Public Accountants 20
Consolidated Balance Sheets at December 31, 2000 and
March 31, 2000 21
Consolidated Statements of Operations for the nine months
ended December 31, 2000 and the years ended
March 31, 2000 and 1999 22
Consolidated Statements of Stockholders' Equity for the
nine months ended December 31, 2000 and the years
ended March 31, 2000 and 1999 23
Consolidated Statements of Cash Flows for the nine months
ended December 31, 2000 and the years ended
March 31, 2000 and 1999 24-25
Notes to Consolidated Financial Statements 26-43
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 15
to Consolidated Financial Statements, page 40.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Certificate of Incorporation of Cotelligent Group, 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 Amended and Restated By-Laws of Cotelligent, Inc. (Exhibit 4.1 of the
Company's Registration Statement on Form S-8 (File No. 333-67589),
filed with the SEC on November 19, 1998, is hereby incorporated by
reference)
3.3 Certificate of Amendment of Certificate of Incorporation of
Cotelligent Group, 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)
4.1 Form of certificate evidencing ownership of Common Stock of
Cotelligent Group, 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 Group, Inc. and BankBoston, N.A. (Exhibit 4.1 of the
Company's Form 8-K (File No. 0-27412), filed with the SEC on September
24, 1997, 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)*
45
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)*
10.3 Employment Agreement, dated as of April 1, 2000, between Cotelligent, Inc.
and Howard Warner (Exhibit 10.3 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)*
10.4 Divestiture Agreement, dated as of April 1, 2000, between Cotelligent,
Inc. and Howard Warner (Exhibit 10.4 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 Employment Agreement, dated as of January 4, 1999, between Cotelligent,
Inc. and Richard M. Hirsh (Exhibit 10.5 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)*
10.6 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)*
10.7 Employment Agreement, dated as of February 20, 1996, by and among BFR Co.,
Inc., Cotelligent Group, Inc. and Jeffrey J. Bernardis (Exhibit 10.4 of
the Company's Post-Effective Amendment to its Form S-1 on Form S-4 (File
No. 333-6086), filed with the SEC on March 19, 1997, is hereby
incorporated by reference)*
10.8 Employment Agreement, dated as of January 26, 1998, between Cotelligent
Group, Inc. and Herbert D. Montgomery, former Senior Vice President and
Chief Financial Officer and Treasurer of the Company who resigned on June
30, 1999 (Exhibit 99 of the Company's Registration Statement on Form 8-K
(File No. 0-27412), filed with the SEC on February 4, 1998, is hereby
incorporated by reference)*
10.9 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)*
10.10 Lease Agreement between BFR Properties and BFR Systems, dated as of April
1, 1995, with respect to 7 Clyde Road (Exhibit 10.9 of the Company's
Annual Report on Form 10-K (File No. 0-27412), filed with the SEC on June
28, 1996, is hereby incorporated by reference)
10.11 Lease Agreement between BFR Properties and BFR Systems, dated as of April
1, 1995, with respect to 31 Clyde Road (Exhibit 10.10 of the Company's
Annual Report on Form 10-K (File No. 0-27412), filed with the SEC on June
28, 1996, is hereby incorporated by reference)
10.12 Amended and Restated Senior Secured Credit Agreement, dated as of March
12, 1999, among Cotelligent, Inc., the Co-Borrowers named therein, the
Banks named therein and BankBoston, N.A. (Exhibit 10.12 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)
10.13 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)*
10.14 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)*
10.15 Forbearance and Reinstatement of Noncompetes Agreement, dated as of May 2,
2000, among Cotelligent USA, Inc., Cotelligent, Inc., E.W. & Associates,
Inc., Thomas H. Edwards and Timothy M. Wooten
46
(Exhibit 10.1 of the Company's Registration Statement on Form S-3 (File
No. 333-37586), filed with the SEC on May 22, 2000, is hereby incorporated
by reference)
10.16 Securities Issuance Agreement, dated as of May 2, 2000, between
Cotelligent, Inc. and E.W. & Associates, Inc. and/or its assigns (Exhibit
10.2 of the Company's Registration Statement on Form S-3 (File No. 333-
37586), filed with the SEC on May 22, 2000, is hereby incorporated by
reference)
10.17 Asset Purchase Agreement, dated as of June 14, 2000, by and among
Cotelligent, Inc., Cotelligent U.S.A., Inc. and Comsys Information
Technology Services, Inc. (Exhibit 10.3 of the Company's Registration
Statement on Form S-3/A (File No. 333-37586), filed with the SEC on June
20, 2000, is hereby incorporated by reference)
10.18 Settlement and Mutual Release, dated as of December 21, 2000, among Comsys
Information Technology Services, Inc. and Cotelligent USA, Inc. **
10.19 Cotelligent 2000 Long-Term Incentive Plan* **
21.1 Subsidiaries of the registrant **
23.1 Consent of Arthur Andersen LLP **
24.1 Power of attorney as reflected on signatures page included herewith**
(b) Reports on Form 8-K
Current Report on Form 8-K dated December 6, 2000, filed with the SEC
on January 3, 2001
* 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 San
Francisco, State of California on the 30th day of March, 2001.
