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 December 31, 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 February 11, 2000 there were 14,831,451 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 December 31, 1999 (Unaudited)
and March 31, 1999 3
Consolidated Statements of Operations for the Three and Nine Months
Ended December 31, 1999 and 1998 (Unaudited) 4
Consolidated Statements of Cash Flows for the Nine Months Ended
December 31, 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 11
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE>
COTELLIGENT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, 1999 March 31, 1999
----------------- ------------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................... $ 1,675 $ 972
Accounts receivable, including unbilled accounts of $20,637.
and $17,719 and net of allowance for doubtful accounts......
of $1,890 and $1,449, respectively.......................... 65,280 62,087
Deferred income taxes....................................... 564 960
Prepaid expenses and other.................................. 4,649 4,971
----------------- ------------------
Total current assets...................................... 72,168 68,990
Property and equipment, net.................................... 13,118 11,405
Goodwill, net of accumulated amortization of $3,804 and........
$1,861, respectively........................................... 83,076 95,200
Notes receivable from officers and related party............... 1,619 191
Deferred income taxes.......................................... 8,153 -
Other assets................................................... 1,085 1,094
----------------- ------------------
Total assets.............................................. $ 179,219 $ 176,880
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt............................................. $ 48,358 $ 236
Accounts payable............................................ 7,723 9,399
Accrued compensation and related payroll liabilities........ 17,131 17,238
Income taxes payable........................................ 1,975 5,702
Other accrued liabilities................................... 14,502 7,460
----------------- ------------------
Total current liabilities................................. 89,689 40,035
Long-term debt................................................. 73 28,191
Deferred income taxes.......................................... - 821
----------------- ------------------
Total liabilities......................................... 89,762 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, 15,213,490 and 13,656,031 shares..............
issued and outstanding, respectively...................... 152 137
Additional paid-in capital................................. 87,023 82,517
Notes receivable from stockholders........................ (5,297) -
Retained earnings.......................................... 7,579 25,179
----------------- ------------------
Total stockholders' equity............................... 89,457 107,833
----------------- ------------------
Total liabilities and stockholders' equity............... $ 179,219 $ 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 Nine Months Ended
December 31, December 31,
-------------------------------- -------------------------------------
1999 1998 1999 1998
-------------- ------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Revenues........................................... $ 81,390 $ 83,849 $ 255,579 $ 236,627
Cost of services................................... 59,407 59,530 184,619 167,630
-------------- ------------- ----------------- ----------------
Gross profit............................... 21,983 24,319 70,960 68,997
Selling, general and administrative expenses....... 21,641 16,535 65,870 48,108
Depreciation and amortization of goodwill.......... 1,711 1,067 4,829 2,556
Impairment of long-lived assets.................... - - 20,000 -
Restructuring charge............................... - - 4,920 -
-------------- ------------- ----------------- ----------------
Operating income (loss) ........................... (1,369) 6,717 (24,659) 18,333
Other income (expense):
Interest expense................................ (1,128) (139) (2,535) (142)
Interest income................................. 55 54 183 674
Other........................................... (6) (2) (66) (28)
-------------- ------------- ----------------- ----------------
Total other income (expense).................. (1,079) (87) (2,418) 504
-------------- ------------- ----------------- ----------------
Income (loss) before provision for income taxes.... (2,448) 6,630 (27,077) 18,837
Provision (benefit) for income taxes............... (1,104) 2,684 (9,477) 7,529
-------------- ------------- ----------------- ----------------
Net income (loss).................................. $ (1,344) $ 3,946 $ (17,600) $ 11,308
============== ============= ================= ================
Earnings (loss) per share -
Basic....................................... $ (0.09) $ 0.28 $ (1.25) $ 0.81
============== ============= ================= ================
Diluted .................................... $ (0.09) $ 0.28 $ (1.25) $ 0.80
============== ============= ================= ================
