UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-25372
COTELLIGENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3173918
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1)has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--------------- ---------------
At November 12, 1999 there were 15,126,204 shares of common stock
outstanding.
<PAGE>
COTELLIGENT, INC.
INDEX
Part I - Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements Page
<S> <C>
Cotelligent, Inc.
Consolidated Balance Sheets at September 30, 1999 (Unaudited)
and March 31, 1999 3
Consolidated Statements of Operations for the Three and Six Months Ended
September 30, 1999 and 1998 (Unaudited) 4
Consolidated Statements of Cash Flows for the Six Months Ended
September 30, 1999 and 1998 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
2
<PAGE>
COTELLIGENT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, 1999 March 31, 1999
------------------- ------------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................... $ 217 $ 972
Accounts receivable, including unbilled accounts of $23,025..
and $17,719 and net of allowance for doubtful accounts of....
$1,825 and $1,449, respectively.............................. 68,997 62,087
Deferred income taxes........................................ 960 960
Prepaid expenses and other................................... 6,011 4,971
----------------- ------------------
Total current assets....................................... 76,185 68,990
Property and equipment, net..................................... 12,990 11,405
Goodwill, net of accumulated amortization of $3,121 and $1,861,.
respectively.................................................... 75,343 95,200
Notes receivable from officers and related party................ 1,340 191
Deferred income taxes........................................... 6,447 -
Other assets.................................................... 1,432 1,094
----------------- ------------------
Total assets............................................... $ 173,737 $ 176,880
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt.............................................. $ 314 $ 236
Accounts payable............................................. 9,152 9,399
Accrued compensation and related payroll liabilities......... 15,331 17,238
Income taxes payable......................................... 2,230 5,702
Other accrued liabilities.................................... 8,081 7,460
----------------- ------------------
Total current liabilities.................................. 35,108 40,035
Long-term debt.................................................. 48,061 28,191
Deferred income taxes........................................... - 821
----------------- ------------------
Total liabilities.......................................... 83,169 69,047
----------------- ------------------
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, 13,639,362 and 13,656,031 shares issued and...
outstanding, respectively................................. 137 137
Additional paid-in capital................................... 81,507 82,517
Retained earnings............................................ 8,924 25,179
----------------- -------------------
Total stockholders' equity................................. 90,568 107,833
----------------- -------------------
Total liabilities and stockholders' equity................. $ 173,737 $ 176,880
================= ===================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
COTELLIGENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------------- -------------------------------------
1999 1998 1999 1998
-------------- ------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Revenues........................................... $ 85,623 $ 79,728 $ 174,189 $ 152,778
Cost of services................................... 61,504 55,917 125,212 108,100
-------------- ------------- ----------------- ----------------
Gross profit............................... 24,119 23,811 48,977 44,678
Selling, general and administrative expenses....... 21,643 16,856 44,228 31,612
Depreciation and amortization of goodwill.......... 1,614 776 3,118 1,450
Impairment of long-lived assets.................... - - 20,000 -
Restructuring charge............................... - - 4,920 -
-------------- ------------- ----------------- ----------------
Operating income (loss) ........................... 862 6,179 (23,289) 11,616
Other income (expense):
Interest expense................................ (755) (1) (1,407) (26)
Interest income................................. 8 287 128 619
Other........................................... 4 (3) (60) (3)
-------------- ------------- ----------------- ----------------
Total other income (expense).................. (743) 283 (1,339) 590
-------------- ------------- ----------------- ----------------
Income (loss) before provision for income taxes.... 119 6,462 (24,628) 12,206
Provision (benefit) for income taxes............... 40 2,617 (8,373) 4,846
-------------- ------------- ----------------- ----------------
Net income (loss).................................. $ 79 $ 3,845 $ (16,255) $ 7,360
============== ============= ================= ================
Earnings (loss) per share
Basic and diluted .......................... $ 0.01 $ 0.27 $ (1.20) $ 0.52
