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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
(Amendment No. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Quarterly Period Ended March 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from to
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Commission File Number 0-27412
COTELLIGENT, INC.
Delaware 94-3173918
(State of incorporation) (I.R.S. ID)
100 Theory, Suite 200, Irvine, California 92612
(949) 823-1600
(Former name, former address and former fiscal year, if changed since last
report)
44 Montgomery Street, San Francisco, California 94104
(415) 439-6400
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]
At May 10, 2002, there were 14,900,891 shares of common stock outstanding.
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Explanatory Note
This Amendment No. 1 to the Quarterly Report on Form 10-Q/A for the quarter
ended March 31, 2002 is being filed for the purpose of amending and restating
Items 1 and 2 of Part I of our Quarterly Report on Form 10-Q to reflect the
restatement of our condensed consolidated balance sheets as of March 31, 2002
and December 31, 2001 and our condensed consolidated statements of operations
and cash flows for the three months ended March 31, 2002 and 2001. We have made
no further changes to the previously filed Quarterly Report on Form 10-Q. All
information in this Amendment No. 1 to Quarterly Report on Form 10-Q/A is as of
March 31, 2002 and does not reflect any subsequent information or events other
than this restatement.
COTELLIGENT, INC.
INDEX
Page
----
Part I - Financial Information
Item 1. Financial Statements
Cotelligent, Inc.
Condensed Consolidated Balance Sheets at March 31, 2002 and
December 31, 2001 4
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2002 and 2001 5
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2002 and 2001 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
Exhibits 22
Item 1. Financial Statements
This Amendment No. 1 to Quarterly Report on Form 10-Q/A restates our condensed
consolidated balance sheets as of March 31, 2002 and December 31, 2001 and our
condensed consolidated statements of operations and cash flows for the three
months ended March 31, 2002 and March 31, 2001, all as more fully described in
Note 2 to the Company's condensed consolidated financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
Restated Restated
March 31, December 31,
2002 2001
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 23,110 $ 18,778
Refundable income taxes ............................................... 7,875 7,008
Accounts receivable, including unbilled accounts of $992 and $1,627
and net of allowance for doubtful accounts of $685 and $533,
respectively ....................................................... 3,920 5,693
Current assets of discontinued operations ............................. 151 151
Notes receivable from officers and stockholder, net of valuation
allowance of $1,703 ................................................ -- --
Current portion of note receivable from acquirer of discontinued
operation .......................................................... 940 835
Prepaid expenses and other current assets ............................. 932 806
-------- --------
Total current assets ............................................... 36,928 33,271
Property and equipment, net .............................................. 6 --
Note receivable from acquirer of discontinued operation .................. 1,339 1,564
Equity investment in alliance partner .................................... 689 847
Other assets ............................................................. 350 398
-------- --------
Total assets ....................................................... $ 39,312 $ 36,080
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 1,274 $ 1,651
Accrued compensation and related payroll liabilities .................. 1,930 2,144
Restructuring liabilities ............................................. 208 331
Deferred revenue ...................................................... 424 874
Other accrued liabilities ............................................. 2,125 2,074
-------- --------
Total current liabilities .......................................... 5,961 7,074
Restructuring liabilities, net of current portion ........................ 862 959
Other long-term liabilities, net of current portion ...................... 359 465
Income tax payable ....................................................... 2,618 2,618
-------- --------
Total liabilities .................................................. 9,800 11,116
Stockholders' equity:
Preferred Stock, $0.01 par value; 500,000 shares authorized, no
shares issued or outstanding ....................................... -- --
Common Stock, $0.01 par value; 100,000,000 shares authorized,
15,545,491 and 15,514,757 shares issued, respectively .............. 155 155
Additional paid-in capital ............................................ 86,666 86,662
Notes receivable from stockholders .................................... (6,193) (6,193)
Accumulated deficit ................................................... (50,616) (55,160)
Treasury Stock ........................................................ (500) (500)
-------- --------
Total stockholders' equity ......................................... 29,512 24,964
-------- --------
Total liabilities and stockholders' equity ......................... $ 39,312 $ 36,080
======== ========
See accompanying notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
Restated
Three Months Ended March 31,
----------------------------
2002 2001
----------- -----------
