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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Quarterly Period Ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from to
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Commission File Number 0-27412
COTELLIGENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3173918
(State of incorporation) (I.R.S. ID)
100 Theory, Suite 200, Irvine, California 92612
(Address of principal executive offices)
(949) 823-1600
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] No [X]
At January 2, 2003, there were 14,801,354 shares of common stock outstanding.
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COTELLIGENT, INC.
INDEX
Page
----
Part I - Financial Information
Item 1. Financial Statements
Cotelligent, Inc.
Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 3
Condensed Consolidated Statements of Operations for the Three & Six Months Ended
June 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Item 4. Controls and Procedures 15
Part II - Other Information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote to Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 18
Exhibits 21
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
2002 2001
-------- ------------
(Restated)
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 20,555 $ 18,778
Refundable income taxes .............................................. 7,695 7,008
Accounts receivable, including unbilled accounts of $627 and $1,627
and net of allowance for doubtful accounts of $610 and $533,
respectively ...................................................... 2,753 5,693
Current assets of discontinued operations ............................ 122 151
Notes receivable from officers and stockholder, net of valuation
allowance of $1,703 ............................................... -- --
Current portion of note receivable from acquirer of discontinued
operation ......................................................... 1,000 835
Prepaid expenses and other current assets ............................ 1,039 806
-------- --------
Total current assets .............................................. 33,164 33,271
Property and equipment, net ............................................. 81 --
Note receivable from acquirer of discontinued operation ................. 1,089 1,564
Equity investment in alliance partner ................................... 561 847
Other assets ............................................................ 349 398
-------- --------
Total assets ...................................................... $ 35,244 $ 36,080
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................................... $ 937 $ 1,651
Accrued compensation and related payroll liabilities ................. 1,761 2,144
Restructuring liabilities ............................................ 132 331
Deferred revenue ..................................................... 476 874
Other accrued liabilities ............................................ 2,567 2,074
-------- --------
Total current liabilities ......................................... 5,873 7,074
Restructuring liabilities, net of current portion ....................... 854 959
Other long-term liabilities, net of current portion ..................... 257 465
Income tax payable ...................................................... 2,618 2,618
-------- --------
Total liabilities ................................................. 9,602 11,116
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,
15,545,954 and 15,514,757 shares issued, respectively ............. 155 155
Additional paid-in capital ........................................... 86,666 86,662
Notes receivable from stockholders ................................... (6,193) (6,193)
Accumulated deficit .................................................. (54,486) (55,160)
Treasury Stock ....................................................... (500) (500)
-------- --------
Total stockholders' equity ........................................ 25,642 24,964
-------- --------
Total liabilities and stockholders' equity ........................ $ 35,244 $ 36,080
======== ========
See accompanying notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
------------ ----------- ----------- -----------
(Restated) (Restated)
Revenues ................................................ $ 4,302 $ 12,460 $ 10,175 $ 29,056
Cost of services ........................................ 2,675 9,443 6,443 21,299
----------- ----------- ----------- -----------
Gross profit ...................................... 1,627 3,017 3,732 7,757
Research and development costs .......................... 599 209 818 315
Selling, general and administrative expenses ............ 5,008 9,533 9,621 19,259
----------- ----------- ----------- -----------
Operating loss .......................................... (3,980) (6,725) (6,707) (11,817)
Other income (expense):
Interest expense ..................................... (24) (30) (71) (60)
Interest income ...................................... 85 273 161 635
Other ................................................ (129) (294) (287) (439)
----------- ----------- ----------- -----------
Total other income (expense) ...................... (68) (51) (197) 136
----------- ----------- ----------- -----------
Loss from continuing operations before income
taxes .......................................... (4,048) (6,776) (6,904) (11,681)
Benefit for income taxes ................................ 96 -- 7,496 3,454
----------- ----------- ----------- -----------
Income (loss) from continuing operations .......... (3,952) (6,776) 592 (8,227)
----------- ----------- ----------- -----------
Gain (loss) on sale of discontinued operations, net
of income tax expense of $0, $0, $0, $0 ........... 82 1 82 (119)
