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 June 30, 2000
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 0-27412
COTELLIGENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3173918
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 August 10, 2000 there were 15,225,368 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 June 30, 2000 (Unaudited)
and March 31, 2000 3
Consolidated Statements of Operations for the Three Months Ended
June 30, 2000 and 1999 (Unaudited) 4
Consolidated Statements of Cash Flows for the Three Months Ended
June 30, 2000 and 1999 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COTELLIGENT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
----------------- ------------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 45,913 $ 4,794
Accounts receivable, including unbilled accounts of $4,960.
and $5,716 and net of allowance for doubtful accounts...
of $1,662 and $1,880, respectively...................... 20,255 23,435
Deferred income taxes...................................... - 564
Current portion of notes receivable from officers and......
related party........................................... 456 505
Prepaid expenses and other................................. 8,931 2,289
Net assets of discontinued operations...................... - 84,721
----------------- ------------------
Total current assets..................................... 75,555 116,308
Property and equipment, net................................... 8,809 5,697
Goodwill, net of accumulated amortization of $2,224 and
$1,913, respectively.................................. 34,929 35,236
Notes receivable from officers................................ 685 1,119
Other assets.................................................. 5,080 1,050
----------------- ------------------
Total assets............................................. $ 125,058 $ 159,410
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt and current maturities of long-term debt... $ 154 $ 48,958
Accounts payable........................................... 2,723 2,055
Accrued compensation and related payroll liabilities....... 11,607 6,312
Income taxes payable....................................... 1,914 1,957
Amounts due sellers of acquired business.................. - 8,386
Deferred income taxes..................................... 519 -
Other accrued liabilities.................................. 20,430 5,710
----------------- ------------------
Total current liabilities................................ 37,347 73,378
Long-term debt................................................ 50 52
----------------- ------------------
Total liabilities........................................ 37,397 73,430
----------------- ------------------
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, 15,183,431 and 15,065,400 shares issued and...
outstanding, respectively................................. 152 151
Additional paid-in capital................................. 86,128 85,442
Notes receivable from stockholders........................ (6,036) (6,149)
Retained earnings.......................................... 7,417 6,536
------------------ -------------------
Total stockholders' equity............................... 87,661 85,980
------------------ -------------------
Total liabilities and stockholders' equity............... $ 125,058 $ 159,410
================== ===================
</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 June 30,
---------------- -----------------
2000 1999
---------------- -----------------
<S> <C> <C>
Revenues............................................... $ 23,753 $ 26,806
Cost of services....................................... 16,500 17,056
---------------- -----------------
Gross profit................................... 7,253 9,750
Selling, general and administrative expenses........... 12,526 9,880
Depreciation and amortization of goodwill.............. 1,042 723
---------------- -----------------
Operating loss......................................... (6,315) (853)
Other income (expense):
Interest expense..................................... (1,556) (652)
Interest income...................................... 49 118
Other................................................ 49 (60)
---------------- -----------------
Total other expense............................ (1,458) (594)
---------------- -----------------
Loss from continuing operations before income..
taxes.......................................... (7,773) (1,447)
Income tax benefit..................................... 2,643 507
---------------- -----------------
Loss from continuing operations................ (5,130) (940)
---------------- -----------------
Operating income (loss) from discontinued operations...
net of income tax (benefit) of $1,551 and $(7,906)..... 1,615 (15,394)
Gain on sale of discontinued operations, net of income.