Revenues ............................................................... $ 5,873 $ 16,596
Cost of services ....................................................... 3,768 11,856
----------- -----------
Gross profit ........................................................ 2,105 4,740
Research and development costs ......................................... 219 106
Selling, general and administrative expenses ........................... 4,613 9,726
----------- -----------
Operating loss ......................................................... (2,727) (5,092)
Other income (expense):
Interest expense .................................................... (47) (30)
Interest income ..................................................... 76 362
Other ............................................................... (158) (145)
----------- -----------
Total other income (expense) ..................................... (129) 187
----------- -----------
Loss from continuing operations before income taxes .............. (2,856) (4,905)
Benefit for income taxes ......................................... 7,400 3,454
----------- -----------
Income (loss) from continuing operations ............................... 4,544 (1,451)
Gain (loss) on sale of discontinued operations, net of income tax
expense of $0 and $0 ............................................. -- (120)
----------- -----------
Net income (loss) ................................................... $ 4,544 $ (1,571)
=========== ===========
Earnings (loss) per share:
Basic -
Income (loss) from continuing operations ............................ $ 0.31 $ (0.09)
Income (loss) from discontinued operations .......................... -- (0.01)
----------- -----------
Net income (loss) ................................................... $ 0.31 $ (0.10)
=========== ===========
Diluted -
Income (loss) from continuing operations ............................ $ 0.27 $ (0.09)
Income (loss) from discontinued operations .......................... -- (0.01)
----------- -----------
Net income (loss) ................................................... $ 0.27 $ (0.10)
=========== ===========
Weighted average number of shares outstanding:
Basic ............................................................... 14,890,646 15,349,060
Diluted ............................................................. 16,925,314 15,349,060
See accompanying notes to condensed consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Restated
Three Months Ended March 31,
----------------------------
2002 2001
------- -------
Cash flows from operating activities:
Income (loss) from continuing operations ........................................ $ 4,544 $(1,451)
Adjustments to reconcile income (loss) from continuing operations to net cash
provided by (used in) operating activities:
Equity loss from investment in alliance partner .............................. 158 152
Depreciation and amortization ................................................ -- 786
Provision for doubtful accounts .............................................. 152 676
Deferred taxes, net .......................................................... (7,400) 2,745
Changes in current assets and liabilities:
Accounts receivable ....................................................... 1,621 6,050
Prepaid expenses and other current assets ................................. (126) (1,164)
Accounts payable and accrued liabilities .................................. (866) (1,601)
Deferred revenue .......................................................... (450) (74)
Income taxes, net ......................................................... 6,533 (6,198)
Other assets .............................................................. 48 --
------- -------
Cash provided by (used for) operating activities ................................ 4,214 (79)
Cash flows from investing activities:
Payments received on note from acquirer of discontinued operations .............. 120 106
Purchases of property and equipment ............................................. (6) (55)
------- -------
Cash provided by investing activities ........................................... 114 51
Cash flows from financing activities:
Payments on capital lease obligations ........................................... -- 15
Net proceeds on issuance of stock ............................................... 4 148
------- -------
Cash provided by financing activities ........................................... 4 163
Cash flow used for discontinued operations ......................................... -- (35)
------- -------
Net increase in cash ............................................................... 4,332 100
Cash at beginning of period ........................................................ 18,778 26,500
------- -------
Cash at end of period .............................................................. $23,110 $26,600
======= =======
Supplemental disclosures of cash flow information:
Interest paid ................................................................... $ 20 $ 30
Income taxes paid (refunded) .................................................... $(6,533) $ 20
Return of common stock previously issued to employee for note receivable ........ $ -- $ 175
See accompanying notes to condensed consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
Note 1 - Business Organization and Basis of Presentation
Cotelligent, Inc. ("Cotelligent" or the "Company"), a Delaware corporation,
provides software consulting services to businesses with complex information
technology ("IT") operations and also provides maintenance, support and contract
services on software products it licenses. These financial statements include
the accounts of Cotelligent, Inc. and its subsidiaries.