COTELLIGENT, INC.
By: /s/ James R. Lavelle
-------------------------
James R. Lavelle
Chief Executive Officer
POWER OF ATTORNEY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. EACH PERSON WHOSE
SIGNATURE APPEARS BELOW HEREBY AUTHORIZES AND CONSTITUTES JAMES R. LAVELLE,
DANIEL E. JACKSON AND CURTIS J. PARKER, AND EACH OF THEM SINGLY, HIS TRUE AND
LAWFUL ATTORNEYS-IN-FACT WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION FOR
HIM AND IN HIS NAME, PLACE AND STEAD, IN ANY AND ALL CAPACITIES (INCLUDING HIS
CAPACITY AS A DIRECTOR AND/OR OFFICER OF COTELLIGENT, INC.) TO SIGN AND FILE ANY
AND ALL AMENDMENTS TO THIS REPORT WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS
IN CONNECTION THEREWITH WITH THE SECURITIES AND EXCHANGE COMMISSION, AND HE
HEREBY RATIFIES AND CONFIRM AS ALL THAT SAID ATTORNEYS-IN-FACT OR ANY OF THEM,
OR THIS OR HIS SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE
HEREOF.
Signature Capacity Date
--------- -------- ----
/s/ James R. Lavelle
- -------------------------------
James R. Lavelle Chairman of the Board of Directors, Director, March 30, 2001
President and Chief Executive Officer (Principal
Executive Officer)
/s/ Edward E. Faber
- -------------------------------
Edward E. Faber Vice Chairman of the Board of Directors March 30, 2001
/s/ Daniel E. Jackson
- -------------------------------
Daniel E. Jackson President, Chief Operating Officer and Director March 30, 2001
/s/ Curtis J. Parker
- -------------------------------
Curtis J. Parker Executive Vice President, Chief Financial Officer March 30, 2001
(Principal Financial and Accounting Officer)
/s/ Anthony M. Frank
- -------------------------------
Anthony M. Frank Director March 30, 2001
/S/ B. TOM GREEN
- -------------------------------
B. Tom Green Director March 30, 2001
/s/ Harvey L. Poppel
- -------------------------------
Harvey L. Poppel Director March 30, 2001
48
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Certificate of Incorporation of Cotelligent Group, 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 Amended and Restated By-Laws of Cotelligent, Inc. (Exhibit 4.1 of the
Company's Registration Statement on Form S-8 (File No. 333-67589),
filed with the SEC on November 19, 1998, is hereby incorporated by
reference)
3.3 Certificate of Amendment of Certificate of Incorporation of
Cotelligent Group, 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)
4.1 Form of certificate evidencing ownership of Common Stock of
Cotelligent Group, 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 Group, Inc. and BankBoston, N.A. (Exhibit 4.1 of the
