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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
----- -----
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Commission File Number 0-27412
COTELLIGENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3173918
(State of incorporation) (I.R.S. ID)
100 Theory, Suite 200, Irvine, California 92612
(Address of principal executive offices)
(949) 823-1600
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
At January 2, 2003, there were 14,801,354 shares of common stock outstanding.
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COTELLIGENT, INC.
INDEX
Part I - Financial Information
Page
----
Item 1. Financial Statements
Cotelligent, Inc.
Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001 3
Condensed Consolidated Statements of Operations for the Three & Nine Months Ended
September 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
Part II - Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote to Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
Exhibits 21
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
2002 2001
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 22,931 $ 18,778
Refundable income taxes .............................................. 199 7,008
Accounts receivable, including unbilled accounts
of $407 and $1,627 and net of allowance for
doubtful accounts of $607 and $533,
respectively ...................................................... 2,084 5,693
Current assets of discontinued operations ............................ -- 151
Notes receivable from officers and stockholder, net of
valuation allowance of $1,703 ..................................... -- --
Current portion of note receivable from acquirer
of discontinued operation ......................................... 1,075 835
Prepaid expenses and other current assets ............................ 649 806
-------- --------
Total current assets .............................................. 26,938 33,271
Property and equipment, net ............................................. 265 --
Note receivable from acquirer of discontinued operation ................. 789 1,564
Investment in marketable security ....................................... 1,174 --
Equity investment in alliance partner ................................... 420 847
Other assets ............................................................ 348 398
-------- --------
Total assets ...................................................... $ 29,934 $ 36,080
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................................... $ 698 $ 1,651
Accrued compensation and related payroll liabilities ................. 1,577 2,144
Restructuring liabilities ............................................ 83 331
Deferred revenue ..................................................... 207 874
Other accrued liabilities ............................................ 2,207 2,074
-------- --------
Total current liabilities ......................................... 4,772 7,074
Restructuring liabilities, net of current portion ....................... 844 959
Other long-term liabilities, net of current portion ..................... 150 465
Income tax payable ...................................................... 2,618 2,618
-------- --------
Total liabilities ................................................. 8,384 11,116
Stockholders' equity:
Preferred Stock, $0.01 par value; 500,000 shares
authorized, no shares issued or outstanding ....................... -- --
Common Stock, $0.01 par value; 100,000,000 shares
authorized, 15,545,954 and 15,514,757 shares
issued, respectively .............................................. 155 155
Additional paid-in capital ........................................... 86,666 86,662
Notes receivable from stockholders ................................... (6,193) (6,193)
Accumulated deficit .................................................. (58,578) (55,160)
Treasury Stock ....................................................... (500) (500)
-------- --------
Total stockholders' equity ........................................ 21,550 24,964
-------- --------
Total liabilities and stockholders' equity ........................ $ 29,934 $ 36,080
======== ========
See accompanying notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(Restated) (Restated)
Revenues ......................................... $ 3,824 $ 10,444 $ 13,999 $ 39,500
Cost of services ................................. 2,175 7,292 8,618 28,591
----------- ----------- ----------- -----------
Gross profit ............................... 1,649 3,152 5,381 10,909
Research and development costs ................... 530 305 1,348 620
Selling, general and administrative expenses ..... 5,178 9,308 14,799 28,567
Impairment of long-lived assets .................. -- 1,132 -- 1,132
Restructuring charge ............................. -- 2,029 -- 2,029
----------- ----------- ----------- -----------
Operating loss ................................... (4,059) (9,622) (10,766) (21,439)
Other income (expense):
Interest expense .............................. (22) (29) (93) (89)
Interest income ............................... 75 189 236 824
Other ......................................... (465) (277) (752) (716)
----------- ----------- ----------- -----------
Total other income (expense) ............... (412) (117) (609) 19
----------- ----------- ----------- -----------
Loss from continuing operations
before income taxes ..................... (4,471) (9,739) (11,375) (21,420)
Benefit for income taxes ......................... -- -- 7,496 3,454
----------- ----------- ----------- -----------
Loss from continuing operations ............... (4,471) (9,739) (3,879) (17,966)
----------- ----------- ----------- -----------
Gain (loss) on sale of discontinued
operations, net of income tax
expense of $0, $0, $0, $0 .................. 379 (154) 461 (273)
----------- ----------- ----------- -----------
Net income (loss) ............................. $ (4,092) $ (9,893) $ (3,418) $ (18,239)