During the fiscal year ended March 31, 2000, the Company was organized 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 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 effects of intense competition, the ability
to develop and successfully market new product and service offerings, and the
ability to streamline operations and increase revenues. There can be no
assurance the Company will be profitable in the future.
Note 2 - Restatement
The Company has restated its consolidated balance sheets as of December 31, 2001
and 2000 and its consolidated statements of operations, stockholders' equity and
cash flows for the year ended December 31, 2001 and the nine months ended
December 31, 2000. Additionally, the Company restated the quarterly financial
data for each three month period within the year ended December 31, 2001 and
nine months ended December 31, 2000. The restated consolidated financial
statements and quarterly financial data, along with a description of the items
causing the restatement, appear in the Company's Amendment No. 3 to Annual
Report on Form 10-K/A for the year ended December 31, 2001, filed with the
Securities and Exchange Commission on December 9, 2002.
As a result of the restatement of the Company's consolidated financial
statements and quarterly financial data described above, the Company has also
restated the condensed consolidated balance sheet as of March 31, 2002 and the
condensed consolidated statement of operations and cash flows for the three
months ended March 31, 2002 for the items described below.
Quarter Ended March 31, 2002
Accumulated Prior Period Adjustments
The March 31, 2001 consolidated balance sheet was restated to give effect to the
accumulated prior period adjustments related to the December 31, 2001 and 2000
restatement described above.
Notes Receivable from Officers and Stockholders
The Company provided a complete valuation allowance against notes receivable
from officers and stockholders prior to December 31 2001. Interest income
originally recorded in 2002 on the notes was reversed, as collectibility was not
reasonably assured.
Capitalized Software Development Costs
Capitalized software costs were written off to research and development costs
prior to December 31, 2001 because the Company had not met the technological
feasibility requirements of SFAS No. 86. Amortization expense originally
recorded to cost of services in 2002 was reversed.
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 at December 31, 2001. Depreciation expense originally recorded to
selling, general and administrative expenses in 2002 was reversed.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
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 as of March 31, 2002.
Accrued Liabilities
Included in other accrued liabilities is a contractual obligation payable to
sellers of an acquired business that does not have a stated interest rate.
Accreted interest not previously recognized was recorded to increase the
original liability and increase interest expense.
Restructuring liabilities and related charges were revised to comply with EITF
94-3 and SAB No. 100.
Revenue and Deferred Revenue
Revenue was increased and deferred revenue was reduced to properly reflect the
progress on certain fixed priced consulting contracts.
Other
Several reclassifications and smaller adjustments were made for bookkeeping
items.
