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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
(Amendment No. 3)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2001
[_] 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.
Delaware 94-3173918
(State of incorporation) (I.R.S.ID)
100 Theory, Suite 200, Irvine, CA 92612
(949) 823-1600
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.01 par value)
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 [_] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $6,407,383 based on the closing price of $0.43 of
the registrant's Common Stock as reported on the OTC Bulletin Board on March 28,
2002. The number of shares of the registrant Common Stock outstanding as of
March 28, 2002 was 14,900,891.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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Explanatory Note
On March 29, 2002, Cotelligent, Inc. ("the Company") filed its Annual Report on
Form 10-K for the fiscal year ended December 31, 2001.
On April 30, 2002, the Company filed Amendment No.1 to the Annual Report on Form
10-K for the fiscal year ended December 31, 2001 to include information related
to Items 10, 11, 12 and 13, expected to be incorporated by reference in the
Company's Proxy Statement for the 2002 Annual Meeting of Stockholders.
On May 7, 2002, the Company filed Amendment No. 2 to its Annual Report on Form
10-K for the fiscal year ended December 31, 2001 to include additional
information related to Item 11 pursuant to the Company's 1998 Long-Term
Incentive Plan during fiscal year ended December 31, 2001 for officers named in
the summary information table.
This Amendment No. 3 to the Annual Report on Form 10-K for the fiscal year ended
December 31, 2001 is being filed in order to:
.. Restate our consolidated financial statements for the fiscal periods ended
December 31, 2001 and 2000, as more fully described in Note 2 to our
consolidated financial statements included in Item 8;
.. Include the report of KPMG LLP on our consolidated financial statements as
of December 31, 2001 and 2000, and for the year ended December 31, 2001 and
the nine months ended December 31, 2000; and
.. Restate Item 6 (Selected Financial Data), Item 7 (Management Discussion and
Analysis of Financial Condition and Results of Operations) and Item 14
(Exhibits, Financial Statement Schedules, and Reports on Form 8-K).
In order to preserve the nature and character of the disclosures set forth in
such Items as originally filed, this report speaks as of the date of the
original filing, and we have not updated the disclosures in this report to speak
as of a later date. While this report primarily relates to the historical
periods covered, events may have taken place since the original filing that
might have been reflected in this report if they had taken place prior to the
original filing. All information contained in this Amendment No. 3 is subject to
updating and supplementing as provided in our reports filed with the Securities
and Exchange Commission subsequent to the date of the original filing of the
Annual Report on Form 10-K.
COTELLIGENT, INC.
FORM 10-K A
For The Fiscal Year Ended December 31, 2001
INDEX
Part I
Item 1. Business ..................................................................................... 5
Item 2. Properties ................................................................................... 16
Item 3. Legal Proceedings ............................................................................ 16
Item 4. Submission of Matters to a Vote of Security Holders .......................................... 16
Part II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters ..................... 17
Item 6. Selected Financial Data ...................................................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ........ 19
Item 8. Financial Statements and Supplementary Data .................................................. 27
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ......... 60
Part III
Item 10. Directors and Executive Officers of the Registrant ........................................... 61
Item 11. Executive Compensation ....................................................................... 62
Item 12. Security Ownership of Certain Beneficial Owners and Management ............................... 63
Item 13. Certain Relationships and Related Transactions ............................................... 64
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ............................. 67
Signatures ................................................................................... 69
PART I
Item 1. Business
Company Overview
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Cotelligent provides complete business solutions, specializing in mobile
business and Web services solutions, to extend information technology ("IT")
beyond the desktop all the way to the mobile enterprise. Our mobility business
solutions keep mobile workforces connected to their companies' business
applications. Our Web services solutions keep our clients' customers, vendors,
partners and employees connected via the Internet to a variety of information
residing in our clients' information technology infrastructures. We also provide
maintenance and support on software products licensed to our clients in
connection with solutions we develop.
As part of our complete solutions, we offer:
. Strategic IT consulting services
. Enterprise Resource Planning (ERP) and Implementation/integration
services
. Custom application development
. Sales and field force automation solutions (FastTrack(TM))
. Mobile middleware products (JASware(TM))
. Hardware and software products (partners)
. Application hosting and Vertical Solution Provider Services
. Remote support services
. Help desk and Education services
While expanding the capabilities of enterprise systems can benefit
Business-to-Business (B2B) and Business-to-Consumer (B2C) initiatives, we
believe the greatest demand today is in the Business-to-Employee (B2E) category.
This includes the management of mobile workers responsible for functions like
route sales, pre-sales, merchandising, route delivery, distribution and field
service/repair. The software and hardware used to facilitate these functions
include laptops, handheld PCs, PDAs and Web-based Customer Relationship
Management (CRM) applications. Cotelligent's complete business solutions, which
include software, hardware and information services, are focused on extending
information technology functionality to a broad spectrum of office-based and
mobile workers. These complete solutions allow mobile workers to do their jobs
more effectively from wherever they are located. They allow the client to
receive more reliable information. These solutions increase productivity from
the field in ways not experienced by the client before. We believe Cotelligent
is different from traditional software and services companies because we are
able to provide the range of products and services needed to develop complete
business solutions that employ advanced mobility and Web-based technologies.
We have expertise in a variety of industries, including consumer goods,
manufacturing, high-tech, financial services and automotive. We understand how
to build advanced technology systems that expand upon a company's existing
systems and compliment the work conducted in their user environments. We have
assembled a technical staff with a broad range of skills and industry expertise,
including business analysts, network architects, account managers and others.
The high level of technical expertise and business experience offered by
Cotelligent is an important Company differentiator in the markets in which we
compete.
Over the past year, we have positioned ourselves to leverage our foundation of
experience in enterprise, systems integration and eBusiness solutions, along
with our vertical industry experience, to take advantage of the emerging and
growing market for mobility solutions. Cotelligent has over ten years of
experience in delivering its FastTrack(TM) sales force automation solutions and
its JASware(TM) mobile middleware solutions to a variety of leading companies.
Cotelligent's enterprise software, eBusiness and Web services solutions
expertise, combined with our FastTrack(TM) and JASware(TM) offerings, uniquely
position our Company. We use a proprietary consulting project methodology to
help ensure that our clients achieve a successful result and help them make
well-informed business and technology decisions.
While we continue to pursue opportunities in eBusiness, our focus on enterprise
solutions is directed toward linking eBusiness and mBusiness solutions in the
enterprise. Our goal is to continue growing our eBusiness revenue but outpace
that growth with mBusiness revenue, which we believe should become the dominant
part of the business over the next two years. For 2001, our
largest client accounted for approximately 9.3% of our revenue, while our ten
largest clients (each over $1 million) accounted for approximately 44% of our
revenue.
5
Strategy
Cotelligent's strategy is comprised of the following components:
Build Systems Using Advanced Technology Empowering the Mobile Workforce
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IDC, a technology market research company, predicts that the Mobile Enterprise
Applications ("MEA") market will be a $150 billion industry by 2003.
Cotelligent's strategy is to take advantage of this market opportunity by
leveraging its core competencies in enterprise software, eBusiness and systems
integration, and help our clients take advantage of advances in mobile and Web
services technologies. To that end, we have already accumulated a strong base of
client experience in moving information seamlessly from back-end "connected"
application systems to front-end "semi-connected" and "disconnected" field force
and customer relations applications using our own FastTrack(TM) and JASware(TM)
solutions and application hosting services. Cotelligent has over ten years of
experience in this market. Our strategy is to use our reputation and record of
success in this area to gain a significant competitive position in the emerging
market aimed at empowering the mobile workforce.
The Company has also developed a strong base of experience in developing and
implementing Web services solutions employing both Microsoft(R) .NET and IBM
open system technologies. As with our mobile computing expertise, we help our
clients achieve success in employing .NET and open system technologies by
leveraging our significant expertise in enterprise software and systems
integration. Our experience has led us to conclude that the effective
integration and utilization of Web services solutions require us to have an
in-depth knowledge of how enterprise software, and general business applications
and functions, interact from end-to-end. Our strategy is to continue to achieve
success in developing Web services solutions in our clients' complex business
environments and leveraging this success and our reputation as this market
continues to grow in the future.
Partnerships
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To successfully execute our business strategy, Cotelligent has determined that
we must be able to offer complete business solutions to our clients. We believe
that in the increasingly interconnected world, key alliances are important. We
leverage the resources and depth that come from having strategic partnerships
with the companies that complement our capabilities. Our partners include Symbol
Technologies, IBM, Microsoft, SAP, Computer Associates, PeopleSoft, Cognos and
White Horse Interactive.
Cotelligent has partnered with companies that provide the best components for
solutions in our targeted markets. Our Partner Selection Model has been
acknowledged in 2001 by IDC as one of the best models of its kind. By carefully
choosing which companies provide the best technical solutions and the best
partnership opportunities, Cotelligent can offer the best total solution for the
best value to our clients. As we continue to evolve to a software
solution-centric company, we expect that our partnership program will be
expanded in order to enhance our ability to deliver advanced mobile computing
and Web services solutions.
Differentiation
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We intend to differentiate ourselves from our competitors in the following ways:
Invest in partnerships
Strong partnerships will help us to further develop and execute our business
strategy:
. Using partner products and technologies to compliment ours improves
"time to market" for Cotelligent solutions.
. Partners integrating JASware(TM) and/or FastTrack(TM) into their
offerings broaden revenue opportunities through channels.
. Cotelligent is able to improve gross and operating margins through
reduced costs of sales and solution delivery.
Invest in technology
Cotelligent's ability to be competitive in mobility and Web services solutions
require us to make investments in technology. These investments will ensure that
our software solutions continue to advance our clients' capabilities and, at the
same time, keep Cotelligent competitive in the market.
Leverage reputation and expertise in enterprise software and systems integration
Cotelligent's reputation for providing outstanding systems implementation and
integration services is key to our ability to ensure that new, more advanced
Cotelligent solutions are properly integrated across our clients' information
technology infrastructure.
Stress optimization in our marketing messages
Our marketing messages will increasingly focus on how Cotelligent solutions
optimize business activities from end-to-end. We will demonstrate this by
employing return on investment ("ROI") analysis and specific factors residing in
each Cotelligent target market.
6
Solutions
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Capitalizing on our experience in specific industries allows us to support
targeted companies seeking improvements in operational efficiencies and
marketplace performance ("optimization") using eBusiness, mBusiness and Web
services technology. The integration of our portfolio of products, services and
applications into specific industry areas combine to create:
. Sales Force Automation (SFA) solutions
. Field Force Automation (FFA) solutions
. eBusiness solutions
. Web services solutions
. Other specialized business software solutions
By implementing Cotelligent's solutions, our clients are able to:
. Cut costs by automating manual processes
. Improve productivity and timeliness of data throughput to and from
mobile workers
. Increase competitive advantage
At the center of our strategy is taking our most effective solutions to market.
In determining this, we use a variety of sources for market analysis and data,
including Gartner Group and IDC. This information has helped Cotelligent target
the most effective components that create the most value (for competitive
positioning) and maximize our profitability. In addition, this approach allows
us to combine and package our software solutions and services, price them
competitively and deliver them as a complete solution to the marketplace.
Below is a description of each of these areas:
Enterprise Solutions
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Our experience in this field distinguishes us from our competitors by giving us
expertise to offer our clients a reliable and scalable framework for managing
and moving business data across a variety of platforms. We integrate client
systems across their organizations, build better customer relationships, improve
back-office efficiencies, share knowledge and generally ensure that software
applications in their eBusiness and mBusiness environments work together in form
and function within their enterprise.
eBusiness Solutions
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This portion of our business is built from our experience and expertise in many
facets of eBusiness application design and creation. We can facilitate the
development and execution of a viable plan that integrates the Internet into new
and/or existing business processes, systems and cultures.
Web Services Solutions
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We are a leader in the technologies most popular in the development and
deployment of Web services - most notably, IBM WebSphere(R) and Microsoft(R)
..NET. As a new breed of pervasive applications, these Web services and
Cotelligent's highly skilled team help our clients promote the publication,
location and promotion of never before possible IT services to anyone with an
Internet connection.
mBusiness and Mobility Solutions
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This field continues to gain significant momentum from our knowledge and
expertise in wireless data applications. We are enhancing our portfolio of
mBusiness solutions through in-house development of our JASware(TM) middleware
and FastTrack(TM) framework. We continue to form strategic alliances with key
hardware and application development providers to strengthen our solution
offerings and capabilities.
7
Value Proposition
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We promote the following advantages when differentiating our solutions from
those of our competitors:
Our track record is verifiable: We apply expertise in complex environments to
deliver solutions on time and within budget.
Our solutions are designed for our clients' industries: We focus on our clients'
needs to achieve their potential.
Our business experts combine technical experience with vertical industry
expertise: We combine high levels of expertise in both Microsoft-based and open
systems environment with over 26 years of experience in vertical industry
markets.
Our framework approach shortens development life cycle: We reduce risk and
development time by using proven components and methodologies.
Our partnerships are carefully managed: We choose and monitor these
relationships in a way that ensures each delivers application and industry
solutions that best fit our clients' business needs.
Our approach is to help our clients achieve self-sufficiency: We are dedicated
to knowledge transfer and remain accessible as our clients' businesses evolve.
Services
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The integrated set of services we provide to our clients include:
Strategic IT Consulting Services
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Analysis of business organization and processes. After reviewing the technology
landscape to determine strengths and weaknesses inherent in our clients' current
environment, we provide recommendations that address their infrastructure to
hardware needs. This assessment includes defining, analyzing, reviewing and
affirming functional and non-functional requirements. We make our clients more
competitive in the markets in which they do business by focusing on their
business strategy and process, technology and personnel transformation.
Enterprise Resource Planning and Implementation/integration Services
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Implementation, integration and optimization of Enterprise Resource Planning
applications, including customization and configuration. We optimize
manufacturing, order entry, accounting, purchasing, warehousing, transportation
and human resource systems to make businesses more responsive and more
profitable.
Application Development
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Custom application development
Development of open system or Microsoft architectured business applications. In
the Web environment, these include eBusiness, ePortal and Web services
solutions.
Industry application framework solutions
Development of industry-specific and company-specific components layered onto
the FastTrack(TM) application framework, which includes communication and mobile
workforce management capabilities. The framework approach begins with a core
application of base functionality that is faster and less risky to complete
compared with a fully customized application.
Mobile Middleware Products (JASware(TM))
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Management of the synchronization and flow of information between a variety of
devices and/or host systems (all in the same system of enterprise) in a wired or
unwired environment. Our middleware product mobilizes enterprise systems while
managing assets on the move.
Hardware and Software Products (Partners)
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Partners' products, services and applications that complement and extend our
products, services and applications to create a more complete end-to-end
business solution.
Application Hosting and Vertical Solution Provider Services
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8
Our Pervasive Data Center provides a suitable environment for the hosting and
operational support of Sales Force Automation, Field Force Automation, mobility
and eBusiness applications. Support is available 24 hours a day, 7 days a week,
to monitor and manage the accessibility and functionality of these applications.
Remote Support Services
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Staging, configuration, distribution and asset management services assist
clients with deployment of new mobile solutions. On-going help desk services are
available to support users around the clock.
Education and eLearning Services
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Education services offer our clients a variety of products and solutions that
can be bundled to meet any business's education and training needs, whether it
is training end users on a new field force application or training the trainers.
Specialized Consulting Services
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Our technological professionals provide the necessary skills to assist our
clients in the completion of their internal development projects or ongoing
operational needs.
Market Conditions
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A study by Gartner Group, a market research company, shows that in North
America, the largest 20 IT professional services providers, which are referred
to as Tier 1 providers, account for approximately 30 percent of the entire
market. By default, about 70 percent of the North American market demand is
satisfied by smaller, or Tier 2, IT professional services providers. Tier 2 IT
professional services providers are companies with less than $500 million in
revenue per annum and deliver some or all the IT professional service lines.
These service lines are combined with technology products (for example, software
or hardware) to create an IT solution. Examples of IT solutions include Customer
Relationship Management, Sales Force Automation, Field Force Automation, data
warehousing, business intelligence, eCommerce, Enterprise Resource Planning,
knowledge management and Supply Chain Management.
Tier 2 IT professional services providers focus on delivering back-office,
project-based services requiring technical architecture and design, project
management, business solution architecture, application development, systems
integration and Internet services. They are not focused on delivering business
strategy consulting or staff augmentation services. eCommerce solutions, on
average, account for 28 percent of IT professional services revenue of the Tier
2 companies surveyed by Gartner Group, followed by Customer Relationship
Management, human resources and business intelligence solutions accounting for
10 percent, 9 percent and 6 percent, respectively. Similarly, Tier 2 companies
that deliver consulting and systems integration services, on average, derive
about 40 percent of their revenue from clients, earning less than $500 million
per annum.
Tier 2 IT professional services providers have grown in importance throughout
most of 2001 for three primary reasons:
. The rise and subsequent fall of pure-play eBusiness services companies
has left a major IT professional services delivery gap.
. Research indicates that the small and mid-size business market in the
United States may increase spending on front office and back-office
eBusiness initiatives over the next few years.
. The absence of a technological catalyst, such as client/server,
Enterprise Resource Planning, Y2K and eBusiness with the potential to
disrupt markets, has enabled Tier 2 competitors to effectively catch
up to Tier 1 competitors through the development of reusable templates
and solutions that also require strong systems integration skills.
9
Marketing
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We initiated a number of important marketing initiatives during 2001. These
marketing initiatives were focused on helping the Company transform its identity
and build its brand in the markets in which it competes.
. The launch of our revamped Web site to reflect the re-branding of
Cotelligent, subsequent integration of new information, including our
JASware(TM) mobile solutions and FastTrack(TM) offerings.
. Brand building through all printed and online materials to support our
offerings and positioning as a mobility solutions provider.
. Brand building through tradeshow presence at partner, targeted
vertical market and similar technology events.
. By employing a PR firm, the Company generated numerous articles in
industry publications and several speaking opportunities at industry
events improving brand awareness.
. Regular internal communications to employees of Cotelligent announcing
events, client wins and successes to promote involvement and build
culture.
We employ an integrated marketing approach that links planning and the launch of
new solutions, products and service offerings with active marketing campaigns to
support them. Our first step toward this was to organizationally link our
Business Development and Marketing functions together.
Sales
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It is important to educate, orient and measure our sales force utilizing
consistent benchmarking procedures. In 2001, we continued the development of
numerous industry-specific sales kits (Client Engagement Guides, or "CEGs") for
each of our target vertical markets. In addition, we have introduced
solution-based CEGs that provide detailed information on how to effectively sell
Cotelligent software solutions and services.
The CEGs provide Cotelligent with market intelligence, enabling our sales teams
to focus on specific market niches. Further, these valuable documents accelerate
the education of new sales Account Executives as they join the Company. Using
these guides, we have advanced the effectiveness of our sales force in the
following ways:
. Establishing a working knowledge of Cotelligent, our core
competencies, market focus and value proposition. Our Account
Executives are now equipped to approach prospective clients with a
greater understanding of their industry and issues, and articulate
Cotelligent's value proposition.
. Building valued relationships with clients by solving today's problems
and providing them with a vision/strategy for the future.
. Accelerating sales opportunities by focusing our selling activities on
discreet market segments in Cotelligent core competencies.
. Increasing revenue.
Our solutions and services are sold by our direct sales force as well as by our
channel sales force. We also utilize telesales and telemarketing sales in order
to generate leads and open new opportunities.
10
Competition
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In the emerging marketplace of mobility solutions, there are few standards
established and a number of ways to extend the functionality of the enterprise
IT system. Therefore, each competitor has determined the scope of the solution
they provide and the components used to build them. Thus, Cotelligent has a
large number of competitors in part determined by the industry and/or technology
niche needed for the particular client's business. In other cases, the
competitor is left over from the days of a more traditional IT consulting model.
For example, mobilization often requires a middleware product. In this area, our
JASware(TM) products compete with companies like Synchrologic and Aether
Systems. The development of the mobile business application requires in-depth
industry knowledge and the ability to customize applications. In the consumer
goods market, we compete with companies like SAP, MEI and Thinque. To make a
mobile solution efficient, it should be integrated into the legacy systems or
added as an enterprise Web service. In this area, we may compete with larger
system integrators or a "Big Five" accounting firm.
To compete successfully, we must be able to deliver leading-edge solutions with
speed and competence, develop and market cost-effective offerings that meet
changing client needs, and respond rapidly to evolving technology by
continuously training our technical and sales consultants.
Registrant Information
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Cotelligent was incorporated in February 1993 under the laws of the State of
California as TSX, a California corporation. In November 1995, we changed our
jurisdiction of incorporation to Delaware and our name to Cotelligent Group,
Inc. In September 1998, we changed our name to Cotelligent, Inc. Unless the
context otherwise requires, references to "Cotelligent," "Company," "we," "us"
and "our" refer to Cotelligent, Inc., a Delaware corporation.
Our headquarters are located at 44 Montgomery St., Suite 4050, San Francisco,
California 94104 and our telephone number is (415) 439-6400.
Employees
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At December 31, 2001 we had 275 employees, including a technical staff of
approximately 165 IT professionals.
11
Risk Factors
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The following discussion contains certain cautionary statements regarding
Cotelligent, Inc.'s business and results of operations, which should be
considered by our stockholders or any reader of our business and results of
financial information disclosure. This information is provided to enable us to
avail ourselves of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. The following factors should be considered in
conjunction with any discussion of our operations or results, including any
forward-looking statements as well as comments contained in press releases,
presentations to securities analysts or investors and all other communications
made by us or our representatives. We intend to use the following words or
variations of the following words to identify forward-looking statements:
anticipates, believes, expects, estimates, intends, plans, projects and seeks.
In making these statements, we disclaim any intention or obligation to address
or update each factor in future filings or communications regarding our business
or results, and we do not undertake to address how any of these factors may have
caused changes to discussions or information contained in previous filings or
communications. In addition, any of the matters discussed below may have
affected our past results and may affect future results, so that our actual
results may differ materially from those expressed here and in prior or
subsequent communications.
If we are unable to generate positive cash flow and return to profitability in
the near term, we may exhaust our capital.
We have experienced a general reduction in demand for our services. At the same
time, we have taken action to divest non-strategic operations and have used the
cash proceeds from these divestitures to pay off debt obligations. As a result,
we have had adequate working capital to fund our needs as we restructured the
business. Nevertheless, we realize these cash resources are limited and that if
our business does not begin to generate revenue, a positive cash flow and return
to profitability in the near term, our on-going liquidity and financial
viability could be materially and adversely affected.
If the eBusiness, mBusiness and Web services markets do not continue to develop,
or if their development is delayed, our business could be harmed.
Our future revenues will depend on the development of the eBusiness, mBusiness
and Web services markets. The failure of these markets to materialize, or a
delay in the development of these markets, could seriously harm our business.