taxes of $4,224........................................ 4,396 -
---------------- -----------------
Income (loss) from discontinued operations...... 6,011 (15,394)
---------------- -----------------
Net income (loss)............................. $ 881 $ (16,334)
================ =================
Earnings per share:
Basic -
Income (loss) from continuing operations............. $ (0.34) $ (0.07)
Income (loss) from discontinued operations........... 0.40 (1.14)
---------------- -----------------
Net income (loss)............................. $ 0.06 $ (1.21)
================ =================
Diluted -
Income (loss) from continuing operations............. $ (0.34) $ (0.07)
Income (loss) from discontinued operations........... 0.40 (1.14)
---------------- -----------------
Net income (loss)............................. $ 0.06 $ (1.21)
================ =================
Weighted average number of shares outstanding
Basic................................................ 15,123,639 13,461,007
================ =================
Diluted.............................................. 15,124,960 13,461,007
================ =================
</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>
Three Months Ended June 30,
------------------- -------------------
2000 1999
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................... $ 881 $ (16,334)
Adjustments to reconcile net income (loss) to net cash
provided by (used in ) operating activities:
Gain on sale of discontinued operations................... (4,396) -
Operating (income) loss from discontinued operations...... (1,615) 15,394
Depreciation and amortization of goodwill ........... 1,042 723
Deferred income taxes, net........................... 3,133 (821)
Loss on disposal of property and equipment........... - 7
Provision for doubtful accounts...................... 324 157
Changes in current assets and liabilities:
Accounts receivable, net....................... 2,856 (5,959)
Prepaid expenses and other current assets...... (2,217) 959
Accounts payable and accrued expenses.......... (1,343) 4,580
Income taxes payable........................... (43) (3,512)
Changes in other assets.............................. 104 (36)
------------------- -------------------
Cash provided by (used for) operating activities (1,274) (4,842)
Cash flows from (used for) investing activities:
Proceeds from sale of assets ................................... 189 6
Purchase price adjustments for previously acquired companies.... - (334)
Purchases of property and equipment ............................ (736) (978)
------------------- -------------------
Cash provided by (used for) investing activities ............... (547) (1,306)
Cash flows from financing activities:
Borrowing under Credit Agreement................................ 9,111 11,213
Payments on Credit Agreement.................................... (57,890) -
Payments on amounts due sellers of acquired business............ (8,534) -
Borrowing (payments) on capital lease obligations .............. (27) 44
Repayments (borrowing) on notes receivable from officers ....... 508 (704)
Net proceeds on issuance of stock .............................. 228 394
Repurchase of common stock...................................... - (2,233)
-------------------- -------------------
Cash provided by (used for) financing activities................ (56,604) 8,714
Discontinued Operations:
Cash provided by (used for) discontinued operations............. (11,951) (2,921)
Proceeds from sale of IT staff augmentation business............ 111,495 -
------------------- -------------------
Cash provided by (used) for discontinued operations............. 99,544 (2,921)
------------------- -------------------
Net increase (decrease) in cash...................................... 41,119 (355)
Cash at beginning of period.......................................... 4,794 972
------------------- -------------------
Cash at end of period................................................ $ 45,913 617
=================== ===================
Supplemental disclosures of cash flow information:
Interest paid................................................... $ 1,906 $ 394
Income taxes paid............................................... $ 20 $ 2,188
Fair value of Common Stock issued to seller of acquired.........
business........................................................ $ 572 $ -
Return of Common Stock previously issued to employee for........
note receivable................................................. $ 113 $ -
</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"), a Delaware corporation, was
formed in February 1993 to acquire, own and operate software consulting
businesses specializing in providing information technology ("IT") consultants
on a contract basis and consulting and outsourcing services to businesses with
complex IT operations. The Company was inactive until February 1996 when it
acquired four companies simultaneously and completed its initial public
offering. Since that date, the Company has acquired 22 IT consulting businesses.
These financial statements include the accounts of Cotelligent 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 conducted operations from offices
across the United States and from 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 and on June 30, 2000, the
Company sold the majority of its IT staff augmentation business. Accordingly,
the accompanying consolidated financial statements and related footnotes have
been prepared to present as discontinued operations the remaining portion of the
Company's IT staff augmentation business that the Company has determined to be
non-strategic and that it intends to dispose of or shut down.
Note 2 - Summary of Significant Accounting Policies
The accompanying interim financial statements do not include all disclosures
included in the financial statements in Cotelligent's Annual Report on Form 10-K
for the year ended March 31, 2000 ("Form 10-K"), and therefore these financial
statements should be read in conjunction with the financial statements included
on Form 10-K.
In the opinion of management, the interim financial statements filed as part of
this Quarterly Report on Form 10-Q reflect all adjustments necessary for a fair
presentation of the financial position and the results of operations and of cash
flows for the interim periods presented. Certain balances of the prior year have
been reclassified to conform to the current presentation.
Note 3 - Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Notes
Common Stock Additional Receivable Total
------------------------ Paid-In From Retained Stockholders
Shares Amount Capital Stockholders Earnings Equity
------------ -------- ----------- ------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 2000.... 15,065,400 151 $ 85,442 $ (6,149) $ 6,536 $ 85,980
Issuance of Common Stock..... 43,031 1 227 - - 228
Shares issued in connection..
with earn-out to sellers of..
acquired business............ 100,000 1 571 - - 572
Cancellation of LSPP Note.... (25,000) (1) (112) 113 - -
Net income................... - - - - 881 881
----------- -------- ------------ ------------- ---------- --------------
Balance at June 30, 2000..... 15,183,431 $ 152 $ 86,128 $ (6,036) $ 7,417 87,661
=========== ======== ============ ============= ========== ==============
</TABLE>
6
<PAGE>
COTELLIGENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
(Unaudited)
Note 4 - Discontinued Operations
In accordance with Accounting Principle Board Opinion No. 30, the following
financial data reflects a summary of operating results for the Company's
discontinued operations for the three months ended June 30, 2000 and 1999.