----------- ----------- ----------- -----------
Net income (loss) .................................... $ (3,870) $ (6,775) $ 674 $ (8,346)
----------- ----------- ----------- -----------
Earnings (loss) per share:
Basic -
Income (loss) from continuing operations ............. $ (0.26) $ (0.44) $ 0.04 $ (0.54)
Income (loss) from discontinued operations ........... -- -- 0.01 (0.01)
----------- ----------- ----------- -----------
Net income (loss) ................................. $ (0.26) $ (0.44) $ 0.05 $ (0.55)
----------- ----------- ----------- -----------
Diluted -
Income (loss) from continuing operations ............. $ (0.26) $ (0.44) $ 0.04 $ (0.54)
Income (loss) from discontinued operations ........... -- -- -- (0.01)
----------- ----------- ----------- -----------
Net income (loss) ................................. $ (0.26) $ (0.44) $ 0.04 $ (0.55)
=========== =========== =========== ===========
Weighted average number of shares outstanding
Basic ................................................... 14,901,054 15,273,716 14,895,879 15,311,180
=========== =========== =========== ===========
Diluted ................................................. 14,901,054 15,273,716 17,387,792 15,311,180
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended June 30,
-------------------------
2002 2001
------- ----------
(Restated)
Cash flows from operating activities:
Income (loss) from continuing operations ....................................... $ 592 $(8,227)
Adjustments to reconcile income (loss) from continuing operations to net cash
provided by (used for) operating activities:
Equity loss from investment in alliance partner ............................. 286 480
Depreciation and amortization ............................................... 3 1,376
Provision for doubtful accounts ............................................. 77 621
Deferred taxes, net ......................................................... (7,496) 2,745
Changes in current assets and liabilities:
Accounts receivable ...................................................... 2,863 9,981
Prepaid expenses and other current assets ................................ (233) (1,425)
Income taxes, net ........................................................ 6,809 (6,208)
Accounts payable and accrued liabilities ................................. (1,116) (3,219)
Deferred revenue ......................................................... (398) (93)
Other assets ............................................................. 49 12
------- -------
Cash provided by (used for) operating activities ............................... 1,436 (3,957)
Cash flows from investing activities:
Payments received on note from acquirer of discontinued operations ............. 310 212
Purchases of property and equipment ............................................ (84) (244)
------- -------
Cash provided by (used for) investing activities ............................... 226 (32)
Cash flows from financing activities:
Payments on capital lease obligations .......................................... -- (3)
Net proceeds on issuance of common stock ....................................... 4 176
Purchase of treasury stock ..................................................... -- (374)
------- -------
Cash provided by (used for) financing activities ............................... 4 (201)
Cash flows provided by discontinued operations .................................... 111 21
------- -------
Net increase (decrease) in cash ................................................... 1,777 (4,169)
Cash at beginning of period ....................................................... 18,778 26,500
------- -------
Cash at end of period ............................................................. $20,555 $22,331
======= =======
Supplemental disclosures of cash flow information:
Interest paid .................................................................. $ 47 $ 61
Income taxes paid (refunded) ................................................... $(6,809) $ 5
Return of common stock previously issued to employee for note receivable ....... $ -- $ 175
See accompanying notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
Note 1 - Business Organization and Basis of Presentation
Cotelligent, Inc. ("Cotelligent" or the "Company"), a Delaware corporation,
provides software consulting services to businesses with complex information
technology ("IT") operations and also provides maintenance, support and contract
services on software products it licenses. These financial statements include
the accounts of Cotelligent, Inc. and its subsidiaries.
During the fiscal year ended March 31, 2000, the Company was organized in two
practice groups, Technology Solutions and Professional Services (also known as
its IT staff augmentation business), and operated across the United States along
with international consultant recruiting offices in Brazil and the Philippines.
Prior to March 31, 2000, the Company entered into a plan to divest its IT staff
augmentation business. Accordingly, the accompanying consolidated financial
statements and related footnotes have been prepared to present as discontinued
operations the Company's IT staff augmentation business for all periods
presented.
The Company has suffered significant operating losses as well as negative
operating cash flows in the last three fiscal periods and continues to be
subject to certain risks common to companies in this industry. These
uncertainties include the availability of financing, the retention of and
dependence on key individuals, the effects of intense competition, the ability
to develop and successfully market new product and service offerings, and the
ability to streamline operations and increase revenues. There can be no
assurance the Company will be profitable in the future.