The success of eBusiness depends substantially upon the widespread adoption of
the Internet as a primary medium for commerce, business applications and
communications. Critical issues concerning the commercial use of the Internet,
such as security, reliability, cost, accessibility and quality of service
continue to evolve and unforeseen factors may negatively affect the growth of
Internet use or the attractiveness of commerce and business communications over
the Internet. The success of mBusiness depends on acceptance of wireless data
applications for commercial use, the quality of telecommunications and
availability of devices supporting wireless applications. Critical issues in the
wireless industry include security, cost, accessibility and reliability of
service, and further development of wireless technology standards.
We have a limited operating history in the mBusiness and Web services markets.
The uncertainty of our future performance in these markets may impact our
ability to market and sell mBusiness and Web services solutions to prospective
clients, which would adversely affect our operating results.
Our future growth and ability to differentiate Cotelligent from its competition
is, in part, dependent upon our success in developing, marketing and selling our
mobile management solution services.
We are developing, marketing and selling mobile management solutions and
services. Some of these efforts in the past year have not been successful. In
addition, our resources in the mobile management solution area are limited.
Nevertheless, we continue to focus on this business as it represents significant
opportunity. If we are not able to stay ahead of technical advancements in the
market or deliver these solutions and services, our operating results could
suffer.
12
Our JASware(TM) and FastTrack(TM) applications may not be accepted by the
market.
We have recently deployed our JASware(TM) Web-enabled mobile management software
and our FastTrack(TM) mobile solutions addressing field force automation, and
these software applications are an important part of our strategy. The use of
JASware(TM) and FastTrack(TM) in client solutions may fail to gain market
acceptance due to a variety of factors, many of which are outside our control.
These factors include:
. Client preferences;
. Competition from companies offering and selling similar solutions and
services;
. Introduction of new technologies not compatible with our existing
solutions and services that render our offerings obsolete;
. Actual or perceived quality and usefulness issues that negatively
impact the Company's prospects.
If our software applications are not accepted by the market, our business could
be adversely affected.
Our software applications may not work as intended.
Part of our strategy is to provide synchronization and transfer of information
between disparate systems, platforms and devices, and rapidly implement mobile
business solutions. If our software products, including our JASware(TM) products
and FastTrack(TM) framework, do not work as intended, we will be unable to
provide these solutions to our clients and our business would be adversely
affected.
We may need to invest heavily in research and development to keep our software
applications viable.
We may need to invest heavily in research and development to keep our software
applications viable in the rapidly changing markets in which we operate. This
research and development effort may require significant resources and may not be
successful. The investment of significant resources in research and development
could adversely affect our liquidity. In addition, our business may be adversely
affected if our investment does not result in the development of software
applications that can be used in providing IT solutions to our clients.
We may be unable to protect our proprietary technology.
Our success in providing mBusiness and Web services solutions depends, in part,
upon our proprietary software applications and other intellectual property
rights. We rely on a combination of trade secrets, nondisclosure, other
contractual arrangements, copyright and trademark laws to protect our
proprietary rights. We enter into confidentiality agreements with our employees,
consultants and clients, and limit access to and distribution of our proprietary
information. We cannot be certain that the steps we take in this regard will be
adequate to deter misappropriation of our proprietary information or that we
will be able to detect unauthorized use and take appropriate steps to enforce
our intellectual property rights. In addition, although we believe that our
services and products do not infringe on the intellectual property rights of
others, infringement claims may be asserted against us in the future, and, if
asserted, these infringement claims may be successful. A successful claim
against us could materially adversely affect our business and results of
operations.
We may not be able to establish successful partnerships or strategic alliances,
and partnerships and strategic alliances we do establish may not be successful.
Part of our strategy is to form partnerships and strategic alliances with
entities that have complementary products, services or technologies which can
help us provide complete IT solutions to our clients. Even if we identify
suitable candidates, we may not be able to form partnerships or alliances on
reasonable commercial terms. In addition, any partnerships or alliances we do
establish may not complement our business or help us provide IT solutions to our
clients. If we fail to establish successful partnerships or strategic alliances,
our ability to provide clients with complete IT solutions could be adversely
affected.
We are subject to rapid changes in technology and client preferences.
Our market is characterized by rapidly changing technology, changes in client
requirements and preferences, frequent new product and service announcements,
and evolving new industry standards and practices that could render our existing
proprietary technology obsolete. Our success will depend, in part, on our
ability to acquire or license leading technologies useful in our business;
enhance
13
our existing software solutions; develop new software solutions and technology
that address the increasingly sophisticated and varied needs of existing and
prospective clients; and respond to technological advances and evolving industry
standards and practices on a cost-effective and timely basis. The development of
proprietary technology entails significant technical, financial and business
risks. To be successful, we must adapt to the rapidly changing market by
continually improving the performance and reliability of our software
applications. We could also incur substantial costs to modify our software
applications to adapt to these changes. Our business could be adversely affected
if we incurred significant costs without adequate results.
Capacity constraints may restrict the use of the Internet as a commercial
marketplace, resulting in decreased demand for our products.
The Internet infrastructure may not be able to support the demands placed on it
by increased usage or by the transmission of large quantities of data. Other
risks associated with commercial use of the Internet could slow its growth,
including:
. Outages and other delays resulting from inadequate network
infrastructure;
. Slow development of enabling technologies and complementary products;
. Limited availability of cost-effective, high-speed access.
Delays in the development or adoption of new equipment standards or protocols
required to handle increased levels of Internet activity, or increased
governmental regulation, could cause the Internet to lose its viability as a
means of communication among participants in the supply chain, resulting in
decreased demand for our services and products.
We are dependent on continued expansion of the Internet infrastructure.
The recent growth in Internet traffic has caused frequent periods of decreased
performance, requiring Internet service providers and users of the Internet to
upgrade their infrastructures. If Web usage continues to grow rapidly, the
Internet infrastructure may not be able to support the demands placed on it by
this growth and its performance and reliability may decline. If these outages or
delays on the Internet occur frequently, overall Web usage could grow more
slowly or decline. Our ability to increase the speed and scope of our services
to customers is ultimately limited by and dependent upon the speed and
reliability of both the Internet and the capacity of the computer equipment used
by our customers. Consequently, the emergence and growth of the market for our
services is dependent on improvements being made to the entire Internet and to
computer equipment in general to alleviate overloading and congestion.
We are subject to government regulation and legal uncertainties.
The Internet is rapidly changing, and federal and state regulation relating to
the Internet is evolving. Currently, there are few laws or regulations directly
applicable to access to the Internet. Due to the increasing popularity of the
Internet, it is possible that laws and regulations may be enacted covering
issues such as user privacy, pricing, taxation, content and quality of products
and services. The adoption of such laws or regulations could reduce the rate of
growth of the Internet, which could materially and adversely affect our
business.
Our clients may cancel or delay spending on IT solution initiatives because of
the current economic climate.
Since the second half of 2000, many companies have experienced financial
difficulties or uncertainty and have begun to cancel or delay spending on
technology consulting initiatives as a result. Furthermore, the severe financial
difficulties which many start-up Internet companies have experienced has further
reduced the perceived urgency by larger companies to begin or continue
technology initiatives. If large companies continue to cancel or delay their
technology consulting initiatives because of the current economic climate, or
for other reasons, our business and results of operations could be adversely
affected.
Our revenues and financial condition may be adversely affected by the loss of
business from significant clients.
Our revenues are primarily derived from services provided in response to client
requests or on an assignment-by-assignment basis. Our engagements, generally
billed on a time and materials basis, are terminable at any time by our clients,
generally without penalty. In addition, for the year ended December 31, 2001,
our largest client and our ten largest clients accounted for approximately 9.3%
and 44%, respectively, of our revenues. Our clients may not continue to engage
us for projects or use our services at historical levels, if at all. If we lose
a major client or suffer a reduction in business, our revenues and financial
condition may be adversely affected.
14
If we fail to continue to attract and retain qualified IT professionals, it
could harm our business.
Our success depends upon our ability to attract, hire and retain technical
consultants, software developers, software engineers and project managers who
possess the necessary skills and experience to conduct our business. We
continually identify, screen and retain qualified IT professionals to keep pace
with client demand for rapidly evolving technologies and varying client needs.
We compete for these professionals with our clients, other providers of software
solutions and services, systems integrators, providers of outsourcing services,
computer systems consultants and temporary staffing companies in a variety of
industry segments. Competition for individuals with proven technical skills is
intense. In the past, we have experienced difficulties in identifying and
retaining qualified IT professionals and, in some instances, we were unable to
meet requests for services. We cannot assure that qualified IT professionals
will continue to be available to us in sufficient numbers.
Our success is dependent on our key management personnel.
Our operations are dependent on the continued efforts of our executive officers
and senior management. In addition, we will likely depend on the senior
management of any business we may merge with or acquire in the future. If any of
these people are unable or unwilling to continue in his or her present role, or
if we are unable to hire, train and integrate new management personnel
effectively, our business could be adversely affected. We do not currently
maintain key person life insurance covering any of our executive officers or
other members of senior management.
We face intense competition that could adversely affect our ability to generate
revenue and profitability.
The IT consulting services industry is highly competitive, fragmented and
subject to rapid change. Our competitors include local, regional and national
software firms, IT consulting firms, system integration firms, professional
service divisions of applications software firms and the professional service
groups of computer equipment companies. We also compete with management
information outsourcing companies, "Big Five" accounting firms and other
management consulting firms. Many of our competitors have greater technical,
financial or marketing resources than we have. In addition, we intend to enter
new markets and expand our solutions and services offerings through internal
growth and acquisitions, and we expect to encounter additional competition from
established companies in these areas. Further, traditional purchasers of
consulting services have consolidated their vendor lists to a smaller number of
preferred solutions and service providers. If we are unable to become a
preferred solutions and service provider, our ability to acquire new clients and
retain existing clients could be adversely affected. If we cannot compete
effectively in our industry, our revenues and profitability could be adversely
affected.
We do not have a credit facility in place as we operate from existing cash
resources.
When we paid off our bank loan on June 30, 2000, our credit facility was
terminated. Prior to June 30, 2000, we have relied on our credit facility and
positive cash flow to satisfy our liquidity needs. We have not secured
additional financing and plan to continue operating using our existing cash
resources and cash resources generated from the collection of our accounts
receivable. Should we find ourselves in need of more cash, we would have to seek
financing and might, as a result, have a short-term liquidity problem.
Additionally, we may not be successful in securing financing, or if successful,
the terms may not be advantageous to us.
If we are unable to increase our revenues through the deployment of our sales
and business development organization, our future growth could suffer.
We re-organized our sales force in 2000, which resulted in significant turnover
and the hiring of a number of new sales people. Although we feel this new sales
team is better suited than our prior sales force to develop the business we are
targeting, we recognize there is an extensive ramp-up time associated with a new
sales force and market conditions for our services are competitive. If this new
team is not successful in growing the number of profitable client engagements in
the near term, our revenues and profitability may not improve. Consequently, our
financial performance could be materially and adversely affected.
We may make acquisitions, which if proven unsuccessful, could negatively affect
our future profitability and growth.
Although our strategy is focused on internal growth, it is possible that we
might make acquisitions. We may not be able to identify, acquire or profitably
manage additional businesses without substantial costs, delays or other
problems. In addition, acquisitions may involve a number of special risks,
including: (1) diversion of management's attention; (2) failure to retain key
acquired personnel;
15
(3) risks associated with unanticipated events, circumstances or legal
liabilities; and (4) amortization of acquired intangible assets. Some or all of
these risks could adversely affect our operations and financial performance. For
example, client satisfaction or performance problems at a single acquired
business could adversely affect our reputation and financial results. Further,
any businesses acquired in the future may not achieve anticipated revenues and
earnings.
We face potential liability due to the project nature of our business which
often requires our IT professionals to work at our clients' place of business.
Our IT professionals are often deployed in the workplace of other businesses. As
a result of this activity, we could be subject to possible claims of
discrimination and harassment, employment of illegal aliens or other similar
claims. These types of claims could result in negative publicity for us and
money damages or fines. Although we have not had any significant problems in
this area, we could encounter these problems in the future.
We are also exposed to liability for actions of our IT professionals while on
assignment, including damages caused by employee errors, misuse of
client-proprietary information or theft of client property. Because of the
nature of our assignments and the related potential liability, we cannot assure
that insurance we maintain, if continually available, will be sufficient in
amount or scope to cover a loss.
Item 2. Properties
Our principal executive offices and our continuing operating subsidiaries are
located in 8 facilities with an aggregate of approximately 77,480 square feet
and are leased at aggregate current monthly rents of approximately $0.1 million
with no lease commitment extending past the year 2007. We believe that our
properties are adequate for our needs. Furthermore, we believe that suitable
additional or replacement space will be available when required on terms we
believe will be acceptable.
Item 3. 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 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders.
16
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The following table sets forth, for the periods indicated, the high and low
sales prices for the Common Stock. Since October 11, 2001 the Common Stock has
been listed on the OTC Bulletin Board under the symbol "CGZT," prior to which it
was listed on the NYSE under the symbol "CGZ".
Quarter End
----------------------------------------------------------------------------------
Fiscal Year Ended Mar 31, 2000 June 30 Sept 30 Dec 31 Mar 31
----------------------------------------------------------------------------------
Common stock price per share:
High $ 15.31 $ 7.81 $ 6.94 $ 6.69
Low 5.63 3.50 2.88 4.25
----------------------------------------------------------------------------------
Nine Months Ended Dec 31, 2000 June 30 Sept 30 Dec 31 Mar 31
----------------------------------------------------------------------------------
Common stock price per share:
High $ 7.25 $ 5.56 $ 3.44
Low 3.75 3.06 0.63
----------------------------------------------------------------------------------
Fiscal Year Ended Dec 31, 2001 Mar 31 June 30 Sept 30 Dec 31
----------------------------------------------------------------------------------
Common stock price per share:
High $ 5.00 $ 0.95 $ 0.99 $ 0.32
Low 0.58 0.40 0.12 0.10
----------------------------------------------------------------------------------
Fiscal Year Ended Dec 31, 2002 Mar 31 June 30 Sept 30 Dec 31
----------------------------------------------------------------------------------
Common stock price per share:
High $ 0.50
Low 0.25
On March 28, 2002, the last reported sales price of the Common Stock, as
reported on the OTC Bulletin Board, was $0.43 per share. On March 28, 2002,
there were 784 stockholders of record of the Common Stock.
Item 6. Selected Financial Data
The Company historically operated on an April 1 to March 31 fiscal year. In July
2000, the Company announced a change in its fiscal year end to December 31 from
March 31, resulting in a nine-month transition period from April 1, 2000 through
December 31, 2000.
The selected financial data with respect to Cotelligent's consolidated
statements of operations for the year ended December 31, 2001 and the nine
months ended December 31, 2000 and with respect to the consolidated balance
sheets as of December 31, 2001 and 2000 have been derived from Cotelligent's
financial statements which have been audited by KPMG LLP.
The selected financial data with respect to Cotelligent's consolidated
statements of operations for the years ended March 31, 1998, 1999 and 2000 and
with respect to the consolidated balance sheets as of March 31, 1998, 1999 and
2000 have been derived from Cotelligent's financial statements which have been
audited by Arthur Andersen LLP.
As discussed in Item 7 and Item 8 of this amended Annual Report on Form 10-K/A
and in Note 2 of our consolidated financial statements, we have restated our
previously audited consolidated statements for the fiscal year ended December
31, 2001 and the nine month transition period ended December 31, 2000. The
effects of these restatements are reflected in this selected consolidated
financial data. The following selected financial data should be read in
conjunction with the financial statements, related notes and other financial
information of the Company included elsewhere herein. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations".
17
SELECTED FINANCIAL DATA
(In thousands, except share data)
Nine Months Ended
Year Ended December 31, December 31, Year Ended March 31,
------------------------ ----------------------- ------------------------------------
Restated Restated Restated
Statement of Operations Data (1)(2): 2001 2000 2000 1999 2000 1999 1998
------------ ----------- ----------- ---------- ----------- ----------- -----------
Revenues .............................. $ 45,447 $ 93,342 $ 66,042 $ 78,264 $ 105,564 $ 88,739 $ 59,202
Cost of services ...................... 31,976 63,496 44,759 51,258 69,995 55,730 39,303
----------- ----------- ----------- ---------- ----------- ----------- -----------
Gross profit ........................ 13,471 29,846 21,283 27,006 35,569 33,009 19,899
Research and development costs ........ 862 - - - - - -
Selling, general and administrative
expenses ............................ 32,332 53,577 41,238 32,787 45,126 27,479 21,273
Impairment of long-lived assets ....... 4,562 42,450 42,450 - - - -
Restructuring charge .................. 2,436 1,620 1,620 - - - -
Non-recurring transaction costs ....... - - - - - - 214
----------- ----------- ----------- ---------- ----------- ----------- -----------
Operating income (loss) ............... (26,721) (67,801) (64,025) (5,781) (9,557) 5,530 (1,588)
Other income (expense) ................ (73) (2,642) (1,360) (2,474) (3,756) 128 (684)
----------- ----------- ----------- ---------- ----------- ----------- -----------
Income (loss) before provision for
income taxes ........................ (26,794) (70,443) (65,385) (8,255) (13,313) 5,658 (2,272)
Benefit (provision) for income taxes .. 3,455 9,447 7,677 2,890 4,660 (2,268) 1,201
----------- ----------- ----------- ---------- ----------- ----------- -----------
Income (loss) from continuing
operations .......................... (23,339) (60,996) (57,708) (5,365) (8,653) 3,390 (1,071)
----------- ----------- ----------- ---------- ----------- ----------- -----------
Operating income (loss) from
discontinued operations, net of
income taxes of $ -, $1,208, $ -,
$6,587, $5,379, $7,951, $8,459 ...... - 2,244 - (12,234) (9,990) 11,926 7,502
Gain (loss) on sale of discontinued
operations, net of income taxes
of $ -, $12,744, $12,744 ............ (190) 19,541 19,541 - - - -
----------- ----------- ----------- ---------- ----------- ----------- -----------
Income (loss) from discontinued
operations .......................... (190) 21,785 19,541 (12,234) (9,990) 11,926 7,502
----------- ----------- ----------- ---------- ----------- ----------- -----------
Net income (loss) ..................... $ (23,529) $ (39,211) $ (38,167) $ (17,599) $ (18,643) $ 15,316 $ 6,431
=========== =========== =========== ========== =========== =========== ===========
Earnings per share
Basic -
Income (loss) from continuing
operations .......................... $ (1.55) $ (4.02) $ (3.79) $ (0.38) $ (0.60) $ 0.24 $ (0.09)
Income (loss) from discontinued
operations .......................... (0.01) 1.44 1.28 (0.87) (0.70) 0.85 0.65
Net income (loss) ..................... $ (1.56) $ (2.58) $ (2.51) $ (1.25) $ (1.30) $ 1.09 $ 0.56
=========== =========== =========== ========== =========== =========== ===========
Diluted -
Income (loss) from continuing
operations .......................... $ (1.55) $ (4.02) $ (3.79) $ (0.38) $ (0.60) $ 0.24 $ (0.09)
Income (loss) from discontinued
operations .......................... (0.01) 1.44 1.28 (0.87) (0.70) 0.84 0.64
=========== =========== =========== ========== ============ =========== ===========
Net income (loss) ..................... $ (1.56) $ (2.58) $ (2.51) $ (1.25) $ (1.30) $ 1.08 $ 0.55
=========== =========== =========== ========== ============ =========== ===========
Weighted average number of
shares outstanding
Basic ................................ 15,075,546 15,173,898 15,230,969 14,060,481 14,298,693 14,078,068 11,485,393
Diluted .............................. 15,075,546 15,173,898 15,230,969 14,060,481 14,298,693 14,236,786 11,610,339
Restated
December 31, March 31,
---------------------- -----------------------------------
2001 2000 2000 1999 1998
--------- --------- --------- --------- ---------
Balance Sheet Data:
Working capital .................... $ 26,197 $ 36,861 $ 43,047 $ 97,614 $ 79,025
Total assets ....................... $ 36,080 $ 65,805 $ 159,527 $ 158,374 $ 103,335
Long-term debt ..................... $ - $ - $ 52 $ 28,191 $ 171
Stockholders' equity ............... $ 24,964 $ 48,794 $ 85,980 $ 107,833 $ 90,339
(1) During fiscal 1998, the Company acquired four businesses accounted for
under the pooling-of-interests method (the "Pooled Companies") and has
restated its financial statements for all periods to present financial data
as if Cotelligent and the Pooled Companies had always been members of the
same operating group. In addition, during the fiscal years ended March 31,
1998, 1999 and 2000, the Company acquired ten businesses accounted for under
the purchase method (the "Purchased Companies"). The consolidated financial
statements include the operating results of the Purchased Companies
subsequent to their respective acquisition dates. Prior to March 31, 2000,
the Company entered into a plan to divest its IT staff augmentation
business. Accordingly, the accompanying financial data have been prepared to
present as discontinued operations the Company's IT staff augmentation
business for all periods presented.
(2) On August 8, 2000, the Company contributed cash and its Philadelphia-based
operation to a joint venture, bSmart.to LLC for 50% ownership. On December
6, 2000, the Company exercised its right to terminate the relationship under
the joint venture agreement, and consequently, the net assets of the
Philadelphia-based operation, including cash and another subsidiary of the
joint venture, JAS Concepts, reverted back to the Company. Accordingly,
during the period of August 8 through December 6, 2000, the Company's
investment in the joint venture was accounted for on the equity method of
accounting. Prior to August 8, 2000 and after December 6, 2000, the results
of the Philadelphia-based operation were consolidated with the accounts of
the Company.
18
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cotelligent was formed in February 1993 to acquire, own and operate IT
consulting services businesses. Cotelligent was a non-operating entity until
1996 when it first began to acquire businesses. The Company historically
operated on an April 1 to March 31 fiscal year. In July 2000, the Company
changed its fiscal year to December 31, resulting in a nine-month transition
period from April 1, 2000 through December 31, 2000.
Prior to March 31, 2000, the Company entered into a plan to divest its IT staff
augmentation business. Accordingly, the Selected Financial Data of Cotelligent
has been restated to present as discontinued operations the Company's IT staff
augmentation business for all periods presented.
On August 8, 2000, the Company contributed cash and its Philadelphia-based
operation to a joint venture, bSmart.to LLC, for 50% ownership. On December 6,
2000, the Company exercised its right to terminate the relationship under the
joint venture agreement, and consequently, the net assets of the
Philadelphia-based operation, including cash and another subsidiary of the joint
venture, JAS Concepts, reverted back to the Company. Accordingly, during the
period of August 8 through December 6, 2000, the Company's investment in the
joint venture was accounted for on the equity method of accounting. Prior to
August 8, 2000 and after December 6, 2000, the results of the Philadelphia-based
operation were consolidated with the accounts of the Company.
Cotelligent provides IT consulting and also provides maintenance, support and
hosting on software products it licenses. The majority of the IT consulting
services 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. 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. 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 associated with software licensing, related
maintenance and consulting services are recognized once a contract is signed,
delivery has been made and collectibility is probable.