Summary of Operating Results of Discontinued Operations:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------
June 30, June 30,
2000 1999
---------------------- ---------------------
<S> <C> <C>
Revenues.................................................... $ 57,368 $ 61,760
Cost of services............................................ 42,243 46,652
---------------------- --------------------
Gross profit.......................................... 15,125 15,108
Selling, general and administrative expenses................ 11,102 12,705
Depreciation and amortization of goodwill................... 875 781
Impairment of goodwill...................................... - 20,000
Restructuring charge........................................ - 4,920
---------------------- --------------------
Operating income (loss)............................... 3,148 (23,298)
Other income (expense)...................................... 18 (2)
---------------------- ---------------------
Income (loss) before provision for income taxes............. 3,166 (23,300)
Provision (benefit) for income taxes........................ 1,551 (7,906)
====================== =====================
Income (loss) from discontinued operations.................. $ 1,615 $ (15,394)
====================== =====================
</TABLE>
On June 30, 2000, the Company sold the majority of its IT staff augmentation
business for $111,495 in cash paid at closing and the assumption of certain
liabilities totaling approximately $10,000. In addition, $5,000 is held in
escrow for one year to cover potential contingent claims by the buyer. The
Company may also be entitled to a contingent payment of up to $5,000 based on
the operating results of the sold business for the three months ended June 30,
2000. The Company agreed to assist the acquirer for up to one year following the
close of the sale. The Company also took responsibility and has reserves for
certain aged receivables greater than 90 days. In addition, Cotelligent is still
the lessee under certain leases on property.
On July 14, 2000, the Company sold its IT staff augmentation operations in
Orlando for a cash payment of $650 and approximately $385 of assumed
liabilities. The Company has written down the remaining value of the net assets
related to this sale, including goodwill, to zero during the first quarter.
The Company anticipates that it will dispose of the remaining IT staff
augmentation businesses in discontinued operations at a loss prior to March 31,
2001. Consequently, the Company has written down the remaining value of the net
assets, including goodwill, of these discontinued businesses to zero during the
first quarter.
The net gain on the disposal of these IT staff augmentation businesses was
$4,400 for the quarter ended June 30, 2000.
7
<PAGE>
COTELLIGENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
(Unaudited)
Note 5 - Earnings (loss) Per Share
Earnings (loss) per share were as follows:
<TABLE>
<CAPTION>
For the Three Months Ended June 30, 2000
-------------------------------------------------------
Per Share
Income (loss) Shares Amount
------------------ -------------- -------------
<S> <C> <C> <C>
Basic earnings (loss) per share-
Loss from continuing operations..................... $ (5,130) 15,123,639 $ (0.34)
Income from discontinued operations................. 6,011 15,123,639 0.40
------------------ -------------
Net income available to common stockholders ........ $ 881 15,123,639 $ 0.06
Per Share
Income (loss) Shares Amount
------------------ -------------- -------------
Diluted earnings (loss) per share-
Loss from continuing operations..................... (5,130) 15,124,960 $ (0.34)
Income from discontinued operations................. 6,011 15,124,960 0.40
------------------ -------------
Net income available to common stockholders ........ $ 881 15,124,960 $ 0.06
For the Three Months Ended June 30, 1999
-------------------------------------------------------
Per Share
Income (loss) Shares Amount
------------------ -------------- -------------
Basic and diluted loss per share-
Loss from continuing operations........................ (940) 13,461,007 $ (0.07)
Loss from discontinued operations...................... (15,394) 13,461,007 (1.14)
------------------ -------------
Net loss available to common stockholders ............. $ (16,334) 13,461,007 $ (1.21)
</TABLE>
Note 6 - Property and Equipment
In connection with the disposal of the majority of the Company's IT staff
augmentation business, certain technology fixed assets were included in the net
assets of discontinued operations at March 31, 2000. During the first quarter,
the Company determined that a portion of these assets will be retained for use
in continuing operations and has reclassified $3,107 into property and equipment
at June 30, 2000.
Note 7 - Credit Agreement
On June 30, 2000, the Company used a portion of the cash proceeds from the sale
of the majority of its IT staff augmentation business to pay off all obligations
under its Amended and Restated Senior Secured Credit Agreement ("Credit
Agreement"), dated March 12, 1999, with BankBoston N.A. and certain other banks.