Weighted average shares outstanding
Basic....................................... 15,167,742 14,055,396 14,060,481 14,003,972
============== ============= ================= ================
Diluted .................................... 15,167,742 14,213,639 14,060,481 14,164,902
============== ============= ================= ================
</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>
Nine Months Ended
December 31,
---------------------------------------------
1999 1998
--------------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................ $ (17,600) $ 11,308
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization of goodwill ............ 4,829 2,556
Impairment of long-lived assets ...................... 20,000 -
Deferred income taxes, net............................ (8,578) (503)
Loss on disposal of property and equipment............ 59 28
Provision for doubtful accounts....................... 441 729
Changes in current assets and liabilities:
Accounts receivable............................. (3,634) (3,644)
Prepaid expenses and other current assets....... 322 (1,135)
Accounts payable and accrued expenses........... (1,783) (1,657)
Income taxes payable............................ (3,727) 131
Other accrued liabilities....................... (958) (778)
Other assets.................................... 9 231
--------------------- --------------------
Net cash (used) provided in operating activities. (10,620) 7,266
--------------------- --------------------
Cash flows from investing activities:
Proceeds from sale of assets .................................... 6 206
Other investment................................................. (253) -
Purchase of businesses, net of cash acquired..................... (1,086) (45,217)
Purchases of property and equipment.............................. (4,644) (4,047)
--------------------- --------------------
Net cash used in investing activities............. (5,977) (49,058)
--------------------- --------------------
Cash flows from financing activities:
Net borrowings (repayments) on long-term debt.................... 20,004 18,587
Increase in notes receivable from officers and related party, net (1,428) -
Net proceeds from issuance of common stock ...................... 956 1,750
Repurchase of common stock ...................................... (2,233) (11,320)
--------------------- --------------------
Net cash provided by financing activities 17,299 9,017
--------------------- --------------------
Net increase (decrease) in cash and cash equivalents............. 702 (32,775)
Cash and cash equivalents at beginning of period................. 972 40,528
===================== ====================
Cash and cash equivalents at end of period....................... $ 1,675 7,753
===================== ====================
Supplemental disclosures of cash flow information:
Cash transactions -
Interest paid................................................. $ 2,281 $ 132
Income taxes paid............................................. $ 2,291 $ 7,259
Non cash transaction -
Issuance of shares in exchange for notes receivable........... $ 5,297 $ -
</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 December 31, 1999, the Company had approximately 3,000
employees, including technical staff of approximately 2,400 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>
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, 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 1,795,859 17 6,737 (5,297) - 1,457
Net loss - - - (17,600) (17,600)
=========== ======== =========== ============= =========== ==============
Balance at December 31, 1999 15,213,490 $ 152 $ 87,023 $ (5,297) $ 7,579 $ 89,457
=========== ======== =========== ============= =========== ==============
</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 nine months ended
December 31, 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
December 31,
-----------------------------------
1999 1998
---------------- --------------
<S> <C> <C>
Revenues........................................ $ 81,390 $ 95,291
Cost of services................................ 59,407 66,160
---------------- --------------
Gross profit............................. 21,983 29,131
Selling, general and administrative expenses.... 23,352 22,045
---------------- --------------
Operating income (loss)......................... (1,369) 7,086
Other income (expense).......................... (1,079) (599)
---------------- --------------
Income (loss) before provision for income taxes. (2,448) 6,487
Provision (benefit) for income taxes............ (1,104) 2,627
---------------- --------------
Net income (loss)............................... $ (1,344) $ 3,860
================ ==============
Earnings (loss) per share -
Basic...................................... $ (0.09) $ 0.26
================ ==============
Diluted.................................... $ (0.09) $ 0.25
================ ==============
Weighted average shares outstanding -
Basic...................................... 15,167,742 14,960,876
================ ==============
Diluted.................................... 15,167,742 15,119,118
================ ==============
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