=========== =========== =========== ===========
Earnings (loss) per share:
Basic -
Income (loss) from continuing operations ...... $ (0.30) $ (0.66) $ (0.26) $ (1.18)
Income (loss) from discontinued operations .... 0.03 (0.01) 0.03 (0.02)
----------- ----------- ----------- -----------
Net income (loss) .......................... $ (0.27) $ (0.67) $ (0.23) $ (1.20)
=========== =========== =========== ===========
Diluted -
Income (loss) from continuing operations ...... $ (0.30) $ (0.66) $ (0.26) $ (1.18)
Income (loss) from discontinued operations .... 0.03 (0.01) 0.03 (0.02)
----------- ----------- ----------- -----------
Net income (loss) .......................... $ (0.27) $ (0.67) $ (0.23) $ (1.20)
=========== =========== =========== ===========
Weighted average number of shares outstanding
Basic ............................................ 14,901,054 14,824,310 14,897,724 15,147,107
=========== =========== =========== ===========
Diluted .......................................... 14,901,054 14,824,310 14,897,724 15,147,107
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended September 30,
-------------------------------
2002 2001
-------- ----------
(Restated)
Cash flows from operating activities:
Income (loss) from continuing operations ............................ $ (3,879) $(17,966)
Adjustments to reconcile loss from continuing operations to net
cash provided by (used in) operating activities:
Equity loss from investment in alliance partner ............... 427 757
Unrealized loss on investment in marketable security .......... 326 --
Depreciation and amortization ................................. 10 2,065
Loss on sale of asset ......................................... 5 --
Impairment of long-lived assets ............................... -- 1,132
Provision for doubtful accounts ............................... 74 2,108
Deferred taxes, net ........................................... (7,496) 2,745
Changes in current assets and liabilities:
Accounts receivable ........................................ 3,535 9,613
Prepaid expenses and other current assets .................. 157 (193)
Income taxes, net .......................................... 14,305 (6,212)
Accounts payable and accrued expenses ...................... (2,065) (326)
Deferred revenue ........................................... (667) (93)
Other assets ............................................... 50 244
-------- --------
Cash provided by (used for) operating activities .................... 4,782 (6,126)
Cash flows from investing activities:
Payments received on note from acquirer of discontinued
operations ....................................................... 535 281
Purchases of property and equipment ................................. (280) (409)
Investment in marketable security ................................... (1,500) --
-------- --------
Cash used for investing activities .................................. (1,245) (128)
Cash flows from financing activities:
Payments on capital lease obligations ............................... -- (44)
Payments on amounts due sellers of acquired businesses .............. -- (600)
Net proceeds on issuance of common stock ............................ 4 190
Purchase of treasury stock .......................................... -- (500)
-------- --------
Cash provided by (used for) financing activities .................... 4 (954)
Cash flows provided by discontinued operations ......................... 612 894
-------- --------
Net increase (decrease) in cash ........................................ 4,153 (6,314)
Cash at beginning of period ............................................ 18,778 26,500
-------- --------
Cash at end of period .................................................. $ 22,931 $ 20,186
======== ========
Supplemental disclosures of cash flow information:
Interest paid ....................................................... $ 71 $ 90
Income taxes paid (refunded) ........................................ $(14,305) $ 14
Return of common Stock previously issued to employee for note
receivable ....................................................... $ -- $ 175
Accounts receivable exchanged for preferred stock ................... $ 1,739 $ --
See accompanying notes to condensed consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
Note 1 - Business Organization and Basis of Presentation
Cotelligent, Inc. ("Cotelligent" or the "Company"), a Delaware corporation,
provides software consulting services to businesses with complex information
technology ("IT") operations and also provides maintenance, support and contract
services on software products it licenses. These financial statements include
the accounts of Cotelligent, Inc. and its subsidiaries.
During the fiscal year ended March 31, 2000, the Company was organized into two
practice groups, Technology Solutions and Professional Services (also known as
its IT staff augmentation business), and operated across the United States along
with international consultant recruiting offices in Brazil and the Philippines.
Prior to March 31, 2000, the Company entered into a plan to divest its IT staff
augmentation business. Accordingly, the accompanying consolidated financial
statements and related footnotes have been prepared to present as discontinued
operations the Company's IT staff augmentation business for all periods
presented.
The Company has suffered significant operating losses as well as negative
operating cash flows in the last two fiscal periods as it works through its
repositioning in the market, and continues to be subject to certain risks common
to companies in this industry. These uncertainties include the availability of
financing, the retention of and dependence on key individuals, the effects of
intense competition, the ability to develop and successfully market new product
and service offerings, and the ability to streamline operations and increase
revenues. There can be no assurance the Company will be profitable in the
future.