Upon settlement of all obligations under the Credit Agreement, the Credit
Agreement was terminated.
8
<PAGE>
COTELLIGENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
(Unaudited)
Note 8 - Income Taxes
The effective tax rate varies from the U.S. Federal statutory tax rate for the
three months ended June 30, 2000, principally due to the following:
<TABLE>
<CAPTION>
Continuing Discontinued
Operations Operations
---------------------- -----------------------
<S> <C> <C>
U.S. Federal Statutory Tax Rate............................ 34.0% 34.0%
Consolidated state rate.................................... 3.0 3.0
Meals and entertainment.................................... (1.2) 0.4
Amortization of non-deductible goodwill.................... (1.5) 0.0
Write-off of non-deductible goodwill....................... - 11.7
---------------------- ----------------------
Effective tax rate......................................... 34.3% 49.1%
====================== ======================
</TABLE>
Note 9 - Subsequent Events
On July 19, 2000, the Company elected to change its fiscal year end to December
31 from March 31. The Company will report the nine-month period beginning April
1, 2000 and ending December 31, 2000 as a transition period. The first new
twelve-month fiscal year will begin January 1, 2001.
On July 18, 2000, the Company paid $2,000 to acquire a 35% ownership interest in
White Horse Interactive, an integrated media agency. The Company is entitled to
appoint two of the five directors to the Board of White Horse Interactive.
On August 8, 2000, the Company executed its definitive joint venture agreement
with bSmart.to Technologies, Inc. Cotelligent is required to contribute its
Philadelphia-based IT solutions staff and ASP data center and cash of $5,000, of
which $2,500 will be distributed to the developer of certain technology, in
exchange for a 50% interest in the joint venture. The Company will have equal
Board representation in the joint venture.
9
<PAGE>
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
March 31, 2000 as well as other filings made with the Securities and Exchange
Commission. 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 was formed in February 1993 to acquire, own and operate IT
consulting services businesses. During the year ended March 31, 2000,
Cotelligent acquired one company acquired on August 12, 1999 which was accounted
for under the purchase method. The results of this acquisition have been
included in the Company's results from its acquisition date.
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 un-utilized time (work activities not chargeable to clients or unrelated to
client services) of full-time salaried service professional employees. Operating
income (gross profit less selling, general and administrative expenses) can be
adversely impacted by increased administrative staff compensation and expenses
related to growing and expanding the Company's business, which may be incurred
before revenues or economies of scale are generated from such investments.
Historically, a majority of the Company's revenues were generated from IT staff
augmentation activities. Following the disposition of substantially all of its
IT staff augmentation business, the majority of the Company's revenues will be
generated by solutions activities which require a higher level of selling,
general and administrative infrastructure to generate revenues.
As a service organization, the Company responds to service demands from its
clients. Accordingly, the Company has limited control over the timing and
circumstances under which its services are provided. Therefore, the Company can
experience volatility in its operating results from quarter to quarter. The
operating results for any quarter are not necessarily indicative of the results
for any future period.
10
<PAGE>
CONSOLIDATED RESULTS OF CONTINUING OPERATIONS
(Dollar amounts in millions)
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Revenues
Revenues decreased $3.1 million, or 11.4%, to $23.8 million in the three months
ended June 30, 2000 from $26.8 million in the three months ended June 30, 1999.
The decrease was primarily due to a general reduction in demand for the
Company's services, partially offset by a 17.6% increase in the average bill
rate.
Gross Profit
Gross profit decreased $2.5 million, or 25.6%, to $7.3 million in the three
months ended June 30, 2000 from $9.8 million in the three months ended June 30,
1999. The decrease was primarily due to a general reduction in demand for the
Company's services. Gross profit as a percentage of revenues decreased to 30.5%
from 36.4%, primarily due to lower utilization of salaried employees.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $2.6 million, or 26.8%,
to $12.5 million in the three months ended June 30, 2000 from $9.9 million in
the three months ended June 30, 1999. The increase was primarily due to
increases in employee wages and benefits incurred in the Company's effort to
move towards a centralized business model which required a more robust
infrastructure. This cost structure was put in place prior to management's
decision to divest the majority of its IT staff augmentation business. Also, the
increase in selling, general and administrative expense was due to the addition
of a business acquired on August 12, 1999.