============== ============= ================= ================
Weighted average shares outstanding
Basic....................................... 13,565,326 14,055,396 13,513,452 14,077,764
============== ============= ================= ================
Diluted..................................... 13,573,264 14,166,025 13,513,452 14,255,913
============== ============= ================= ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
COTELLIGENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
-------------------------------------------
1999 1998
-------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................ $ (16,255) $ 7,360
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization of goodwill ............ 3,118 1,450
Impairment of long-lived assets ...................... 20,000 -
Deferred income taxes, net............................ (7,268) (532)
Loss on disposal of property and equipment............ 95 25
Provision for doubtful accounts....................... 202 155
Changes in current assets and liabilities:
Accounts receivable............................. (6,505) (10,372)
Prepaid expenses and other current assets....... (848) (927)
Accounts payable and accrued expenses........... (2,439) 1,227
Income taxes payable............................ (3,472) (127)
Other accrued liabilities....................... 622 (4)
Other assets.................................... (80) 22
-------------------- -------------------
Net cash used in operating activities...... (12,830) (1,723)
-------------------- -------------------
Cash flows from investing activities:
Proceeds from sale of assets .................................... 18 317
Other investment................................................. (253) -
Purchase of businesses, net of cash acquired..................... (1,535) (10,847)
Purchases of property and equipment.............................. (3,444) (2,648)
-------------------- -------------------
Net cash used in investing activities....... (5,214) (13,178)
-------------------- -------------------
Cash flows from financing activities:
Net proceeds from long-term debt................................. 20,110 -
Payments on capital lease obligations............................ (162) -
Net borrowings on short-term debt................................ - (23)
Increase in notes receivable from officers and related party, net (1,149) -
Net proceeds from issuance of common stock ...................... 723 1,457
Repurchase of common stock ...................................... (2,233) (4,690)
-------------------- -------------------
Net cash provided by (used in) financing activities.. 17,289 (3,256)
-------------------- -------------------
Net decrease in cash and cash equivalents........................ (755) (18,157)
Cash and cash equivalents at beginning of period................. 972 40,528
==================== ===================
Cash and cash equivalents at end of period....................... $ 217 $ 22,371
==================== ===================
Supplemental disclosures of cash flow information:
Interest paid.................................................... $ 1,432 $ 26
Income taxes paid................................................ $ 2,637 $ 3,008
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
COTELLIGENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
(Unaudited)
Note 1 - Business Organization and Basis of Presentation
Cotelligent, Inc. ("Cotelligent" or the "Company") was formed in February
1993 to acquire, own and operate software professional service 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 commenced operations in February 1996 when it
completed its initial public offering and started acquiring and operating
businesses. Since that date, the Company has acquired 26 IT professional service
businesses. All of the businesses acquired have operations substantially the
same as the Company. These financial statements include the accounts of
Cotelligent, Inc. and its subsidiaries.
The Company is currently organized in two practice groups consisting of
Technology Solutions and Professional Services, and operates offices across the
United States along with international consultant recruiting offices in Brazil
and the Philippines. At September 30, 1999, the Company had approximately 3,200
employees, including technical staff of approximately 2,700 IT professional
consultants providing services to approximately 900 clients across a broad
spectrum of industries.
Note 2 - Summary of Significant Accounting Policies
Interim Financial Statement Presentation
The accompanying interim financial statements do not include all
disclosures included in the financial statements as included in Cotelligent's
Annual Report on Form 10-K for the year ended March 31, 1999 ("Form 10-K"), and
therefore these financial statements should be read in conjunction with the
financial statements included on Form 10-K.
In the opinion of management, the interim financial statements filed as
part of this Quarterly Report on Form 10-Q reflect all adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation of the
financial position and the results of operations and of cash flows for the
interim periods presented. Certain 1998 balances have been reclassified to
conform with the current presentation.