Company's Form 8-K (File No. 0-27412), filed with the SEC on September
24, 1997, 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)*
10.3 Employment Agreement, dated as of April 1, 2000, between Cotelligent, Inc.
and Howard Warner (Exhibit 10.3 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)*
10.4 Divestiture Agreement, dated as of April 1, 2000, between Cotelligent,
Inc. and Howard Warner (Exhibit 10.4 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 Employment Agreement, dated as of January 4, 1999, between Cotelligent,
Inc. and Richard M. Hirsh (Exhibit 10.5 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)*
10.6 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)*
10.7 Employment Agreement, dated as of February 20, 1996, by and among BFR Co.,
Inc., Cotelligent Group, Inc. and Jeffrey J. Bernardis (Exhibit 10.4 of
the Company's Post-Effective Amendment to its Form S-1 on Form S-4 (File
No. 333-6086), filed with the SEC on March 19, 1997, is hereby
incorporated by reference)*
10.8 Employment Agreement, dated as of January 26, 1998, between Cotelligent
Group, Inc. and Herbert D. Montgomery, former Senior Vice President and
Chief Financial Officer and Treasurer of the Company who resigned on June
30, 1999 (Exhibit 99 of the Company's Registration Statement on Form 8-K
(File No. 0-27412), filed with the SEC on February 4, 1998, is hereby
incorporated by reference)*
10.9 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)*
10.10 Lease Agreement between BFR Properties and BFR Systems, dated as of April
1, 1995, with respect to 7 Clyde Road (Exhibit 10.9 of the Company's
Annual Report on Form 10-K (File No. 0-27412), filed with the SEC on June
28, 1996, is hereby incorporated by reference)
10.11 Lease Agreement between BFR Properties and BFR Systems, dated as of April
1, 1995, with respect to 31 Clyde Road (Exhibit 10.10 of the Company's
Annual Report on Form 10-K (File No. 0-27412), filed with the SEC on June
28, 1996, is hereby incorporated by reference)
10.12 Amended and Restated Senior Secured Credit Agreement, dated as of March
12, 1999, among Cotelligent, Inc., the Co-Borrowers named therein, the
Banks named therein and BankBoston, N.A. (Exhibit 10.12 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)
10.13 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)*
10.14 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)*
10.15 Forbearance and Reinstatement of Noncompetes Agreement, dated as of May 2,
2000, among Cotelligent USA, Inc., Cotelligent, Inc., E.W. & Associates,
Inc., Thomas H. Edwards and Timothy M. Wooten
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(Exhibit 10.1 of the Company's Registration Statement on Form S-3 (File
No. 333-37586), filed with the SEC on May 22, 2000, is hereby incorporated
by reference)
10.16 Securities Issuance Agreement, dated as of May 2, 2000, between
Cotelligent, Inc. and E.W. & Associates, Inc. and/or its assigns (Exhibit
10.2 of the Company's Registration Statement on Form S-3 (File No. 333-
37586), filed with the SEC on May 22, 2000, is hereby incorporated by
reference)
10.17 Asset Purchase Agreement, dated as of June 14, 2000, by and among
Cotelligent, Inc., Cotelligent U.S.A., Inc. and Comsys Information
Technology Services, Inc. (Exhibit 10.3 of the Company's Registration
Statement on Form S-3/A (File No. 333-37586), filed with the SEC on June
20, 2000, is hereby incorporated by reference)
10.18 Settlement and Mutual Release, dated as of December 21, 2000, among Comsys
Information Technology Services, Inc. and Cotelligent USA, Inc. **
10.19 Cotelligent 2000 Long-Term Incentive Plan* **
21.1 Subsidiaries of the registrant **
23.1 Consent of Arthur Andersen LLP **
24.1 Power of attorney as reflected on signatures page included herewith**
(b) Reports on Form 8-K
Current Report on Form 8-K dated December 6, 2000, filed with the SEC
on January 3, 2001
* Management contracts and compensatory plans or arrangements required
to be filed as exhibits to this Form 10-K.
** Filed herewith.
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