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, 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 November 10, 2000 there were 15,303,402 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, 2000 (Unaudited)
and March 31, 2000 3
Consolidated Statements of Operations for the Three & Six Months Ended
September 30, 2000 and 1999 (Unaudited) 4
Consolidated Statements of Cash Flows for the Six Months Ended
September 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 13
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COTELLIGENT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
----------------- ------------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 26,420 $ 4,794
Accounts receivable, including unbilled accounts of $5,337
and $5,716 and net of allowance for doubtful accounts...
of $1,652 and $1,880,respectively....................... 21,431 23,435
Deferred income taxes...................................... - 564
Current portion of notes receivable from officers and......
related party.............................................. 494 505
Prepaid expenses and other................................. 1,731 2,289
Net assets of discontinued operations...................... - 84,721
----------------- ------------------
Total current assets..................................... 50,076 116,308
Property and equipment, net................................... 8,083 5,697
Goodwill, net of accumulated amortization of $1,899 and.......
$1,913, respectively.................................. 24,514 35,236
Investments................................................... 20,779 253
Notes receivable from officers................................ 706 1,119
Other assets.................................................. 669 797
----------------- -------------------
Total assets............................................. $ 104,827 $ 159,410
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt and current maturities of long-term debt... $ 35 $ 48,958
Accounts payable........................................... 1,315 2,055
Accrued compensation and related payroll liabilities....... 6,493 6,312
Income taxes payable....................................... 831 1,957
Amounts due sellers of acquired business.................. - 8,386
Deferred income taxes..................................... 175 -
Other accrued liabilities.................................. 9,959 5,710
----------------- ------------------
Total current liabilities................................ 18,808 73,378
Long-term debt................................................ 51 52
----------------- ------------------
Total liabilities........................................ 18,859 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, 15,303,402 and 15,065,400 shares issued.......
and outstanding, respectively............................. 153 151
Additional paid-in capital.................................. 87,439 85,442
Notes receivable from stockholders........................ (6,333) (6,149)
Retained earnings........................................... 4,709 6,536
----------------- -----------------
Total stockholders' equity................................ 85,968 85,980
------------------ ------------------
$ 104,827 $ 159,410
Total liabilities and stockholders' equity............... ================= ===================
</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,
-------------------------------- -----------------------------------
2000 1999 2000 1999
-------------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenues........................................... $ 22,475 $ 26,162 $ 46,228 $ 52,968
Cost of services................................... 14,904 17,217 31,404 34,273
-------------- ------------- ---------------- ----------------
Gross profit............................... 7,571 8,945 14,824 18,695
Selling, general and administrative expenses....... 11,440 9,960 23,966 19,840
Depreciation and amortization of goodwill.......... 987 816 2,029 1,539
-------------- ------------- ---------------- ----------------
Operating loss..................................... (4,856) (1,831) (11,171) (2,684)
Other income (expense):
Interest expense................................ (8) (755) (1,564) (1,407)
Interest income................................. 543 8 592 126
Other........................................... (7) 6 42 (54)
-------------- ------------- ---------------- ----------------
Total other income (expense).................. 528 (741) (930) (1,335)
-------------- ------------- ---------------- ----------------
Loss before provision for income taxes............ (4,328) (2,572) (12,101) (4,019)
Benefit for income taxes........................... 1,472 900 4,115 1,407
-------------- ------------- ---------------- ----------------
Loss from continuing operations.................... (2,856) (1,672) (7,986) (2,612)
-------------- ------------- ---------------- ----------------
Operating income (loss) from discontinued
operations, net of income tax (benefit) of
$142, $940, $1,693 and $(6,966) ................. 148 1,751 1,763 (13,643)
Gain on sale of discontinued operations, net
of income taxes of $4,224........................ - - 4,396 -
-------------- ------------- ---------------- ----------------
Income (loss) from discontinued operations......... 148 1,751 6,159 (13,643)
-------------- ------------- ---------------- ----------------