-----------------------------------
1999 1998
---------------- --------------
<S> <C> <C>
Revenues....................................... $ 258,623 $ 280,087
Cost of services............................... 186,776 191,981
---------------- --------------
Gross profit............................ 71,847 88,106
Selling, general and administrative expenses... 96,736 66,504
---------------- --------------
Operating income (loss)........................ (24,889) 21,602
Other income (expense)......................... (2,588) (2,515)
---------------- --------------
Income (loss) before provision for income taxes (27,477) 19,087
Provision (benefit) for income taxes........... (9,477) 7,730
---------------- --------------
Net income (loss).............................. $ (18,000) $ 11,357
================ ==============
Earnings (loss) per share -
Basic..................................... $ (1.28) $ 0.75
================ ==============
Diluted................................... $ (1.28) $ 0.74
================ ==============
Weighted average shares outstanding -
Basic..................................... 14,098,219 15,164,100
================ ==============
Diluted................................... 14,098,219 15,325,030
================ ==============
</TABLE>
7
<PAGE>
COTELLIGENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(Unaudited)
Note 5 - Earnings (loss) Per Share
Earnings per share were as follows:
<TABLE>
<CAPTION>
For the Three Months Ended December 31, 1999
-------------------------------------------------------
Per Share
Income (loss) Shares Amount
------------------ -------------- -------------
<S> <C> <C> <C>
Basic and diluted earnings (loss) per share-
Net loss available to common stockholders ............. $ (1,344) 15,167,742 $ (0.09)
For the Three Months Ended December 31, 1998
-------------------------------------------------------
Per Share
Income (loss) Shares Amount
------------------ -------------- -------------
Basic earnings (loss) per share-
Net income available to common stockholders ........... $3,946 14,055,396 $ 0.28
Options issued to directors and employees ............. 158,243
--------------
Diluted earnings (loss) per share-
Income available to common stockholders
plus assumed conversions .......................... $3,946 14,213,639 $ 0.28
==============
For the Nine Months Ended December 31, 1999
-------------------------------------------------------
Per Share
Income (loss) Shares Amount
------------------ -------------- -------------
Basic and diluted earnings (loss) per share-
Net loss available to common stockholders ............. $ (17,600) 14,060,481 $ (1.25)
For the Nine Months Ended December 31, 1998
-------------------------------------------------------
Per Share
Income (loss) Shares Amount
------------------ -------------- -------------
Basic earnings (loss) per share-
Net income available to common stockholders ........... $ 11,308 14,003,972 $ 0.81
Options issued to directors and employees ............. 160,930
--------------
Diluted earnings (loss) per share-
Income available to common stockholders
plus assumed conversions .......................... $ 11,308 14,164,902 $ 0.80
==============
</TABLE>
8
<PAGE>
COTELLIGENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
(Unaudited)
Note 6 - Credit Agreement
On November 15, 1999, the Company entered into the second amendment (the
"Second Amendment") to the Amended and Restated Credit Agreement, dated March
12, 1999, among the Company, its consolidated subsidiaries, BankBoston N.A., as
administrative agent, letter of credit issuer and swingline lender, and the
other banks and financial institutions party thereto (the "Credit Agreement").
The Second Amendment, among other provisions, required that the Company's net
income and EBIT be greater than one dollar beginning with the fiscal quarter
ending December 31, 1999 through the fiscal quarter ending September 30, 2000
and set minimum levels for the Company's EBITDA for the fiscal quarters ending
September 30, 1999 through September 30, 2000. The Company's net income and EBIT
for the quarter ended December 31, 1999 was not greater than one dollar and the
EBITDA for the quarter ended December 31, 1999 did not meet the minimum levels
required by the Second Amendment.
On December 22, 1999, the Company entered into the third amendment (the
"Third Amendment") to the Credit Agreement. The Third Amendment required the
Company to enter into a capital transaction on or before January 7, 2000 to fund
the earnout payment due to sellers pursuant to the agreement to purchase
Information System Resources ("ISR") or alternatively, to enter into an
agreement with the sellers of ISR with a revised payment schedule. The Company
has not yet entered into a capital transaction for such funding nor has it
entered any agreement with the ISR sellers.
Due to the breach of the covenants at December 31, 1999, as amended above,
the amount due under the credit agreement has been classified as a current
liability.
However, on February 11, 2000, the Company entered into a letter agreement
with BankBoston N.A. whereby the lenders party to the Credit Agreement (the
"Lenders") agreed to waive the defaults set forth above through March 31, 2000.