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
--------------------------------------------------------------------------------
As previously disclosed on July 10, 2002, we terminated Arthur Andersen LLP and
engaged KPMG LLP as our independent public accountants. During the course of our
quarterly review for the three months ended June 30, 2002, we determined that it
was necessary to engage KPMG to re-audit our consolidated financial statements
for the year ended December 31, 2001 and the nine month transition period ended
December 31, 2000 because we identified potential errors in those previously
reported consolidated financial statements. In the course of the re-audit, we
concluded that certain errors in our consolidated financial statements needed to
be corrected. Accordingly, the Company has restated the consolidated financial
statements as of and for the fiscal year ended December 31, 2001 and the nine
months ended December 31, 2000 and the notes thereto included in this amended
Annual Report on Form 10-K/A. For additional information regarding the
restatement, please refer to Note 2 to the consolidated financial statements
included in Item 8.
19
Results of Operations (in thousands)
--------------------------------------------------------------------------------
For comparability purposes, the following discussion will make reference to
comparisons between the year ended December 31, 2001 and the year ended December
31, 2000, and the nine-month periods ended December 31, 2000 and December 31,
1999. The Company believes that these comparisons are meaningful as they
represent identical period-over-period comparisons.
Results for the year ended December 31, 2000, which have been restated, and the
nine months ended December 31, 1999 are unaudited. The Company changed its year
end to December 31 from March 31 and reported audited results for the nine month
transition period ended December 31, 2000 in its Transition Report on Form 10-K.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
(Unaudited)
Revenues
--------------------------------------------------------------------------------
Revenues decreased during the year ended December 31, 2001 by $47,895, or 51%,
to $45,447 from $93,342 in the year ended December 31, 2000. The decrease was
due to a general reduction in demand for services due to softening in the market
coupled with the Company's evolution from providing general IT consulting
services towards offering mobile workforce management solutions.
Gross Profit
--------------------------------------------------------------------------------
Gross profit decreased in the year ended December 31, 2001 by $16,375, or 55%,
to $13,471 from $29,846 in the year ended December 31, 2000. The decrease was
due to a general reduction in demand for services due to softening in the market
coupled with the Company's evolution from providing general IT consulting
services towards offering mobile workforce management solutions. Gross profit as
a percentage of revenues decreased to 30% from 32% primarily due to lower
utilization of salaried billable staff caused by a downturn in demand for
services.
Research and Development Costs
--------------------------------------------------------------------------------
Research and development costs were $862 for the year ended December 31, 2001.
During the year ended December 31, 2001, the Company created a dedicated team of
people solely focused on research and development activities associated with
mobile workforce management and Web services solutions.
Selling, General and Administrative Expenses
--------------------------------------------------------------------------------
Selling, general and administrative expenses decreased in the year ended
December 31, 2001 by $21,245, or 40%, to $32,332 from $53,577 in the year ended
December 31, 2000. The decrease was primarily due to the closure of three
operating locations in the latter part of 2000, 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 revenue, a decrease in the provision for doubtful accounts receivable
(which in the year ended December 31, 2000 primarily related to dot.com
customers where venture capital funding had not materialized), valuation
allowance established for notes receivable from officers of the Company in 2000.
Selling, general and administrative expenses as a percent of revenues were 71%
for the year ended December 31, 2001 compared to 57% for the same period of the
prior year. Although the Company has streamlined operations, the Company
continues to invest heavily in sales, marketing and business development
activities as it shifts away from general IT consulting services towards
offering mobile workforce management solutions.
Impairment of Long-lived Assets
--------------------------------------------------------------------------------
During the year ended December 31, 2001, the Company recognized an impairment of
long-lived assets charge for $4,562 representing a $3,430 property and equipment
impairment charge and a further $1,132 property and equipment impairment charge
associated with locations where the Company ceased operations.
During the year ended December 31, 2000, the Company recognized an impairment of
long-lived assets charge for $42,450 representing a $37,831 goodwill impairment
charge, a $2,519 write-off of investment costs associated with the bSmart.to
joint venture and a $2,100 property and equipment impairment charge associated
with locations where the Company ceased operations.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
the Company considers, among other factors, deterioration of operating
performance or a general reduction in demand for services for a sustainable
period to be indicators of potential impairment of long-lived assets. The
Company has experienced a reduction in demand for its services. As a result of
this reduction in demand for its services, the Company recognized a $37,831
goodwill impairment charge in the nine months ended December 31, 2000, as the
future discounted cash flows (fair value) of its certain long-lived assets were
estimated to be less than the asset's related carrying value. In addition, in
the same fiscal period, the Company ceased operating at certain locations as
part of a plan to streamline operations and took a $2,100 impairment charge of
property and equipment.
20
In December 2000, the Company exercised its right to terminate the bSmart.to
joint venture when the Company believed that the wireless venture would require
a substantial additional investment to remain viable and that making such an
investment would not be in the best interest of the Company. As a result of
termination of the joint venture, the Company recognized a $2,519 impairment
charge related to investment costs associated with the formation of and the
investment in the bSmart.to joint venture.
During the year ended December 31, 2001, the Company continued to experience a
further decline in demand for its services and in September 2001, entered into a
restructuring plan to further streamline operations in line with its existing
revenue stream. In connection with this restructuring, the Company ceased
operations at several operating locations and recognized a $1,132 property and
equipment impairment charge. This restructuring caused the Company to further
test for impairment of long-lived assets, which resulted in a $3,430 property
and equipment impairment charge as the future discounted cash flows of its
certain long-lived assets were estimated to be less than the asset's related
carrying value.
Restructuring Charge
--------------------------------------------------------------------------------
In September 2001 and December 2000, 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. 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." The restructuring charge of $2,436 during the year ended
December 31, 2001 included provisions for severance of approximately 145
management and operating staff ($1,034) as well as closure costs associated with
a plan to dispose of certain locations ($1,402). The restructuring charge of
$1,620 during the year ended December 31, 2000 included provisions for severance
of approximately 90 management and operating staff ($707) as well as closure
costs associated with a plan to consolidate or dispose of certain locations
($913).
Other Income (Expense)
--------------------------------------------------------------------------------
Other income (expense) primarily consists of interest income, interest expense
and equity method losses on an investment in an alliance partner. Other expense
was $73 for the year ended December 31, 2001 as compared to other expense of
$2,642 for the year ended December 31, 2000 due to a reduction in interest
expense. Interest expense decreased due to the pay-off of all debt due under the
Company's Credit Agreement and an interest bearing earn-out agreement from
proceeds generated on the Company's sale of the majority of the IT staff
augmentation business on June 30, 2000. Subsequent to June 30, 2000, interest
expense was reduced and the Company also earned interest income on the cash
proceeds received from the sale on June 30, 2000 during the years ended December
31, 2000 and 2001. The benefit of reduced interest expense was offset by an
increase in equity loss on an investment in an alliance partner during the year
ended December 31, 2001.
Provision (Benefit) for Income Taxes
--------------------------------------------------------------------------------
The Company realized an income tax benefit of $3,455, or an effective tax rate
of 13% of pre-tax loss for the year ended December 31, 2001, compared to an
income tax benefit of $9,447, or an effective tax rate of 13% for the year ended
December 31, 2000. The effective tax rate was consistent between years and the
difference between the effective rates and statutory rates is primarily the
result of a valuation allowance against the tax benefit associated with the net
operating loss generated in the year ended December 31, 2001, due to the
uncertainty of realization, as it is only available to carry forward against
future years' income, and the result of the valuation allowance and
non-deductible impairment charges in the year ended December 31, 2000.
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 is not reflected in the December 31, 2001 financial statements as changes in
tax law must be reflected in the period of enactment. Had this change in tax law
been reflected in the financial statements at December 31, 2001, additional tax
benefits would have been recorded.
Income (Loss) from Discontinued Operations
--------------------------------------------------------------------------------
Discontinued operations is comprised of operations associated with the IT staff
augmentation portion of the Company's business and the gain on the sale of the
discontinued operations.
The income from discontinued operations of $2,244 for the year ended December
31, 2000 includes the results of the discontinued operations through March 31,
2000, the date the Company entered into a plan to discontinue such operations.
In accordance with Accounting Principles Board Opinion No. 30, the results of
the discontinued operations were classified as operating income (loss) from
discontinued operations up through the date the Company entered into a plan to
discontinue such operations, March 31, 2000.
21
Subsequent to March 31, 2000, the results of the discontinued operations were
classified together with the gain on sale of discontinued operations.
The loss on sale of the discontinued operations of $190 for the year ended
December 31, 2001 consists of the operating results of the discontinued
operations, which only included one remaining component from the original plan.
This loss was not anticipated under the original plan and, therefore, was not
accrued for as of June 30, 2000. In addition, during the year ended December 31,
2001, the Company abandoned its plan to sell the one remaining component, and
consequently, closed the business.
The gain on sale of the discontinued operations of $19,541 for the year ended
December 31, 2000 consists of four separate components, including: 1) the sale
of the majority of the IT staff augmentation business on June 30, 2000 for
proceeds of $116,495 and the assumptions of approximately $10,000 in
liabilities, 2) the sale of the IT staff augmentation operations in Orlando on
July 14, 2000 for $650 and the assumption of $385 of assumed liabilities and 3)
the operating results from the discontinued operations subsequent to March 31,
2000 totaling $1,455.
22
Nine Months Ended December 31, 2000 Compared to Nine Months Ended December 31,
1999 (Unaudited)
Revenues
--------------------------------------------------------------------------------
Revenues decreased in the nine months ended December 31, 2000 by $12,222, or
16%, to $66,042 from $78,264 in the nine months ended December 31, 1999. The
decrease was primarily due to a general reduction in demand for the Company's
services and the discontinuation of revenues from the Company's
Philadelphia-based operations from August 8, 2000 through December 6, 2000 while
contributed to the bSmart.to joint venture and accounted for on the equity
method of accounting. Partially offsetting the decrease in revenues was a 21%
increase in the average billing rate.
Gross Profit
--------------------------------------------------------------------------------
Gross profit decreased in the nine months ended December 31, 2000 by $5,723, or
21%, to $21,283 from $27,006 in the nine months ended December 31, 1999. The
decrease was primarily due to a general reduction in demand for the Company's
services and the contribution of the Company's Philadelphia-based operations to
the joint venture from August 8, 2000 through December 6, 2000. Gross profit as
a percentage of revenues decreased from 35% to 32% due to lower utilization of
salaried billable staff caused by a downturn in demand for services and the
exclusion of the Philadelphia-based operations, which, contributed to the
bSmart.to joint venture, had inherently higher gross profit as a percentage of
revenue. The decrease was partially offset by an increase in the average billing
rate.
Selling, General and Administrative Expenses
--------------------------------------------------------------------------------
Selling, general and administrative expenses increased in the nine months ended
December 31, 2000 by $8,451, or 26%, to $41,238 from $32,787 in the nine months
ended December 31, 1999. The increase was primarily due to increases in employee
wages and benefits incurred in the Company's effort to move towards a
centralized business model which required a more robust infrastructure and was
put into place prior to management's decision to divest the majority of its IT
staff augmentation business. In addition, the Company increased the provision
for doubtful accounts receivable (primarily related to dot.com customers where
venture capital funding has not materialized), paid retention benefits to
employees at locations closed, increased marketing efforts associated with the
re-branding of the Company and provided a valuation allowance against notes
receivable from officers and stockholders. Selling, general and administrative
expenses as a percent of revenues were 62% for the nine months ended December
31, 2000 compared to 42% for the same period of the prior year. Although the
Company was in the process of divesting its discontinued operations during the
nine months ended December 31, 2000, selling, general and administrative
expenses did not decrease as the Company continued to maintain a similar
infrastructure to address and resolve various transitional issues subsequent to
June 30, 2000.
Impairment of Long-lived Assets
--------------------------------------------------------------------------------
During the nine months ended December 31, 2000, the Company recognized an
impairment of long-lived assets charge for $42,450, representing a $37,831
goodwill impairment charge and a $2,519 write-off of investment costs associated
with the bSmart.to joint venture and a $2,100 property and equipment impairment
charge associated with locations where the Company ceased operations. The
company did not record an impairment of long-lived assets charge in the nine
months ended December 31, 1999.
Restructuring Charge
--------------------------------------------------------------------------------
As described above, in December 2000, following the divestiture of the
professional services segment 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
certain operating facilities to conform to the Company's new operating
structure. Accordingly, the Company adopted a restructuring plan in accordance
with EITF 94-3 and Staff Accounting Bulletin No. 100. During the nine months
ended December 31, 2000, the Company recognized a $1,620 restructuring charge
resulting from a thorough review of its cost structure in order to streamline
its operations commensurate with its revenue base. The charge included
provisions for severance of approximately 90 management and operating staff
($707) as well as closure costs associated with a plan to consolidate or
discontinue certain operating locations ($913).
23
Other Income (Expense)
--------------------------------------------------------------------------------
Other income (expense) primarily consists of interest expense, net of interest
income and equity method losses on an investment on an investment in an alliance
partner. Other expense was $1,360 for the nine months ended December 31, 2000 as
compared to other expense of $2,474 for the nine months ended December 31, 1999.
The decrease in other expense was due to the elimination of all obligations due
under the Company's Credit Agreement and an interest bearing earn-out agreement
resulting from the Company's sale of the majority of the IT staff augmentation
business on June 30, 2000 which reduced interest expense. The Company also
earned additional interest income on the cash proceeds received from the sale on
June 30, 2000 during the nine months ended December 31, 2000. In addition the
Company recognized equity method partner in July of 2000.
Provision (Benefit) for Income Taxes
--------------------------------------------------------------------------------
The Company realized a benefit of $7,677 or an effective tax rate of 12% of
pre-tax loss for the nine months ended December 31, 2000, compared to an income
tax benefit of $2,890, or an effective tax rate of 35% for the nine months ended
December 31, 1999. The decrease in the effective tax rate reflects recognition
of a valuation allowance against the current year benefit and non-deductible
impairment charges.
Income (Loss) from Discontinued Operations
--------------------------------------------------------------------------------
Discontinued operations is comprised of operations associated with the IT staff
augmentation portion of the Company's business and the gain on the sale of the
discontinued operations.
The loss from discontinued operations of $12,234 for the nine months ended
December 31, 1999 includes the operating results of the discontinued operations.
In accordance with Accounting Principles Board Opinion No. 30, the results of
the discontinued operations were classified as operating income (loss) from
discontinued operations up through the date the Company entered into a plan to
discontinue such operations, March 31, 2000. Subsequent to March 31, 2000, the
results of the discontinued operations were classified together with the gain on
sale of discontinued operations.
The gain on sale of the discontinued operations of $19,541 for the nine months
ended December 31, 2000 consists of three separate components, as described
above.
24
Liquidity and Capital Resources
--------------------------------------------------------------------------------
The Company has historically financed its operations principally through cash
flows from operations, borrowing under its credit facilities and the use the net
proceeds from its public offerings.
Prior to June 30, 2000, the Company maintained a credit facility ("Credit Line")
with a consortium of banks (the "Lenders") under which it borrowed to fund
working capital needs. On June 30, 2000, the Company completed the sale of the
majority of the IT staff augmentation business for $116,495. The Company used a
portion of the cash proceeds from the sale to pay off all obligations under the
Credit Line and to pay an earn-out obligation due sellers of an acquired
business. Upon settlement of all obligations under the Credit Line, the Credit
Line was terminated. Subsequent to June 30, 2000, the Company maintained no
credit facility.
Cash used in operating activities was $9,438 for the year ended December 31,
2001. The net loss and the reduction in accounts payable and accrued expenses
were the primary uses of cash for operating activities, partially offset by
reductions in accounts receivable and the add back of non-cash depreciation,
amortization and impairment of long-lived assets. The primary sources of
liquidity for the Company going forward are the collection of its accounts
receivable, the cash balances resulting from the sale of the discontinued
operations and refundable federal and state income taxes resulting from the
carry-back of net operating losses. Total receivables were 73 and 86 days of
quarterly revenue at December 31, 2001 and December 31, 2000, respectively. At
December 31, 2001, refundable income taxes were $7,008, most of which were
received in the first quarter of 2002. In addition, 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 is expected to result in
the Company's ability to receive additional tax refunds estimated at $7,400,
which could be received late in 2002.
Other cash uses during the year ended December 31, 2001 included $440 for the
purchase of property and equipment, principally for continuous upgrades to
computer software and equipment, $600 for a final settlement payment due the
sellers of an acquired business in connection with an earn-out payment, and $500
for total repurchases of common stock under a share repurchase program executed
during the second and third quarters.
Other sources of cash during the year ended December 31, 2001 included $199 of
proceeds from the issuance of common stock under the Employee Stock Purchase
Plan, which was terminated in early 2002 due to reduced participation in light
of a continuous decline in the number of employees remaining with the Company.
In addition, the Company received $430 in note payments from the acquirer of a
discontinued operation component.
Management of the Company believes that the remaining cash on hand will provide
adequate cash to fund its anticipated cash working capital needs at least
through next year.
Quantitative and Qualitative Disclosures about Market Risk
--------------------------------------------------------------------------------
During the year ended March 31, 2000 and through the quarter ended June 30,
2000, the Company was exposed to market risk related to changes in interest
rates on its Credit Line. The interest rate for the Credit Line was tied to the
Agent's prime rate and LIBOR. The Credit Line was terminated on June 30, 2000
upon the complete payment of all of the Company's obligations under the Credit
Agreement.
Recent Accounting Pronouncements
--------------------------------------------------------------------------------
A Financial Accounting Standards Board ("FASB") staff announcement was issued in
November 2001 regarding "Income Statement Characterization of Reimbursements
Received for `Out-of-Pocket' Expenses Incurred." In this announcement, the FASB
staff concluded that amounts billed by service providers for reimbursement of
out-of-pocket expenses incurred should be characterized as revenue in the
Company's income statement. Currently, the Company records revenue received on
such arrangements as an offset to the expenses incurred, as these arrangements
are billed at zero margin. In accordance with this announcement, the Company
intends to reclassify amounts received for reimbursement of out-of-pocket
expenses as revenues in its December 31, 2002 consolidated statement of
operations. Management does not believe that the impact of this reclassification
will have a material effect on the Company's gross margins.
25
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 exclude 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" and Staff Accounting Bulletin No. 100,
"Restructuring and Impairment Charges". Management has adjusted these
obligations over the payment periods of each restructuring plan as liabilities
have been settled and payments have been made.
Accounting for Long-Lived Assets
--------------------------------------------------------------------------------
The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amount of those items. Our cash flow estimated are based on
historical results adjusted to reflect our best estimate of future market and
operating conditions. Any material change affecting the assumptions used to
project the estimated undiscounted cash flows or our expectation of future
market conditions could result in a different conclusion. Assets for which the
carrying value is not fully recoverable are reduced to fair value.
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. 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. 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 is not reflected in the December 31, 2001 financial
statements as changes in tax law must be reflected in the period of enactment.
Had this change in tax law been reflected in the financial statements at
December 31, 2001, additional tax benefits would have been recorded.
26
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Cotelligent, Inc.:
We have audited the accompanying consolidated balance sheets of Cotelligent,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 2001, and the nine months ended December 31, 2000.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. The accompanying consolidated
statements of operations, stockholders' equity and cash flows of Cotelligent,
Inc. and subsidiaries for the year ended March 31, 2000 were audited by other
auditors who have ceased operations. Those auditors expressed an unqualified
opinion on those financial statements in their report dated March 21, 2002.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cotelligent, Inc.
and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for the year ended December 31, 2001, and the
nine months ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 2 to the accompanying consolidated financial statements,
the Company has restated the consolidated balance sheets as of December 31, 2001
and 2000 and the related consolidated statements of operations, stockholders'
equity and cash flows for the year ended December 31, 2001, and the nine months
ended December 31, 2000, which consolidated financial statements were previously
audited by other independent auditors who have ceased operations.
/s/ KPMG LLP
Costa Mesa, CA
December 6, 2002
27
The audit report of Arthur Andersen LLP, our former independent public
accountants, which is set forth below, is included in this amended Annual Report
on Form 10-K/A for purposes only of including the opinion of Arthur Andersen LLP
on our financial statements for the year ended March 31, 2000. Our financial
statements for the fiscal year ended December 31, 2001 and the nine month
transition period ended December 31, 2000 have been re-audited by and are
reported on by KPMG LLP at page 27 of this amended Annual Report on Form 10-K/A.
As a result of this re-audit, you should not rely upon Arthur Andersen LLP's
opinion set forth below on the financial statements for the year ended December
31, 2001 and the nine month transition period ended December 31, 2000.
The audit report set forth below is a copy of the original audit report dated
March 21, 2002 rendered by Arthur Andersen LLP that was included in our Annual
Report on Form 10-K filed on March 29, 2002, and has not been reissued by Arthur
Andersen LLP since that date. We are including this copy of the March 21, 2002
Arthur Andersen LLP audit report pursuant to Rule 2-02(e) of Regulation S-X
under the Securities Act of 1933. Your ability to assert claims against Arthur
Andersen LLP based on its report may be limited.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cotelligent, Inc.:
We have audited the accompanying consolidated balance sheets of Cotelligent,
Inc. and subsidiaries (a Delaware corporation) as of December 31, 2001 and 2000,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the year ended December 31, 2001, the nine months ended December
31, 2000, and the year ended March 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cotelligent, Inc.
and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for the year ended December 31, 2001, the nine
months ended December 31, 2000, and the year ended March 31, 2000, in conformity
with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
San Francisco, California
March 21, 2002
28
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, December 31,
2001 2000
------------ ------------
(Restated) (Restated)
ASSETS
Current assets:
Cash and cash equivalents ................................................................ $ 18,778 $ 26,500
Refundable income taxes .................................................................. 7,008 -
Accounts receivable, including unbilled accounts of $1,627 and $4,043 and net of
allowance for doubtful accounts of $533 and $3,241, respectively ....................... 5,693 19,493
Deferred tax assets ...................................................................... - 865
Current assets of discontinued operations ................................................ 151 3,508
Notes receivable from officers and stockholder, net of valuation allowance of
$1,703 and $1,703, respectively ........................................................ - -
Current portion of note receivable from acquirer of discontinued operation ............... 835 503
Prepaid expenses and other current assets ................................................ 806 1,387
------------ ------------
Total current assets ................................................................... 33,271 52,256
Property and equipment, net ................................................................ - 6,761
Note receivable from acquirer of discontinued operation .................................... 1,564 2,726
Equity investment in alliance partner ...................................................... 847 1,766
Deferred tax asset ......................................................................... - 1,880
Other assets ............................................................................... 398 416
------------ ------------
Total assets ........................................................................... $ 36,080 $ 65,805
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................................... $ 1,651 $ 2,311
Accrued compensation and related payroll liabilities ..................................... 2,144 5,463
Restructuring liabilities ................................................................ 331 1,477
Current liabilities of discontinued operations ........................................... - 528
Deferred revenue ......................................................................... 874 93
Income tax payable ....................................................................... - 1,126
Other accrued liabilities ................................................................ 2,074 4,397
------------ ------------
Total current liabilities .............................................................. 7,074 15,395
Restructuring liabilities, net of current portion .......................................... 959 -
Other long-term liabilities ................................................................ 465 868
Income tax payable ......................................................................... 2,618 748
------------ ------------
Total liabilities ..................................................................... 11,116 17,011
------------ ------------
Commitments, contingencies and subsequent events
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, 15,514,757 and
15,349,630 shares issued, respectively ................................................. 155 153
Additional paid-in capital ............................................................... 86,662 86,640
Notes receivable from stockholders ....................................................... (6,193) (6,368)
Accumulated deficit ...................................................................... (55,160) (31,631)
Treasury Stock ........................................................................... (500) -
------------ ------------
Total stockholders' equity ............................................................. 24,964 48,794
------------ ------------
Total liabilities and stockholders' equity ............................................. $ 36,080 $ 65,805
============ ============
See accompanying notes to consolidated financial statements.