Net income (loss).................................. $ (2,708) $ 79 $ ( 1,827) $ (16,255)
============== ============= ================ ================
Earnings (loss) per share:
Basic and diluted -
Loss from continuing operations.................... $ (0.19) $ (0.12) $ (0.53) $ (0.19)
Income (loss) from discontinued operations......... 0.01 0.13 0.41 (1.01)
============== ============== ================ ================
Net income (loss) ................................. $ (0.18) $ 0.01 $ (0.12) $ (1.20)
============== ============== ================ ================
Weighted average shares outstanding
Basic....................................... 15,235,827 13,565,326 15,180,040 13,513,452
============== ============== ================ ================
Diluted..................................... 15,235,827 13,573,264 15,180,040 13,513,452
============== ============== ================ ================
</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,
------------------- -- -------------------
2000 1999
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................ $ (1,827) $ (16,255)
Adjustments to reconcile net loss to net cash
Provided by (used in ) operating activities:
Gain on sale of discontinued operations.............. (4,396) -
Operating (income) loss from discontinued operations. (1,763) 13,643
Equity loss from investments......................... 11 -
Depreciation and amortization of goodwill............ 2,029 1,275
Deferred income taxes, net........................... 2,789 1,538
Loss on disposal of property and equipment........... 17 7
Provision for doubtful accounts...................... 1,145 202
Changes in current assets and liabilities:
Accounts receivable, net....................... (247) (4,391)
Prepaid expenses and other current assets...... (366) (497)
Accounts payable and accrued expenses.......... (2,551) (1,329)
Income taxes payable........................... (1,126) (3,473)
Changes in other assets.............................. 124 (409)
------------------- -------------------
Cash used for operating activities............................... (6,161) (9,689)
Cash flows provided by (used for) investing activities:
Proceeds from sale of property and equipment ................... - 6
Purchase of businesses, net of cash acquired.................... - (771)
Investments..................................................... (7,377) -
Purchases of property and equipment ............................ (1,270) (1,767)
------------------- -------------------
Cash used for investing activities ............................. (8,647) (2,532)
Cash flows provided by (used for) financing activities:
Borrowing under Credit Agreement................................ 9,111 19,830
Payments on Credit Agreement.................................... (57,890) -
Payments on amounts due sellers of acquired business............ (8,534) (730)
Borrowing (payments) on capital lease obligations .............. (57) 86
Repayments (borrowing) on notes receivable from officers ....... 449 (1,149)
Net proceeds on issuance of stock .............................. 344 723
Repurchase of common stock...................................... - (2,233)
------------------- -------------------
Cash provided by (used for) financing activities................ (56,577) 16,527
Cash flows provided by (used for) discontinued operations:
Cash provided by (used for) discontinued operations............. (19,470) (5,061)
Proceeds from sale of IT staff augmentation business............ 112,481 -
------------------- -------------------
Cash provided by (used for) discontinued operations............. 93,011 (5,061)
------------------- -------------------
Net increase (decrease) in cash...................................... 21,626 (755)
Cash at beginning of period.......................................... 4,794 972
------------------- -------------------
Cash at end of period................................................ $ 26,420 $ 217
=================== ===================
Supplemental disclosures of cash flow information:
Interest paid................................................... $ 1,914 $ 1,432
Income taxes paid............................................... $ 29 $ 2,367
Net book value of assets contributed to joint venture........... $ 11,311 $ -
Issuance of warrants in exchange for warrants received.......... $ 900 $ -
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. On June 30, 2000, the Company
sold the majority of its IT staff augmentation business and on July 14, 2000
sold another component 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...... 163,002 2 638 (297) - 343
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 - -
Investment in warrants
received in connection with
investment in joint venture... - - 900 - - 900
Net income.................... - - - - (1,827) (1,827)
----------- -------- ----------- ------------- ---------- --------------
Balance at September 30, 2000. 15,303,402 $ 153 $ 87,439 $ (6,333) $ 4,709 $ 85,968
=========== ======== =========== ============= ========== ==============
</TABLE>
6
<PAGE>
COTELLIGENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
(Unaudited)
Note 4 - Discontinued Operations
In accordance with Accounting Principles Board Opinion No. 30, the following
financial data reflects a summary of operating results for the Company's
discontinued operations for the three and six months ended September 30, 2000
and 1999.