Note 2 - Restatement
The Company has restated its consolidated balance sheets as of December 31, 2001
and 2000 and its consolidated statements of operations, stockholders' equity and
cash flows for the year ended December 31, 2001 and the nine months ended
December 31, 2000. Additionally, the Company restated the quarterly financial
data for each three month period within the year ended December 31, 2001 and
nine months ended December 31, 2000. The restated consolidated financial
statements and quarterly financial data, along with a description of the items
causing the restatement, appear in the Company's Amendment No. 3 to Annual
Report on Form 10-K/A for the year ended December 31, 2001, filed with the
Securities and Exchange Commission on December 9, 2002.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
The following tables present the changes that have been made to the condensed
consolidated statements of operations and cash flows for the three and nine
months ended September 30, 2001:
As Previously Reported Restated
---------------------- -----------
Three Months Ended September 30, 2001
-------------------------------------
Consolidated Statement of Operations:
Revenues ........................................... $ 10,444 $ 10,444
Cost of services ................................... 7,292 7,292
----------- -----------
Gross profit ................................. 3,152 3,152
Research and development costs ..................... -- 305
Selling, general and administrative expenses ....... 7,910 9,308
Impairment of long-lived assets .................... -- 1,132
Restructuring charge ............................... 3,373 2,029
----------- -----------
Operating loss ..................................... (8,131) (9,622)
Other income (expense):
Interest expense ................................ -- (29)
Interest income ................................. 312 189
Other ........................................... (86) (277)
----------- -----------
Total other income (expense) ................. 226 (117)
----------- -----------
Income (loss) from continuing operations
before income taxes ............................. (7,905) (9,739)
Benefit for income taxes ........................... -- --
----------- -----------
Income (loss) from continuing operations ........... (7,905) (9,739)
Operating income (loss) from
discontinued operations ...................... (49) --
Loss on sale of discontinued operations ......... -- (154)
----------- -----------
Income (loss) from discontinued operations ...... (49) (154)
----------- -----------
Net income (loss) ............................ $ (7,954) $ (9,893)
=========== ===========
Earnings (loss) per share:
Basic -
Income (loss) from continuing operations ........ $ (0.54) $ (0.66)
Income (loss) from discontinued operations ...... -- (0.01)
----------- -----------
Net income (loss) ............................ $ (0.54) $ (0.67)
=========== ===========
Diluted -
Income (loss) from continuing operations ........ $ (0.54) $ (0.66)
Income (loss) from discontinued operations ...... -- (0.01)
----------- -----------
Net income (loss) ............................ $ (0.54) $ (0.67)
=========== ===========
Weighted average number of shares outstanding:
Basic ........................................... 14,824,310 14,824,310
=========== ===========
Diluted ......................................... 14,824,310 14,824,310
=========== ===========
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
As Previously Reported Restated
---------------------- -----------
Nine Months Ended September 30, 2001
-------------------------------------
Revenues ........................................... $ 39,500 $ 39,500
Cost of services ................................... 28,591 28,591
----------- -----------
Gross profit ................................. 10,909 10,909
Research and development costs ..................... -- 620
Selling, general and administrative expenses ....... 26,771 28,567
Impairment of long-lived assets .................... -- 1,132
Restructuring charge ............................... 3,373 2,029
----------- -----------
Operating loss ..................................... (19,235) (21,439)
Other income (expense):
Interest expense ................................ (2) (89)
Interest income ................................. 1,193 824
Other ........................................... (143) (716)
----------- -----------
Total other income (expense) ................. 1,048 19
----------- -----------
Income (loss) from continuing operations
before income taxes ............................. (18,187) (21,420)
Benefit for income taxes ........................... -- 3,454
----------- -----------
Income (loss) from continuing operations ........... (18,187) (17,966)
----------- -----------
Operating income (loss) from
discontinued operations ...................... (32) --
Loss on sale of discontinued operations ......... -- (273)
----------- -----------
Income (loss) from discontinued operations ...... (32) (273)
----------- -----------
Net income (loss) ............................ $ (18,219) $ (18,239)
=========== ===========
Earnings (loss) per share:
Basic -
Income (loss) from continuing operations ........ $ (1.20) $ (1.18)
Income (loss) from discontinued operations ...... -- (0.02)
----------- -----------
Net income (loss) ............................ $ (1.20) $ (1.20)
=========== ===========
Diluted -
Income (loss) from continuing operations ........ $ (1.20) $ (1.18)
Income (loss) from discontinued operations ...... -- (0.02)
----------- -----------
Net income (loss) ............................ $ (1.20) $ (1.20)
=========== ===========
Weighted average number of shares outstanding:
Basic ........................................... 15,150,770 15,147,107
=========== ===========
Diluted ......................................... 15,150,770 15,147,107
=========== ===========
As Previously Reported Restated
---------------------- -----------
Nine Months Ended September 30, 2001
------------------------------------
Consolidated Statement of Cash Flows:
Net cash used in operating activities .............. $(5,441) $(6,126)
Net cash used in investing activities .............. (1,029) (128)
Net cash used in financing activities .............. (1,247) (954)
Cash provided by discontinued operations ........... 1,403 894
Note 3 - Summary of Significant Accounting Policies
The accompanying interim financial statements do not include all disclosures
included in the financial statements in Cotelligent's Amendment No. 3 to Annual
Report on Form 10-K/A for the year ended December 31, 2001 ("Form 10-K/A"), and
therefore these financial statements should be read in conjunction with the
financial statements included in Cotelligent's Form 10-K/A.
In the opinion of management, the interim financial statements filed as part of
this Quarterly Report on Form 10-Q reflect all adjustments necessary for a fair
presentation of the financial position and the results of operations and of cash
flows for the interim periods presented. Certain balances of the prior year have
been reclassified to conform to the current presentation.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
Note 4 - Changes in Stockholders' Equity
Notes
Common Stock Additional Receivable Total
------------------- Paid-In From Accum. Treasury Stock Stockholders'
Shares Amount Capital Stockholders Deficit Shares Amount Equity
------------------- ---------- ------------ -------- ----------------- -------------
Balance at December 31, 2001 ..... 15,514,757 $155 $86,662 $(6,193) $(55,160) 644,600 $ (500) $24,964
Issuance of common stock ......... 31,197 -- 4 -- -- -- -- 4
Net loss ......................... -- -- -- -- (3,418) -- -- (3,418)
------------------- ------- ------- -------- ------- ------- -------
Balance at September 30, 2002 .... 15,545,954 $155 $86,666 $(6,193) $(58,578) 644,600 $ (500) $21,550
=================== ======= ======= ======== ======= ======= =======
Note 5 - Discontinued Operations
On June 30, 2000, the Company sold the majority of its IT staff augmentation
business and on July 14, 2000 and October 31, 2000 sold other components of the
IT staff augmentation business. During the quarter ended September 30, 2002, the
Company continued to hold one remaining component of its IT staff augmentation
business. During the fourth quarter of fiscal 2001, the Company abandoned its
plan to divest of this operation and consequently closed this business.