Selling, general and administrative expenses as a percent of revenues were 52.7%
in the three months ended June 30, 2000 compared to 36.9% in the three months
ended June 30, 1999. Although the Company was in the process of divesting part
of its operations during the three months ended June 30, 2000, selling, general
and administrative expenses did not decrease as the Company continued to provide
the infrastructure and support for the divested operations. With the completion
of the divestiture at the end of the first quarter, the Company is in the
process of streamlining its operations commensurate with its lower revenue base.
Depreciation and Amortization of Goodwill
Depreciation and amortization of goodwill increased $0.3 million, or 44.1%, to
$1.0 million in the three months ended June 30, 2000 from $0.7 million in the
three months ended June 30, 1999. The increase was primarily due to the
increased spending on technology equipment during the quarter and the related
depreciation together with increased amortization of goodwill from a business
purchased on August 12, 1999.
Other Income (Expense)
Other income (expense) of $1.5 million primarily consists of interest expense,
net of interest income. Interest expense was $1.6 million in the three months
ended June 30, 2000 compared to interest expense of $0.7 million in the three
months ended June 30, 1999. The increase was due to increased borrowing under
the Company's Credit Agreement and the accrual of interest on the Company's
obligation under an earn-out agreement with the owners of a previously acquired
business.
Benefit for Income Taxes
The Company recorded an income tax benefit of $2.6 million for its continuing
operations in the three months ended June 30, 2000 using an effective rate of
34.0% compared to a benefit of $0.5 million, or an effective rate of 35.0% of
pre-tax income, for the three months ended June 30, 1999.
Income (Loss) from Discontinued Operations
Discontinued operations is comprised of operations associated with the majority
of the Company's IT staff augmentation business. The net income from
discontinued operations of $6.0 million for the three months ended June 30, 2000
was comprised of $1.6 million of operating income for these operations (net of
income tax expense of $1.6 million) and net gain of $4.4 million (net of income
taxes of $4.2 million) related to the sale of a majority of the IT staff
augmentation business and the write-down of the remaining discontinued
operations to their net realizable value. This compares to a net loss from
discontinued operations of $15.4 million for the three months ended June 30,
1999, largely due to a restructuring charge of $4.9 million and a goodwill
impairment charge of $20.0 million taken prior to year-end.
11
<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 June 30, 2000, the Company sold the majority of its IT staff augmentation
business for $111.5 million in cash paid at closing and the assumption of
certain liabilities totaling approximately $10.0 million. In addition, $5.0
million will be held in escrow for one year to cover potential contingent claims
by the buyer. The Company may also be entitled to a contingent payment of up to
$5.0 million based on the operating results of the sold business for the three
months ended June 30, 2000. On June 30, 2000, the Company used a portion of the
cash proceeds from the sale to pay off all obligations under the Credit
Agreement and to pay existing earn-out obligations to sellers of an acquired
business. Upon settlement of all obligations under the Credit Agreement, the
Credit Agreement was terminated.
Cash used for operating activities was $1.3 million for the three months ended
June 30, 2000. Historically, the Company's primary sources of liquidity have
been the collection of accounts receivable and borrowings under the Credit
Agreement. Total receivables were 78 days of quarterly revenue at June 30, 2000.
With the termination of its borrowing arrangements under the Credit Agreement,
the Company's primary sources of liquidity going forward will be cash balances,
if any, resulting from the sales of the components of the remaining discontinued
IT staff augmentation business to be disposed of. The Company believes that the
remaining cash from the consummated divestiture transactions, additional
proceeds from the potential sale(s) of the remainder of its discontinued IT
staff augmentation business and any funds generated from operations will provide
adequate cash to fund its anticipated cash working capital needs at least
through the next year.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Cotelligent has invested its excess 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 excess
cash in a manner that provides Cotelligent with the appropriate level of
liquidity to enable the Company to meet its current obligations, primarily
accounts payable, capital expenditures and payroll, recognizing that the Company
does not currently have outside bank funding available.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter
ended June 30, 2000.
Cotelligent, Inc. filed with the Securities and Exchange
Commission, on May 12, 2000, the bSmart.to LLC Operating
Agreement, regarding the Company and bSmart.to Technologies,
Inc.'s formation of a joint venture entity, bSmart.to LLC, to
develop and market m-Commerce solutions in the emerging wireless
internet communications area.
Cotelligent, Inc. filed with the Securities and Exchange
Commission, on June 22, 2000, a press release announcing the
Company and COMSYS Information Technology Services, Inc.'s,
execution of an Asset Purchase Agreement pursuant to which the
Company divested substantially all of its IT staff augmentation
business.
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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: August 14, 2000 /s/ Curtis J. Parker
--------------------
Curtis J. Parker
Vice President,
Chief Accounting Officer
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