Note 2 - Restatement
The Company has restated its consolidated balance sheets as of December 31, 2001
and 2000 and its consolidated statements of operations, stockholders' equity and
cash flows for the year ended December 31, 2001 and the nine months ended
December 31, 2000. Additionally, the Company restated the quarterly financial
data for each three month period within the year ended December 31, 2001 and
nine months ended December 31, 2000. The restated consolidated financial
statements and quarterly financial data, along with a description of the items
causing the restatement, appear in the Company's Amendment No. 3 to Annual
Report on Form 10-K/A for the year ended December 31, 2001, filed with the
Securities and Exchange Commission on December 9, 2002.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
The following tables present the changes that have been made to the condensed
consolidated statements of operations and cash flows for the three and six
months ended June 30, 2001:
As Previously
Reported Restated
------------- ------------
Three Months Ended June 30, 2001
--------------------------------
Consolidated Statement of Operations:
Revenues ................................................. $ 12,460 $ 12,460
Cost of services ......................................... 9,443 9,443
----------- -----------
Gross profit ....................................... 3,017 3,017
Research and development costs ........................... -- 209
Selling, general and administrative expenses ............. 9,326 9,533
----------- -----------
Operating loss ........................................... (6,309) (6,725)
Other income (expense):
Interest expense ...................................... (1) (30)
Interest income ....................................... 396 273
Other ................................................. (103) (294)
----------- -----------
Total other income (expense) ....................... 292 (51)
----------- -----------
Loss from continuing operations before income taxes ...... (6,017) (6,776)
Benefit for income taxes ................................. -- --
----------- -----------
Loss from continuing operations .......................... (6,017) (6,776)
Operating income (loss) from discontinued operations .. 23 --
Gain on sale of discontinued operations ............... -- 1
----------- -----------
Income (loss) from discontinued operations ............ 23 1
----------- -----------
Net loss ........................................... $ (5,994) $ (6,775)
=========== ===========
Earnings (loss) per share:
Basic -
Income (loss) from continuing operations .............. $ (0.39) $ (0.44)
Income (loss) from discontinued operations ............ -- --
----------- -----------
Net income (loss) .................................. $ (0.39) $ (0.44)
=========== ===========
Diluted -
Income (loss) from continuing operations .............. $ (0.39) $ (0.44)
Income (loss) from discontinued operations ............ -- --
----------- -----------
Net income (loss) .................................. $ (0.39) $ (0.44)
=========== ===========
Weighted average number of shares outstanding:
Basic ................................................. 15,273,716 15,273,716
=========== ===========
Diluted ............................................... 15,273,716 15,273,716
=========== ===========
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
As Previously
Reported Restated
------------- ------------
Six Months Ended June 30, 2001
------------------------------
Revenues ....................................................... $ 29,056 $ 29,056
Cost of services ............................................... 21,299 21,299
----------- -----------
Gross profit ............................................. 7,757 7,757
Research and development costs ................................. -- 315
Selling, general and administrative expenses ................... 18,861 19,259
----------- -----------
Operating loss ................................................. (11,104) (11,817)
Other income (expense):
Interest expense ............................................ (2) (60)
Interest income ............................................. 881 635
Other ....................................................... (57) (439)
----------- -----------
Total other income (expense) ............................. 822 136
----------- -----------
Income (loss) from continuing operations before income taxes ... (10,282) (11,681)
Benefit for income taxes ....................................... -- 3,454
----------- -----------
Income (loss) from continuing operations ....................... (10,282) (8,227)
----------- -----------
Operating income (loss) from discontinued operations ........ 17 --
Gain (loss) on sale of discontinued operations .............. -- (119)
----------- -----------
Income (loss) from discontinued operations .................. 17 (119)
----------- -----------
Net income (loss) ........................................ $ (10,265) $ (8,346)
=========== ===========
Earnings (loss) per share:
Basic -
Income (loss) from continuing operations .................... $ (0.67) $ (0.54)
Income (loss) from discontinued operations .................. -- (0.01)
----------- -----------
Net income (loss) ........................................ $ (0.67) $ (0.55)
=========== ===========
Diluted -
Income (loss) from continuing operations .................... $ (0.67) $ (0.54)
Income (loss) from discontinued operations .................. -- (0.01)
----------- -----------
Net income (loss) ........................................ $ (0.67) $ (0.55)
=========== ===========
Weighted average number of shares outstanding:
Basic ....................................................... 15,316,705 15,311,180
=========== ===========
Diluted ..................................................... 15,316,705 15,311,180
=========== ===========
As Previously
Reported Restated
------------- --------
Six Months Ended June 30, 2001
------------------------------
Consolidated Statement of Cash Flows:
Net cash used in operating activities ......................... $(3,849) $(3,957)
Net cash used in investing activities ......................... (559) (32)
Net cash used in financing activities ......................... (445) (201)
Cash provided by discontinued operations ...................... 684 21
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
Note 3 - Summary of Significant Accounting Policies
The accompanying interim financial statements do not include all disclosures
included in the financial statements in Cotelligent's Amendment No. 3 to Annual
Report on Form 10-K/A for the year ended December 31, 2001 ("Form 10-K/A"), and
therefore these financial statements should be read in conjunction with the
financial statements included in Cotelligent's Form 10-K/A.