The following financial data reflects a summary of operating results for the
Company's discontinued operations for the three and nine months ended September
30, 2001.
Summary of Operating Results of Discontinued Operations:
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
2001 2001
------------------ -----------------
Revenues .......................................... $ 335 $3,838
Cost of services .................................. 351 3,078
----- ------
Gross profit ................................ (16) 760
Selling, general and administrative expenses ...... 138 1,033
----- ------
Operating loss .............................. (154) (273)
Other income (expense) ............................ -- --
----- ------
Operating loss before provision for taxes ......... (154) (273)
Provision for income taxes ........................ -- --
----- ------
Operating loss from discontinued operations ....... (154) (273)
Reclassification to gain on sale
of discontinued operations ..................... 154 273
----- ------
Operating income (loss) from
discontinued operations ........................ $ -- $ --
===== ======
Gain on Sale of Discontinued Operations in 2002:
The gain on the sale of discontinued operations for the three and nine months
ended September 30, 2002 is the result of recoveries of trade accounts
receivable in 2002 previously written off to bad debt expense.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
Note 6 -Investment in Marketable Security
On August 19, 2002, the Company acquired 3,055,540 shares of Series C
Convertible Redeemable Preferred Stock ("Series C") of Bluebook International
Holding Company, Inc. ("Bluebook"), representing an approximately 9% ownership
interest (assuming conversion of all outstanding preferred stock) in exchange
for $1,000 in cash, conversion of a $500 bridge loan from Cotelligent to
Bluebook, advanced earlier in the third quarter of 2002, and services rendered
in connection with the development of software for Bluebook. In accordance with
the purchase and development agreement, management of the Company expects
Cotelligent to be a preferred provider of implementation services for Bluebook's
future software products.
Under the Series C purchase and development agreement, the Company is obligated
to contribute additional services and fund an additional $1,500 in cash, due
upon Bluebook's first sale of certain software associated with the purchase and
development agreement. Upon payment of the additional $1,500 and delivery of the
remaining services, the Company will receive an additional 2,261,164 shares of
Series C, which will increase the Company's ownership interest in Bluebook to
15% (assuming conversion of all outstanding preferred stock, and assuming no
further stock issuances on behalf of Bluebook). In December 2002, the Company
funded the additional $1,500 after Bluebook satisfied the necessary conditions
required for payment. In addition, Bluebook issued the remaining 2,261,164
Series C shares.
The Series C were initially recorded at $1,500, the amount of cash paid to
Bluebook. The cost of the contributed services were recorded as research and
development costs in the accompanying condensed consolidated statements of
operations.
Under the certificate of designation of the Series C stock, Bluebook is
required, at the Company's option, to either a) convert the Series C shares to
common stock at any time or b) redeem the Series C shares for cash beginning
four years and up through six years after the date of initial issuance.
The Series C meets the definition of a debt security under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". In accordance with SFAS No. 115, the Company classified the Series
C as a trading security and consequently reports the investment at fair value,
with unrealized gains and losses recorded in other income (expense) in the
consolidated statements of operations. Accordingly, the initial investment was
reduced by $326 during the three months ended September 30, 2002 due to the
decrease in fair value since the acquisition date.
During the nine months ended September 30, 2002, the Company delivered software
development services to Bluebook with a cost of $717. Of the total services
contributed, $396 and $321 were recorded as research and development costs
during the three months ended June 30, 2002 and September 30, 2002,
respectively.
Note 7 - Income Taxes
On March 9, 2002, Congress approved the Job Creation and Worker Assistance Act
of 2002 allowing net operating losses for the Company's fiscal tax year ending
March 31, 2002 to be carried back five years. In accordance with SFAS No. 109,
the effect of this change in tax law was reflected in the March 31, 2002
financial statements as changes in tax law must be reflected in the period of
enactment. Consequently, the Company recorded a $7,496 tax benefit during the
nine months ended September 30, 2002, which reflects the release of a valuation
allowance against a deferred tax asset previously written down to zero due to
the uncertainty of its realization. The Company received a $7,496 refund of
taxes on August 10, 2002.
Note 8 - Subsequent Event - Restructuring Charge
During the fourth quarter and as part of the Company's efforts to streamline its
operations commensurate with its revenue base, the Company identified
opportunities to reduce its cost structure by reducing headcount and closing the
Dallas sales office as well as consolidating the San Francisco headquarters into
excess space at the Irvine, California facility, at the end of their respective
lease terms. Accordingly, the Company adopted a restructuring plan, which is
expected to result in a pre-tax restructuring charge of approximately $700
during the fourth quarter of 2002. This charge includes severance costs for
approximately 28 management and operating staff.