29
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
2001 2000 2000
------------ ----------------- ------------
(Restated) (Restated)
Revenues ................................................................. $ 45,447 $ 66,042 $ 105,564
Cost of services ......................................................... 31,976 44,759 69,995
------------ ----------------- ------------
Gross profit ......................................................... 13,471 21,283 35,569
Research and development costs ........................................... 862 - -
Selling, general and administrative expenses ............................. 32,332 41,238 45,126
Impairment of long-lived assets .......................................... 4,562 42,450 -
Restructuring charge ..................................................... 2,436 1,620 -
------------ ----------------- ------------
Operating loss ........................................................... (26,721) (64,025) (9,557)
Other income (expense):
Interest expense ....................................................... (119) (2,237) (3,915)
Interest income ........................................................ 945 1,123 278
Other .................................................................. (899) (246) (119)
------------ ----------------- ------------
Total other income (expense) ......................................... (73) (1,360) (3,756)
------------ ----------------- ------------
Loss from continuing operations before income taxes ...................... (26,794) (65,385) (13,313)
Benefit for income taxes ................................................. 3,455 7,677 4,660
------------ ----------------- ------------
Loss from continuing operations .......................................... (23,339) (57,708) (8,653)
------------ ----------------- ------------
Operating income (loss) from discontinued operations less provision
(benefit) for income taxes of $ -, $ -, and ($5,379) ................. - - (9,990)
Gain (loss) on sale of discontinued operations, net of income taxes of
$-, $12,744 and $- ................................................... (190) 19,541 -
------------ ----------------- ------------
Income (loss) from discontinued operations ............................. (190) 19,541 (9,990)
------------ ----------------- ------------
Net loss ................................................................. $ (23,529) $ (38,167) $ (18,643)
============ ================= ============
Earnings per share:
Basic and diluted -
Loss from continuing operations ........................................ $ (1.55) $ (3.79) $ (0.60)
Income (loss) from discontinued operations ............................. (0.01) 1.28 (0.70)
------------ ----------------- ------------
Net loss ................................................................. $ (1.56) $ (2.51) $ (1.30)
============ ================= ============
Basic and diluted weighted average number of shares
outstanding ............................................................ 15,075,546 15,230,969 14,298,693
============ ================= ============
See accompanying notes to consolidated financial statements.
30
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Notes Retained
Additional Receivable Earnings
Common Stock Paid-In from (Accumulated Treasury Stock
---------------------- -------------------------
Shares Amount Capital Stockholders Deficit) Shares Amount
---------------------- ----------- ------------ ----------- -------------------------
Balance at March 31, 1999 .... 14,489,510 $ 145 $ 93,667 $ - $ 25,179 833,479 $ (11,158)
Issuance of Common Stock,
net of costs ............... 1,045,099 11 8,062 (6,149) - - -
Tax benefit on stock
options exercised .......... - - 38 - - - -
Repurchase of Common Stock ... - - - - - 238,400 (2,477)
Re-issuance of Treasury
Stock ...................... - - (13,635) - - (1,071,879) 13,635
Return of Common Stock
previously issued to acquire
company .................... (469,209) (5) (2,690) - - - -
Net loss ..................... - - - - (18,643) - -
----------------------- ----------- ---------- ----------- -------------------------
Balance at March 31, 2000 .... 15,065,400 151 85,442 (6,149) 6,536 - -
Issuance of Common Stock,
net of costs ............... 209,230 2 739 (332) - - -
Shares issued in connection
with earn-out to sellers of
acquired businesses ........ 100,000 1 571 - - - -
Return of shares issued under
note receivable from
stockholder ................ (25,000) (1) (112) 113 - - -
Warrants issued in connection
with investment in joint
venture - Restated ......... - - 900 - - - -
Warrants cancelled in
connection with
dissolution of joint
venture .................... - - (900) - - - -
Net loss - Restated .......... - - - - (38,167) - -
----------------------- ----------- ---------- ----------- -------------------------
Balance at December 31, 2000 -
Restated .................. 15,349,630 153 86,640 (6,368) (31,631) - -
Issuance of Common Stock,
net of costs ............... 215,127 3 196 - - - -
Cancellation of LSPP Note .... (50,000) (1) (174) 175 - - -
Purchase of Treasury Shares .. - - - - - 644,600 (500)
Net loss - Restated .......... - - - - (23,529) - -
----------------------- ----------- ---------- ----------- -------------------------
Balance at December 31,
2001 - Restated .............. 15,514,757 $ 155 $ 86,662 $ (6,193) $ (55,160) 644,600 $ (500)
======================= =========== ========== =========== =========================
Total
Stockholders'
Equity
-------------
Balance at March 31, 1999 .... $ 107,833
Issuance of Common Stock,
net of costs ............... 1,924
Tax benefit on stock
options exercised .......... 38
Repurchase of Common Stock ... (2,477)
Re-issuance of Treasury
Stock ...................... -
Return of Common Stock
previously issued to acquire
company .................... (2,695)
Net loss ..................... (18,643)
-----------
Balance at March 31, 2000 .... 85,980
Issuance of Common Stock,
net of costs ............... 409
Shares in connection with
earn-out to sellers of
acquired businesses ........ 572
Return of shares issued under
note receivable from
stockholder ................ -
Warrants issued in connection
with investment in joint
venture - Restated ......... 900
Warrants cancelled in
connection with
dissolution of joint
venture .................... (900)
Net loss - Restated .......... (38,167)
-----------
Balance at December 31, 2000 -
Restated .................. 48,794
Issuance of Common Stock,
net of costs ............... 199
Cancellation of LSPP Note .... -
Purchase of Treasury Shares .. (500)
Net loss - Restated .......... (23,529)
-----------
Balance at December 31,
2001 - Restated .............. $ 24,964
===========
See accompanying notes to consolidated financial statement
31
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
2001 2000 2000
----------- ----------------- ------------
(Restated) (Restated)
Cash flows from operating activities:
Loss from continuing operations ...................................... $ (23,339) $ (57,708) $ (8,653)
Adjustments to reconcile net loss from continuing operations
to net cash used in operating activities:
Depreciation and amortization ................................... 2,634 3,035 3,266
Impairment of long-lived assets ................................. 4,562 42,450 -
Fair value of common stock issued to seller of
acquired business in connection with forbearance
agreement ..................................................... - 572 -
Equity loss from investments .................................... 919 234 -
Deferred income taxes, net ...................................... 2,745 (2,181) (425)
Loss on disposal of property and equipment ...................... 5 12 10
Provision of doubtful accounts .................................. 904 3,610 818
Valuation allowance on notes receivable from officers ........... - 1,703 -
Loss on forgiveness of note receivable from acquirer of
discontinued operation ........................................ 400 - -
Changes in current assets and liabilities:
Accounts receivable ........................................... 12,896 572 (931)
Prepaid expenses and other current assets ..................... 581 464 980
Accounts payable and accrued liabilities ...................... (6,280) (439) (1,079)
Deferred revenue .............................................. 781 - -
Income taxes, net ............................................. (6,264) (83) (3,745)
Changes in other assets ....................................... 18 440 63
--------- --------- ---------
Net cash used in operating activities ................................ (9,438) (7,319) (9,696)
Cash flows from investing activities:
Proceeds from sale of assets ......................................... - 525 603
Investments in alliance partners ..................................... - (8,092) (253)
Cash acquired upon dissolution of joint venture ...................... - 1,281 -
Payment received on note from acquirer of discontinued operation ..... 430 71 -
Purchase of businesses, net of cash of acquired ...................... - (600) (2,756)
Purchases of property and equipment .................................. (440) (1,778) (3,892)
--------- --------- ---------
Net cash used in investing activities ................................ (10) (8,593) (6,298)
Cash flows from financing activities:
Borrowing under credit agreement ..................................... - 9,111 20,668
Payments under credit agreement ...................................... - (57,890) -
Payments on capital lease obligations ................................ (12) (201) (82)
Payments on amounts due sellers of acquired businesses ............... (600) (8,534) (730)
Net borrowings on short-term debt .................................... - - 9
Net repayments (borrowings) on notes receivable from officers ........ - 100 (1,433)
Net proceeds from issuance of common stock ........................... 199 409 1,462
Repurchase of common stock ........................................... (500) - (2,477)
--------- --------- ---------
Net cash provided by (used in) financing activities .................. (913) (57,005) 17,417
--------- --------- ---------
Cash flows provided by discontinued operations:
Cash provided by discontinued operations ............................. 2,639 94,623 2,399
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents .................. (7,722) 21,706 3,822
Cash and cash equivalents at beginning of period ...................... 26,500 4,794 972
--------- --------- ---------
Cash and cash equivalents at end of period ............................ $ 18,778 $ 26,500 $ 4,794
========= ========= =========
See accompanying notes to consolidated financial statements.
32
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands, except share data)
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
2001 2000 2000
---------------- ------------------ ------------
(Restated) (Restated)
Supplemental disclosures of cash flow information:
Interest paid ................................................... $ 2 $ 1,914 $ 3,338
Income taxes paid ............................................... 74 32 788
Significant non-cash transactions:
Fair market value of Common Stock issued to acquire
businesses .................................................... - - 500
Return of shares previously issued to acquire business .......... - - 2,695
Adjustments to purchase price of businesses acquired in
prior years ................................................... - - 8,386
Common stock issued to employees for notes receivable ........... - 332 6,149
Return of Common Stock previously issued to employee for
note receivable ............................................... 175 113 -
Sale of discontinued operation for note receivable .............. - 3,300 -
See accompanying notes to consolidated financial statements.
33
Notes to Consolidated Financial Statements (In Thousands, Except Share Data)
Note 1 - Business Organization
--------------------------------------------------------------------------------
Cotelligent, Inc. ("Cotelligent" or the "Company"), a Delaware corporation,
provides software consulting services to businesses with complex information
technology ("IT") operations and 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 in 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 historically operated on an April 1 to March 31 fiscal year. In July
2000, the Company changed its fiscal year to December 31, resulting in a
nine-month transition period from April 1, 2000 through December 31, 2000.
The Company has suffered significant operating losses as well as negative
operating cash flows in the last three fiscal periods 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 affects 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
--------------------------------------------------------------------------------
Our previously issued consolidated balance sheets as of December 31, 2001 and
2000 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year ended December 31, 2001 and for the nine
month transition period ended December 31, 2000 have been restated for the items
described below.
Nine Months Ended December 31, 2000
Discontinued Operations
The majority of the discontinued IT staff augmentation business was sold on June
30, 2000 and the remaining portion of the business was sold or abandoned during
a phase-out period ending on or about December 31, 2001, as described in Note
13. The consolidated financial statements were revised with respect to the
accounting for the discontinued operations. Accordingly, current assets of
discontinued operations, current liabilities of discontinued operations, notes
receivable from acquirer of discontinued operations (current and long term), and
prepaid expenses and other current assets were adjusted on the consolidated
balance sheet. In addition, selling, general and administrative expenses,
interest income, benefit for income taxes, operating income from discontinued
operations and gain on sale of discontinued operations have been adjusted on the
consolidated statement of operations.
The revisions resulted from (i) re-establishing net assets previously written
off at June 30, 2000 for certain components of the discontinued segment that
were not sold at that time and removing such net assets from the computation of
the gain on sale of discontinued operations, (ii) removing the operations of
these components during the phase-out period from a divestiture accrual
initially recorded on June 30, 2000 and recording the operations as a component
of the gain on sale of discontinued operations in accordance with APB No. 30,
(iii) recording a promissory note received from former employees upon the sale
of the international component of the discontinued operations at fair value,
instead of at face value, resulting in a smaller gain on sale of discontinued
operations, recognizing payments received on the note as a reduction of
principal rather than as interest income since future collectibility was not
reasonably assured, and reclassifying the current and long-term portions of the
note receivable due to the aforementioned revisions, (iv) expensing
unrecoverable costs related to the discontinued operations, which were initially
capitalized in prepaid expenses and other current assets, (v) reducing the
divestiture liability initially recorded on June 30, 2000, which increased the
gain on sale of discontinued operations at June 30, 2000 and reversing operating
expenses subsequently charged against the divestiture accrual or the gain on
sale of discontinued operations and recording them to the appropriate line item
within the consolidated statement of operations, (vi) classifying operating
income (loss) from discontinued operations as a component of the gain on sale of
discontinued operations in accordance with APB No. 30 instead of as a separate
line item within the consolidated statement of operations.
34
Investment in Joint Venture
Revenue and cost of services were reduced for services contributed to the
bSmart.to LLC joint venture (bSmart) described in Note 7. The costs of the
services were recorded as an increase to the bSmart investment. Also, the
investment in bSmart and additional paid-in capital was reduced to reflect the
cancellation of warrants originally issued to the bSmart.to joint venture
partner. In 2000, bSmart was dissolved and the Company's investment in bSmart
was impaired and written off.
Notes Receivable from Officers and Stockholders
The Company reclassified a valuation allowance on the notes receivable from
officers and stockholder previously reported in other accrued liabilities
against the notes receivable to properly reflect the notes at their net
realizable value. Interest expense originally recorded on the notes was
reversed, as collectibility was not reasonably assured.
An additional valuation allowance on notes receivable from officers and
stockholder was recorded to selling, general and administrative expense to
reduce the carrying amount to net realizable value (zero).
Equity Investment in Alliance Partner
The investment in Whitehorse described in Note 7 resulted in a difference
between the carrying amount of the investment and the Company's share of the
equity of Whitehorse. This difference, which is similar to goodwill, was not
amortized in accordance with APB No. 18. Therefore, the restated financial
statements reflect the amortization expense. Equity method losses were also
increased and the revised amount, along with the amortization, is now included
in other expense in the restated consolidated statement of operations. Both of
these adjustments resulted in a reduction of the equity investment in alliance
partner.
Accrued Liabilities
Accrued compensation and related payroll liabilities and selling, general and
administrative expense were reduced for the over accrual of compensation costs.
Restructuring liabilities and related charges, as described in Note 11, were
reduced to comply with EITF 94-3 and SAB No. 100. Also, an asset impairment
charge, originally recorded as a restructuring charge, was reclassified to
impairment of long-lived assets.
Included in other accrued liabilities and other long-term liabilities is a
contractual obligation payable to sellers of an acquired business that does not
have a stated interest rate. The financial statements have been revised to
impute interest on the obligation in accordance with APB No. 21. The correction
reduced the carrying amount of the obligation and the goodwill associated with
the purchase of the business, which was ultimately impaired and written off in
the nine months ended December 31, 2000. Accreted interest increased the
original liability and increased interest expense in subsequent periods.
Included in other accrued liabilities was an over accrual related to an earn-out
provision of a business combination. This amount was reversed, which reduced
other accrued liabilities and the impairment of long-lived assets since the
goodwill had already been written off.
Income Taxes
The tax provision was adjusted for i) the impact of adjustments described above,
ii) recognition of a net operating loss benefit that was previously reported in
the year ended December 31, 2001 and iii) an adjustment to the originally
reported deferred tax assets and liabilities based on a revised computation.
Other
Several reclassifications and smaller adjustments were made for bookkeeping
items.
The consolidated statement of cash flows was revised for the above adjustments.
Year Ended December 31, 2001
The December 31, 2001 balance sheet was restated to give effect to accumulated
prior period adjustments and their related tax impacts, which are described
above.
Allowance For Doubtful Accounts
Allowance for doubtful accounts was reduced to properly reflect accounts
receivable at net realizable value, resulting in a reduction to selling, general
and administrative expense.
35
Capitalized Software Development Costs
Previously capitalized software costs were written off to research and
development costs because the Company had not met the technological feasibility
requirements of SFAS No. 86.
Property and Equipment
Property and equipment was written off to impairment of long-lived assets as the
fair value of the assets under the provisions of SFAS No. 121 was determined to
be zero.
Equity Investment in Alliance Partner
Amortization of the difference between the Company's investment in Whitehorse
and its underlying share of Whitehorse's equity and the appropriate amount of
equity method losses were recorded to other expense, further reducing the equity
investment in alliance partner in 2001.
Accrued Liabilities
Included in other accrued liabilities is a contractual obligation payable to
sellers of an acquired business. Accreted interest not previously recognized was
recorded to increase the liability and interest expense.
Restructuring liabilities and related charges, as described in Note 11, were
reduced to comply with EITF 94-3 and SAB No. 100. Also, an asset impairment
charge, originally recorded as a restructuring charge, was reclassified to
impairment of long-lived assets.
The divestiture liability and the gain on sale of discontinued operations have
been adjusted to record the operations of discontinued operations during the
phase-out period as a component of the gain on sale of discontinued operations
and several amounts incorrectly charged against the divestiture liability were
corrected and expensed primarily to selling, general and administrative expense.
Revenue and Deferred Revenue
Revenue was reduced and deferred revenue was increased to properly reflect the
progress on certain fixed priced consulting contracts.
Income Taxes
The tax provision was adjusted for i) the impact of adjustments described above,
ii) recognition of a net operating loss benefit in the restated consolidated
statement of operations for the nine months ended December 31, 2000, which was
originally reported in the year ended December 31, 2001 and iii) an adjustment
to the originally reported deferred tax assets and liabilities based on a
revised computation.
Other
Several reclassifications and smaller adjustments were made for bookkeeping
items.
The consolidated statement of cash flows was revised for the above adjustments.
36
The following tables present the changes that have been made to the consolidated
statement of operations and cash flows for the year ended December 31, 2001 and
the nine months ended December 31, 2000 as well as the consolidated balance
sheets as of December 31, 2001 and 2000 as a result of the restatement.
As Previously
Reported Restated
------------- --------
December 31, 2000
------------------------
Consolidated Balance Sheet:
Accounts receivable, net of allowance for doubtful accounts ................. $ 19,229 $ 19,493
Deferred tax assets ......................................................... 1,435 865
Current assets of discontinued operations ................................... -- 3,508
Notes receivable from officers and stockholder, net of valuation allowance... 1,703 --
Current portion of note receivable from acquirer of discontinued operation... -- 503
Prepaid expenses and other current assets ................................... 1,916 1,387
Total current assets ...................................................... 50,783 52,256
Note receivable from acquirer of discontinued operation ........................ 4,459 2,726
Equity investment in alliance partner .......................................... 2,047 1,766
Deferred tax asset ............................................................. -- 1,880
Other assets ................................................................... 664 416
Total assets .............................................................. 64,714 65,805
Accounts payable ............................................................... 2,047 2,311
Accrued compensation and related payroll liabilities ........................... 5,826 5,463
Restructuring liabilities ...................................................... 2,136 1,477
Current liabilities of discontinued operations ................................. -- 528
Income tax payable ............................................................. -- 1,126
Other accrued liabilities ...................................................... 6,519 4,397
Total current liabilities ................................................... 16,528 15,395
Other long-term liabilities .................................................... 1,000 868
Deferred taxes ................................................................. 1,435 --
Total liabilities ........................................................... 19,711 17,011
Stockholders' equity:
Additional paid-in capital .................................................. 86,866 86,640
Accumulated deficit ......................................................... (35,648) (31,631)
Total stockholders' equity ................................................ 45,003 48,794
Total liabilities and stockholders' equity ................................ 64,714 65,805
37
As Previously
Reported Restated
------------- --------
For the Nine Months Ended
December 31, 2000
------------------------
Consolidated Statement of Operations:
Revenues ................................................. $ 66,292 $ 66,042
Cost of services ......................................... 44,884 44,759
Gross profit ........................................ 21,408 21,283
Selling, general and administrative expenses ............. 39,777 41,238
Impairment of long-lived assets .......................... 41,478 42,450
Restructuring charge ..................................... 4,200 1,620
Operating loss ........................................... (64,047) (64,025)
Other income (expense):
Interest expense ...................................... (1,564) (2,237)
Interest income ....................................... 1,194 1,123
Other ................................................. 47 (246)
Total other income (expense) ........................ (323) (1,360)
Loss from continuing operations before income taxes ...... (64,370) (65,385)
Benefit for income taxes ................................. 9,334 7,677
Loss from continuing operations .......................... (55,036) (57,708)
Operating income (loss) from discontinued operations... 2,889 --
Gain on sale of discontinued operations ............... 9,963 19,541
Income (loss) from discontinued operations ............ 12,852 19,541
Net loss ................................................. (42,184) (38,167)
Earnings per share:
Basic and diluted -
Loss from continuing operations .......................... (3.61) (3.79)
Income (loss) from discontinued operations ............... 0.84 1.28
Net loss ................................................. (2.77) (2.51)
As Previously
Reported Restated
------------- --------
For the Nine Months Ended
December 31, 2000
------------------------
Consolidated Statement of Cash Flows:
Net cash used in operating activities .................... $ (9,782) $ (7,319)
Net cash used in investing activities .................... (7,875) (8,593)
Net cash used in financing activities .................... (56,926) (57,005)
Cash provided by discontinued operations ................. 96,289 94,623
38
As Previously
Reported Restated
------------- --------
December 31, 2001
------------------------
Consolidated Balance Sheet:
Current assets:
Accounts receivable, net of allowance for doubtful accounts ................. $ 4,660 $ 5,693
Deferred tax assets .......................................................... 13 --
Current assets of discontinued operations .................................... -- 151
Notes receivable from officers and stockholder, net of valuation allowance.... 1,829 --
Current portion of note receivable from acquirer of discontinued operation.... 525 835
Prepaid expenses and other current assets .................................... 1,022 806
Total current assets ....................................................... 33,835 33,271
Capitalized software costs, net ................................................ 862 --
Property and equipment, net .................................................... 3,430 --
Note receivable from acquirer of discontinued operation ........................ 3,508 1,564
Equity investment in alliance partner .......................................... 1,860 847
Other assets ................................................................... 157 398
Total assets .............................................................. 43,652 36,080
Accounts payable ............................................................... 1,535 1,651
Accrued compensation and related payroll liabilities ........................... 2,217 2,144
Restructuring liabilities ...................................................... 1,334 331
Deferred revenue ............................................................... 420 874
Other accrued liabilities ...................................................... 5,942 2,074
Total current liabilities .................................................... 11,448 7,074
Restructuring liabilities, net of current portion .............................. -- 959
Other long-term liabilities .................................................... 538 465
Deferred taxes ................................................................. 13 --
Total liabilities ............................................................ 14,617 11,116
Stockholders' equity:
Additional paid-in capital ................................................... 86,888 86,662
Accumulated deficit .......................................................... (51,315) (55,160)
Total stockholders' equity ................................................. 29,035 24,964
Total liabilities and stockholders' equity ................................. 43,652 36,080
39
As Previously
Reported Restated
-------- --------
For the Year Ended
December 31, 2001
-----------------
Consolidated Statement of Operations:
Revenues ....................................................................... $ 45,901 $ 45,447
Gross profit .............................................................. 13,925 13,471
Research and development costs ................................................. - 862
Selling, general and administrative expenses ................................... 32,510 32,332
Impairment of long-lived assets ................................................ - 4,562
Restructuring charge ........................................................... 3,373 2,436
Operating loss ................................................................. (21,958) (26,721)
Other income (expense):
Interest expense ............................................................ (2) (119)
Interest income ............................................................. 1,418 945
Other ....................................................................... (167) (899)
Total other income (expense) .............................................. 1,249 (73)
Loss from continuing operations before income taxes ............................ (20,709) (26,794)
Benefit for income taxes ....................................................... 5,074 3,455
Loss from continuing operations ................................................ (15,635) (23,339)
Operating income (loss) from discontinued operations ........................ (32) -
Loss on sale of discontinued operations ..................................... - (190)
Income (loss) from discontinued operations .................................. (32) (190)
Net loss ....................................................................... (15,667) (23,529)
Earnings per share:
Basic and diluted -
Loss from continuing operations ................................................ (1.04) (1.55)
Income (loss) from discontinued operations ..................................... - (0.01)
Net loss ....................................................................... (1.04) (1.56)
As Previously
Reported Restated
-------- --------
For the Year Ended
December 31, 2001
-----------------
Consolidated Statement of Cash Flows:
Net cash used in operating activities .......................................... $ (6,995) $ (9,438)
Net cash used in investing activities .......................................... (1,244) (10)
Net cash used in financing activities .......................................... (1,206) (913)
Cash provided by discontinued operations ....................................... 1,723 2,639
Note 3 - Summary of Significant Accounting Policies
--------------------------------------------------------------------------------
Basis of Presentation
The accompanying consolidated financial statements and related notes to the
consolidated financial statements include the accounts and results of
Cotelligent, Inc. and its subsidiaries. In addition, the consolidated financial
statements and related notes include those companies acquired utilizing the
purchase method of accounting from their respective acquisition dates. All
significant intercompany transactions and accounts have been eliminated.