In the opinion of management, the interim financial statements filed as part of
this Quarterly Report on Form 10-Q reflect all adjustments necessary for a fair
presentation of the financial position and the results of operations and of cash
flows for the interim periods presented. Certain balances of the prior year have
been reclassified to conform to the current presentation.
Note 4 - Changes in Stockholders' Equity
Notes
Common Stock Additional Receivable Treasury Stock Total
------------------- Paid-In From Accum. ---------------- Stockholders'
Shares Amount Capital Stockholders Deficit Shares Amount Equity
---------- ------ ---------- ------------ -------- ------- ------ -------------
Balance at December 31, 2001... 15,514,757 $155 $86,662 $(6,193) $(55,160) 644,600 $(500) $24,964
Issuance of common stock....... 31,197 -- 4 -- -- -- -- 4
Net income..................... -- -- -- -- 674 -- -- 674
---------- ---- ------- ------- -------- ------- ----- -------
Balance at June 30, 2002....... 15,545,954 $155 $86,666 $(6,193) $(54,486) 644,600 $(500) $25,642
========== ==== ======= ======= ======== ======= ===== =======
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
Note 5 - Discontinued Operations
On June 30, 2000, the Company sold the majority of its IT staff augmentation
business and on July 14, 2000 and October 31, 2000 sold other components of the
IT staff augmentation business. During the quarter ended June 30, 2001, the
Company held one remaining component of its discontinued operations. During the
fourth quarter of fiscal 2001, the Company abandoned its plan to divest of this
operation and consequently closed this business.
The following financial data reflects a summary of operating results for the
Company's discontinued operations for the three and six months ended June 30,
2001.
Summary of Operating Results of Discontinued Operations:
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
2001 2001
-------- --------
Revenues............................................. $1,426 $3,503
Cost of services..................................... 1,055 2,727
------ ------
Gross profit...................................... 371 776
Selling, general and administrative expenses......... 370 895
------ ------
Operating income (loss)........................... 1 (119)
Other income (expense)............................... -- --
------ ------
Operating income (loss) before provision for taxes... 1 (119)
Provision for income taxes........................... -- --
------ ------
Operating income (loss)........................... 1 (119)
Reclassification to gain (loss) on sale of
discontinued operations........................... (1) 119
------ ------
Operating income from discontinued operations........ $ -- $ --
====== ======
Gain on Sale of Discontinued Operations in 2002:
The gain on the sale of discontinued operations for the three and six months
ended June 30, 2002 is the result of recoveries of trade accounts receivable in
2002 previously written off as bad debt.
Note 6 - Income Taxes
On March 9, 2002, Congress approved the Job Creation and Worker Assistance Act
of 2002 allowing net operating losses for the Company's fiscal tax year ending
March 31, 2002 to be carried back five years. In accordance with SFAS No. 109,
the effect of this change in tax law was reflected in the March 31, 2002
financial statements as changes in tax law must be reflected in the period of
enactment. Consequently, the Company recorded a $7,496 tax benefit during the
six months ended June 30, 2002, which reflects the release of a valuation
allowance against a deferred tax asset previously written down to zero due to
the uncertainty of its realization. The Company received a $7,496 refund of
taxes on August 10, 2002.
Note 7 - Weighted Average Number of Shares Outstanding
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Basic weighted average number of shares outstanding ......... 14,901,054 15,273,716 14,895,879 15,311,180
Effect of stock options issued to employees and directors ... -- -- 2,491,913 --
---------- ---------- ---------- ----------
Diluted weighted average number of shares outstanding ....... 14,901,054 15,273,716 17,387,792 15,311,180
========== ========== ========== ==========
Options to purchase 4,646,094 and 1,956,386 shares of common stock were
outstanding at June 30, 2002 and 2001, respectively, but were not included in
EPS for the three months ended June 30, 2002 and 2001 because the Company had a
loss from continuing operations making the options antidilutive. Options to
purchase 422,402 shares of common stock were outstanding for the six months
ended June 30, 2002 but were not included in the computation of diluted EPS
because the options' exercise price was greater than the average market price of
the common shares. Options to purchase 1,956,386 shares of common stock were
outstanding at June 30, 2001, but were not included in EPS for the six months
ended June 30, 2001 because the Company had a loss from continuing operations
making the options antidilutive.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for statements of historical fact contained herein, any statements
contained in this report may be deemed to be forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. For example,
words such as "may," "will," "should," "estimates," "predicts," "potential,"
"continue," "strategy," "believes," "anticipates," "plans," "expects," "intends"
and similar expressions are intended to identify forward-looking statements. All
such forward-looking statements are based upon current expectations that involve
risks and uncertainties. Cotelligent's actual results and the timing of certain
events may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause or contribute to such a
discrepancy include, but are not limited to, those discussed under "Risk
Factors" in Cotelligent's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, other filings made with the Securities and Exchange
Commission and Cotelligent's press release announcing earnings for the quarter
ended March 31, 2002, which was issued on April 30, 2002. The following
discussion is qualified in its entirety by, and should be read in conjunction
with, the more detailed information set forth in our financial statements and
the notes thereto included elsewhere in this filing. All forward-looking
statements included in this report are based upon information available to
Cotelligent as of the date thereof, and Cotelligent assumes no obligation to
update any of such forward-looking statements.