Note 9 - Weighted Average Number of Shares Outstanding
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Basic weighted average number of shares outstanding ........... 14,901,054 14,824,310 14,897,724 15,147,107
Effect of stock options issued to employees and directors ..... -- -- -- --
---------- ---------- ---------- ----------
Diluted weighted average number of shares outstanding ......... 14,901,054 14,824,310 14,897,724 15,147,107
========== ========== ========== ==========
Options to purchase 4,318,331 and 1,820,952 shares of common stock were
outstanding at September 30, 2002 and 2001, respectively, but were not included
in EPS for the three and nine months ended September 30, 2002 and 2001 because
the Company had a loss from continuing operations making the options
antidilutive.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for statements of historical fact contained herein, any statements
contained in this report may be deemed to be forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. For example,
words such as "may," "will," "should," "estimates," "predicts," "potential,"
"continue," "strategy," "believes," "anticipates," "plans," "expects," "intends"
and similar expressions are intended to identify forward-looking statements. All
such forward-looking statements are based upon current expectations that involve
risks and uncertainties. Cotelligent's actual results and the timing of certain
events may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause or contribute to such a
discrepancy include, but are not limited to, those discussed under "Risk
Factors" in Cotelligent's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, other filings made with the Securities and Exchange
Commission and Cotelligent's press release announcing earnings for the quarter
ended March 31, 2002, which was issued on April 30, 2002. The following
discussion is qualified in its entirety by, and should be read in conjunction
with, the more detailed information set forth in our financial statements and
the notes thereto included elsewhere in this filing. All forward-looking
statements included in this report are based upon information available to
Cotelligent as of the date thereof, and Cotelligent assumes no obligation to
update any of such forward-looking statements.
OVERVIEW
Cotelligent provides software consulting services to businesses with complex
information technology ("IT") operations and also provides maintenance, support
and contract services on software products it licenses. These activities are
provided under time and materials billing arrangements or on a fixed-fee basis.
For time and materials billing arrangements, revenues are recorded as work is
performed. Revenues are directly related to the total number of hours billed to
clients and the associated hourly billing rates. Hourly billing rates are
established for each service provided and are a function of the type of work
performed and the related skill level of the consultant. For fixed-fee
arrangements, work is performed in line with established deliverables and
revenue is calculated on a percentage of completion basis. In addition, the
Company has developed complete mobile workforce management solutions for
industries that have medium to large transient sales, field or delivery
personnel. A component of these solutions may be software that has been
developed by the Company. Revenues earned for software license sales and service
contracts are recorded based on the provisions of AICPA SOP 97-2, "Software
Revenue Recognition," which shares the basic criteria of SAB No. 101.
The Company's principal costs are professional compensation directly related to
the performance of services and related expenses. Gross profits (revenues after
professional compensation and related expenses) are primarily a function of
hours billed to clients per professional employee or consultant, hourly billing
rates of those employees or consultants and employee or consultant compensation
relative to those billing rates. Gross profits can be adversely impacted if
services provided cannot be billed, if the Company is not effective in managing
its service activities, if fixed-fee engagements are not properly priced, if
consultant cost increases exceed bill rate increases or if there are high levels
of unutilized time (work activities not chargeable to clients or unrelated to
client services) of full-time salaried service professional employees.
Operating income can be adversely impacted by increased administrative staff
compensation and expenses related to streamlining or expanding the Company's
business, which may be incurred before revenues or economies of scale are
generated from such investment. Solution development activities require a higher
level of selling, general and administrative activities as well as investment in
research and development activities.
As a service and software organization, the Company responds to service demands
from its clients. Accordingly, the Company has limited control over the timing
and circumstances under which its services are provided. Therefore, the Company
can experience volatility in its operating results from quarter to quarter. The
operating results for any quarter are not necessarily indicative of the results
for any future period.
RESTATEMENT
The Company has restated the condensed consolidated statements of operations and
cash flows for the three and nine months ended September 30, 2001 included in
this Quarterly Report on Form 10-Q. For additional information regarding the
restatement, please refer to Note 2 to the condensed consolidated financial
statements included in Item 1.
11
CONSOLIDATED RESULTS OF OPERATIONS
(In Thousands)
Three Months Ended September 30, 2002 Compared to Three Months Ended September
30, 2001
Revenues
Revenues decreased $6,620, or 63%, to $3,824 in the three months ended September
30, 2002 from $10,444 in the three months ended September 30, 2001. The decrease
was due to a general reduction in demand for its services due to softening in
the market coupled with a shift away from general IT consulting services towards
offering mobile workforce management solutions and its associated ramp-up time.
Gross Profit
Gross profit decreased $1,503, or 48%, to $1,649 in the three months ended
September 30, 2002 from $3,152 in the three months ended September 30, 2001. The
decrease was due to lower revenues following a general reduction in demand for
its services due to softening in the market coupled with a shift away from
general IT consulting services towards offering mobile workforce management
solutions and its associated ramp-up time. The gross profit margin increased to
43% from 30%, due to better pricing, a mix shift to higher margin projects,
caused in part by the end of some long-term, lower margin, legacy system
development engagements, and an increase in utilization of billable staff.