The letter agreement also amended the Credit Agreement so as to (i) terminate
the obligation of the Lenders to make available certain revolving acquisition
loans, thereby reducing the credit facility by $42,600 to $57,400 (ii) obligate
the Company to deliver all cash presently held and hereafter generated by it and
its consolidated subsidiaries to BankBoston N.A., to be used for satisfying the
Company's obligations under the Credit Agreement and (iii) terminate the
Company's ability to elect LIBOR Rate Loans (as defined in the Credit
Agreement). In addition, the Company agreed (a) that no payments will be made to
the ISR sellers from working capital loans advanced pursuant to the Credit
Agreement or from cash generated from the Company's business and any such
payments will be made exclusively from a capital transaction and (b) that any
funds received from such a capital transaction will be used to pay the ISR
sellers (and the sellers due an earnout payment as a result of the Company's
acquisition of MD Technology, Inc.) in full and any remaining funds will be used
solely for working capital and not for further acquisitions. Subject to the
foregoing, the Company is agreed to pay in full all amounts due to the ISR
sellers by March 5, 2000. Finally, the parties also agreed to meet in other to
negotiate a mutually acceptable forbearance agreement by March 31, 2000.
9
<PAGE>
COTELLIGENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
(Unaudited)
Note 7 - Stockholders Equity
Stock Repurchase Program
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 14.0%
of the then outstanding shares. During the six months ended September 30, 1999,
the Company completed the stock repurchase program with the repurchase of
238,400 shares for a total cost of $2,233.
Leveraged Stock Purchase Plan
On September 8, 1999, the stockholders approved The Cotelligent, Inc. 1999
Leveraged Stock Purchase Plan (the "Plan") which authorizes the purchase of
shares of Common Stock by eligible employees who are selected by the
Compensation Committee of the Board (the "Committee") to participate in the Plan
on terms and conditions determined by the Committee.
Effective October 1, 1999, 1,486,842 shares were issued under the Plan
resulting in notes receivable from stockholders for $5,297, which is included in
stockholders equity. The notes receivable (i) bear interest at the applicable
federal interest rate as defined by the Internal Revenue Code; (ii) are secured
by the pledge of Cotelligent stock issued; (iii) are full recourse as to the
employee, except that in the case of death, disability, termination by the
Company without cause or change of control of the Company, recourse against the
employee is limited to the pledged stock; and (iv) have a term of five years
from date issuance, unless the stock is sold, then the loan shall be prepaid,
otherwise, the loan may not be prepaid. The stock issued under the Plan is
restricted from sale in the open market for a period of two years from the date
of issuance, except in the case of death, disability, termination by the Company
without cause or change of control of the Company, then the stock may be sold
and proceeds used to repay the loan.
Note 8 - 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 nine months ended
December 31, 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 9 - 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 nine months ended December 31, 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 December 31, 1999, $2,357 of
restructuring charges remained in accrued liabilities.
10
<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 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.
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.
11
<PAGE>
CONSOLIDATED RESULTS OF OPERATIONS
Three Months Ended December 31, 1999 Compared to Three Months Ended December 31,
1998
Revenues
Revenues decreased $2.5 million, or 2.9%, to $81.4 million in the three
months ended December 31, 1999 from $83.8 million in the three months ended
December 31, 1998. The decrease was primarily due to a general reduction in
demand for the Company's services, offset by the inclusion of revenues from the
companies acquired under the purchase method of accounting during fiscal 1999
and 2000 ("FY99 and FY00 Purchases").
Gross Profit
Gross profit decreased $2.3 million, or 9.6%, to $22.0 million in the three
months ended December 31, 1999 from $24.3 million in the three months ended
December 31, 1998. The decrease was primarily due to a general reduction in
demand for the Company's services, offset by the inclusion of the FY99 and FY00
Purchases. Gross profit as a percentage of revenues decreased to 27.0%, from
29.0%, 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 $5.1 million, or
30.9%, to $21.6 million in the three months ended December 31, 1999 from $16.5
million in three months ended December 31, 1998. The increase was primarily due
to the inclusion of selling, general and administrative expenses related to the
FY99 and FY00 Purchases, new staff added in advance of anticipated continued
growth, and additional occupancy costs and increased marketing and sales
activities during the third quarter of fiscal 2000.