OVERVIEW
Cotelligent provides software consulting services to businesses with complex
information technology ("IT") operations and also provides maintenance, support
and contract services on software products it licenses. These activities are
provided under time and materials billing arrangements or on a fixed-fee basis.
For time and materials billing arrangements, revenues are recorded as work is
performed. Revenues are directly related to the total number of hours billed to
clients and the associated hourly billing rates. Hourly billing rates are
established for each service provided and are a function of the type of work
performed and the related skill level of the consultant. For fixed-fee
arrangements, work is performed in line with established deliverables and
revenue is calculated on a percentage of completion basis. In addition, the
Company has developed complete mobile workforce management solutions for
industries that have medium to large transient sales, field or delivery
personnel. A component of these solutions may be software that has been
developed by the Company. Revenues earned for software license sales and service
contracts are recorded based on the provisions of AICPA SOP 97-2, "Software
Revenue Recognition," which shares the basic criteria of SAB No. 101.
The Company's principal costs are professional compensation directly related to
the performance of services and related expenses. Gross profits (revenues after
professional compensation and related expenses) are primarily a function of
hours billed to clients per professional employee or consultant, hourly billing
rates of those employees or consultants and employee or consultant compensation
relative to those billing rates. Gross profits can be adversely impacted if
services provided cannot be billed, if the Company is not effective in managing
its service activities, if fixed-fee engagements are not properly priced, if
consultant cost increases exceed bill rate increases or if there are high levels
of unutilized time (work activities not chargeable to clients or unrelated to
client services) of full-time salaried service professional employees.
Operating income can be adversely impacted by increased administrative staff
compensation and expenses related to streamlining or expanding the Company's
business, which may be incurred before revenues or economies of scale are
generated from such investment. Solution development activities require a higher
level of selling, general and administrative activities as well as investment in
research and development activities.
As a service and software organization, the Company responds to service demands
from its clients. Accordingly, the Company has limited control over the timing
and circumstances under which its services are provided. Therefore, the Company
can experience volatility in its operating results from quarter to quarter. The
operating results for any quarter are not necessarily indicative of the results
for any future period.
RESTATEMENT
The Company has restated the condensed consolidated statements of operations and
cash flows for the three and six months ended June 30, 2001 included in this
Quarterly Report on Form 10-Q. For additional information regarding the
restatement, please refer to Note 2 to the condensed consolidated financial
statements included in Item 1.
11
CONSOLIDATED RESULTS OF OPERATIONS
(In thousands)
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Revenues
Revenues decreased $8,158, or 65%, to $4,302 in the three months ended June 30,
2002, from $12,460 in the three months ended June 30, 2001. The decrease was due
to a general reduction in demand for its services due to softening in the market
coupled with a shift away from general IT consulting services towards offering
mobile workforce management and Web services solutions.
Gross Profit
Gross profit decreased $1,390, or 46%, to $1,627 in the three months ended June
30, 2002, from $3,017 in the three months ended June 30, 2001. The decrease was
due to lower revenues following a general reduction in demand for its services
due to softening in the market coupled with a shift away from general IT
consulting services towards offering mobile workforce management and Web
services solutions. The gross profit margin increased to 38% from 24% due to
better pricing, a mix shift to higher margin projects, caused in part by the end
of some long-term, lower margin, legacy system development engagements and an
increase in utilization of billable staff.
Research and Development Costs
Research and development costs were $599 for the three months ended June 30,
2002 compared to $209 for the three months ended June 30, 2001. The Company has
a dedicated team of people solely focused on research and development activities
associated with mobile workforce management and Web services solutions. The
increase of $390 results from research and development costs related to the
development of a software solution for a prospective business partner.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $4,525, or 47%, to $5,008
in the three months ended June 30, 2002 from $9,533 in the three months ended
June 30, 2001. The decrease was primarily due to reductions in operating staff
and associated spending in order to streamline operations in line with revenues,
offset by increased spending in the June 2002 quarter in legal and proxy
solicitation costs in connection with the 2002 Annual Meeting of Stockholders.