Research and Development Costs
Research and development costs were $530 for the three months ended September
30, 2002 compared to $305 for the three months ended September 30, 2001. The
Company has a dedicated team of people solely focused on research and
development activities associated with mobile workforce management and Web
services solutions. The higher spending level during the three months ended
September 30, 2002 was due to research and development costs incurred for the
development of a software solution for a business partner (See Note 6 to the
condensed consolidated financial statements included in Item 1).
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $4,130, or 44%, to $5,178
in the three months ended September 30, 2002 from $9,308 in the three months
ended September 30, 2001. The decrease was primarily due to reductions in
operating staff following the divestiture of the majority of the IT staff
augmentation business, as well as the effects of other reductions in staff to
streamline operations in line with revenues.
Impairment of Long-Lived Assets
In September 2001, the Company recognized an impairment of long-lived assets
charge of $1,132 on property and equipment associated with locations where the
Company ceased operations.
Restructuring Charge
In September 2001, as part of the Company's efforts to streamline its operations
commensurate with its revenue base, the Company identified opportunities to
reduce its cost structure by reducing headcount and closing certain operating
facilities to conform to the Company's new operating structure resulting in a
$2,436 restructuring charge during the year ended December 31, 2001.
Accordingly, the Company adopted a restructuring plan in accordance with EITF
94-3 "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)"
and Staff Accounting Bulletin No. 100, "Restructuring and Impairment Charges."
Restructuring costs of $2,029 were recorded in the three months ended September
30, 2001. The remainder of the charge was recorded during the three months ended
December 31, 2001.
Other Income (Expense)
Other income (expense) primarily consists of interest income, interest expense,
loss on an investment in an alliance partner accounted for under the equity
method of accounting and the change in market value associated with an
investment in a marketable security. Interest income net of interest expense was
$53 for the three months ended September 30, 2002 compared to $160 for the three
months ended September 30, 2001. The decrease in net interest income was due to
a lower cash balance on hand during the three months ended September 30, 2002.
Other expense for the three months ended September 30, 2002 was $465 principally
from the change in market value associated with an investment in a marketable
security which resulted in a $326 unrealized loss.
Benefit for Income Taxes
The Company did not record an income tax benefit for the three months ended
September 30, 2002 or 2001 due to the uncertainty of its realization.
12
CONSOLIDATED RESULTS OF OPERATIONS
(In Thousands)
Gain on Sale of Discontinued Operations
Discontinued operations was comprised of the Company's IT staff augmentation
business. The gain on sale from discontinued operations of $379 for the three
months ended September 30, 2002 compares to a loss of $154 for the three months
ended September 30, 2001. The increase is the result of cash collected in 2002
on trade accounts receivable written off in prior years to bad debt expense.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30,
2001
Revenues
Revenues decreased $25,501, or 65%, to $13,999 in the nine months ended
September 30, 2002 from $39,500 in the nine months ended September 30, 2001. The
decrease was due to a general reduction in demand for its services due to
softening in the market coupled with a shift away from general IT consulting
services towards offering mobile workforce management solutions and its
associated ramp-up time.
Gross Profit
Gross profit decreased $5,528, or 51%, to $5,381 in the nine months ended
September 30, 2002 from $10,909 in the nine months ended September 30, 2001. The
decrease was due to a general reduction in demand for its services due to
softening in the market coupled with a shift away from general IT consulting
services towards offering mobile workforce management solutions and its
associated ramp-up time. The gross profit margin increased to 38% from 28%, due
to better pricing, a mix shift to higher margin projects caused in part by the
end of some long-term, lower margin, legacy system development engagements and
an increase in utilization of billable staff.
Research and Development Costs
Research and development costs were $1,348 for the nine months ended September
30, 2002 compared to $620 for the nine months ended September 30, 2001. The
higher level of spending during the nine months ended September 30, 2002 was due
to research and development costs incurred for the development of a software
solution for a business partner. See Note 6 to the condensed consolidated
financial statements included in Item 1.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $13,768, or 48%, to
$14,799 in the nine months ended September 30, 2002 from $28,567 in the nine
months ended September 30, 2001. The decrease was primarily due to reductions in
operating staff as well as the effects of other reductions in staff to
streamline operations in line with revenue.
Impairment of Long-Lived Assets
In September 2001, the Company recognized an impairment of long-lived assets
charge of $1,132 on property and equipment associated with locations where the
Company ceased operations.
Restructuring Charge
In September 2001, as part of the Company's efforts to streamline its operations
commensurate with its revenue base, the Company identified opportunities to
reduce its cost structure by reducing headcount and closing certain operating
facilities to conform to the Company's new operating structure resulting in a
$2,436 restructuring charge during the year ended December 31, 2001.
Accordingly, the Company adopted a restructuring plan in accordance with EITF
94-3 "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)"
and Staff Accounting Bulletin No. 100, "Restructuring and Impairment Charges."