40
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade accounts receivable. Receivables
arising from services provided to clients are not collateralized and
accordingly, the Company performs ongoing credit evaluations of its clients to
reduce the risk of loss and provides a reserve for potentially uncollectible
accounts.
Software Development Costs
Costs incurred in the research and development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility has been established. After technological feasibility
is established, any additional costs are capitalized in accordance with SFAS No.
86, "Accounting for the Costs of Computer Software to Be Sold, Leased or
otherwise Marketed". Because the Company believes that its current process for
developing software is essentially completed concurrently with the establishment
of technological feasibility, no software development has been capitalized as of
December 31, 2001 and 2000.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided over the
estimated useful lives of the respective assets on a straight-line basis.
Leasehold improvements are amortized over the shorter of the lease term or the
estimated useful life of the respective assets.
Goodwill
In prior periods, goodwill represented the excess of cost over fair value of net
tangible assets acquired through acquisitions and was previously amortized on a
straight-line basis over a period of 30 years.
Investments
Investments in other businesses where ownership is less than 20% are accounted
for using the cost basis of accounting. Investments where ownership is between
20% and 50%, and where the Company has the ability to exercise significant
influence, are accounted for using the equity method of accounting. Any
difference between the cost of an investment and the amount of underlying equity
in net assets of an investee is amortized to the consolidated statement of
operations over the expected life of the investment, currently three years.
Long-Lived Assets
The Company accounts for the impairment and disposition of long-lived assets in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of". In accordance with SFAS No.
121, long-lived assets to be held are reviewed for events or changes in
circumstances, which indicate that their carrying value may not be recoverable.
The Company periodically reviews the carrying amount of long-lived assets to
determine whether or not impairment to such amount has occurred.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, refundable income taxes,
short-term accounts receivable, a note receivable, accounts payable and accrued
liabilities for which current carrying amounts are equal to or approximate fair
market value.
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 exclude 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.
41
Cost of Services
Cost of services expenses consist primarily of compensation and benefits of
Cotelligent's employees engaged in the delivery of consulting services.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes.
Provision is made in the Company's consolidated financial statements for current
income taxes payable and deferred income taxes arising primarily from net
operating loss carryforwards and temporary differences. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
realized or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The Company recorded a valuation allowance to reduce deferred
tax assets to an amount whose realization is more likely than not. Refer to Note
12 - Income Taxes.
Repurchase of Common Stock
The Company records the repurchase of Common Stock as a reduction of
stockholders' equity at cost. When common shares are reissued, the Company uses
a first-in, first-out method.
Earnings Per Share
Basic earnings per share is calculated by dividing net income by the weighted
average number of shares of Common Stock outstanding during the period. Diluted
earnings per share includes the impact of Common Stock options outstanding, when
dilutive.
Discontinued Operations
Discontinued operations consist of the Company's IT staff augmentation business.
The Company entered into a plan to divest of these operations prior to March 31,
2000. The operating results of these operations subsequent to April 1, 2000,
have been reflected in the accompanying consolidated financial statements as
gain or loss on the sale of discontinued operations. Subsequent to June 30,
2000, the net assets of the remaining component of the segment are reflected in
the accompanying consolidated financial statements as current assets and current
liabilities of discontinued operations.
Restructuring Charges
Restructuring charges are recognized in the period when management enters into a
plan to reorganize or streamline the operations. The charges include costs
associated with the termination of employees and the closure of operating
locations. Restructuring charges not resulting in a future benefit that do not
qualify for accrual under EITF 94-3 or SAB No. 100 are recorded when due and
payable.
Recent Accounting Pronouncements
A Financial Accounting Standards Board ("FASB") staff announcement was issued in
November 2001 regarding "Income Statement Characterization of Reimbursement
Received for `Out-of-Pocket' expenses Incurred." In this announcement, the FASB
staff concluded that amounts billed by service providers for reimbursement of
out-of-pocket expenses incurred should be characterized as revenue in the
Company's income statement. Currently, the Company records revenue received on
such arrangements as an offset to the expenses incurred, as these arrangements
are billed at zero margin. In accordance with this announcement, the Company
intends to reclassify amounts received for reimbursement of out-of-pocket
expenses as revenues in its December 31, 2002 income statement. Management does
not believe that the impact of this reclassification will have a material effect
on the Company's gross margins.
Reclassifications
Certain reclassifications have been made in the prior years' financial
statements to conform to the presentation in the current period.
Note 4 - Business Combinations
--------------------------------------------------------------------------------
During the year ended March 31, 2000, Cotelligent acquired one company accounted
for under the purchase method for aggregate consideration of $2,800 (100,758
shares issued at fair market value of $500 and $2,300 of cash). Total assets
acquired related to this acquisition were $1,481, which resulted in the
recognition of goodwill of $2,085. The results of this acquisition have been
included in the Company's results from its respective acquisition date.
Pro forma Statement of Operations
The following pro forma consolidated statement of operations for the year ended
March 31, 2000 gives effect to the acquisition of the business during that
fiscal year as if this acquisition was made on April 1, 1999. The pro forma
consolidated income statement reflects adjustments for interest expense on cash
consideration and amortization of goodwill.
42
(Unaudited)
Year Ended
March 31,
2000
------------
Revenues ...................................................... $ 108,608
Cost of services .............................................. 72,152
------------
Gross profit ............................................. 36,456
Selling, general and administrative expenses .................. 46,339
------------
Operating loss ................................................ (9,883)
Other expense ................................................. (3,922)
------------
Loss from continuing operations before income taxes ........... (13,805)
Benefit for income taxes ...................................... 4,660
Loss from continuing operations ............................... $ (9,145)
============
Basic and diluted loss from continuing operations per share ... $ (0.64)
============
Basic and diluted weighted average shares ..................... 14,340,538
============
Note 5 - Allowance for Doubtful Accounts
--------------------------------------------------------------------------------
Allowance for doubtful accounts activity is presented below.
Balance, March 31, 1999 ............................................................ $ 1,449
Balance of newly acquired companies' allowance for accounts at acquisition ...... 174
Charges to costs and expenses ................................................... 818
Write-offs ...................................................................... (561)
-------------
Balance, March 31, 2000 ............................................................ 1,880
Charges to costs and expenses ................................................... 3,610
Write-offs ...................................................................... (2,249)
-------------
Balance, December 31, 2000 - Restated .............................................. 3,241
Charges to costs and expenses ................................................... 904
Write-offs ......................................................................... (3,612)
-------------
Balance, December 31, 2001 - Restated .............................................. $ 533
=============
Note 6 - Property and Equipment
--------------------------------------------------------------------------------
Property and equipment is comprised of the following:
December 31, December 31,
2001 2000
----------- ------------
Computer and office equipment .............................. $ -- $ 10,545
Furniture and fixtures ..................................... -- 1,758
Leasehold improvements ..................................... -- 1,154
----------- ------------
-- 13,457
Less: Accumulated depreciation ............................. -- (6,696)
----------- ------------
Property and equipment, net of accumulated depreciation..... $ -- $ 6,761
=========== ============
Depreciation is provided on the estimated useful lives of the respective
assets(ranging from three to ten years). Leasehold improvements are amortized
over the useful life of the improvements or the term of the lease, which ever is
shorter. Depreciation expense of property and equipment, included in selling,
general and administrative expense, for the twelve months ended December 31,
2001 and the nine months ended December 31, 2000 was $2,634 and $1,839,
respectively.
The Company recognized a $4,562 impairment of property and equipment charge
during the year ended December 31, 2001, under the provisions of SFAS No. 121.
Note 7 - Investments
--------------------------------------------------------------------------------
During the fiscal period ended December 31, 2000, the Company made two
investments as follows:
Investment in White Horse Interactive
On July 18, 2000, the Company paid $2,000 to acquire a 35% ownership interest in
White Horse Interactive, an integrated media agency, which resulted in a
difference between the cost of the investment and the amount of underlying
equity in net assets totaling
43
$1,300. The Company uses the equity method of accounting for this investment and
recorded an equity loss, including the amortization of the difference between
the cost of the investment and the amount of underlying equity in the net
assets, of $234 for the nine months ended December 31, 2000, and an equity loss
of $919 for the year ended December 31, 2001.
Investment in bSmart.to LLC
On August 8, 2000, the Company executed a definitive joint venture agreement
with bSmart.to Technologies, Inc. The Company contributed: (1) cash of $5,000,
of which $2,500 was paid directly to the joint venture and $2,500 was
distributed to the developer of certain technology, and (2) its
Philadelphia-based IT solutions staff and ASP data center and, accordingly,
reclassified $1,200 of working capital and property and equipment as well as
$10,073 of goodwill, in exchange for a 50% interest in the joint venture. In
addition, the Company incurred approximately $2,040 in transaction costs that
were capitalized as a part of its investment in the joint venture. In connection
with the investment in the joint venture with bSmart.to Technologies, Inc., the
Company issued to and received from bSmart.to Technologies, Inc. warrants for
the purchase of common shares. Accordingly, the Company recognized an additional
investment of $900 for the warrants issued to bSmart.to Technologies, Inc., and
a corresponding amount in additional paid-in capital.
On December 6, 2000, the Company exercised its right under the joint venture
agreement to terminate the relationship. As a result, the Company regained
complete ownership of the Philadelphia-based operation, including $1,281 in cash
and more working capital than originally contributed, 100% ownership in JAS
Concepts, Inc., an investment made by the joint venture prior to its
dissolution, and consequently, recognized a charge of $2,519 to reduce the
investment in the joint venture to its realizable value (zero). The charge is
included in impairment of long-lived assets in the statement of operations for
the nine months ended December 31, 2000.
During the period August 8, 2000 through December 6, 2000 the Company used the
equity method of accounting for this investment and recorded an equity loss of
$33 for the nine months ended December 31, 2000. The Company commenced
consolidating the results from the Philadelphia-based operation upon regaining a
controlling financial interest on December 6, 2000.
Note 8 - Other Current Liabilities
--------------------------------------------------------------------------------
December 31, December 31,
2001 2000
------------- -------------
Current portion of obligation due sellers of an acquired business, net of
discount for imputed interest ................................................... $ 330 $ 83
Accrual for obligations due sellers of acquired businesses ........................ 492 1,075
Other accrued liabilities ......................................................... 1,252 3,239
------------- -------------
Total other current liabilities ................................................... $ 2,074 $ 4,397
============= =============
Note 9 - Other Long-Term Liabilities
-------------------------------------------------------------------------------
December 31, December 31,
2001 2000
------------- -------------
Long-term portion of obligation due sellers of an acquired business, net of
discount for imputed interest, net of current portion ........................... $ 426 $ 868
Lease deposits on sublet properties ............................................... 39 --
------------- -------------
Total other long-term liabilities ................................................. $ 465 $ 868
============= =============
Note 10 - Impairment of Long-lived Assets
--------------------------------------------------------------------------------
44
In accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
the Company considers, among other factors, deterioration of operating
performance or a general reduction in demand for services for a sustainable
period to be indicators of potential impairment of long-lived assets. The
Company has experienced a reduction in demand for its services. As a result of
this reduction in demand for its services, the Company recognized a $37,831
goodwill impairment charge in the nine months ended December 31, 2000, as the
future discounted cash flows (fair value) of its certain long-lived assets were
estimated to be less than the asset's related carrying value. In addition, in
the same fiscal period, the Company ceased operating at certain locations as
part of a plan to streamline operations and took a $2,100 impairment charge of
property and equipment and also took a $2,519 write-off of its investment in
bSmart.to (see Note 7).
During the year ended December 31, 2001, the Company continued to experience a
further decline in demand for its services and in September 2001, entered into a
restructuring plan to further streamline operations in line with its existing
revenue stream. In connection with this restructuring, the Company ceased
operations at several operating locations and recognized a $1,132 property and
equipment impairment charge. This restructuring caused the Company to further
test for impairment of long-lived assets, which resulted in a $3,430 property
and equipment impairment charge as the future discounted cash flows (fair value)
of its property and equipment were estimated to be less than the related
carrying value.
Note 11 - Restructuring Programs
--------------------------------------------------------------------------------
In June 1999, as part of the Company's reorganization into 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 restructuring charge of $4,920. The
charge included 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). The change was originally
recorded as an operating expense in June 1999. Upon the Company's decision to
discontinue its IT staff augmentation segment the amount was reclassified to
discontinued operations, as all charges related to severance or other activities
of the discontinued operations (see Note 13).
In December 2000 and September 2001, as part of the Company's efforts to
streamline its operations commensurate with its revenue base, the Company
identified additional opportunities to reduce its cost structure. Accordingly,
the Company adopted a exit 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" which
resulted in a restructuring charge of $1,620 during the nine months ended
December 31, 2000 and $2,436 during the year ended December 31, 2001. The
December 2000 charge included provisions for severance of approximately 90
management and operating staff ($707) as well as closure costs associated with a
plan to consolidate or dispose of certain locations ($913). The September 2001
plan included provisions for severance of approximately 145 management and
operating staff ($1,034) as well as closure costs associated with a plan to
consolidate or dispose of certain locations ($1,402). The September 2001 plan
did not meet the requirements of the aforementioned standards in order to accrue
costs as of a commitment date. Therefore, the September 2001 plan costs that did
not provide a future benefit were charged to operations when due and payable.
The following summarizes the activity and balances in each restructuring program
from inception through December 31, 2001:
June 1999 December 2000 September 2001
------------------------ ------------------------- ------------------------
Facilities Facilities Facilities
Severance Closure Severance Closure Severance Closure Total
----------- ----------- ----------- ----------- ----------- ----------- ---------
Restructuring Charge ................. $ 3,510 $ 1,410 $ -- $ -- $ -- $ -- $ 4,920
Spending and write-downs ............. (2,636) (409) -- -- -- -- (3,045)
----------- ----------- ----------- ----------- ----------- ----------- ---------
Balance-March 31, 2000 ............... 874 1,001 -- -- -- -- 1,875
Restructuring charge ................. -- -- 707 913 -- -- 1,620
Spending and write-downs ............. (505) -- (200) -- -- -- (705)
Release of excess restructuring
liability ......................... (312) (1,001) -- -- -- -- (1,313)
----------- ----------- ----------- ----------- ----------- ----------- ---------
Balance-December 31, 2000 ............ 57 -- 507 913 -- -- 1,477
Restructuring charge ................. -- -- -- -- 1,034 1,402 2,436
Spending and write-downs ............. (57) -- (507) (913) (1,034) (112) (2,623)
----------- ----------- ----------- ----------- ----------- ----------- ---------
Balance-December 31, 2001 ............ $ -- $ -- $ -- $ -- $ -- $ 1,290 $ 1,290
=========== =========== =========== =========== =========== =========== =========
45
Note 12 - Income Taxes
--------------------------------------------------------------------------------
The income tax provision (benefit) from continuing operations consists of the
following:
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
2001 2000 2000
----------------- ------------------ ------------------
Current:
Federal ................................................. $ (6,264) $ (12,918) $ (1,164)
State ................................................... 64 232 -
----------------- --------------- ----------------
(6,200) (12,686) (1,164)
----------------- --------------- ----------------
Deferred:
Federal ................................................. 2,745 4,728 (3,059)
State ................................................... - 281 (437)
----------------- --------------- ----------------
2,745 5,009 (3,496)
----------------- --------------- ----------------
Total provision (benefit) for income taxes ................... $ (3,455) $ (7,677) $ (4,660)
================= =============== ================
The tax benefits associated with nonqualified stock options reduced taxes
currently payable as shown above by $38 for the year ended March 31, 2000. Such
tax benefits are credited to additional paid-in capital when realized. No
benefits were realized for the fiscal periods ended December 31, 2001 and 2000.
In addition to the benefit recorded on continuing operations for the nine months
ended December 31, 2000, the Company recorded a tax provision associated with
discontinued operations and the gain on the sale of its discontinued operations
of $12,744.
Significant components of deferred tax assets and liabilities of the Company are
as follows:
46
December 31, December 31,
2001 2000
---------------- ----------------
Current
Deferred tax assets:
Allowance for doubtful accounts ............................................. $ 207 $ 524
Allowance for officer notes ................................................. 684 153
Restructuring liabilities ................................................... 129 502
Accrued vacation ............................................................ 138 401
Accrued liabilities ......................................................... 484 437
Other ....................................................................... 9 187
Valuation allowance ............................................................ (1,651) (1,339)
---------------- ----------------
Net current deferred tax assets ......................................... - 865
Non-current
Deferred tax assets:
Net operating loss carry forwards ........................................... 5,318 -
Goodwill .................................................................... 3,717 7,896
Contract obligations ........................................................ 428 462
Depreciation and amortization ............................................... 1,353 -
Restructuring liabilities ................................................... 373 -
Other ....................................................................... 812 394
Valuation allowance ............................................................ (12,001) (5,316)
---------------- ----------------
Net non-current deferred tax assets ..................................... - 3,436
Deferred tax liabilities:
Depreciation and amortization ............................................... - (1,556)
Total deferred tax liabilities .......................................... - (1,556)
---------------- ----------------
Net deferred taxes ...................................................... $ - $ 2,745
================ ================
During the year ended March 31, 2000, the Company decided to dispose of its IT
staff augmentation business and recorded a deferred tax asset for $7,190 on the
books of its discontinued operations (see Note 13). Upon the ultimate sale of
the majority of these operations during the nine months ended December 31, 2000,
the Company reclassified this deferred tax asset to continuing operations.
During the year ended December 31, 2001, the Company utilized a portion of its
net operating losses in a carryback claim, thus resulting in a current benefit.
At December 31, 2001, the Company has fully reserved for all net deferred tax
assets generated from continuing operations, including net operating losses, due
to management's uncertainty of their realizability. The Company will continue to
assess the adequacy of and need for the valuation allowance and to the extent it
is determined that such allowance is no longer required, the tax benefit of the
remaining net deferred tax assets will be recognized in the future. The Company
had approximately $15,600 of net operating losses carryforwards for U.S. federal
tax purposes that will begin expiring in the 2021 tax year.
In the first quarter of 2002, Congress approved the Job Creation and Worker
Assistance Act of 2002 (the Act) 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 is not
reflected in the December 31, 2001 financial statements as changes in tax law
must be reflected in the period of enactment. Management expects that its fiscal
year 2001 net operating losses reserved for above will become fully realizable
during the first quarter 2002 as a result of the enactment of the Act.
47
The Company's effective income tax rate for its continuing operations varied
from the U.S. federal statutory tax rate as follows:
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
2001 2000 2000
--------------- ------------------ ---------------
U.S. federal statutory rate ............................................ (34.0%) (34.0%) (34.0%)
State income taxes, net of federal benefit ............................. (6.0) 0.8 (2.0)
Non-deductible items ................................................... 2.3 11.4 -
Change in valuation allowance .......................................... 24.7 10.4 -
Other .................................................................. 0.1 (0.3) 1.0
------------ ------------- -------------
Effective tax rate ................................................ (12.9%) (11.7%) (35.0%)
============ ============= =============
Note 13 - Discontinued Operations
--------------------------------------------------------------------------------
Prior to March 31, 2000, the Company entered into a plan to divest its IT staff
augmentation business. The following financial data reflects the net assets at
December 31, 2001 and 2000, and the summary of operating results for the year
ended December 31, 2001, the nine months ended December 31, 2000, and the year
ended March 31, 2000 for these discontinued operations.
Net Assets of Discontinued Operations:
December 31, December 31,
2001 2000
--------------- --------------
Assets
Accounts receivable, including unbilled accounts of $0 and $375 ................ $ 151 $ 3,457
Prepaid expenses and other ..................................................... - 51
----------- -----------
Total assets .............................................................. 151 3,508
----------- -----------
Liabilities ....................................................................