Other Income (Expense)
Other income (expense) primarily consists of interest income, interest expense
and losses on an investment in an alliance partner accounted for under the
equity method of accounting. Interest income net of interest expense was $61 for
the three months ended June 30, 2002 compared to net interest income of $243 for
the three months ended June 30, 2001. The decrease in interest income was due to
lower cash and cash equivalents on hand during the three months ended June 30,
2002 and lower interest rates available on cash equivalents. The equity method
losses on the investment in an alliance partner also decreased between the
periods.
Benefit for Income Taxes
The Company recognized a tax benefit of $96 which represented a true-up of the
estimated tax benefit recognized in the quarter ended March 31, 2002. The
benefit was based on the carryback claim actually filed in the quarter ended
June 30, 2002.
Gain on Sale from Discontinued Operations
Discontinued operations is comprised of the Company's IT staff augmentation
business. During the quarter ended June 30, 2001, the Company held one remaining
component in discontinued operations. During the fourth quarter fiscal 2001, the
Company abandoned its plan to divest of this operation and consequently closed
the business.
The gain from the sale of discontinued operations for the three months ended
June 30, 2002 of $82 was the result of cash collected on trade accounts
receivable written off to bad debt expense in prior years.
12
CONSOLIDATED RESULTS OF OPERATIONS
(In thousands)
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Revenues
Revenues decreased $18,881, or 65%, to $10,175 in the six months ended June 30,
2002 from $29,056 in the six months ended June 30, 2001. The decrease was due to
a general reduction in demand for its services due to softening in the market,
coupled with a shift away from general IT consulting services towards offering
mobile workforce management and Web services solutions.
Gross Profit
Gross profit decreased $4,025, or 52%, to $3,732 in the six months ended June
30, 2002 from $7,757 in the six months ended June 30, 2001. The decrease was due
to a general reduction in demand for its services due to softening in the
market, coupled with a shift away from general IT consulting services towards
offering mobile workforce management and Web services solutions. The gross
profit margin increased to 37% from 27%, due to better pricing, a mix shift to
higher margin projects, caused in part by the end of some long-term, lower
margin, legacy system development engagements and an increase in utilization of
billable staff.
Research and Development Costs
Research and development costs were $818 for the six months ended June 30, 2002
compared to $315 for the six months ended June 30, 2001. The Company has created
a dedicated team of people solely focused on research and development activities
associated with mobile workforce management and Web services solutions and has
increased the number of people assigned to this area in 2002. Also, the Company
incurred $400 of research and development costs related to the development of a
software solution for a prospective business partner during the three months
ended March 31, 2002.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $9,638, or 50%, to $9,621
in the six months ended June 30, 2002 from $19,259 in the six months ended June
30, 2001. The decrease was primarily due to the reductions in operating staff
and associated spending in order to streamline operations in line with revenue,
offset by increased spending in the June 2002 quarter in legal and proxy
solicitation costs in connection with the 2002 Annual Meeting of Stockholders.
Other Income (Expense)
Other income (expense) primarily consists of interest income, interest expense
and losses on an investment in an alliance partner accounted for under the
equity method of accounting. Interest income net of interest expense was $90 for
the six months ended June 30, 2002 compared to net interest income of $575 for
the six months ended June 30, 2001. The decrease in interest income was due to
lower cash and cash equivalents on hand during the six months ended June 30,
2002 and lower interest rates available on cash equivalents. The equity method
losses on the investment in an alliance partner also decreased between the
periods.
Benefit for Income Taxes
The income tax benefit of $7,496 for the six months ended June 30, 2002 was the
result of the Job Creation and Worker Assistance Act of 2002, approved by
Congress on March 9, 2002, allowing net operating losses for the Company's
fiscal tax year ending March 31, 2002 to be carried back five years. In
accordance with SFAS No. 109, the effect of this change in tax law was reflected
in the six months ended June 30, 2002 financial statements as changes in tax law
must be reflected in the period of enactment. The Company recorded a further
income tax benefit of $3,454 for the six months ended June 30, 2001 due to the
deduction of goodwill associated with an abandoned operating location.