Summary of Operating Results of Discontinued Operations:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------------- ---------------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
---------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenues........................... $ 7,688 $ 59,461 $ 65,056 $ 121,221
Cost of services................... 5,974 44,287 48,217 90,939
---------------- --------------- -------------- ---------------
Gross profit................. 1,714 15,174 16,839 30,282
Selling, general and administrative 1,424 11,683 12,526 24,388
expenses...........................
Depreciation and amortization of...
goodwill .......................... - 798 875 1,579
Impairment of goodwill............. - - - 20,000
Restructuring charge............... - - - 4,920
---------------- --------------- -------------- ---------------
Operating income (loss)...... 290 2,693 3,438 (20,605)
Other income (expense)............. - (2) 18 (4)
---------------- --------------- -------------- ---------------
Operating income (loss) before
provision for taxes................ 290 2,691 3,456 (20,609)
Provision (benefit) for income.....
taxes.............................. 142 940 1,693 (6,966)
---------------- --------------- -------------- ---------------
Operating income (loss) from.......
discontinued operations............ $ 148 $ 1,751 $ 1,763 $ (13,643)
================ =============== ============== ===============
</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 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 $5,000 based on
the operating results of the sold business for the three months ended June 30,
2000. Both contingent payments are subject to further review and analysis
between the Company and the buyer. The Company agreed to provide administrative
information systems support to the acquirer for up to one-year following the
close of the sale. In addition, Cotelligent is still the lessee under certain
leases of property.
On July 14, 2000, the Company sold its IT staff augmentation operations in
Orlando for a cash payment of $650 and the assumption of approximately $385 of
certain liabilities. The Company has written down the value of the net assets
related to this sale, including goodwill, to zero during the quarter ended June
30, 2000.
On October 31, 2000, the Company sold its Global Resources International IT
staff augmentation operations for a $4,500 secured promissory note, bearing
interest at 9.5% per annum, payable over 5 years. The Company has written down
the value of the net assets related to this sale, including goodwill, to zero
during the quarter ended June 30, 2000.
The Company anticipates that it will dispose of the remaining component of its
IT staff augmentation business in discontinued operations at a loss prior to
March 31, 2001. Consequently, the Company has written down the value of the net
assets, including goodwill, of these discontinued businesses to zero during the
quarter ended June 30, 2000.
The net gain on the disposal of these IT staff augmentation businesses was
$4,400 for the quarter ended June 30, 2000 and the six months ended September
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 September 30, 2000
-------------------------------------------------------
Per Share
Income (loss) Shares Amount
------------------ -------------- -------------
<S> <C> <C> <C>
Basic and diluted earnings (loss) per share-
Loss from continuing operations........................ $ (2,856) 15,235,827 $ (0.19)
Income from discontinued operations.................... 148 15,235,827 0.01
------------------ -------------
Net loss available to common stockholders ............. $ (2,708) 15,235,827 $ (0.18)
For the Three Months Ended September 30, 1999
-------------------------------------------------------
Per Share
Income (loss) Shares Amount
------------------ -------------- -------------
Basic earnings (loss) per share-
Loss from continuing operations........................ $ (1,672) 13,565,326 $ (0.12)
Income from discontinued operations.................... 1,751 13,565,326 0.13
------------------ -------------
Net income available to common stockholders ........... $ 79 13,565,326 $ 0.01
Diulted earnings (loss) per share-
Loss from continuing operations........................ $ (1,672) 13,573,264 $ (0.12)
Income from discontinued operations.................... 1,751 13,573,264, 0.13
------------------ -------------
Net income available to common stockholders............ $ 79 13,573,264 $ 0.01
For the Six Months Ended September 30, 2000
-------------------------------------------------------
Per Share
Income (loss) Shares Amount
------------------ -------------- -------------
Basic and diluted earnings (loss) per share-
Loss from continuing operations........................ $ (7,986) 15,180,040 $ (0.53)
Income from discontinued operations.................... 6,159 15,180,040 0.41
------------------ -------------
Net loss available to common stockholders ............. $ (1,827) 15,180,040 $ (0.12)
For the Six Months Ended September 30, 1999
-------------------------------------------------------
Per Share
Income (loss) Shares Amount
------------------ -------------- -------------
Basic and diluted earnings (loss) per share-
Loss from continuing operations........................ $ (2,612) 13,513,452 $ (0.19)
Loss from discontinued operations...................... (13,643) 13,513,452 (1.01)
------------------ -------------
Net loss available to common stockholders ............. $ (16,255) 13,513,452 $ (1.20)
</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. Subsequent to March 31,
2000, 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.