Note 3 - Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional Total
-------------------------- Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
------------ ---------- ------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1999..... 13,656,031 $ 137 $ 82,517 $ 25,179 $ 107,833
Repurchase of Common Stock.... (238,400) (2) (2,231) - (2,233)
Issuance of Common Stock...... 221,731 2 1,221 - 1,223
Net loss...................... - - - (16,255) (16,255)
============ ========== ============= ============ ================
Balance at September 30, 1999. 13,639,362 $ 137 $ 81,507 $ 8,924 $ 90,568
============ ========== ============= ============ ================
</TABLE>
6
<PAGE>
COTELLIGENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
(Unaudited)
Note 4 - Business Combinations
Since inception, the Company has acquired 26 IT professional services
firms. During fiscal 1999, Cotelligent acquired five companies (acquired on
September 16, 1998, October 29, 1998, October 30, 1998, November 30, 1998 and
January 4, 1999) accounted for under the purchase method. During fiscal 2000,
Cotelligent acquired one company on August 12, 1999 accounted for under the
purchase method. The results of these acquisitions have been included in the
Company's results from their respective acquisition dates. The following pro
forma consolidated statements of operations for the three and six months ended
September 30, 1998 and 1999 give effect to the acquisitions of the companies
purchased in fiscal 1999 and 2000 as if these acquisitions were made on April 1,
1998 and 1999. The pro forma consolidated financial statement reflects
adjustments for interest expense on cash consideration and amortization of
goodwill for the companies accounted for under the purchase method of
accounting.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------------
1999 1998
---------------- --------------
<S> <C> <C>
Revenues....................................... $ 86,618 $ 96,185
Cost of services............................... 62,479 65,068
---------------- --------------
Gross profit............................ 24,139 31,117
Selling, general and administrative expenses... 23,830 23,151
---------------- --------------
Operating income .............................. 309 7,966
Other expense.................................. (770) (1,147)
---------------- --------------
Income (loss) before provision for income taxes (461) 6,819
Provision (benefit) for income taxes........... (156) 2,767
---------------- --------------
Net income (loss).............................. $ (305) $ 4,052
================ ==============
Earnings (loss) per share -
Basic..................................... $ (0.02) $ 0.26
================ ==============
Diluted................................... $ (0.02) $ 0.26
================ ==============
Weighted average shares outstanding -
Basic..................................... 13,627,752 15,356,535
================ ==============
Diluted................................... 13,627,752 15,467,164
================ ==============
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
September 30,
-----------------------------------
1999 1998
---------------- --------------
<S> <C> <C>
Revenues....................................... $ 177,233 $ 184,797
Cost of services............................... 127,369 125,821
---------------- --------------
Gross profit............................ 49,864 58,976
Selling, general and administrative expenses... 73,480 44,459
---------------- --------------
Operating income .............................. (23,616) 14,517
Other expense.................................. (1,413) (1,915)
---------------- --------------
Income (loss) before provision for income taxes (25,029) 12,602
Provision (benefit) for income taxes........... (8,374) 5,105
---------------- --------------
Net income (loss).............................. $ (16,655) $ 7,497
================ ==============
Earnings (loss) per share -
Basic..................................... $ (1.23) $ 0.49
================ ==============
Diluted................................... $ (1.23) $ 0.48
================ ==============
Weighted average shares outstanding -
Basic..................................... 13,594,388 15,378,903
================ ==============
Diluted................................... 13,594,388 15,557,052
================ ==============
</TABLE>
7
<PAGE>
COTELLIGENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(Unaudited)
Note 5 - Earnings Per Share
Earnings per share were as follows:
<TABLE>
<CAPTION>
For the Three Months Ended September 30, 1999
-------------------------------------------------------
Per Share
Income Shares Amount
------------------ -------------- -------------
<S> <C> <C> <C>
Basic earnings per share-
Net income available to common stockholders ........... $ 79 13,565,326 $ 0.01
Options issued to directors and employees ............. 7,938
--------------
Diluted earnings per share-
Income available to common stockholders
plus assumed conversions .......................... $ 79 13,573,264 $ 0.01
==============
For the Three Months Ended September 30, 1998
-------------------------------------------------------
Per Share
Income Shares Amount
------------------ -------------- -------------
Basic earnings per share-
Net income available to common stockholders ........... $ 3,845 14,055,396 $ 0.27
Options issued to directors and employees ............. 110,629
--------------
Diluted earnings per share-
Income available to common stockholders
plus assumed conversions .......................... $ 3,845 14,166,025 $ 0.27
==============
For the Six Months Ended September 30, 1999
-------------------------------------------------------
Per Share
Income Shares Amount
------------------ -------------- -------------
Basic and diluted earnings per share-
Net loss available to common stockholders ............. $ (16,255) 13,513,452 $ (1.20)
For the Six Months Ended September 30, 1998
-------------------------------------------------------
Per Share
Income Shares Amount
------------------ -------------- -------------
Basic earnings per share-
Net income available to common stockholders ........... $ 7,360 14,077,764 $ 0.52
Options issued to directors and employees ............. 178,149
--------------
Diluted earnings per share-
Income available to common stockholders
plus assumed conversions .......................... $ 7,360 14,255,913 $ 0.52
==============
</TABLE>
8
<PAGE>
COTELLIGENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
(Unaudited)
Note 6 - Capital Stock
In September 1998, Cotelligent's Board of Directors authorized the
repurchase of up to 2.0 million shares of the Company's Common Stock, or 14% of
the then outstanding shares. During the six months ended September 30, 1999, the
Company completed the share repurchase program with the repurchase of 238,400
shares for a total cost of $2,233.