Gain on Sale from Discontinued Operations
Discontinued operations was comprised of the Company's IT staff augmentation
business. During the six months ended June 30, 2001, the Company held one
remaining component in discontinued operations which resulted in a loss from
discontinued operations of $119. During the fourth quarter of fiscal 2001, the
Company abandoned its plan to divest this operation and consequently closed the
business. The gain on sale of discontinued operations in the six months ended
June 30, 2002 was the result of recovering trade accounts receivable written off
in prior years.
13
LIQUIDITY AND CAPITAL RESOURCES
(In thousands)
The Company has financed itself principally through cash flows from operations,
net proceeds from its public offerings, net proceeds from the sale of its IT
staff augmentation business and tax refunds from the carry back of net operating
losses.
The Company previously maintained a credit facility with a consortium of banks
under which it borrowed to fund working capital needs. On June 30, 2000, the
Company used a portion of the cash proceeds from the sale of its IT staff
augmentation business to pay off all obligations under the credit facility and
to pay existing earn-out obligations to sellers of an acquired business. Upon
settlement of all obligations under the credit facility, the credit facility was
terminated. Since June 30, 2000, the Company has not maintained a credit
facility.
Cash provided by operating activities was $1,436 for the six months ended June
30, 2002, and the average cash balance during the quarter was $21,833. The
Company's primary sources of liquidity for the Company going forward include the
collection of accounts receivable and federal and state income tax refunds
resulting from the carry-back of net operating losses. In addition, the Company
continues to utilize the cash proceeds generated from the sales of its IT staff
augmentation businesses. Total receivables were 72 days of quarterly revenues at
June 30, 2002 and 74 days at December 31, 2001. In the first quarter of 2002,
Congress approved the Job Creation and Worker Assistance Act of 2002 allowing
fiscal tax year end March 31, 2002 net operating losses to be carried back five
years. The effect of this change in tax law resulted in a $7,496 tax refund
received by the Company on August 10, 2002. The Company's 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.
The following table reflects our contractual cash obligations, excluding
interest, due over the indicated periods.
- ---------------------------------------------------------------------------------------------------
Payments Due by Period
----------------------------------------------
Less than 1 to 3 4 to 5 After 5
Contractual Cash Obligations: Total 1 Year Years Years Years
- ---------------------------------------------------------------------------------------------------
Obligations due sellers of an acquired business $ 578 $ 360 $ 218 $ -- $--
- ---------------------------------------------------------------------------------------------------
Operating leases $5,439 $1,703 $3,279 $457 $--
- ---------------------------------------------------------------------------------------------------
Total contractual obligation $6,017 $2,063 $3,497 $457 $--
- ---------------------------------------------------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operations, plant closing, or other exit or disposal activities. SFAS No. 146 is
effective prospectively for exit or disposal activities initiated after December
31, 2002, with earlier adoption encouraged. As the provisions of SFAS No. 146
are required to be applied prospectively after the adoption date, we cannot
determine the potential effects that adoption of SFAS No. 146 will have on our
consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
Allowance for Doubtful Accounts
The Company provides an allowance for potentially uncollectible accounts
receivable under the provisions of SFAS No. 5, "Accounting for Contingencies,"
in the ordinary course of business. The allowance is derived as the result of
periodic and thorough reviews of aged and known problem accounts during each
quarter. In addition, the Company reserves for unknown issues in its receivables
at the balance sheet date using a formula consistent from quarter to quarter.
Management believes that its approach is appropriate to reserve for potentially
uncollectible receivables. Should management have taken another approach to
developing its reserve, the allowance for doubtful accounts may have been
different than that reported.
Revenue Recognition
The Company accounts for time and materials revenue under the provisions of SAB
101, "Staff Accounting Bulletin No. 101: Revenue Recognition in Financial
Statements", which requires revenue to be recorded when there is evidence of an
agreement, a fixed or determinable fee, collectibility is reasonably assured,
and delivery has occurred. Revenues include reimbursable expenses charged to and
collected from clients. Revenues pursuant to fixed-fee contracts are generally
recognized as services are rendered on
14
the percentage-of-completion method of accounting based on hours incurred to
total estimated labor hours to complete. Revenues earned for software license
sales and service contracts are recorded based on the provisions of AICPA SOP
97-2, "Software Revenue Recognition", which shares the basic criteria of SAB No.
101.
Restructuring Liabilities
As part of the Company's efforts to streamline its operations commensurate with
its revenue base, the Company identified opportunities to reduce its cost
structure by reducing headcount and closing certain operating facilities to
conform to the Company's changing operating structure in June 1999, December
2000, and September 2001. These restructuring obligations were calculated using
information known at the date of the respective accruals based on the provisions
of EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity." Management has adjusted these obligations
over the payment periods of each restructuring plan as liabilities have been
settled and payments have been made. Management periodically reviews the
accuracy of the restructuring liabilities, and accounts for any necessary
adjustments due to changes in estimates in the statement of operations as
originally provided.