8
<PAGE>
COTELLIGENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
(Unaudited)
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.
Note 8 - Income Taxes
The effective tax rate varies from the U.S. Federal statutory tax rate for the
three and nine months ended September 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 ........... (1.8) -
Write-off of non-deductible goodwill............... - 11.7
---------------------- ----------------------
Effective tax rate................................. 34.0% 49.1%
====================== ======================
</TABLE>
Note 9 - Change in Fiscal Year End
On July 19, 2000, the Company changed 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.
Note 10 - Investments
During the quarter September 30, 2000, the Company made certain investments as
follows:
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. The
Company uses the equity method of accounting for this investment.
On August 8, 2000, the Company executed its definitive joint venture agreement
with bSmart.to Technologies, Inc. The Company contributed: (1) cash of $5,000,
of which $2,500 was paid directly to the joint venture and $2,500 was
distributed to the developer of certain technology, and (2) its
Philadelphia-based IT solutions staff and ASP data center and, accordingly,
reclassified $1,200 of working capital and property and equipment as well as
$10,073 of goodwill, in exchange for a 50% interest in the joint venture. In
addition, the Company incurred approximately $1,500 in transaction costs that
have been capitalized as a part of its investment in the joint venture. The
Company will have representation on the Board of Directors of the joint venture
equal to that of its joint venture partner. The Company uses the equity method
of accounting for this investment.
In connection with the investment in the joint venture with bSmart.to
Technologies, Inc., the Company issued and received from bSmart.to Technologies,
Inc. warrants for the purchase of common shares. Accordingly, the Company
recognized an investment of $900 for the warrants received, and a corresponding
amount in additional paid-in capital.
Note 11 - Subsequent Event
On October 31, 2000, the Company sold its Global Resources International IT
staff augmentation operations for a $4,500 secured promissory note, bearing
interest at 9.5% per annum, payable over 5 years.
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, other filings made with the Securities and Exchange Commission
and Cotelligent's press release announcing earnings for the quarter ended
September 30,2000 issued November 8, 2000. 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 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 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 selling, general and 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 technology 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
Three Months Ended September 30, 2000 Compared to Three Months Ended
September 30, 1999
Revenues
Revenues decreased $3.7 million, or 14.1%, to $22.5 million in the three months
ended September 30, 2000 from $26.2 million in the three months ended September
30, 1999. The decrease was due to a general reduction in demand for the
Company's services coupled with the discontinuation of revenues from the
Philadelphia-based operation effective with its contribution to the bSmart.to
joint venture on August 8, 2000, offset by an 18.1% increase in the average
billing rate. Gross Profit Gross profit decreased $1.4 million, or 15.4%, to
$7.6 million in the three months ended September 30, 2000 from $8.9 million in
the three months ended September 30, 1999. The decrease was due to a general
reduction in demand for the Company's services coupled with the discontinuation
of revenues and cost of services from the Philadelphia-based operation effective
with its contribution to the bSmart.to joint venture on August 8, 2000. Gross
profit as a percentage of revenues decreased to 33.7% from 34.2%, primarily due
to a drop in utilization of salaried employees, offset by the 18.1% increase in
the average billing rate.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $1.5 million, or 14.9%,
to $11.4 million in the three months ended September 30, 2000 from $10.0 million
in the three months ended September 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. Selling,
general and administrative expenses as a percent of revenues were 50.9% in the
three months ended September 30, 2000 compared to 38.1% in the three months
ended September 30, 1999, reflective of the increases described above. During
the three months ended September 30, 2000, the Company began the process of
streamlining its operations commensurate with its revenue base. By the end of
the quarter, the Company had made a thorough review of its cost structure and
implemented several cost-saving programs, including reducing staff, eliminating
excess office space and consolidating accounting centers with a view towards
reducing excess overhead. While cognizant of the need for cost containment, the
Company continues to invest in revenue generating programs.