The consolidated statement of cash flows was revised for the above adjustments.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
The following tables present the changes that have been made to the condensed
consolidated balance sheets as of March 31, 2002 and the condensed consolidated
statement of operations and condensed consolidated financial statement and cash
flows for the three months ended March 31, 2002 and 2001
As Previously
Reported Restated
------------- --------
March 31, 2002
------------------------
Consolidated Balance Sheet:
Current assets:
Refundable income taxes ................................ $ 225 $ 7,875
Accounts receivable .................................... 2,937 3,920
Deferred tax assets .................................... 7,413 --
Notes receivable from officers and stockholder ......... 1,860 --
Current portion of note receivable from acquirer of
discontinued operation .............................. 642 940
Prepaid expenses and other current assets .............. 960 932
Total current assets ................................ 37,147 36,928
Capitalized software costs, net ........................... 827 --
Property and equipment, net ............................... 3,036 6
Note receivable from acquirer of discontinued operation ... 3,352 1,339
Equity investment in alliance partner ..................... 1,871 689
Other assets .............................................. 110 350
Total assets ........................................ 46,343 39,312
Accounts payable .......................................... 1,084 1,274
Restructuring liabilities ................................. 1,042 208
Deferred revenue .......................................... 84 424
Other accrued liabilities ................................. 5,512 2,125
Total current liabilities .............................. 9,652 5,961
Restructuring liabilities ................................. -- 862
Other long-term liabilities ............................... 508 359
Deferred tax liabilities .................................. 13 --
Income tax payable ........................................ 2,368 2,618
Total liabilities ...................................... 12,541 9,800
Stockholders' equity:
Additional paid-in capital ............................. 86,891 86,666
Retained deficit ....................................... (46,551) (50,616)
Total stockholders' equity .......................... 33,802 29,512
Total liabilities and stockholders' equity .......... 46,343 39,312
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
As Previously
Reported Restated
------------- -----------
Three Months Ended March 31, 2002
---------------------------------
Consolidated Statement of Operations:
Revenues .............................................. $ 5,784 $ 5,873
Cost of services ...................................... 3,803 3,768
Gross profit .................................... 1,981 2,105
Selling, general and administrative expenses .......... 4,574 4,613
Operating loss ........................................ (2,812) (2,727)
Other income (expense):
Interest expense ................................... (21) (47)
Interest income .................................... 186 76
Other .............................................. 11 (158)
Total other income (expense) .................... 176 (129)
Loss from continuing operations before income taxes ... (2,636) (2,856)
Benefit for income taxes .............................. 7,400 7,400
Income from continuing operations ..................... 4,764 4,544
Net income ............................................ 4,764 4,544
Earnings per share:
Basic -
Income from continuing operations .................. 0.32 0.31
Net income ......................................... 0.32 0.31
Diluted -
Loss from continuing operations .................... 0.31 0.27
Net income ......................................... 0.31 0.27
Weighted average number of shares outstanding
Diluted ............................................ 15,556,747 16,925,314
As Previously
Reported Restated
------------- --------
Three Months Ended March 31, 2002
---------------------------------
Consolidated Statement of Cash Flows:
Net cash provided by operating activities ............. $4,509 $ 4,214
Net cash provided by investing activities ............. 33 114
Net cash provided by (used in) financing activities ... (125) 4
Cash provided by (used in) discontinued operations .... (85) --
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
As Previously
Reported Restated
------------- --------
Three Months Ended March 31, 2001
---------------------------------
Consolidated Statement of Operations:
Research and development costs ................................. $ -- $ 106
Selling, general and administrative expenses ................... 9,535 9,726
Operating loss ................................................. (4,795) (5,092)
Other income (expense):
Interest expense ............................................ (1) (30)
Interest income ............................................. 485 362
Other ....................................................... 46 (145)
Total other income ....................................... 530 187
(Income) loss from continuing operations before income taxes ... (4,265) (4,905)
Benefit for income taxes ....................................... -- 3,454
Loss from continuing operations ................................ (4,265) (1,451)
Income (loss) from discontinued operations .................. (6) (120)
Net income (loss) .............................................. (4,271) (1,571)
Earnings (loss) per share:
Basic -
Loss from continuing operations .......................... (0.28) (0.09)
Loss from discontinued operations ........................ -- (0.01)
Net income (loss) ........................................ (0.28) (0.10)
Diluted ..................................................... --
Loss from continuing operations .......................... (0.28) (0.09)
Loss from discontinued operations ........................ -- (0.01)
Net income (loss) ........................................ (0.28) (0.10)
As Previously
Reported Restated
------------- --------
Three Months Ended March 31, 2001
---------------------------------
Consolidated Statement of Cash Flows:
Net cash provided by (used in) operating activities ............ $(279) $(79)
Net cash provided by (used in) investing activities ............ (161) 51
Cash provided by (used in) discontinued operations ............. 377 (35)
Note 3 - Summary of Significant Accounting Policies
The accompanying interim financial statements do not include all disclosures
included in the financial statements in Cotelligent's Amendment No. 3 to Annual
Report on Form 10-K/A for the year ended December 31, 2001 ("Form 10-K/A"), and
therefore these financial statements should be read in conjunction with the
financial statements included in Cotelligent's Form 10-K/A.