Accounts payable ............................................................... - 274
Accrued compensation ........................................................... - 132
Other current liabilities ...................................................... - 122
----------- -----------
Total liabilities ......................................................... - 528
----------- -----------
Net assets of discontinued operations .......................................... $ 151 $ 2,980
=========== ===========
48
Summary of Operating Income (Loss) From Discontinued Operations:
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
2001 2000 2000
---------------- ---------------- ----------------
Revenues ................................................. $ 3,453 $ 69,528 $ 233,278
Cost of services ......................................... 2,692 51,464 174,289
---------------- ---------------- ----------------
Gross profit ......................................... 761 18,064 58,989
Impairment of long-lived assets .......................... - - 20,000
Restructuring charge ..................................... - (1,313) 4,920
Selling, general and administrative expenses ............. 951 17,124 49,475
---------------- ---------------- ----------------
Operating income (loss) .............................. (190) 2,253 (15,406)
Other income ............................................. - 18 37
---------------- ---------------- ----------------
Income (loss) before provision for income taxes .......... (190) 2,271 (15,369)
Provision (benefit) for income taxes ..................... - 816 (5,379)
---------------- ---------------- ----------------
Income (loss) from discontinued operations before
reclassification to gain on sale of discontinued
operations ............................................. (190) 1,455 (9,990)
Reclassification to gain on sale of discontinued
operations ............................................. 190 (1,455) -
---------------- ---------------- ----------------
Operating income (loss) from discontinued operations ..... $ - $ - $ (9,990)
================ ================ ================
On March 31, 2000, the Company committed to a plan to discontinue its IT staff
augmentation segment, which was comprised of operating locations throughout the
United States of America. The Company's initial intent was to sell the entire
segment to one buyer on or about June 30, 2000. Ultimately, the Company sold the
segment in three components and abandoned any unsold operations as more fully
described below.
On June 30, 2000, the Company sold the majority of its IT staff augmentation
business for $116,495 and approximately $10,000 of assumed liabilities. The
Company also took responsibility and has reserves for certain aged receivables
greater than 90 days.
On July 14, 2000, the Company sold its staff augmentation operations in Orlando
for a cash payment of $650 and approximately $385 of assumed liabilities. As of
June 30, 2000, the Company has written down goodwill to zero and accrued the
anticipated loss on sale as a component of the gain on sale of discontinued
operations, during the quarter ended June 30, 2000.
On October 31, 2000, the Company sold its international IT staff augmentation
business for a secured promissory note with a face value of $4,459 bearing
interest at the prime rate of interest, plus one percent and payable over five
years. The Company recorded the secured promissory note at fair value ($3,300),
using a market interest rate. Collections under the note agreement will first
reduce principal as the ultimate collectibility is uncertain. The goodwill
related to this operation was written down to zero during the quarter ended June
30, 2000 based on the preliminary estimate of the entity's net realizable value
prior to the sale.
The net gain on the disposal of the IT staff augmentation businesses was $19,541
for the nine months ended December 31, 2000 which includes the proceeds, less
the asset value of the businesses sold and the expense of sale, together with
the operating income from discontinued operations subsequent to the date
management entered into a plan to dispose of the discontinued operations, March
31, 2000.
From March 31, 2000 until the fourth quarter of 2001, the Company held one
remaining component in discontinued operations. The Company could not find a
buyer for this component and therefore closed the business in the fourth quarter
of 2001.
49
Note 14 - Lease Commitments
--------------------------------------------------------------------------------
Cotelligent leases various office space and certain equipment under
noncancelable lease agreements which expire at various dates. Future minimum
rental payments under such leases at December 31, 2001 for the Company's
continuing operations are as follows.
Operating Leases
----------------
2002 ..................................................... $ 2,991
2003 ..................................................... 2,172
2004 ..................................................... 1,691
2005 ..................................................... 1,105
2006 ..................................................... 613
Thereafter ............................................... 150
----------------
Total minimum lease payments ............................. 8,722
Less: Sublease payments due Cotelligent .................. (2,295)
----------------
Net minimum lease payments ............................... $ 6,427
================
Rental expense under these leases for the year ended December 31, 2001, the nine
months ended December 31, 2000 and the year ended March 31, 2000 was $2,601,
$3,061 and $3,126, respectively. The rental expense in fiscal 2001 and fiscal
2000 is net of sublease income totaling approximately $355 and $67,
respectively.
Note 15 - Employee Benefit Plans
--------------------------------------------------------------------------------
Long-term Incentive Plan
The Company maintains the 1998 Long-Term Incentive Plan (the "1998 Plan") and
the 2000 Long-Term Incentive Plan (the "2000 Plan"). The 1998 Plan was adopted
as a replacement to the Company's 1995 Long-Term Incentive Plan (the "1995
Plan"). No further awards may be granted under the 1995 Plan, although awards
granted prior to the adoption of the 1998 Plan remain outstanding under the 1995
Plan in accordance with their terms. The 2000 Plan is similar to the 1998 Plan,
except that (i) awards under the 2000 Plan are to be made primarily to employees
who are not officers or directors, (ii) the 2000 Plan does not contain a limit
as to the number of shares that may be subject to outstanding awards granted
either individually or in the aggregate (whereas the 1998 Plan contains 750,000
per individual annual limit, and aggregate limit of 18% of total outstanding
shares), and (iii) incentive stock options (ISOs) cannot be granted under the
2000 Plan. Of the non-qualified options granted to date, a majority are
generally exercisable beginning one year from the date of the grant in
cumulative yearly amounts of 25% to 33% of the shares under option and all
expire ten years from the date of the grant. Under the provisions of the plans,
stock-based awards are granted at terms and prices determined by the Long-Term
Incentive Plan Committee as defined in each plan.
A summary of option transactions is described in the table below. All options
described below are non-qualified and were granted with exercise prices no less
than the fair market value of the underlying stock on the date of the grant,
except for options issued and exchanged on January 4, 1999 in connection with
one of the Company's acquisitions. The difference between the grant price and
the market value of these options was recorded as purchase price.
Weighted
Option Price Average
Number of Range per Exercise Expiration
Shares Share Price Date
------------------ ----------------- ----------------- ------------------
Outstanding at March 31, 1999............... 2,574,892 $1.54-$29.00 $16.16 2006-2009
Granted................................ 341,425 $ 4.00-$6.13 $ 5.02 2006-2010
Exercised.............................. (45,808) $ 1.54-$9.00 $ 2.60 2006-2009
Cancelled.............................. (980,216) $1.54-$29.00 $17.09 2006-2010
------------------ ----------------- ----------------- ------------------
Outstanding at March 31, 2000............... 1,890,293 $1.54-$29.00 $13.99 2010
Granted................................ 1,459,965 $ 2.56-$6.69 $ 4.25 2010
Exercised.............................. (900) $1.54 $ 1.54 2009
Cancelled.............................. (1,150,642) $3.44-$29.00 $10.32 2006-2010
------------------ ----------------- ----------------- ------------------
Outstanding December 31, 2000............... 2,198,716 $1.54-$29.00 $ 9.37 2006-2010
Granted................................ 5,097,732 $ 0.14-$1.13 $ 0.23 2011
Exercised.............................. - - - -
Cancelled.............................. (2,215,994) $0.17-$29.00 $ 9.02 2006-2011
------------------ ----------------- ----------------- ------------------
Outstanding at December 31, 2001............ 5,080,454 $0.14-$27.25 $ 0.35 2006-2011
50
On March 9, 2001, the Company notified all option holders under the Long-Term
Incentive Plan of a stock option exchange program. The exchange program was
developed as a way to bring the option exercise prices back in line with the
market price for the Company's Common Stock. Completely voluntary on the part of
the option holder, the program allows the option holder to exchange existing
stock option grants for a new option grant of the same number of options at an
exercise price equal to the fair value of the Company's Common Stock as of the
date of grant, September 21, 2001. The vesting schedule was not interrupted as a
result of the exchange program. The number of options cancelled in the year
ended December 31, 2001 include 1,229,714 options surrendered and cancelled on
March 16, 2001 in order to participate in the option exchange program. These
options surrendered had an option price range per share of $1.04-$23.06. The
number of options issued in the year ended December 31, 2001 include 1,169,446
new options granted on September 21, 2001 at $0.25 per share as part of the
option exchange program.
The following table summarizes information concerning outstanding and
exercisable options at December 31, 2001:
Weighted
Average Weighted
Number of Remaining Average Number of Weighted
Range of Options Contractual Exercise Options Average
Exercise Price Outstanding Life Price Exercisable Exercise Price
-------------------- ----------------- ----------------- ----------------- ------------------ ------------------
$0.14-$0.25 4,591,457 9.77 $0.19 1,083,612 $0.24
$0.30-$16.25 485,865 8.90 $1.77 105,495 $2.65
$17.53-$27.25 3,132 6.20 $19.84 2,599 $19.76
-------------------- ----------------- ----------------- ----------------- ------------------ ------------------
$0.14-$27.25 5,080,454 9.69 $0.35 1,191,706 $0.50
==================== ================= ================= ================= ================== ==================
Exercisable options at December 31, 2001, December 31, 2000, and March 31, 2000
were 1,191,706, 1,004,512, and 943,571 at exercise prices between $0.14 and
$27.25, and weighted average exercise prices of $0.50, $13.72, and $15.79,
respectively.
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," and the Company continues to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25 and FASB Interpretation No. 44 in
accounting for its employee stock option plans. The fair value of these options
was estimated at the date of grant using a Black-Scholes option pricing
("Black-Scholes") model with the following weighted average assumptions for the
year ended December 31, 2001, the nine months ended December 31, 2000 and the
year ended March 31, 2000, respectively: (1) risk-free interest rates of 4.67%,
4.77%, and 6.04%, (2) a dividend yield of 0%, (3) volatility factors of the
expected market price of the Company's common stock of 193%, 106%, and 89%, and
(4) a weighted average expected life of 4.76, 4.61 years and 4.8 years. The
weighted average fair values of options granted during the year ended December
31, 2001, the nine months ended December 31, 2000, and the year ended March 31,
2000 were $0.23, $2.74, and $3.62 per share, respectively.
The Black-Scholes model was developed for use in estimating the fair value of
traded options that have no vesting restriction and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions, including the expected volatility of the Company's Common Stock.
For purposes of pro forma disclosure, the estimated fair value of options is
amortized to expense over the options' vesting period. If the Company had
elected to recognize compensation expense for options granted during the year
ended December 31, 2001, the nine months ended December 31, 2000, and the year
ended March 31, 2000 based on the fair value as described in SFAS No. 123, net
loss and earnings per share would have been changed to the pro forma amounts
indicated below.
51
Year Ended Nine Months Ended
December 31, December 31, Year Ended March 31,
2001 2000 2000
----------------------------- ---------------------------- -----------------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
------------- -------------- ---------- --------------- -------------- -------------
Loss from continuing operations........ $ (23,339) $ (23,573) $ (57,708) $ (63,838) $ (8,653) $ (12,771)
Net loss............................... $ (23,529) $ (23,763) $ (38,167) $ (44,297) $ (18,643) $ (22,761)
Loss per share:
Basic and diluted -
Loss from continuing operations... (1.55) (1.56) (3.79) (4.19) (0.60) (0.89)
Net loss ......................... (1.56) (1.58) (2.51) (2.91) (1.30) (1.59)
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (the "ESPP") allows eligible
employees to purchase shares of the Company's Common Stock at a price equal to
85% of the lower of the closing market price on the first or last trading day
of the ESPP's quarter. A total of 950,000 shares of Common Stock have been
reserved for issuance under the ESPP. During the year ended December 31, 2001,
the nine months ended December 31, 2000, and the year ended March 31, 2000,
employees purchased 215,127, 101,719 and 318,802 shares for aggregate proceeds
to the Company of $199, $395 and $1,251, respectively.
On February 1, 2002, the Company terminated the Employee Stock Purchase Plan
(ESPP). Because the number of employees in the Company had decreased
significantly over the prior two fiscal years, the administrative costs of the
plan were out of line with the remaining number of active participants. The
Company terminated the plan as a means to streamline its operating expenses
going forward.
401(k) Plan
The Company sponsors the Cotelligent, Inc. 401(k) Retirement Saving Plan (the
"401(k) Plan") for the benefit of all employees upon date of hire. The 401(k)
Plan is funded by employee payroll deductions and a matching program whereby the
Company contributes 25% of an employee's first 4% of salary deferral to the
401(k) Plan. Matching contributions vest over a four-year period. The Company
contributed $109, $152 and $503, respectively, in connection with the matching
program during the year ended December 31, 2001, the nine months ended December
31, 2000, and the year ended March 31, 2000.
Leveraged Stock Purchase Plan
In 1999, the stockholders approved the Cotelligent, Inc. 1999 Leveraged Stock
Purchase Plan (the "LSPP") which authorizes the purchase of shares of Common
Stock by eligible employees who are selected by the Compensation Committee of
the Board of Directors (the "Committee") to participate in the LSPP on terms and
conditions determined by the Committee.
Through December 31, 2001, 1,691,842 shares are outstanding under the LSPP
resulting in notes receivable from stockholders for $6,193 which is included as
a component of stockholders' equity. The notes receivable (1) include varying
rates of interest; (2) are secured by the pledge of Cotelligent stock issued;
(3) are full recourse as to the employee, except that in the case of death,
disability, termination by the Company without cause or a change of control of
the Company, where recourse against the employees is limited to the pledged
stock; and (4) have a term of five years from date of issuance, provided that if
the stock is sold, the loan shall be prepaid, and if the stock is not sold, the
loan may not be prepaid. The stock issued under the LSPP is restricted from sale
in the open market for a period of two years from the date of issuance,
provided, however, that in the case of death, disability, termination by the
Company without cause or change of control of the Company, the stock may be sold
and the proceeds used to repay the loan.
Note 16 - Stockholders' Equity
--------------------------------------------------------------------------------
Preferred Stock
The Company has authorized 500,000 shares of one class of $0.01 par value
Preferred Stock. The Board of Directors has authority, without further vote or
action by stockholders, to issue the shares, fix the number of shares and change
the number of shares
52
constituting any series, and to provide for or change the voting powers,
designations, preferences and relative, participating, optional or other special
rights, qualifications, limitations or restrictions thereof, including dividend
rights (and whether dividends are cumulative), dividend rates, terms of
redemption (including sinking fund provisions), a redemption price or prices,
conversion rights and liquidation preferences of the shares constituting any
class or series of the Preferred Stock. No Preferred Stock was outstanding at
December 31, 2001 or 2000. The Company has no current plans to issue any shares
of Preferred Stock.
Common Stock
The Company has authorized 100,000,000 shares of one class of $0.01 par value
Common Stock. The holders of Common Stock are entitled to one vote for each
share on all matters voted upon by stockholders, including the election of the
directors. At December 31, 2001 and 2000, there were 15,514,757 and 15,349,630
shares of Common Stock outstanding, respectively. In May 1998, the Company
registered 4 million shares of its Common Stock to be used in connection with
merger and acquisition activities. The Company repurchased 644,600 and 238,400
shares of its Common Stock during the year ended December 31, 2001 and the year
ended March 31, 2000, respectively. In addition, during the year ended March 31,
2000, the Company negotiated the return of 469,209 shares of Common Stock from
the original seller of its Orlando operations pursuant to terms in the original
purchase agreement.
Anti-takeover Provisions
The Company has a stockholder rights plan in effect (the "Rights Plan"). Under
the terms of the Rights Plan, the holders of the Common Stock received one
preferred share purchase right (each, a "Right") as a dividend for each share of
Common Stock held as of the close of business on September 24, 1997. Each Right
entitles the holder to buy 1/10,000 of a share of Series A Junior Preferred
Stock of the Company at an exercise price of $90.00. Further, each Right gives
the holder the right to buy Common Stock of the Company having twice the value
of the exercise price of the Rights if a person or group acquires beneficial
ownership of 20% or more of the Common Stock or commences a tender or exchange
offer that would result in such a person or group owning 20% or more of the
Common Stock. In addition, the Board of Directors of the Company is empowered to
issue up to 500,000 shares of Preferred Stock, and to determine the price,
rights, preferences and privileges of such shares, without any further
stockholder action. The existence of the Rights Plan and this "blank check"
preferred stock may have the effect of delaying, discouraging, inhibiting,
preventing or rendering more difficult an attempt to obtain control of the
Company by means of a tender offer, merger, proxy contest or otherwise. In
addition, this "blank check" preferred stock, or any issuance thereof, may have
an adverse effect on the market price of the Common Stock. The Company's
Certificate of Incorporation provides for a "staggered" Board of Directors,
which may also have the effect of inhibiting a change of control of the Company
and may have an adverse effect on the market price of the Common Stock.
Note 17 - Earnings Per Share
--------------------------------------------------------------------------------
Earnings per share is as follows:
For The Year Ended
December 31, 2001
------------------------------------------
Per Share
Income (Loss) Shares Amount
------------- ---------- ------------
Basic/diluted earnings (loss) per share-
Loss from continuing operations $ (23,339) 15,075,546 $(1.55)
Loss from discontinued operations (190) 15,075,546 (0.01)
----------- ---------- ------
Net loss applicable to common shareholders $ (23,529) 15,075,546 $(1.56)
53
For The Nine Months Ended
December 31, 2000
--------------------------------------------
Per Share
Income (Loss) Shares Amount
-------------- ------------ ------------
Basic/diluted earnings (loss) per share-
Loss from continuing operations $ (57,708) 15,230,969 $ (3.79)
Income from discontinued operations 19,541 15,230,969 1.28
-------------- ------------ ------------
Net loss applicable to common shareholders $ (38,167) 15,230,969 $ (2.51)
For The Year Ended
March 31, 2000
--------------------------------------------
Per Share
Income (Loss) Shares Amount
-------------- ------------ ------------
Basic/diluted earnings (loss) per share-
Loss from continuing operations $ (8,653) 14,298,693 $ (0.60)
Loss from discontinued operations (9,990) 14,298,693 (0.70)
-------------- ------------ ------------
Net loss applicable to common shareholders $ (18,643) 14,298,693 $ (1.30)
Options to purchase common shares of 5,080,454, 2,198,716, and 1,890,293 were
excluded from the computation of diluted earnings per share for the year ended
December 31, 2001, the nine months ended December 31, 2000 and for the year
ended March 31, 2000, respectively, due to the loss position of the Company's
continuing operations.
Note 18 - Commitments and Contingencies
--------------------------------------------------------------------------------
Employment Agreements
The executive officers have entered into employment agreements with the Company
which contain provisions for compensation upon termination without cause or
changes in control. Pursuant to such employment agreements, each such officer is
eligible to earn bonus compensation payable out of a bonus pool determined by
the Board of Directors or its Compensation Committee. Bonuses will be determined
by measuring, among other objective and subjective measures, such officer's
performance, the performance of the local operation for which such officer has
primary responsibility and the Company's performance against targets.
Loans to White Horse Interactive
The Company has agreed to advance White Horse Interactive up to $70 for
short-term working capital purposes. At December 31, 2001, no advances had been
made under this agreement.
Legal Matters
The Company is involved in various legal matters in the normal course of
business. In the opinion of management, these matters are not anticipated to
have a material adverse effect on the financial position or results of
operations or cash flows of the Company.
54
Note 19 - Segment Information
--------------------------------------------------------------------------------
During the year ended March 31, 2000, the Company streamlined its operations
into two operating segments, Professional Services, also known as the IT staff
augmentation business, and Technology Solutions. The Company subsequently
discontinued the IT staff augmentation business. Accordingly, assets,
liabilities, results of operations and cash flows have been segregated and
reported as discontinued operations for all periods presented and previously
reported results have been restated (see Note 13). Within the Technology
Solutions segment, the Company continues to provide licensed software,
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, hosting and support service, and IT
Education. Management has considered the requirements of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", and has
determined that the Company has one continuing operating segment; therefore, no
additional disclosure has been provided.
Note 20 - Quarterly Financial Data (Unaudited)
--------------------------------------------------------------------------------
The following is quarterly data for the periods presented on the consolidated
statement of operations.
The information in this footnote has been revised from the information
previously reported to reflect the Company's restatement of its financial
statements for the year ended December 31, 2001 and the nine month transition
period ended December 31, 2000. See Note 2 for a description of the restatement.
For the Year Ended December 31, 2001
------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------- -------------- ------------- --------------
Revenues .................................................. $ 16,022 $ 12,073 $ 10,187 $ 7,165
Gross profit .............................................. 4,740 3,017 3,152 2,562
Income (loss) from continuing operations .................. (1,451) (6,776) (9,739) (5,373)
Income (loss) from discontinued operations ................ (120) 1 (154) 83
Net income (loss) ......................................... (1,571) (6,775) (9,893) (5,290)
Earnings per share:
Basic -
Income (loss) from continuing operations .............. $ (0.09) $ (0.44) $ (0.66) $ (0.36)
Income (loss) from discontinued operations ............ (0.01) - (0.01) 0.01
----------- ----------- ----------- -----------
Net income (loss) ................................... $ (0.10) $ (0.44) $ (0.67) $ (0.35)
=========== =========== =========== ===========
Diluted -
Income (loss) from continuing operations .............. $ (0.09) $ (0.44) $ (0.66) $ (0.36)
Income (loss) from discontinued operations ............ (0.01) - (0.01) 0.01
----------- ----------- ----------- -----------
Net income (loss) ................................... $ (0.10) $ (0.44) $ (0.67) $ (0.35)
=========== =========== =========== ===========
Weighted average shares:
Basic ................................................... 15,349,060 15,273,716 14,824,310 14,852,326
=========== =========== =========== ===========
Diluted ................................................. 15,349,060 15,273,716 14,824,310 14,852,326
=========== =========== =========== ===========
55
For the Nine Months Ended December 31, 2000
----------------------------------------------------
First Quarter Second Quarter Third Quarter
------------- -------------- --------------
Revenues ............................................. $ 23,756 $ 22,475 $ 19,811
Gross profit ......................................... 7,253 7,571 6,459
Income (loss) from continuing operations ............. (5,426) (3,188) (49,094)
Income (loss) from discontinued operations ........... 19,118 40 383
Net income (loss) .................................... 13,692 (3,148) (48,711)
Earnings per share:
Basic -
Income (loss) from continuing operations ......... $ (0.36) $ (0.21) $ (3.20)
Income (loss) from discontinued operations ....... 1.26 - 0.02
----------- ----------- -----------
Net income (loss) .............................. $ 0.90 $ (0.21) $ (3.18)
=========== =========== ===========
Diluted -
Income (loss) from continuing operations ......... $ (0.36) $ (0.21) $ (3.20)
Income (loss) from discontinued operations ....... 1.26 - 0.02
----------- ----------- -----------
Net income (loss) .............................. $ 0.90 $ (0.21) $ (3.18)
=========== =========== ===========
Weighted average shares:
Basic .............................................. 15,123,639 15,235,827 15,332,273
=========== =========== ===========
Diluted ............................................ 15,123,639 15,235,827 15,332,273
=========== =========== ===========
The following tables reconcile our previously filed quarterly financial data to
the restated quarterly financial data included herein for revisions described
more fully in Note 2 (in thousands, except for share data). A summary of the
nature of the reconciling items for each quarter has been provided below each
table and should be read in conjunction with Note 2.