Depreciation and Amortization of Goodwill
Depreciation and amortization of goodwill increased $0.2 million, or 21.0%, to
$1.0 million in the three months ended September 30, 2000 from $0.8 million in
the three months ended September 30, 1999. The increase was primarily due to the
spending on new state-of-the-art technology equipment and the related
depreciation.
Other Income (Expense)
Other income (expense) primarily consists of net interest income (expense).
Interest income was $0.5 million for the three months ended September 30, 2000
compared to interest expense of $0.8 for the three months ended September 30,
1999. This increase resulted from interest income earned during the quarter
ended September 30, 2000 on the cash proceeds from the sale of the majority of
the IT staff augmentation business on June 30, 2000, which cas remained after
the pay off of all obligations due under the Company's Credit Agreement and an
earn-out agreement.
Benefit for Income Taxes
The Company recorded an income tax benefit of $1.5 million for its continuing
operations in the three months ended September 30, 2000, compared to a benefit
of $0.9 million for the three months ended September 30, 1999, reflecting a net
effective rate of 34.0% for both periods.
Income (Loss) from Discontinued Operations
Discontinued operations is comprised of operations associated with the majority
of the Company's IT staff augmentation business. The income from discontinued
operations of $0.1 million for the three months ended September 30, 2000
compares to income of $1.8 million for the three months ended September 30,
1999. The decrease in income from discontinued operations is the result of the
sale of the majority of the discontinued operations on June 30, 2000.
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Six Months Ended September 30, 2000 Compared to Six Months Ended
September 30, 1999
Revenues
Revenues decreased $6.7 million, or 12.7%, to $46.2 million in the six months
ended September 30, 2000 from $53.0 million in the six months ended September
30, 1999. The decrease was due to a general reduction in demand for the
Company's services coupled with the discontinuation of revenues from its
Philadelphia-based operation effective with its contribution to the bSmart.to
joint venture on August 8, 2000, offset by a 13.9% increase in the average
billing rate.
Gross Profit
Gross profit decreased $3.9 million, or 20.7%, to $14.8 million in the six
months ended September 30, 2000 from $18.7 million in the six months ended
September 30, 1999. The decrease was due to a general reduction in demand for
the Company's services coupled with the discontinuation of revenues and cost of
services from its Philadelphia-based operation effective with its contribution
to the bSmart.to joint venture on August 8, 2000. Gross profit as a percentage
of revenues decreased to 32.1% from 35.3%, primarily due to lower utilization of
salaried employees offset by increases in the average billing rate.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $4.1 million, or 20.8%,
to $24.0 million in the six months ended September 30, 2000 from $19.8 million
in the six months ended September 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. Selling,
general and administrative expenses as a percent of revenues were 51.8% in the
six months ended September 30, 2000 compared to 37.5% in the six months ended
September 30, 1999. Although the Company was in the process of divesting part of
its operations during the six months ended September 30, 2000, selling, general
and administrative expenses did not decrease as the Company continued to provide
the infrastructure and support for the divested operations. During the three
months ended September 30, 2000, the Company began the process of streamlining
its operations commensurate with its revenue base. By the end of the quarter,
the Company had made a thorough review of its cost structure and implemented
several cost-saving programs, including reducing staff, eliminating excess
office space and consolidating accounting centers with a view towards reducing
excess overhead. While cognizant of the need for cost containment, the Company
continues to invest in revenue generating programs.
Depreciation and Amortization of Goodwill
Depreciation and amortization of goodwill increased $0.5 million, or 31.8%, to
$2.0 million in the six months ended September 30, 2000 from $1.5 million in the
six months ended September 30, 1999. The increase was primarily due to the
spending on new state-of-the-art technology equipment and the related
depreciation.
Other Income (Expense)
Other income (expense) primarily consists of net interest income (expense). Net
interest expense of $0.9 million for the six months ended September 30, 2000
compared to net interest expense of $1.3 million for the six months ended
September 30, 1999. The decrease in net interest expense was due to interest
income earned during the quarter ended September 30, 2000 on the cash proceeds
from the sale of the majority of the IT staff augmentation business on June 30,
2000 that remained after the pay off of all obligations due under the Company's
Credit Agreement and an earn-out agreement.