In the opinion of management, the interim financial statements filed as part of
this Amendment No. 1 to Quarterly Report on Form 10-Q/A reflect all adjustments
necessary for a fair presentation of the financial position and the results of
operations and of cash flows for the interim periods presented. Certain balances
of the prior year have been reclassified to conform to the current presentation.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
Note 4 - Recent Accounting Pronouncements
The following identifies recent accounting pronouncements that took effect in
the quarter ended March 31, 2002.
Reimbursement Received for Out-of-Pocket Expenses Incurred
A 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. Effective
January 1, 2002 the Company began to classify amounts received for reimbursement
of out-of-pocket expenses as revenues. Reclassification has been made to the
prior years' financial statements to conform to the presentation in the current
period.
Note 5 - Changes in Stockholders' Equity
Notes
Common Stock Additional Receivable Treasury Stock Total
------------------- Paid-In From Accum. ---------------- Stockholders'
Shares Amount Capital Stockholders Deficit Shares Amount Equity
---------- ------ ---------- ------------ -------- ------- ------ -------------
Balance at December 31, 2001 ... 15,514,757 $155 $86,662 $(6,193) $(55,160) 644,600 $(500) $24,964
Issuance of Common Stock ....... 30,734 -- 4 -- -- -- -- 4
Net income ..................... -- -- -- -- 4,544 -- -- 4,544
---------- ---- ------- ------- -------- ------- ----- -------
Balance at March 31, 2002 ...... 15,545,491 $155 $86,666 $(6,193) $(50,616) 644,600 $(500) $29,512
========== ==== ======= ======= ======== ======= ===== =======
Note 6 - Discontinued Operations - Restated
On June 30, 2000, the Company sold the majority of its IT staff augmentation
business and on July 14, 2000 and October 31, 2000 sold other components of the
IT staff augmentation business. During the quarter ended March 31, 2001, the
Company held one remaining component in discontinued operations. During the
fourth quarter of fiscal 2001, the Company abandoned its plan to divest of this
operation and consequently closed this business.
The following financial data reflects a summary of operating results for the
Company's discontinued operations for the three months ended March 31, 2001.
Summary of Operating Results of Discontinued Operations:
Three Months Ended
March 31, 2001
------------------
Revenues ...................................................... $2,077
Cost of services .............................................. 1,672
------
Gross profit ............................................... 405
Selling, general and administrative expenses .................. 525
------
Operating loss ............................................. (120)
Other expense ................................................. --
------
Operating loss before provision for taxes ..................... (120)
Provision for taxes ........................................... --
------
Operating loss from discontinued operations ................... (120)
Reclassification to loss on sale of discontinued operations ... 120
------
Operating income (loss) from discontinued operations .......... $ --
======
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
Note 7 - Restructuring Programs - Restated
In September 2001, as part of the Company's efforts to streamline its operations
commensurate with its revenue base, the Company identified opportunities to
reduce its cost structure by reducing headcount and closing certain operating
facilities to conform to the Company's new operating structure. Accordingly, the
Company adopted a restructuring plan, which resulted in a pre-tax restructuring
charge of $2,029 during the nine months ended September 30, 2001. The September
2001 charge 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 ($995). The severance costs were
expensed when paid prior to September 30, 2001. The accrual for the closure
costs was increased by $407 during the three months ended December 31, 2001
resulting from a change in estimate of sublease rental income.