For the Three Months Ended March 31, 2001
---------------------------------------------------
As Previously As
Reported Adjustments Restated
-------------- ----------- -----------
Revenues ............................................. $ 16,022 - $ 16,022
Gross profit ......................................... 4,740 - 4,740
Income (loss) from continuing operations ............. (4,265) 2,814 (1,451)
Income (loss) from discontinued operations ........... (6) (114) (120)
Net income (loss) .................................... (4,271) 2,700 (1,571)
Earnings per share:
Basic -
Income (loss) from continuing operations ......... $ (0.28) $ (0.09)
Income (loss) from discontinued operations ....... - (0.01)
----------- -----------
Net income (loss) .............................. $ (0.28) $ (0.10)
=========== ===========
Diluted -
Income (loss) from continuing operations ......... $ (0.28) $ (0.09)
Income (loss) from discontinued operations ....... - (0.01)
----------- -----------
Net income (loss) .............................. $ (0.28) $ (0.10)
=========== ===========
Weighted average shares:
Basic .............................................. 15,349,060 15,349,060
=========== ===========
Diluted ............................................ 15,349,060 15,349,060
=========== ===========
Loss from continuing operations was reduced as a result of revising amortization
expense and equity method losses for the equity investment in alliance partner,
expensing capitalized software development costs, reversing interest income on
notes from officers and shareholders, expensing selling, general and
administrative costs recorded against the divesture liability, recording
payments received on note receivable from acquirer of discontinued operations as
principal reduction instead of interest income, recording interest expense on a
contractual obligation due to sellers of an acquired business, allocation of a
tax benefit originally reported in the month of December 2001 to March 2001, the
quarter in which the tax year ended and the corresponding benefit applied, and
revising other less significant book keeping items.
Loss from discontinued operations was increased for bad debt expense related to
accounts receivable of the discontinued operations, revising the tax provision
for the items described in Note 2, and adjusting other less significant book
keeping items.
56
For the Three Months Ended June 30, 2001
---------------------------------------------
As Previously As
Reported Adjustments Restated
------------- ----------- --------
Revenues .................................................................... $12,073 - $12,073
Gross profit ................................................................ 3,017 - 3,017
Income (loss) from continuing operations .................................... (6,017) (759) (6,776)
Income (loss) from discontinued operations .................................. 23 (22) 1
Net income (loss) ........................................................... (5,994) (781) (6,775)
Earnings per share:
Basic -
Income (loss) from continuing operations ................................ $ (0.39) $ (0.44)
Income (loss) from discontinued operations .............................. 0.00 -
---------- ----------
Net income (loss) ..................................................... $ (0.39) $ (0.44)
========== ==========
Diluted -
Income (loss) from continuing operations ................................ $ (0.39) $ (0.44)
Income (loss) from discontinued operations .............................. 0.00 -
---------- ----------
Net income (loss) ..................................................... $ (0.39) $ (0.44)
========== ==========
Weighted average shares:
Basic ..................................................................... 15,273,716 15,273,716
========== ==========
Diluted ................................................................... 15,273,716 15,273,716
========== ==========
The nature of the items increasing loss from continuing operations and
decreasing income from discontinued operations was primarily the same as in the
three months ended March 31, 2001, except for a restructuring charge that
increased selling, general and administrative expense, and not recording a
tax benefit recorded in the three months ended March 31, 2001.
For the Three Months Ended September 30, 2001
----------------------------------------------
As Previously As
Reported Adjustments Restated
------------- ----------- --------
Revenues .................................................................... $10,187 - $10,187
Gross profit ................................................................ 3,152 - 3,152
Income (loss) from continuing operations .................................... (7,905) (1,834) (9,739)
Income (loss) from discontinued operations .................................. (49) (105) (154)
Net income (loss) ........................................................... (7,954) (1,939) (9,893)
Earnings per share:
Basic -
Income (loss) from continuing operations ................................ $ (0.54) (0.66)
Income (loss) from discontinued operations .............................. 0.00 (0.01)
---------- ----------
Net income (loss) ..................................................... $ (0.54) (0.67)
========== ==========
Diluted -
Income (loss) from continuing operations ................................ $ (0.54) (0.66)
Income (loss) from discontinued operations .............................. 0.00 (0.01)
---------- ----------
Net income (loss) ..................................................... $ (0.54) (0.67)
========== ==========
Weighted average shares:
Basic ..................................................................... 14,824,310 14,824,310
========== ==========
Diluted ................................................................... 14,824,310 14,824,310
========== ==========
The nature of the items increasing loss from continuing operations and
discontinued operations was the same as in the three months ended March 31,
2001, except for reversing a restructuring charge, reducing the valuation
allowance on accounts receivable, recording a legal settlement to selling,
general and administrative expense, and not recording a tax benefit
recorded in the three months ended March 31, 2001.
57
For the Three Months Ended December 31, 2001
-------------------------------------------------
As Previously As
Reported Adjustments Restated
------------- ----------- --------
Revenues ................................................................... $7,619 (454) $ 7,165
Gross profit ............................................................... 3,016 (454) 2,562
Income (loss) from continuing operations ................................... 2,552 (7,925) (5,373)
Income (loss) from discontinued operations ................................. - 83 83
Net income (loss) .......................................................... 2,552 (7,842) (5,290)
Earnings per share:
Basic -
Income (loss) from continuing operations ............................... $ 0.17 $ (0.36)
Income (loss) from discontinued operations ............................. 0.00 0.01
---------- ----------
Net income (loss) .................................................... $ 0.17 $ (0.35)
========== ==========
Diluted -
Income (loss) from continuing operations ............................... $ 0.17 $ (0.36)
Income (loss) from discontinued operations ............................. 0.00 0.01
---------- ----------
Net income (loss) .................................................... $ 0.17 $ (0.35)
========== ==========
Weighted average shares:
Basic .................................................................... 14,852,326 14,852,326
========== ==========
Diluted .................................................................. 14,852,326 14,852,326
========== ==========
The nature of the items increasing loss from continuing operations and
increasing income from discontinued operations was primarily the same as in the
three months ended March 31, 2001, except for reducing selling, general and
administrative expense for the over accrual of accounts payable, accrued
compensation, and other accrued liabilities, deferring revenue to accurately
reflect the progress on certain fixed price consulting contracts, expensing
selling, general and administrative costs charged against the restructuring
liability, recording an impairment on property and equipment, and not recording
a tax benefit recorded in the three months ended March 31, 2001.
For the Three Months Ended June 30, 2000
-------------------------------------------------
As Previously As
Reported Adjustments Restated
------------- ----------- --------
Revenues ................................................................... $23,753 - $23,756
Gross profit ............................................................... 7,253 - 7,253
Income (loss) from continuing operations ................................... (5,130) (296) (5,426)
Income (loss) from discontinued operations ................................. 6,011 13,107 19,118
Net income (loss) .......................................................... 881 12,811 13,692
Earnings per share:
Basic -
Income (loss) from continuing operations ............................... (0.34) $ (0.36)
Income (loss) from discontinued operations ............................. 0.40 1.26
---------- ----------
Net income (loss) .................................................... $ 0.06 $ 0.90
========== ==========
Diluted -
Income (loss) from continuing operations ............................... $ (0.34) $ (0.36)
Income (loss) from discontinued operations ............................. 0.40 1.26
---------- ----------
Net income (loss) .................................................... $ 0.06 $ 0.90
========== ==========
Weighted average shares:
Basic .................................................................... 15,123,639 15,123,639
========== ==========
Diluted .................................................................. 15,124,960 15,123,639
========== ==========
Loss from continuing operations was reduced as a result of expensing selling,
general and administrative expense recorded against the divesture liability,
expensing prepaid assets that are not recoverable, correcting continuing
operation expenses recorded against the gain on sale of discontinued operations,
expensing period costs recorded against the divestiture and restructuring
accruals, reducing restructuring expense for the over accrual of restructuring
liabilities, revising the tax provision for continuing operations, and adjusting
other less significant book keeping items.
Income from discontinued operations was increased for revising continuing
operating expenses recorded against the gain on sale of discontinued operations,
increasing the gain on sale for the over accrual of the divestiture liability,
revising the tax provision for discontinued operations, and adjusting other less
significant book keeping items.
58
For the Three Months Ended September 30, 2000
---------------------------------------------------
As Previously As
Reported Adjustments Restated
------------- ----------- --------
Revenues .................................................................... $22,475 - $22,475
Gross profit ................................................................ 7,571 - 7,571
Income (loss) from continuing operations .................................... (2,856) (332) (3,188)
Income (loss) from discontinued operations .................................. 148 (108) 40
Net income (loss) ........................................................... (2,708) (440) (3,148)
Earnings per share:
Basic -
Income (loss) from continuing operations ................................ $ (0.19) $ (0.21)
Income (loss) from discontinued operations .............................. 0.01 -
---------- ----------
Net income (loss) ..................................................... $ (0.18) $ (0.21)
========== ==========
Diluted -
Income (loss) from continuing operations ................................ $ (0.19) $ (0.21)
Income (loss) from discontinued operations .............................. 0.01 -
---------- ----------
Net income (loss) ..................................................... $ (0.18) $ (0.21)
========== ==========
Weighted average shares:
Basic ..................................................................... 15,235,827 15,235,827
========== ==========
Diluted ................................................................... 15,235,827 15,235,827
========== ==========
Loss from continuing operations was increased overall as a result of expensing
selling, general and administrative costs recorded against the divesture
liability, revising amortization expense for the equity investment in alliance
partner, revising the tax provision related to continuing operations, and
revising other less significant book keeping items.
Income from discontinued operations decreased overall as a result of writing off
uncollectible accounts receivable of the discontinued operations, revising the
tax provision for discontinued operations, and revising other less significant
book keeping items.
For the Three Months Ended December 31, 2000
---------------------------------------------------
As Previously As
Reported Adjustments Restated
------------- ----------- --------
Revenues .................................................................... $ 20,064 (253) $ 19,811
Gross profit ................................................................ 6,584 (125) 6,459
Income (loss) from continuing operations .................................... (47,050) (2,044) (49,094)
Income (loss) from discontinued operations .................................. 6,693 (6,310) 383
Net income (loss) ........................................................... (40,357) (8,354) (48,711)
Earnings per share:
Basic -
Income (loss) from continuing operations ................................ $ (3.07) $ (3.20)
Income (loss) from discontinued operations .............................. 0.44 0.02
---------- ----------
Net income (loss) ..................................................... $ (2.63) $ (3.18)
========== ==========
Diluted -
Income (loss) from continuing operations ................................ $ (3.07) $ (3.20)
Income (loss) from discontinued operations............................... 0.44 0.02
---------- ----------
Net income (loss) ..................................................... $ (2.63) $ (3.18)
========== ==========
Weighted average shares:
Basic ..................................................................... 15,332,273 15,332,273
========== ==========
Diluted ................................................................... 15,332,273 15,332,273
========== ==========
Loss from continuing operations and income from discontinued operations were
impacted by the items listed in Note 2 for the nine months ended December 31,
2000.
59
Note 21 - Related Party Transactions
--------------------------------------------------------------------------------
Notes Receivable From Officers and Stockholder
The Company has notes receivable due from certain Officers and a former Officer
of the Company. At December 31, 2000, the notes included $683 due from the Chief
Executive Officer to cover margin calls, $516 due from the Chief Operating
Officer for relocation assistance ($83) and to cover margin calls ($433), and
$504 due from a former Chief Operating Officer to cover margin calls. The notes
are unsecured except for the notes due from the former Officer of the Company,
which are secured by the principal residence of that individual. The notes,
although due on demand, were issued with original due dates in 2000 and 2001.
The notes due from the Chief Executive Officer and the Chief Operating Officer
were extended by a vote of the Compensation Committee of the Board of Directors
on October 29, 2001 for three years to October 29, 2004. There is also
acceleration on payment of the Chief Executive Officer's and Chief Operating
Officer's notes should the Company's stock reach certain sustained target
values.
During the nine months ended December 31, 2000, the Company provided a valuation
allowance against all the notes receivable related to the margin calls because
the Company's market price for its Common Stock has remained beneath levels that
would result in repayment for an extended period of time. In addition, a
valuation allowance was provided against a relocation loan upon extension of the
due date of the loan.
Investment in Alliance Partner
During 2000 and 2001, the Company engaged White Horse Interactive, to provide
design services in connection with the Company's Web site and paid White Horse
Interactive $204 and $182 in 2000 and 2001, respectively.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
60
PART III
Item 10 - Directors and Executive Officers of the Registrant
Pursuant to the Company's Certificate of Incorporation and By-laws, the Board of
Directors is divided into three classes, Class I, Class II and Class III,
serving staggered three-year terms. One class of directors is elected at each
annual meeting of stockholders to serve for the following three years. Currently
there are two Class I directors whose terms will expire at the Annual Meeting,
two Class II directors whose terms expire in 2003 and one Class III director
whose term expires in 2004. The Company's Certificate of Incorporation provides
that the classes of directors shall be as nearly equal in number as possible.
Class I Directors
Edward E. Faber is 69 years old and is Vice Chairman of the Board of Directors
of the Company. Mr. Faber joined the Company as a director in March 1993 and
served as Chairman from August 1995 to April 1996. From 1990 through 1992, he
was Vice Chairman, President and Chief Executive Officer of Supercuts, Inc., a
company specializing in hairstyling. Mr. Faber was founding President and Chief
Executive Officer of Computerland Corporation ("Computerland"), a company
specializing in the sale of computer equipment and accessories, from 1976
through 1983. He retired from Computerland in 1983 and returned in 1985 as
Chairman of the Board and Chief Executive Officer, serving in that capacity
until 1987 when he again retired. Mr. Faber is a director of Outdoor
Broadcasting TV.com and is chairman of Gumtech International, Inc. Mr. Faber has
a Bachelor of Science degree from Cornell University and served as an officer in
the United States Marine Corps.
Daniel E. Jackson is 41 years old and is a director of the Company, as well as
its President and Chief Operating Officer. Mr. Jackson has served as a director
of the Company since September 1999. Mr. Jackson was promoted to the position of
Chief Operating Officer and President in July 2000. Mr. Jackson served as
Executive Vice President, Chief Financial Officer and Treasurer from June 1999
until July 2000. From September 1995 until June 1999, Mr. Jackson served in the
capacities of Executive Vice President, Corporate Development and General
Counsel. Mr. Jackson served as Secretary from September 1996 until September
1997 and as Chief Financial Officer from November 1996 until January 1998. From
1994 to 1995, Mr. Jackson served as Vice President and General Counsel of an
affiliate of Notre Venture Capital, Ltd., a partnership specializing in industry
consolidation transactions. Prior to that, he was Corporate Counsel and
Secretary of Sanifill, Inc., an environmental services company, from its
founding in 1990 through 1994. From 1986 until 1990, Mr. Jackson was an
associate at Morgan, Lewis & Bockius LLP in New York, where he practiced law in
the areas of securities and mergers and acquisitions. Mr. Jackson received a
Bachelor of Science degree in business administration from The Ohio State
University and a Juris Doctor degree from the University of Pennsylvania.
Class II Directors
James R. Lavelle is 51 years old and is the founder, Chairman of the Board and
Chief Executive Officer of the Company. Mr. Lavelle has served as Chief
Executive Officer since he founded the Company in 1993. From inception of the
Company until August 1995, Mr. Lavelle was also Chairman of the Board of the
Company, a position that he reassumed in April 1996. From 1985 to 1993, he was a
business consultant specializing in strategic marketing and organization
development. From 1983 to 1985, Mr. Lavelle was Senior Manager and Director of
Management Consulting Services for the San Francisco office of KPMG Main
Hurdman, an international accounting firm. Prior to that, he was Manager of
Management Consulting Services in the San Francisco office of Price Waterhouse
LLP, an international accounting firm. Mr. Lavelle has a bachelor's degree from
University of California at Santa Barbara and a Master of Business
Administration degree from Santa Clara University.
Debra J. Richardson is 47 years old, and joined the Company as a director on
August 8, 2001. Dr. Richardson joined the faculty at UC Irvine in 1987, where
she researches formal quality analysis and testing methods, had developed
leading edge tools, and worked with several companies in adopting technology to
improve the quality of critical software systems. She is currently director of
the Microelectronics Innovation and Computer Research Opportunities (MICRO), one
of the University of California's Industry-Cooperative Research Programs, and is
a founding member of the UC Institute for Software Research. Dr. Richardson
holds the Ted and Janice Smith Family Foundation Endowed Chair. Dr. Richardson
earned a Doctorate of Philosophy and a Master of Science in Computer and
Information Science from the University of Massachusetts, Amherst, and received
a Bachelor of Arts degree in mathematics from Revelle College of the University
of California, San Diego.
61
Class III Director
Anthony M. Frank is 70 years old and is a director of the Company. He joined the
Company in that capacity in March 1993. In September 1994, Mr. Frank became
co-founding General Partner and Chairman of Belvedere Capital Partners, the
general partner of the California Community Financial Institutions Fund, the
primary purpose of which is investing in California community banks. From 1992
to 1994, Mr. Frank was an independent financial consultant and venture
capitalist. From March 1988 to March 1992, Mr. Frank served as the Postmaster
General of the United States. From 1971 until 1988, he served as Chairman and
Chief Executive Officer of First Nationwide Bank. Mr. Frank is a graduate of
Dartmouth College and the Tuck School of Business and was an overseer of the
Tuck School of Business. He is also a director of several companies, including
The Charles Schwab Corporation, Crescent Real Estate Equities Ltd., Temple
Inland Corporation and Bedford Properties Investors.
Other Executive Officers
Curtis J. Parker is 47 years old and is Executive Vice President, Chief
Financial Officer, Treasurer & Assistant Secretary of the Company. From November
1996 until December 2000, Mr. Parker served as Vice President and Chief
Accounting Officer. From January 1996 until March 1996, he served as a
consultant to the Company and was appointed Corporate Controller in March 1996.
From 1988 through 1995, Mr. Parker was employed by Burns Philp Food Inc., a
manufacturer of food products, where he rose to the position of Vice President -
Finance for the Industrial Products Division. Mr. Parker has a Bachelor of
Commerce degree from the University of British Columbia and is a Certified
Public Accountant.
Item 11 - Executive Compensation
The following table sets forth certain information regarding the compensation
earned by or awarded to the Chief Executive Officer and remaining executive
officers of the Company for the fiscal year ended December 31, 2001, the twelve
month period ended December 31, 2000 and the fiscal year ended March 31, 2000.
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
Fiscal Options/
Name and Principal Position Year Salary($) (2) Bonus($) Other($) SARs(#)
------------------------------------------------------------------------------------------------------------------------------------
2001 361,166 0 18,000(3) 0
James R. Lavelle ............................ 2000(1) 450,000 0 18,000(3) 0
Chairman and Chief Executive Officer 2000 450,000 0 18,000(3) 0
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Daniel E. Jackson ........................... 2001 302,120 0 18,000(3) 0
President and Chief Operating Officer 2000(1) 375,000 0 5,470(4)
18,000(3) 0
2000 368,750 0 5,470(4)
18,000(3) 0
5,470(4)
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Curtis J. Parker ............................ 2001 166,500 0 0 227,500
Executive Vice President, Chief 2000(1) 175,000 100,000 0 25,000
Financial Officer, Treasurer and 2000 160,000 0 0 0
Assistant Secretary
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
(1) In July 2000, the Company changed its fiscal year end from March 31 to
December 31. Accordingly, for each of the following persons identified,
compensation for the period January 1, 2000 - March 31, 2000 is included in
the twelve months ended December 31, 2000 and the fiscal year ended March
31, 2000: James R. Lavelle - $112,500, Daniel E. Jackson - $93,750, Curtis
J. Parker - $40,000.
(2) Base salary and commissions earned. Effective January 1, 2001, Mr. Lavelle
and Mr. Jackson each voluntarily took a 20% reduction in base salary to
help the Company during a difficult financial period.
(3) Represents payments made as an automobile allowance.
(4) Imputed interest on below market loans. See Item 13, "Certain Relationships
and Related Transactions."
Stock Option Grants Table
The following table sets forth, as to the executive officers named in the
Summary Compensation Table, information related to the grant of stock options
pursuant to the Company's 1998 Long-Term Incentive Plan during the fiscal year
ended December 31, 2001.
62
OPTIONS GRANTED IN THE FISCAL YEAR ENDED DECEMBER 31, 2001
The following table sets forth, as to the executive officers named in the
Summary Compensation Table, information related to the grant of stock options
pursuant to the Company's 1998 Long-Term Incentive Plan during the fiscal year
ended December 31, 2001.
Individual Grants
----------------------------------------------------------------------------------------------
Number of Percentage of Total Exercise or Base Potential Realizable Value
Securities Options Granted to Price Per Share At Assumed Annual Rates
Underlying Employees in the ($/Share)(1) of Stock Price Appreciation
Name Options fiscal year ended For Option Term ($)(2)
Granted December 31, 2001
------------------------------------------------------------------------------------------------------------------------------------
5% 10%
-------------- -------------
James R. Lavelle 400,000(3) 7.8% $0.25 62,889 159,374
Daniel E. Jackson 250,000(4) 4.9% $0.25 39,306 99,609
Curtis J. Parker 47,500(5) 0.9% $0.25 7,468 18,926
Curtis J. Parker 10,000 0.2% $0.88 5,534 14,025
Curtis J. Parker 17,500 0.3% $0.81 8,915 22,591
Curtis J. Parker 200,000 3.9% $0.17 21,382 54,187
(1) The exercise price per share for all options granted is equal to the market
price of the underlying Common Stock as of the date of grant.
(2) The potential realizable value has been determined using market price on
the date the options were granted, compounded annually over ten years, net
of exercise price. These values have been determined based upon assumed
rates of appreciation and are not intended to forecast the future value or
trading prices of the Company's Common Stock. There can be no assurance
that the amounts reflected in this table will be achieved.
(3) Represents options issued under the Company's stock option exchange program
initiated in March 2001 to replace a corresponding number of options
cancelled under such program with exercise prices ranging from $12.75 to
$19.00 per share.
(4) Represents options issued under the Company's stock option exchange program
initiated in March 2001 to replace a corresponding number of options
cancelled under such program with exercise prices ranging from $12.75 to
$19.00 per share.
(5) Represents options issued under the Company's stock option exchange program
initiated in March 2001 to replace a corresponding number of options
cancelled under such program with exercise prices ranging from $9.00 to
$20.75 per share.
Stock Option Exercises and Year End Values Table
The following table shows, as to the executive officers named in the Summary
Compensation Table, information with respect to the unexercised options to
purchase Common Stock granted under the 1995 and 1998 Long-Term Incentive Plans
and held as of December 31, 2001.