Benefit for Income Taxes
The Company recorded an income tax benefit of $4.1 million for its continuing
operations in the six months ended September 30, 2000, compared to a benefit of
$1.4 million for the six months ended September 30, 1999, reflecting a net
effective rate of 34.0% for both periods.
Income (Loss) from Discontinued Operations
Discontinued operations is comprised of operations associated with the majority
of the Company's IT staff augmentation business. The income from discontinued
operations of $1.8 million for the six months ended September 30, 2000 was
comprised of $3.5 million of operating income for these operations (net of
income tax expense of $1.7 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 discontinued
operations and the write-down of the remaining discontinued operations to their
net realizable value. This compares to a loss from discontinued operations of
$13.6 million for the six months ended September 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.
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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. Both contingent payments are subject to further
review and analysis between the Company and the buyer. 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.
During the quarter ended September 30, 2000, the Company received $1.0 in cash
from the sale of its IT staff augmentation business in Orlando and the sale of
real property previously used by one of its IT staff augmentation locations.
Cash used for operating activities was $6.2 million for the six months ended
September 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 88 days of quarterly revenues at September 30,
2000.
With the termination of its borrowing arrangements under the Credit Agreement,
the Company's primary sources of liquidity going forward will be the existing
cash balances, and any cash 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 twelve months.
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.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits were filed during the quarter ended September
30, 2000.
BSmart.to LLC Amended and Restated Operating Agreement, dated August
8, 2000, between bSmart.to Technologies, Inc. and CGZ Mobile Ventures,
Inc. (Exhibit 10.1 of the Form 8-K filed with the Securities and
Exchange Commission on August 23, 2000) is hereby incorporated by
reference.
Letter Agreement, dated as of August 8, 2000, between Cotelligent,
Inc. and eMeris Limited (Exhibit 99 of the Form 8-K filed with the
Securities and Exchange Commission on August 23, 2000) is hereby
incorporated by reference.
Press Release, dated July 19, 2000, regarding the change of
Cotelligent, Inc.'s fiscal year end from March 31 to December 31 and
other company information (Exhibit 99.1 of the Form 8-K fileD with the
Securities and Exchange Commission on July 21, 2000) is hereby
incorporated by reference.
Employment Agreement, dated July 10, 2000, between Cotelligent, Inc.
and Jeffrey B. Van Horn (Exhibit 10.1 of the Form 8-K filed with the
Securities and Exchange Commission on July 18, 2000) is hereby
incorporated by reference.*
Press Release, dated July 10, 2000, announcing the promotion of Daniel
E. Jackson to the President and Chief Operating Officer of
Cotelligent, Inc. and Cotelligent, Inc.'s employment of Jeffrey B. Van
Horn (Exhibit 99 of the Form 8-K filed with the Securities and
Exchange Commission on July 18, 2000) is hereby incorporated by
reference.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter ended
September 30, 2000.
Cotelligent, Inc. filed with the Securities and Exchange Commission,
on July 17, 2000, Form 8-K regarding the divestiture of the majority
of its IT staff augmentation business to COMSYS Information Technology
Services, Inc. and the divestiture of its Orlando IT Staff
Augmentation business together with unaudited pro forma financial
statements for the year ended March 31, 2000.
Cotelligent, Inc. filed with the Securities and Exchange Commission,
on July 18, 2000, Form 8-K regarding the promotion of Daniel E.
Jackson to the position of President and Chief Operating Officer and
its employment of Jeffrey B. Van Horn as Executive Vice President,
Chief Financial Officer and Treasurer.
Cotelligent, Inc. filed with the Securities and Exchange Commission,
on July 27, 2000, Form 8-K regarding the change of the Company's
fiscal year end from March 31 to December 31.
Cotelligent, Inc. filed with the Securities and Exchange Commission, a
Form 8-K regarding the bSmart.to LLC Amended and Restated Operating
Agreement, dated August 8, 2000 between bSmart.to Technologies, Inc.
and CGZ Mobile Ventures, Inc. and the finders fee paid to eMeris
Limited related to such transaction.
*Management contracts and compensatory plans or arrangements required
to be filed as exhibits to this Form 10-Q.
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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: November 13, 2000 /s/ Jeffrey B. Van Horn
-------------------------
Jeffrey B. Van Horn
Executive Vice President,
Chief Financial Officer and Treasurer
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