Selling, general and administrative expenses as a percent of revenue were
26.6% in the three months ended December 31, 1999 compared to 19.7% in the three
months ended December 31, 1998. The majority of the FY99 and FY00 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 $0.6 million, or 60.4%,
to $1.7 million in the three months ended December 31, 1999 from $1.1 million in
three months ended December 31, 1998. The increase was primarily due to the
inclusion of amortization of goodwill related to the FY99 and FY00 Purchases.
Other Income (Expense)
Other income (expense) primarily consists of interest expense, net of
interest income. Interest expense, net of interest income, was $1.1 million in
the three months ended December 31, 1999 as compared to interest expense, net of
interest income, of $0.1 million in the three months ended December 31, 1998.
The increase was primarily due to interest expense on the Company's credit
facility during the third quarter of fiscal 2000. The lower net interest expense
in the third quarter of fiscal 1999 was the result of interest expense on lower
debt levels offset by 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 benefit of $1.1 million, or an
effective tax rate of 45.1% of pre-tax income in the three months ended December
31, 1999, compared to income tax expense of $2.7 million, or an effective rate
of 40.5% of pre-tax income for the three months ended December 31, 1998. The
increase in the effective tax rate in the third quarter of fiscal 2000, as
compared to the same period of fiscal 1999, reflects a change in the full-year
effective tax rate from 34.0% to 35.0%.
12
<PAGE>
CONSOLIDATED RESULTS OF OPERATIONS
Nine Months Ended December 31, 1999 Compared to Nine Months Ended December 31,
1998
Revenues
In the first nine months of fiscal 2000, revenues increased $19.0 million,
or 8.0%, to $255.6 million from $236.6 million in the same period of fiscal
1999. The increase was primarily due to the inclusion of revenues from the FY99
and FY00 Purchases.
Gross Profit
Gross profit increased $2.0 million, or 2.8%, to $71.0 million in the first
nine months of fiscal 2000 from $69.0 million in the same period of fiscal 1999,
as a result of the inclusion of the FY99 and FY00 Purchases. Gross profit as a
percentage of revenues decreased to 27.8%, 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 $17.8 million, or
36.9%, to $65.9 million in the first nine months of fiscal 2000 from $48.1
million in the same period of fiscal 1999. The increase was primarily due to the
inclusion of selling, general and administrative expenses related to the FY99
and FY00 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 nine months of fiscal
2000.
Selling, general and administrative expenses as a percent of revenue were
25.8% in the nine months ended December 31, 1999 compared to 20.3% in the nine
months ended December 31, 1998. The majority of the FY99 and FY00 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 $2.3 million, or 88.9%,
to $4.8 million in the nine months ended December 31, 1999 from $2.6 million in
the nine months ended December 31, 1998. The increase was primarily due to the
inclusion of amortization of goodwill related to the FY99 and FY00 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 nine months ended
December 31, 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.
13
<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 nine months ended December 31, 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 $2.4 million in
the nine months ended December 31, 1999 as compared to interest income, net of
interest expense, of $0.5 million in the nine months ended December 31, 1998.
The increase was primarily due to interest expense recognized on the Company's
line of credit during the first nine months of fiscal 2000. The net interest
income in the first nine 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 $9.5 million, or an effective
tax rate of 35.0% of pre-tax loss in the nine months ended December 31, 1999,
compared to income tax expense of $7.5 million, or an effective rate of 40.0% of
pre-tax income for the nine months ended December 31, 1998. The decrease in the
effective tax rate in the first nine 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.
14
<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 November 15, 1999, the Company entered into the second amendment (the
"Second Amendment") to the Amended and Restated Credit Agreement, dated March
12, 1999, among the Company, its consolidated subsidiaries, BankBoston N.A., as
administrative agent, letter of credit issuer and swingline lender, and the
other banks and financial institutions party thereto (the "Credit Agreement").