VALUE OF OPTIONS AT DECEMBER 31, 2001
Number of Number of Securities Underlying
Shares Value Unexercised Options Held Value of Unexercised
Acquired Realized at December 31, 2001 In-the-Money Options
On Exercise ($) at December 31, 2001 ($) (1)
----------------------------------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
-------------------------------- ------------------------------------------------------------------------
James R. Lavelle 0 0 400,000 0 4,000 0
Daniel E. Jackson 0 0 250,000 0 2,500 0
Curtis J. Parker 0 0 78,125 221,875 463 18,013
(1) Options are "in-the-money" if the closing market price of the Company's
Common Stock exceeds the exercise price of the options. The value of the
unexercised options represents the difference between the exercise price of
such options and the closing market price ($0.26) of the Company's Common
Stock on the OTC Bulletin Board on December 31, 2001.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of April 24, 2002 information regarding the
beneficial ownership of the Common Stock of the Company by (i) each person known
to beneficially own more than 5% of the outstanding shares of Common Stock, (ii)
each of the Company's directors, (iii) each named executive officer and each
officer named in the Summary Compensation Table and (iv) all
63
executive officers and directors as a group. All persons listed have an address
c/o the Company's principal executive offices and have sole voting and
investment power with respect to their shares unless otherwise indicated.
Shares Beneficially Owned
-----------------------------
Name Number Percent
---------------------------------------------------------------------------------------------------- -------------- -------------
James R. Lavelle (1) ............................................................................... 1,305,308 8.1%
Daniel E. Jackson (2) .............................................................................. 1,099,473 6.9%
FMR Corp. (3) ...................................................................................... 1,000,000 6.7%
Anthony M. Frank (4) ............................................................................... 174,656 1.2%
Edward E. Faber (5) ................................................................................ 146,356 1.0%
Curtis J. Parker (6) ............................................................................... 84,117 *
Debra J. Richardson (7) ............................................................................ 5,000 *
All executive officers and directors as a group (6 persons) (8) .................................... 2,814,910 15.9%
*Less than 1%
(1) Includes 400,000 shares issuable upon exercise of options exercisable
within 60 days of April 24, 2002.
(2) Includes 250,000 shares issuable upon exercise of options exercisable
within 60 days of April 24, 2002.
(3) The address of the stockholder is 82 Devonshire Street, Boston,
Massachusetts, 02109. Data obtained from the stockholder's Schedule 13G,
filed with the Securities and Exchange Commission, on February 14, 2002.
(4) Includes 102,500 shares issuable upon exercise of options exercisable
within 60 days of April 24, 2002.
(5) Includes 102,500 shares issuable upon exercise of options exercisable
within 60 days of April 24, 2002.
(6) Includes 78,125 shares issuable upon exercise of options exercisable within
60 days of April 24, 2002.
(7) Includes 5,000 shares issuable upon exercise of options exercisable within
60 days of April 24, 2002.
(8) Includes 938,125 shares issuable upon exercise of options exercisable
within 60 days of April 24, 2002.
Item 13 - Certain Relationships and Related Transactions
The following is information with respect to certain relationships and related
transactions between directors and officers, on the one hand, and the Company,
on the other hand.
Employment Agreements; Covenants-Not-To-Compete
Mr. James R. Lavelle, Cotelligent's Chairman and Chief Executive Officer, is a
party to a three-year employment agreement effective January 5, 2000 which,
unless terminated or not renewed by him, continues thereafter on a year-to-year
basis on the same terms and conditions. Mr. Lavelle's employment agreement
provides that, in the event of termination of employment by the Company without
cause, he shall be entitled to receive from the Company an amount equal to (i)
three times the minimum base salary, as defined in the employment agreement,
plus (ii) three times his most recent annual bonus (not including any payments
made under Cotelligent's Long-Range Bonus Incentive Plan), without regard to
whether he obtains subsequent employment. His employment agreement provides
that, in the event of a change in control of the Company where he has not
received at least five days' notice of such change in control, he will be deemed
to have been terminated without cause and shall be entitled to compensation as
respectively described in the preceding sentence. Additionally, in such event he
will not be bound by any non-compete terms in his employment agreement, as
discussed below. If given at least five days notice of such change in control,
he may elect to terminate his employment agreement and collect the respective
compensation provided above.
Mr. Daniel E. Jackson, Cotelligent's President and Chief Operating Officer, is a
party to a two-year employment agreement effective January 25, 2000 which,
unless terminated or not renewed by him, continues thereafter on a year-to-year
basis on the same terms and conditions. Mr. Jackson's employment agreement
provides that, in the event of termination of employment by the Company without
cause, he shall be entitled to receive from the Company an amount equal to (i)
two times the minimum base salary, as defined in the employment agreement, plus
(ii) two times his most recent annual bonus (not including any payments made
under Cotelligent's Long-Range Bonus Incentive Plan), without regard to whether
he obtains subsequent employment. His employment agreement provides that, in the
event of a change in control of the Company where he has not received at least
five days' notice of such change in control, he will be deemed to have been
terminated without cause and shall be entitled to compensation as respectively
described in the preceding sentence. Additionally, in such event he will not be
bound by any non-compete terms in his employment agreement, as discussed below.
If given at least five days notice of such change in control, he may elect to
terminate his employment agreement and collect the respective compensation
provided above.
In the event of a change in control, Mr. Lavelle and Mr. Jackson are entitled to
reimbursement for any excise taxes the employee incurs under Section 4999 of the
Internal Revenue Code, as well as any interest or penalties related to the
excise tax and any
64
entitlements outside of the employment agreement that are
described in Section 280G(b)(2)(A)(i) of the Internal Revenue Code. In the
employment agreements of both, a "Change in Control" is deemed to occur if: (1)
any person or entity, other than the Company, a corporation owned directly or
indirectly by the stockholders of the Company in substantially the same
proportions as their ownership of the Common Stock of the Company, or an
employee benefit plan of Company or a subsidiary of Company, acquires directly
or indirectly Beneficial Ownership (as defined in Rule 13d-3 of the Exchange
Act) of any voting security of the Company and immediately after such
acquisition such person or entity is, directly or indirectly, the Beneficial
Owner of voting securities representing 30% or more of the total voting power of
all of the then-outstanding voting securities of the Company; (2) a change in
the composition of the individuals on the Board of Directors as a result of
which fewer than one-half of the incumbent directors are directors who either
(a) had been directors of Company on the date 24 months prior to the date of the
event that constitutes a change in control (the "original directors") or (b)
were elected, or nominated with the affirmative votes of at least a majority of
the aggregate of the original directors who were still in office at the time of
the election or nomination and the directors whose election or nomination was
previously so approved; (3) the consummation of a merger or consolidation of
Company with or into another entity or any other corporate reorganization, if
more than 50% of the combined voting power of the continuing or surviving
entity's securities outstanding immediately after such merger, consolidation or
other reorganization is owned by persons who were not stockholders of Company
immediately prior to such merger, consolidation or other reorganization; or (4)
the liquidation of the Company or the sale, transfer or other disposition of all
or substantially all of the Company's assets.
The employment agreements of Mr. Lavelle and Mr. Jackson contain a
covenant-not-to-compete with the Company for a period of two years immediately
following the termination of employment; or, in the case of a termination
without cause, for a period of one year following the termination of his
employment; or, in the case of a Change in Control in which he is not given at
least five days' notice of such Change in Control, the covenant not-to-compete
does not apply for any period of time. If any court of competent jurisdiction
determines that the scope, time or territorial restrictions contained in the
covenant are unreasonable, the covenant-not-to-compete shall be reduced to the
maximum period permitted by such court. The compensation to which Mr. Lavelle or
Mr. Jackson is entitled, as the case may be, shall nonetheless be paid to him.
Annual base salary paid to Mr. Lavelle for the fiscal year ended December 31,
2001 was $361,166. For the fiscal year ended December 31, 2001, he was eligible
for, but did not receive, a bonus based upon achieving certain performance
objectives and upon the operating results of the Company, which objectives and
results had been established by the Compensation Committee. Pursuant to the
Long-Range Bonus Incentive Plan, Mr. Lavelle is eligible for bonuses in fiscal
years 2003 and 2006 based upon the operating results of the Company.
Annual base salary paid to Daniel E. Jackson for the fiscal year ended December
31, 2001 was $302,120. For the fiscal year ended December 31, 2001, he was
eligible for, but did not receive, a bonus based upon achieving certain
performance objectives and upon the operating results of the Company, which
objectives and results had been established by the Compensation Committee.
Pursuant to the Long-Range Bonus Incentive Plan, Mr. Jackson is eligible for
bonuses in fiscal years 2003 and 2006 based upon the operating results of the
Company.
Mr. Curtis J. Parker, as Cotelligent's Executive Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary, is a party to a one-year employment
agreement effective December 19, 2000 which was extended for a two-year period
as of December 19, 2001 and then, unless terminated by either party or not
renewed by him, continues thereafter on a year-to-year basis, in each case on
the same terms and conditions. Mr. Parker's employment agreement provides that,
in the event of termination of employment by the Company without cause, he shall
be entitled to receive from the Company an amount equal to (i) one times the
Market Based Salary, as defined in the employment agreement, plus (ii) one times
his most recent annual bonus, without regard to whether he obtains subsequent
employment. His employment agreement provides that, in the event of a Change in
Control of the Company where he has not received at least five days' notice of
such change in control, he will be deemed to have been terminated without cause
and shall be entitled to compensation as respectively described in the preceding
sentence. Additionally, in such event he will not be bound by any non-compete
terms in his employment agreement, as discussed below. If given at least five
days' notice of such change in control, he may elect to terminate his employment
agreement and collect the respective compensation provided above.
The employment agreement of Mr. Parker contains a covenant-not-to-compete with
the Company for a period of one year immediately following the termination of
employment; or, in the case of a termination without cause, for a period of six
months following the termination of his employment; or, in the case of a Change
in Control in which the he is not given at least five days' notice of such
Change in Control, the covenant not-to-compete does not apply for any period of
time. If any court of competent jurisdiction determines that the scope, time or
territorial restrictions contained in the covenant are unreasonable, the
covenant-not-to-compete shall be reduced to the maximum period permitted by such
court. The compensation to which Mr. Parker is entitled shall nonetheless be
paid to him.
65
Mr. Parker's employment agreement provides for a minimum base salary of $180,000
per year (subject to increase to $200,000 per year by the Chief Executive
Officer when he determines it appropriate in light of the Company's operating
performance and subject to any requisite approval by the Board of Directors or
the Compensation Committee) and the right to receive annually discretionary
incentive bonuses of up to fifty percent (50%) of the amount of his base salary
provided by the Compensation Committee. During 2001, Mr. Parker agreed to a
series of salary reductions and at the end of 2001 was earning a salary of
$141,525 and had received no bonus.
Certain Transactions
From May 1996 through early July 1996, the Company advanced to Daniel E.
Jackson, President and Chief Operating Officer, $250,000 to facilitate
relocation of his residence to Northern California. Of the amount due, there is
a remaining balance of $82,500. The remaining balance is evidenced by a demand
note. The note is non-interest bearing and the principal balance was originally
due July 15, 2001 or upon termination of employment if prior to the due date.
The note to cover relocation was extended by a vote of the Compensation
Committee of the Board of Directors on October 29, 2000 for three years to July
15, 2004. Since the beginning of the 2000 fiscal year, the Company has also
advanced to Mr. Jackson an aggregate amount of approximately $480,000, evidenced
by five separate unsecured demand promissory notes, three dated August 11, 1999,
one dated September 30, 1999, and one dated November 23, 1999. The purpose of
such advances was to cover margin calls made on brokerage accounts held by Mr.
Jackson. On May 5, 2000, Mr. Jackson repaid $68,270 of principal and $31,730 of
interest. The notes, although due on demand, were issued with original due dates
in 2001. These notes were also extended by a vote of the Compensation Committee
of the Board of Directors on October 29, 2001 for three years to October 29,
2004. The interest rates on these notes remained unchanged at rates between
7.75% and 8.75%. Payment of the notes is accelerated if the Company's Common
Stock reaches certain sustained target levels.
On March 31, 1996, the Company advanced to James R. Lavelle, Chairman of the
Board and Chief Executive Officer of the Company, $37,902, evidenced by an
unsecured demand promissory note bearing interest annually at a rate of 6%. The
entire amount of such advance remains outstanding. Since the beginning of the
2000 fiscal year, the Company has also advanced to Mr. Lavelle an aggregate
amount of $619,000, evidenced by seven separate unsecured demand promissory
notes. The purpose of such advances was to cover margin calls made on brokerage
accounts held by Mr. Lavelle. On May 1, 2000, Mr. Lavelle repaid $15,330 of
principal and $34,670 of interest. The notes, although due on demand, were
issued with original due dates in 2001. The notes were extended by a vote of the
Compensation Committee of the Board of Directors on October 29, 2001 for three
years to October 29, 2004. The interest rates on these notes remain unchanged at
rates between 7.75% and 8.25%. Payment of the notes is accelerated if the
Company's Common Stock reaches certain sustained target levels.
On September 8, 1999, the stockholders approved the Cotelligent, Inc. 1999
Leveraged Stock Purchase Plan (the "LSPP") which authorizes the purchase of
shares of Common Stock by eligible employees who are selected by the
Compensation Committee of the Board to participate in the LSPP on terms and
conditions determined by the Compensation Committee. Since the LSPP's inception
through March 31, 2000, Mr. Lavelle has been issued 750,000 shares of Common
Stock and Mr. Jackson has been issued 736,842 shares of Common Stock. Shares
issued under the LSPP resulted in notes receivable from Mr. Lavelle for
$2,671,875 at 5.93% interest, and from Mr. Jackson for $2,625,000 at 5.93%
interest. The total principal amount of the notes remains outstanding. The notes
(1) are secured by the pledge of Common Stock issued; (2) are full recourse as
to the employee, except that in the case of death, disability, termination by
the Company without cause or a change of control of the Company, recourse
against the employees is limited to the pledged stock; and (3) have a term of
five years from date of issuance, provided that if the stock is sold, the loan
shall be prepaid, and if the stock is not sold, the loan may not be prepaid. The
Common Stock issued under the LSPP is restricted from sale in the open market
for a period of two years from the date of issuance, provided, however, that in
the case of death, disability, termination by the Company without cause or
change of control of the Company, the Common Stock may be sold and the proceeds
used to repay the loan.
66
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as a part of the Annual Report on
Form 10-K:
1. Financial Statements Form 10-K Page No.
-------------------- ------------------
Report of Independent Public Accountants' 27-28
Condensed Consolidated Balance Sheets at December 31, 2001 and 2000 29
Condensed Consolidated Statements of Operations for the year ended December 31, 2001,
the nine months ended December 31, 2000 and the year ended March 31, 2000 30
Condensed Consolidated Statements of Stockholders' Equity for the year ended
December 31, 2001, the nine months ended December 31, 2000 and the year
ended March 31, 2000 31
Condensed Consolidated Statements of Cash Flows for the year ended December 31, 2001,
the nine months ended December 31, 2000 and the year ended March 31, 2000 32-33
Notes to Condensed Consolidated Financial Statements 34-60
2. The following is a list of all Exhibits filed as part of this report.
Exhibit 11.1 is omitted because the information is included in Note 16 to
Consolidated Financial Statements, page 43.
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Certificate of Incorporation of Cotelligent, Inc. (Exhibit 3.1 of the Company's Registration Statement on
Form S-1 (File No. 33-80267), effective February 9, 1996, is hereby incorporated by reference)
3.2 Amended and Restated By-Laws of Cotelligent, Inc. (Exhibit 4.1 of the Company's Registration Statement on
Form S-8 (File No. 333-67589), filed with the SEC on November 19, 1998, is hereby incorporated by reference)
3.3 Certificate of Amendment of Certificate of Incorporation of Cotelligent, Inc. (Exhibit 3.3 of the Company's
Annual Report on Form 10-K (File No. 0-27412), filed with the SEC on June 29, 1999, is hereby incorporated
by reference)
4.1 Form of certificate evidencing ownership of Common Stock of Cotelligent, Inc. (Exhibit 4.1 of the Company's
Registration Statement on Form S-1 (File No. 33-80267), effective February 9, 1996, is hereby incorporated by
reference)
4.2 Rights Agreement, dated as of September 24, 1997, between Cotelligent, Inc. and BankBoston, N.A. (Exhibit 4.1 of
the Company's Form 8-K (File No. 0-27412), filed with the SEC on September 24, 1997, is hereby incorporated
by reference)
10.1 Amended and Restated Employment Agreement, dated as of January 5, 2000, between Cotelligent, Inc. and
James R. Lavelle (Exhibit 10.1 of the Company's Annual Report on Form 10-K (File No. 0-27412), filed with the SEC
on July 14, 2000, is hereby incorporated by reference)*
10.2 Amended and Restated Employment Agreement, dated as of January 25, 2000, between Cotelligent, Inc. and
Daniel E. Jackson (Exhibit 10.2 of the Company's Annual Report on Form 10-K (File No. 0-27412), filed with the SEC
on July 14, 2000, is hereby incorporated by reference)*
10.3 Employment Agreement, dated as of December 19, 2000, between Cotelligent, Inc. and Curtis J. Parker *, ***
10.4 Long-Range Bonus Incentive Plan, effective as of November 18, 1999, among Cotelligent, Inc., James R. Lavelle and
Daniel E. Jackson (Exhibit 10.6 of the Company's Annual Report on Form 10-K (File No. 0-27412), filed with the SEC
on July 14, 2000, is hereby incorporated by reference)*
67
10.5 Cotelligent 1995 Long-Term Incentive Plan (Exhibit 10.9 of the Company's
Registration Statement on Form S-1/A (File No. 33-80267), filed with the
SEC on January 24, 1996, is hereby incorporated by reference)*
10.6 Amended and Restated Senior Secured Credit Agreement, dated as of
March 12, 1999, among Cotelligent, Inc., the Co-Borrowers named therein,
the Banks named therein and BankBoston, N.A. (Exhibit 10.12 of the
Company's Annual Report on Form 10-K (File No. 0-27412), filed with the
SEC on June 29, 1999, is hereby incorporated by reference)
10.7 Cotelligent 1998 Long-Term Incentive Plan (Exhibit 10.13 of the Company's
Annual Report on Form 10-K (File No. 0-27412), filed with the SEC on June
29, 1999, is hereby incorporated by reference)*
10.8 Cotelligent, Inc. 1999 Leveraged Stock Purchase Plan (Exhibit 2 of the
Company's Schedule 13D (File No. 5-47567), filed with the SEC on January
31, 2000, is hereby incorporated by reference)*
10.9 Forbearance and Reinstatement of Noncompetes Agreement, dated as of May 2,
2000, among Cotelligent USA, Inc., Cotelligent, Inc., E.W. & Associates,
Inc., Thomas H. Edwards and Timothy M. Wooten (Exhibit 10.1 of the
Company's Registration Statement on Form S-3 (File No. 333-37586), filed
with the SEC on May 22, 2000, is hereby incorporated by reference)
10.10 Securities Issuance Agreement, dated as of May 2, 2000, between
Cotelligent, Inc. and E.W. & Associates, Inc. and/or its assigns (Exhibit
10.2 of the Company's Registration Statement on Form S-3 (File No.
333-37586), filed with the SEC on May 22, 2000, is hereby incorporated by
reference)
10.11 Asset Purchase Agreement, dated as of June 14, 2000, by and among
Cotelligent, Inc., Cotelligent U.S.A., Inc. and Comsys Information
Technology Services, Inc. (Exhibit 10.3 of the Company's Registration
Statement on Form S-3/A (File No. 333-37586), filed with the SEC on June
20, 2000, is hereby incorporated by reference)
10.12 Settlement and Mutual Release, dated as of December 21, 2000, among Comsys
Information Technology Services, Inc. and Cotelligent USA, Inc. (Exhibit
10.18 of the Company's Annual Report on Form 10-K (File No. 0-27412),
filed with the SEC on April 2, 2001 is hereby incorporated by reference)
10.13 Cotelligent 2000 Long-Term Incentive Plan (Exhibit 10.19 of the Company's
Annual Report on Form 10-K (File No. 0-27412), filed with the SEC on April
2, 2001 is hereby incorporated by reference)
21.1 Subsidiaries of the registrant ***
23.1 Consent of KPMG LLP **
24.1 Power of attorney as reflected on signatures page included herewith **
99.1 Letter pursuant to temporary note 3T***
99.2 Certification pursuant to 18 U.S.C. Section 1350, or adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002**
99.3 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 Form 8-K dated December 6, 2000, filed with the SEC
on January 3, 2001
* Management contracts and compensatory plans or arrangements required to be
filed as exhibits to this Form 10-K.
** Filed herewith.
*** Previously filed
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Irvine,
State of California on the 5th day of December, 2002.
COTELLIGENT, INC.
By: /s/ James R. Lavelle
-----------------------
James R. Lavelle
Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. Each person whose
signature appears below hereby authorizes and constitutes James R. Lavelle,
Daniel E. Jackson and Curtis J. Parker, and each of them singly, his true and
lawful attorneys-in-fact with full power of substitution and resubstitution for
him and in his name, place and stead, in any and all capacities (including his
capacity as a director and/or officer of Cotelligent, Inc.) to sign and file any
and all amendments to this report with all exhibits thereto, and other documents
in connection therewith with the Securities and Exchange Commission, and he
hereby ratifies and confirm as all that said attorneys-in-fact or any of them,
or this or his substitutes, may lawfully do or cause to be done by virtue
hereof.
Signature Capacity Date
--------- -------- ----
/s/ James R. Lavelle
-------------------------------
James R. Lavelle Chairman of the Board of Directors, Director and December 5, 2002
Chief Executive Officer (Principal Executive
Officer)
/s/ Curtis J. Parker
-------------------------------
Curtis J. Parker Executive Vice President, Chief Financial Officer December 5, 2002
(Principal Financial and Accounting Officer)
/s/ Anthony M. Frank
-------------------------------
Anthony M. Frank Director December 5, 2002
/s/ Debra J. Richardson
-------------------------------
Debra J. Richardson Director December 5, 2002
69
Certifications Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
I, James R. Lavelle, certify that:
1. I have reviewed this amended Annual Report on Form 10-K/A of Cotelligent,
Inc.;
2. Based on my knowledge, this amended Annual Report on Form 10-K/A 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 amended Annual Report on Form 10-K/A and;
3. Based on my knowledge, the financial statements, and other financial
information included in this amended Annual Report on Form 10-K/A, fairly
present in all material respects the financial condition, results of operations
and cash flows of Cotelligent, Inc. as of, and for, the periods presented in
this amended Annual Report on Form 10-K/A.
Date: December 5, 2002
/S/ James. R. Lavelle
---------------------
James R. Lavelle
Chairman of the Board and Chief Executive Officer
70
Certifications Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
I, Curtis J. Parker, certify that:
1. I have reviewed this amended Annual Report on Form 10-K/A of Cotelligent,
Inc.;
2. Based on my knowledge, this amended Annual Report on Form 10-K/A 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 Amendment No. 3 to Annual Report on Form 10-K/A and;
3. Based on my knowledge, the financial statements, and other financial
information included in this amended Annual Report on Form 10-K/A, fairly
present in all material respects the financial condition, results of operations
and cash flows of Cotelligent, Inc. as of, and for, the periods presented in
this amended Annual Report on Form 10-K/A.
Date: December 5, 2002
/s/ Curtis J. Parker
--------------------
Curtis J. Parker
Executive Vice President and Chief
Financial Officer
71