Restructuring costs of $2,029 were recorded in the nine months ended September
30, 2001. The remainder of the charge was recognized during the three months
ended December 31, 2001.
Other Income (Expense)
Other income (expense) primarily consists of interest income, interest expense,
loss on an investment in an alliance partner accounted for under the equity
method of accounting and the change in market value associated with an
investment in a marketable security. Interest income, net of interest expense
was $143 for the nine months ended September 30, 2002 compared to net interest
income of $735 for the nine months ended September 30, 2001. The decrease in net
interest income was due to a lower cash balance on hand during the nine months
ended September 30, 2002. Other expense for the nine months ended September 30,
2002 was $752, principally consisting of an unrealized loss of $326 resulting
from the change in market value associated with an investment in a marketable
security. Offsetting these reductions was a decrease in the equity loss from the
investment in alliance partner.
Benefit for Income Taxes
The income tax benefit of $7,496 for the nine months ended September 30, 2002
was the results of the Job Creation and Worker Assistance Act of 2002, approved
by Congress on March 9, 2002, allowing net operating losses for the Company's
fiscal tax year ending March 31, 2002 to be carried back five years. In
accordance with SFAS No. 109, the effect of this change in tax law was reflected
in the March 31, 2002 financial statements as changes in tax law must be
reflected in the period of enactment. The income
13
tax benefit of $3,454 for the nine months ended September 30, 2001 resulted from
a decrease in a valuation allowance previously established against a goodwill
deduction that was written off on the March 31, 2001 tax return.
Gain on Sale of Discontinued Operations
Discontinued operations is comprised of the Company's IT staff augmentation
business. The gain on sale of discontinued operations of $461 for the nine
months ended September 30, 2002 compares to a loss of $273 for the nine months
ended September 30, 2001. The increase in gain on sale of from discontinued
operations is the result of cash collected on trade accounts receivable in 2002
written off in prior years to bad debt expense.
14
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed itself principally through cash flows from operations,
net proceeds from its public offerings, net proceeds from the sale of its IT
staff augmentation business and tax refunds from the carry back of net operating
losses.
The Company previously maintained a credit facility with a consortium of banks
under which it borrowed to fund working capital needs. On June 30, 2000, the
Company used a portion of the cash proceeds from the sale of its IT staff
augmentation business to pay off all obligations under the credit facility and
to pay existing earn-out obligations to sellers of an acquired business. Upon
settlement of all obligations under the credit facility, the credit facility was
terminated. Since June 30, 2000, the Company has not maintained a credit
facility.
Cash provided by operating activities was $4,782 for the nine months ended
September 30, 2002, and the average cash balance during the quarter was $21,743.
The Company's primary sources of liquidity for the Company going forward include
the collection of accounts receivable and federal and state income tax refunds
resulting from the carry-back of net operating losses. In addition, the Company
continues to utilize the cash proceeds generated from the sales of its IT staff
augmentation businesses. Total receivables were 64 days of quarterly revenues at
September 30, 2002 and 74 days at December 31, 2001. In the first quarter of
2002, Congress approved the Job Creation and Worker Assistance Act of 2002,
allowing fiscal tax year end March 31, 2002 net operating losses to be carried
back five years. The effect of this change in tax law resulted in a $7,496 tax
refund received by the Company on August 10, 2002. The Company's management
believes that the remaining cash on hand will provide adequate cash to fund its
anticipated cash working capital needs at least through next year.
The following table reflects our contractual cash obligations, excluding
interest, due over the indicated periods.
------------------------------------------------------------------------------------------------------
Payments Due by Period
----------------------------------------------
Less than 1 to 3 4 to 5 After 5
Contractual Cash Obligations: Total 1 Year Years Years Years
------------------------------------------------------------------------------------------------------
Obligations due sellers of an acquired business $ 499 $ 388 $ 111 $ -- $--
------------------------------------------------------------------------------------------------------
Operating leases $5,394 $1,566 $3,412 $416 $--
------------------------------------------------------------------------------------------------------
Total contractual obligation $5,893 $1,954 $3,523 $416 $--
------------------------------------------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES
Allowance for Doubtful Accounts
The Company provides an allowance for potentially uncollectible accounts
receivable under the provisions of SFAS No. 5, "Accounting for Contingencies,"
in the ordinary course of business. The allowance is derived as the result of
periodic and thorough reviews of aged and known problem accounts during each
quarter. In addition, the Company reserves for unknown issues in its receivables
at the balance sheet date using a formula consistent from quarter to quarter.
Management believes that its approach is appropriate to reserve for potentially
uncollectible receivables. Should management have taken another approach to
developing its reserve, the allowance for doubtful accounts may have been
different than that reported.
Revenue Recognition
The Company accounts for time and materials revenue under the provisions of SAB
101, "Staff Accounting Bulletin No. 101: Revenue Recognition in Financial
Statements", which requires revenue to be recorded when there is evidence of an
agreement, a fixed or determinable fee, collectibility is reasonably assured,
and delivery has occurred. Revenues include reimbursable expenses charged to and
collected from clients. Revenues pursuant to fixed-fee contracts are generally
recognized as services are rendered on the percentage-of-completion method of
accounting based on hours incurred to total estimated labor hours to complete.