The Second Amendment, among other provisions, required that the Company's net
income and EBIT be greater than one dollar beginning with the fiscal quarter
ending December 31, 1999 through the fiscal quarter ending September 30, 2000
and set minimum levels for the Company's EBITDA for the fiscal quarters ending
September 30, 1999 through September 30, 2000. The Company's net income and EBIT
for the quarter ended December 31, 1999 was not greater than one dollar and the
EBITDA for the quarter ended December 31, 1999 did not meet the minimum levels
required by the Second Amendment.
On December 22, 1999, the Company entered into the third amendment (the
"Third Amendment") to the Credit Agreement. The Third Amendment required the
Company to enter into a capital transaction on or before January 7, 2000 to fund
the earnout payment due to sellers pursuant to the agreement to purchase
Information System Resources ("ISR") or alternatively, to enter into an
agreement with the sellers of ISR with a revised payment schedule. The Company
has not yet entered into a capital transaction for such funding nor has it
entered any agreement with the ISR sellers.
However, on February 11, 2000, the Company entered into a letter agreement
with BankBoston N.A. whereby the lenders party to the Credit Agreement (the
"Lenders") agreed to waive the defaults set forth above through March 31, 2000.
The letter agreement also amended the Credit Agreement so as to (i) terminate
the obligation of the Lenders to make available certain revolving acquisition
loans, thereby reducing the credit facility by $42,600 to $57,400 (ii) obligate
the Company to deliver all cash presently held and hereafter generated by it and
its consolidated subsidiaries to BankBoston N.A., to be used for satisfying the
Company's obligations under the Credit Agreement and (iii) terminate the
Company's ability to elect LIBOR Rate Loans (as defined in the Credit
Agreement). In addition, the Company agreed (a) that no payments will be made to
the ISR sellers from working capital loans advanced pursuant to the Credit
Agreement or from cash generated from the Company's business and any such
payments will be made exclusively from a capital transaction and (b) that any
funds received from such a capital transaction will be used to pay the ISR
sellers (and the sellers due an earnout payment as a result of the Company's
acquisition of MD Technology, Inc.) in full and any remaining funds will be used
solely for working capital and not for further acquisitions. Subject to the
foregoing, the Company is agreed to pay in full all amounts due to the ISR
sellers by March 5, 2000. Finally, the parties also agreed to meet in order to
negotiate a mutually acceptable forbearance agreement by March 31, 2000.
Prior to the letter agreement dated February 11, 2000, the interest rate
options include base rate borrowings at the lead lender's prime rate plus
one-quarter of one percent and LIBOR rate borrowings at LIBOR plus applicable
margin which fluctuates based upon certain leverage ratios. Effective with the
February 11, 2000 letter agreement, the LIBOR rate borrowing option is no longer
available.
The Company's primary sources of liquidity are cash balances, the Credit
Line and the collection of its accounts receivable. Total receivables were 74
and 61 days of quarterly revenue at December 31, 1999 and March 31, 1999
respectively. The increase was primarily the result of certain customers
lengthening the timing of their payments to Cotelligent and the Company's move
to a centralized collections group. Going forward the Company has a dedicated
national credit and collections center working to improve collections. 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.
Cash used in operating activities was $10.6 million for the nine months
ended December 31, 1999. The Company used borrowings on its Credit Line to fund
cash needs for its operations. At December 31, 1999, the Company had an
outstanding balance of $48.2 million under the Credit Line.
15
<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 reports on Form 8-K were filed during the quarter ended
December 31, 1999.
Cotelligent, Inc. filed with the Securities and Exchange Commission a
copy of the press release dated September 24, 1999 announcing earnings
expectations for the three months ending September 30, 1999.
Cotelligent, Inc. filed with the Securities and Exchange Commission
the first and second amendments to the Amended and Restated Senior
Secured Credit Agreement.
16
<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: February 14, 2000 /s/ Daniel E. Jackson
---------------------------
Daniel E. Jackson
Executive Vice President,
Chief Financial Officer and
Treasurer
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COTELLIGENT, INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED
DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
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<NAME> COTELLIGENT, INC.
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