Accounting for Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes." This pronouncement requires using an asset and liability approach to
recognize deferred tax assets and liabilities for the tax consequences of
temporary differences by applying enacted statutory tax rates to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities. The Company has not given benefit to any deferred tax
assets or net operating losses in the previous two fiscal years due to
uncertainty of realizing these assets in future periods, except a) in the first
quarter of 2001, the Company recognized an income tax benefit related to a net
operating loss generated through March 31, 2001 that was carried back to early
years and for which a refund of taxes was received and b) in the first quarter
of 2002, Congress approved the Job Creation and Worker Assistance Act of 2002,
allowing March 31, 2002 net operating losses to be carried back five years.
Under SFAS No. 109, the effect of this change in tax law was reflected in the
March 31, 2002 financial statements as changes in tax law must be reflected in
the period of enactment. In addition, the financial statements have provided
reserves for certain tax positions taken by the Company in the March 31, 1999,
2000 and 2001 tax returns based on enacted tax laws during those periods.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Cotelligent has invested its existing cash in highly liquid money market
accounts and does not use derivative financial instruments, derivative commodity
instruments or other market risk sensitive instruments, positions or
transactions. Accordingly, the Company believes that it is not subject to any
material risks arising from changes in interest rates, foreign currency exchange
rates, commodity prices, equity prices or other market changes that affect
market risk sensitive instruments. Cotelligent's policy is to invest its cash in
a manner that provides Cotelligent with the appropriate level of liquidity to
enable it to meet its current obligations, primarily accounts payable, capital
expenditures and payroll, recognizing that it does not currently have outside
bank funding available.
Item 4. Controls and Procedures
There have not been any significant changes in the Company's internal controls
or in other factors that could significantly affect these controls and there
have been no corrective actions taken with regard to significant deficiencies
and material weaknesses subsequent to the date of their evaluation.
15
PART II - OTHER INFORMATION
Item 1. 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 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company solicited proxies for an annual meeting of stockholders held on
June 11, 2002 at which one director was to be elected. The Board of
Directors nominated Debra J. Richardson to serve as a director for a term
expiring at the 2005 annual meeting of stockholders. The terms of directors
James R. Lavelle and Anthony M. Frank continued after the annual meeting.
Skiritai Capital LLC, a stockholder of the Company, solicited proxies in
opposition to the Board's nominee for the purpose of electing its nominee,
Russell Silvestri, as director.
On June 18, 2002, the independent inspector of elections certified the
final results of the voting at Cotelligent's annual meeting held on June
11, 2002. Stockholders elected Debra J. Richardson and approved a
non-binding stockholder proposal recommending that the Board of Directors
redeem the rights issued and outstanding under the Company's shareholder
rights plan. The final results are as follows:
1. Election of one director to serve for a three-year term expiring
at the annual meeting in 2005.
For
Debra J. Richardson 7,229,844
Russell Silvestri 3,127,647
Authority Withheld 1,389,804
2. Approve the adoption of a non-binding stockholder proposal
recommending that the Board of Directors redeem the rights issued
and outstanding under the Company's shareholder rights plan.
For 5,106,532
Against 4,145,605
Abstain 53,296
Broker
Non-Vote 2,441,862
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
16
Cotelligent, Inc. filed with the Securities and Exchange Commission on
May 9, 2002, a current report on Form 8-K in connection with the
adoption of Amended and Restated By-laws of Cotelligent, Inc and
certain changes to Cotelligent Inc.'s Board of Directors.
Cotelligent, Inc. filed with the Securities and Exchange Commission on
June 13, 2002, a current report Form 8-K regarding Amendment No. 1 to
Rights Agreement, amending the Rights Agreement dated September 24,
1997, between Cotelligent, Inc. and BankBoston, N.A.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COTELLIGENT, INC.
Date: January 6, 2003 /s/ Curtis J. Parker
-------------------------------------
Curtis J. Parker
Executive Vice President,
Chief Financial Officer and Treasurer
18
Certifications Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
I, James R. Lavelle, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cotelligent, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: January 6, 2003
/s/ James R. Lavelle
-------------------------------------------------
James R. Lavelle
Chairman of the Board and Chief Executive Officer
19
Certifications Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
I, Curtis J. Parker, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cotelligent, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: January 6, 2003
/s/ Curtis J. Parker
----------------------------------------------------
Curtis J. Parker
Executive Vice President and Chief Financial Officer
20