The following summarizes the activity and balances in the restructuring program
for the three months ended March 31, 2002:
September 2001
Restructuring Program Total
---------------------- ------
Facilities
Severance Closure
--------- ----------
Balance at December 31, 2001 ................ $-- $1,290 $1,290
Spending .................................... -- (220) (220)
--- ------ ------
Balance at March 31, 2002 ................... $-- $1,070 $1,070
=== ====== ======
Note 8 - Income Taxes
On March 9, 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 was reflected in the March
31, 2002 financial statements as changes in tax law must be reflected in the
period of enactment. Consequently, the Company recorded a $7,400 tax benefit
during the quarter ended March 31, 2002, which reflects the release of a
valuation allowance against a deferred tax asset previously written down to zero
due to the uncertainty of its realization.
Note 9 - Weighted Average Number of Shares Outstanding
Three Months Ended
March 31,
-----------------------
2002 2001
---------- ----------
Basic weighted average number of shares outstanding ......... 14,890,646 15,349,060
Effect of stock options issued to employees and directors ... 2,034,668 --
---------- ----------
Diluted weighted average number of shares outstanding ....... 16,925,314 15,349,060
========== ==========
Options to purchase 503,309 shares of common stock were outstanding during the
three months ended March 31, 2002 but were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares. Options to purchase 2,115,164 shares of
common stock were outstanding at March 31, 2001 but were not included in EPS
because the Company had a loss from continuing operations making the options
antidilutive.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for statements of historical fact contained herein, any statements
contained in this report may be deemed to be forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. For example,
words such as "may," "will," "should," "estimates," "predicts," "potential,"
"continue," "strategy," "believes," "anticipates," "plans," "expects," "intends"
and similar expressions are intended to identify forward-looking statements. All
such forward-looking statements are based upon current expectations that involve
risks and uncertainties. Cotelligent's actual results and the timing of certain
events may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause or contribute to such a
discrepancy include, but are not limited to, those discussed under "Risk
Factors" in Cotelligent's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, other filings made with the Securities and Exchange
Commission and Cotelligent's press release announcing earnings for the quarter
ended March 31, 2002, which was issued on April 30, 2002. The following
discussion is qualified in its entirety by, and should be read in conjunction
with, the more detailed information set forth in our financial statements and
the notes thereto included elsewhere in this filing. All forward-looking
statements included in this report are based upon information available to
Cotelligent as of the date thereof, and Cotelligent assumes no obligation to
update any of such forward-looking statements.
OVERVIEW
Cotelligent provides software consulting services to businesses with complex
information technology ("IT") operations and also provides maintenance, support
and hosting on software products it licenses. These activities are provided
under time and materials billing arrangements or on a fixed-fee basis. For time
and materials billing arrangements, revenues are recorded as work is performed.
Revenues are directly related to the total number of hours billed to clients and
the associated hourly billing rates. Hourly billing rates are established for
each service provided and are a function of the type of work performed and the
related skill level of the consultant. For fixed-fee arrangements, work is
performed in line with established deliverables and revenue is calculated on a
percentage of completion basis. In addition, the Company has developed complete
mobile workforce management solutions for industries that have medium to large
transient sales, field or delivery personnel. A component of these solutions may
be software that has been developed by the Company. Revenues 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
The Company has restated the condensed consolidated financial statements as of
March 31, 2002 and December 31, 2001 and the condensed consolidated statements
of operations and cash flows for the three months ended March 31, 2002 and 2001
included in this Amendment No. 1 to Quarterly Report on Form 10-Q/A. For
additional information regarding the restatement, please refer to Note 2 to the
condensed consolidated financial statements included in Item 1.
14
CONSOLIDATED RESULTS OF OPERATIONS
(In Thousands)
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
Revenues
Revenues decreased $10,723, or 65%, to $5,873 in the three months ended March
31, 2002 from $16,596 in the three months ended March 31, 2001. The decrease was
due to a general reduction in demand for its services due to softening in the
market coupled with a shift away from general IT consulting services towards
offering mobile workforce management and Web services solutions.