Revenues earned for software license sales and service contracts are recorded
based on the provisions of AICPA SOP 97-2, "Software Revenue Recognition", which
shares the basic criteria of SAB No. 101.
Restructuring Liabilities
As part of the Company's efforts to streamline its operations commensurate with
its revenue base, the Company identified opportunities to reduce its cost
structure by reducing headcount and closing certain operating facilities to
conform to the Company's changing operating structure in June 1999, December
2000, and September 2001. These restructuring obligations were calculated using
information known at the date of the respective accruals based on the provisions
of EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity." Management has adjusted these obligations
over the payment periods of each restructuring plan as liabilities have been
settled and payments have been made. Management periodically reviews the
accuracy of the restructuring liabilities, and accounts for any necessary
adjustments due to changes in estimates in the statement of operations as
originally provided.
15
Accounting for Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes." This pronouncement requires using an asset and liability approach to
recognize deferred tax assets and liabilities for the tax consequences of
temporary differences by applying enacted statutory tax rates to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities. The Company has not given benefit to any deferred tax
assets or net operating losses in the previous two fiscal years due to
uncertainty of realizing these assets in future periods, except a) in the first
quarter of 2001, the Company recognized an income tax benefit related to a net
operating loss generated through March 31, 2001 that was carried back to early
years and for which a refund of taxes was received and b) in the first quarter
of 2002, Congress approved the Job Creation and Worker Assistance Act of 2002,
allowing March 31, 2002 net operating losses to be carried back five years.
Under SFAS No. 109, the effect of this change in tax law was reflected in the
March 31, 2002 financial statements as changes in tax law must be reflected in
the period of enactment. In addition, the financial statements have provided
reserves for certain tax positions taken by the Company in the March 31, 1999,
2000 and 2001 tax returns based on enacted tax laws during those periods.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Cotelligent's policy is to invest its 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.
During the quarter ended September 30, 2002, the Company invested approximately
$1,500 of cash in convertible redeemable preferred stock in Bluebook
International Holding Company, a publicly traded company. As the instrument is
convertible into a publicly traded security, the investment has market risk
which can result in fluctuations in the value. The Company looks to the publicly
traded value to determine the fair value of the investment at each reporting
date and recognizes unrealized gains or losses in the consolidated statement of
operations in accordance with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities".
Cotelligent has invested its existing cash in highly liquid money market
accounts and does not use derivative financial instruments, derivative commodity
instruments or other market risk sensitive instruments, positions or
transactions. Accordingly, the Company believes that it is not subject to any
material risks arising from changes in interest rates, foreign currency exchange
rates, commodity prices, equity prices or other market changes that affect
market risk sensitive instruments.
Item 4. Controls and Procedures
Based on the evaluation by the Chief Executive Officer and Chief Financial
Officer of the Company as of a date within 90 days of the filing date of this
quarterly report, those officers believe that the Company's disclosure controls
and procedures are reasonably effective to ensure that the information required
to be included in this report has been recorded, processed, summarized and
reported on a timely basis. There have not been any significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls and there have been no corrective actions taken with regard to
significant deficiencies and material weaknesses subsequent to the date of such
officers' evaluation.
16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are, from time to time, a party to litigation arising in the normal
course of our business. We are not presently subject to any material
litigation.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Series C Convertible Redeemable Preferred Stock Purchase
Agreement, dated as of August 19, 2002, by and between the
Bluebook International Holding Company, Mark A. Josipovich,
Daniel E. Josipovich, Daniel T. Josipovich, Dorothy E. Josipovich
and Cotelligent, Inc.
10.2 Voting Agreement, dated as of August 19, 2002, by and among the
Bluebook International Holding Company, certain holders listed on
the signature pages thereto and Cotelligent, Inc.
10.3 Right of First Refusal Agreement, dated as of August 19, 2002, by
and among the Bluebook International Holding Company, Mark A.
Josipovich, Daniel E. Josipovich, Daniel T. Josipovich, Dorothy
E. Josipovich and Cotelligent, Inc.
10.4 Investor Rights Agreement, dated as of August 19, 2002, by and
between The Bluebook International Holding Company and
Cotelligent, Inc.
10.5 Indemnification Agreement, dated as of August 19, 2002, by and
between The Bluebook International Holding Company and James
Lavelle.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Current Report on 8-K filed July 16, 2002 relating to change in
Cotelligent's certifying accountant.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COTELLIGENT, INC.
Date: January 6, 2003 /s/ Curtis J. Parker
-------------------------------------
Curtis J. Parker
Executive Vice President,
Chief Financial Officer and Treasurer
18
Certifications Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
I, James R. Lavelle, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cotelligent, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in the quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial date and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether of not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: January 6, 2003
/s/ James R. Lavelle
-------------------------------------------------
James R. Lavelle
Chairman of the Board and Chief Executive Officer
19
Certifications Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
I, Curtis J. Parker, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cotelligent, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in the quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial date and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether of not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: January 6, 2003
/s/ Curtis J. Parker
----------------------------------------------------
Curtis J. Parker
Executive Vice President and Chief Financial Officer
20