Note 7 - Goodwill Impairment Charge
In accordance with Statement of Financial Accounting Standards (SFAS) No.
121, the Company considers, among other factors, deterioration of operating
performance or significant loss of client base to be indicators of potential
impairment of long-lived assets. The Company experienced a reduction in demand
for its services, which it believes to be principally related to strategies
being employed by the Company's customers of reducing investment in IT
infrastructures while their "Year 2000" compliance is being ascertained. In
particular, one of the Company's operating locations experienced a significant
reduction in demand. As a result of the reduction in demand for its services,
the Company recognized an impairment of goodwill during the six months ended
September 30, 1999 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. The pre-tax non-cash charge was $20,000, which represents the excess of
the assets' carrying value over the Company's estimate of its fair value.
Note 8 - Restructuring of Operations
As part of the Company's reorganization into two 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
during the six months ended September 30, 1999. The charge includes 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). As the Company's reorganization plan proceeds, the amount of
the restructuring charge could change. At September 30, 1999, $3,204 of
restructuring charges remained in accrued liabilities.
9
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cotelligent, Inc. ("Cotelligent" or the "Company") was formed in February
1993 to acquire, own and operate software professional service businesses
specializing in providing information technology ("IT") consultants to
businesses with complex IT operations. Cotelligent's consulting practices are
divided into two groups: Professional Services - IT staff augmentation and
Technology Solutions, which encompass all of the Company's consulting services
including custom application software development and outsourcing solutions,
solutions in conjunction with national partnerships with leading enterprise
application software companies, network design, intranet and internet
application design and development and IT Education.
During fiscal 1999 and fiscal 2000, Cotelligent acquired six companies
(acquired on September 16, 1998, October 29, 1998, October 30, 1998, November
30, 1998, January 4, 1999 and August 12, 1999) accounted for under the purchase
method. The results of these acquisitions have been included in the Company's
results from their respective acquisition dates.
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. 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 unutilized time (work activities not chargeable to clients or unrelated to
client services) of full-time salaried service professional employees. Operating
income (gross profit less selling, general and administrative expenses,
depreciation and amortization of goodwill, impairment of long-lived assets and
restructuring charge) can be adversely impacted by increased administrative
staff compensation and expenses related to growing and expanding the Company's
business, which may be incurred before revenues or economies of scale are
generated from such investment. In addition, the Company's solutions oriented
practices require a higher level of selling, general and administrative
infrastructure in order to generate revenue. If the Company is unable to
generate sufficient revenue from these activities, operating income may be
adversely affected.
As part of its strategic plan, the Company intends to acquire other IT
consulting services businesses. Should the Company be successful in acquiring
such businesses, periods subsequent to the completion of an acquisition could be
adversely impacted by costs and activities associated with the assimilation and
integration of the acquired company. In addition, there can be no assurance that
the acquired company will meet its revenue or profit expectations following the
acquisition. If the Company is unsuccessful in its acquisition program, the
period in which costs associated with the pursuit of such opportunities are
written off could be adversely impacted.
As a professional services organization, the Company responds to service
demands from its clients. Accordingly, the Company has limited control over the
timing and circumstances under which its services are provided. Therefore, the
Company can experience volatility in its operating results from quarter to
quarter. The operating results for any quarter are not necessarily indicative of
the results for any future period.
The Company has conducted a comprehensive review of its internal computer
systems to identify the systems that could be affected by the "Year 2000" issue
and has concluded that the "Year 2000" issue will not pose any significant
operational problems for the Company. The Company does not expect the
expenditures related to the "Year 2000" issue to have a material effect on its
financial position or results of operations in any year.
Except for historical information contained herein, the information
contained in this report includes forward-looking statements that involve
certain risks and uncertainties that could cause actual results to vary
materially from such statements. 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 such
forward-looking statement. Please refer to the discussion of risk factors and
other factors included in Cotelligent's Annual Report on Form 10-K for the
fiscal year ended March 31, 1999 and other filings made with the Securities and
Exchange Commission.
10
<PAGE>
CONSOLIDATED RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998
Revenues
Revenues increased $5.9 million, or 7.4% to $85.6 million in the three
months ended September 30, 1999 from $79.7 million in the three months ended
September 30, 1998. The increase was primarily due to the inclusion of revenues
in the second quarter of fiscal 2000 from the companies acquired under the
purchase method of accounting during fiscal 1999 ("Fiscal Year 1999 Purchases"),
partially offset by a general reduction in demand for the Company's services.
Gross Profit
Gross profit increased $0.3 million, or 1.3%, to $24.1 million in the three
months ended September 30, 1999 from $23.8 million in the three months ended
September 30, 1998 as a result of the inclusion of the Fiscal Year 1999
Purchases. Gross profit as a percentage of revenues decreased to 28.2%, from
29.9%, primarily due to a drop in utilization of salaried employees caused by a
general reduction in demand for IT consulting services.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $4.8 million, or
28.4%, to $21.6 million in the three months ended September 30, 1999 from $16.9
million in three months ended September 30, 1998. The increase was primarily due
to the inclusion of selling, general and administrative expenses related to the
Fiscal Year 1999 Purchases, increased compensation to existing staff, new staff
added in advance of anticipated continued growth, additional occupancy costs and
increased marketing and sales activities during the second quarter of fiscal
2000.
Selling, general and administrative expenses as a percent of revenue were
25.3% in the three months ended September 30, 1999 compared to 21.1% in the
three months ended September 30, 1998. The majority of the Fiscal Year 1999
Purchases offer solutions oriented services which require a higher level of
selling, general and administrative infrastructure in order to generate revenue.
In addition, the increased staffing, occupancy, marketing and sales activities
occurred in advance of anticipated revenue and were in place in the period when
the Company experienced a reduction in demand for its services.
Depreciation and Amortization of Goodwill
Depreciation and amortization of goodwill increased $0.8 million, or 108%,
to $1.6 million in the three months ended September 30, 1999 from $0.8 million
in three months ended September 30, 1998. The increase was primarily due to the
inclusion of amortization of goodwill related to the Fiscal Year 1999 Purchases.
Other Income (Expense)
Other income (expense) primarily consists of interest expense, net of
interest income. Interest expense, net of interest income was $0.7 million in
the three months ended September 30, 1999 as compared to interest income, net of
interest expense of $0.3 million in the three months ended September 30, 1998.
The increase is primarily due to interest expense recognized on the Company's
credit facility during the second quarter of fiscal 2000. The net interest
income in the second quarter of fiscal 1999 was the result of interest income
earned on cash proceeds from the common stock offering completed in March 1998.
Provision for Income Taxes
Provision for income taxes was a tax expense of $0.04 million, or an
effective tax rate of 34% of pre-tax income in the three months ended September
30, 1999, compared to income tax expense of $2.6 million, or an effective rate
of 40.5% of pre-tax income for the three months ended September 30, 1998. The
decrease in the effective tax rate in the second quarter of fiscal 2000, as
compared to the same period of fiscal year 1999, reflects the impact, in a
year-to-date pre-tax loss situation, of non-deductible items to the effective
tax rate.
11
<PAGE>
CONSOLIDATED RESULTS OF OPERATIONS
Six Months Ended September 30, 1999 Compared to Six Months Ended
September 30, 1998
Revenues
In the first half of fiscal 2000 revenues increased $21.4 million, or 14%,
to $174.2 million from $152.8 million in the first half of fiscal 1999. The
increase was primarily due to the inclusion of revenues in the second quarter of
fiscal 2000 from the companies acquired under the purchase method of accounting
during fiscal 1999.
Gross Profit
Gross profit increased $4.3 million, or 9.6%, to $49.0 million in the first
half of 2000 from $44.7 million in the first half of 1999, as a result of the
inclusion of the Fiscal Year 1999 Purchases. Gross profit as a percentage of
revenues decreased to 28.1%, from 29.2%, primarily due to a drop in utilization
of salaried employees caused by a general reduction in demand for IT consulting
services.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $12.6 million, or
39.9%, to $44.2 million in the first half of 2000 from $31.6 million in the
first half of 1999. The increase was primarily due to the inclusion of selling,
general and administrative expenses related to the Fiscal Year 1999 Purchases,
increased compensation to existing staff, new staff added in advance of
anticipated continued revenue, additional occupancy costs and increased
marketing and sales activities during the first six months of fiscal 2000.
Selling, general and administrative expenses as a percent of revenue were
25.4% in the six months ended September 30, 1999 compared to 20.7% in the six
months ended September 30, 1998. The majority of the Fiscal Year 1999 Purchases
offer solutions oriented services which require a higher level of selling,
general and administrative infrastructure in order to generate revenue. In
addition, the increased staffing, occupancy, marketing and sales activities
occurred in advance of anticipated revenue and were in place in the period when
the Company experienced a reduction in demand for its services.
Depreciation and Amortization of Goodwill
Depreciation and amortization of goodwill increased $1.6 million, or 115%,
to $3.1 million in the six months ended September 30, 1999 from $1.5 million in
the six months ended September 30, 1998. The increase was primarily due to the
inclusion of amortization of goodwill related to the Fiscal Year 1999 Purchases.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards (SFAS) No.
121, the Company considers, among other factors, deterioration of operating
performance or significant loss of client base to be indicators of potential
impairment of long-lived assets. The Company experienced a reduction in demand
for its services, which it believes to be principally related to strategies
being employed by the Company's customers of reducing investment in IT
infrastructures while their "Year 2000" compliance is being ascertained. In
particular, one of the Company's operating locations experienced a significant
reduction in demand. As a result of the reduction in demand for its services,
the Company recognized an impairment of goodwill during the six months ended
September 30, 1999 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. The pre-tax non-cash charge was $20.0 million, which represents the
excess of the asset's carrying value over the Company's estimate of its fair
value.
12
<PAGE>
Restructuring Charge
As part of the Company's reorganization into two 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 $4.9
million during the six months ended September 30, 1999. The charge includes
provisions for severance of approximately 60 management and operating staff
($3.5 million) as well as closure costs related to a plan of consolidating
certain operating locations ($1.4 million). As the Company's reorganization plan
proceeds, the amount of the restructuring charge could change.
Other Income (Expense)
Other income (expense) primarily consists of interest expense, net of
interest income. Interest expense, net of interest income was $1.3 million in
the six months ended September 30, 1999 as compared to interest income, net of
interest expense of $0.6 million in the six months ended September 30, 1998. The
increase is primarily due to interest expense recognized on the Company's line
of credit during the first six months of fiscal 2000. The net interest income in
the first six months of fiscal 1999 was the result of interest income earned on
cash proceeds from the common stock offering completed in March 1998.
Provision for Income Taxes
Provision for income taxes was a benefit of $8.4 million, or an effective
tax rate of 34% of pre-tax loss in the six months ended September 30, 1999,
compared to income tax expense of $4.8 million, or an effective rate of 40% of
pre-tax income for the six months ended September 30, 1998. The decrease in the
effective tax rate in the first six months of fiscal 2000, as compared to the
same period of fiscal year 1999, reflects the impact, in a pre-tax loss
situation, of non-deductible items to the effective tax rate.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth principally through cash flows from
operations, periodic borrowing under its credit facilities and the use of the
net proceeds from its public offerings. On March 12, 1999, the Company entered
into a $100 million revolving line of credit facility (the "Credit Line") which
was amended on June 28, 1999 and November 15, 1999. Interest rate options
include base borrowings at the lead lender's prime rate plus one-quarter of one
percent and term loans at LIBOR plus an applicable margin which fluctuates based
upon certain leverage ratios. The Company believes the existing sources of
liquidity and funds generated from operations will provide adequate cash to fund
its anticipated cash working capital needs at least through the next year.
The Company's primary sources of liquidity are cash balances, the Credit
Line and the collection of its accounts receivable. Accounts receivable
increased as the Company's operations have grown. Total receivables were 72 and
61 days of revenue at September 30, 1999 and March 31, 1999 respectively. The
increase was primarily the result of certain customers lengthening the timing of
their payments to Cotelligent. Should the Company be unable to bill and collect
for its services on a timely basis, the Company could draw upon available cash
or existing credit facilities to finance its operations.
Cash used in operating activities was $12.8 million for the six months
ended September 30, 1999. The Company used borrowings on its Credit Line to fund
cash needs for its operations. At September 30, 1999, the Company had an
outstanding balance of $48.1 million under the Credit Line.
14
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
The following report on Form 8-K was filed during the quarter ended
September 30, 1999.
Cotelligent, Inc. filed with the Securities and Exchange Commission a
copy of the press release dated August 26, 1999 announcing the resig-
nation of its President and Chief Operating Officer.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COTELLIGENT, INC.
Date: November 15, 1999 /s/ Daniel E. Jackson
--------------------------
Daniel E. Jackson
Executive Vice President,
Chief Financial Officer and
Treasurer
16
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COTELLIGENT, INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED
SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
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