Gross Profit
Gross profit decreased $2,635, or 56%, to $2,105 in the three months ended March
31, 2002 from $4,740 in the three months ended March 31, 2001. The decrease was
due to lower revenues following a general reduction in demand for its services
due to softening in the market coupled with a shift away from general IT
consulting services towards offering mobile workforce management and Web
services solutions. The gross profit margin increased to 36% from 29%, due to
better pricing and a mix shift to higher margin projects caused in part by the
end of some long-term, lower margin, legacy system development engagements.
Research and Development Costs
Research and development costs increased $113, or 107%, to $219 for the three
months ended March 31, 2002. The increase was due to the additional operating
staff working in the area of research and development activities associated with
mobile workforce management and Web services solutions.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $5,113, or 53%, to $4,613
in the three months ended March 31, 2002 from $9,726 in the three months ended
March 31, 2001. The decrease was primarily due to reductions in operating staff
and associated spending in order to streamline operations in line with revenues
together with the closure of several locations in 2001 and zero depreciation
expense resulting from a complete impairment of fixed assets at December 31,
2001.
Other Income (Expense)
Other income (expense) primarily consists of interest income, interest expense
and losses on an investment in an alliance partner accounted for under the
equity method of accounting. Interest income, net of interest expense was $29
for the three months ended March 31, 2002 compared to net interest income of
$332 for the three months ended March 31, 2001. The decrease in interest income
was due to lower cash and cash equivalents on hand during the three months ended
March 31, 2002 and lower interest rates available on cash equivalents.
Benefit for Income Taxes
The income tax benefit of $7,400 for the quarter ended March 31, 2002 was the
result of the Job Creation and Worker Assistance Act of 2002, approved by
Congress on March 9, 2002, allowing net operating losses for the Company's
fiscal tax year ending March 31, 2002 to be carried back five years. In
accordance with SFAS No. 109, the effect of this change in tax law was reflected
in the March 31, 2002 financial statements as changes in tax law must be
reflected in the period of enactment. The income tax benefit of $3,454 for the
quarter ended March 31, 2001 resulted from a decrease in a valuation allowance
previously established against a goodwill deduction that was written off on the
March 31, 2001 tax return.
Gain (loss) on sale from Discontinued Operations
Discontinued operations is comprised of the Company's IT staff augmentation
business. During the quarter ended March 31, 2001, the Company held one
remaining component in discontinued operations which resulted in operating loss
of $120. During the fourth quarter of fiscal 2001, the Company abandoned its
plan to divest of this operation and consequently closed this business.
15
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed itself principally through cash flows from operations,
net proceeds from its public offerings, net proceeds from the sale of its IT
staff augmentation business and tax refunds resulting from the carry back of net
operating losses.
The Company previously maintained a credit facility with a consortium of banks
under which it borrowed to fund working capital needs. On June 30, 2000, the
Company used a portion of the cash proceeds from the sale of its IT staff
augmentation business to pay off all obligations under the credit facility and
to pay existing earn-out obligations to sellers of an acquired business. Upon
settlement of all obligations under the credit facility, the credit facility was
terminated. Since June 30, 2000, the Company has not maintained a credit
facility.
Cash provided by operating activities was $4,214 for the three months ended
March 31, 2002 and the average cash balance during the quarter was $20,944. The
Company's primary sources of liquidity going forward include the collection of
accounts receivable and refundable federal and state income taxes resulting from
the carry-back of net operating losses. In addition, the Company continues to
utilize the cash proceeds generated from the sales of its IT staff augmentation
businesses. Total receivables were 71 days of quarterly revenues at March 31,
2002 and 74 days at December 31, 2001. In the first quarter of 2002, Congress
approved the Job Creation and Worker Assistance Act of 2002, allowing fiscal tax
year end March 31, 2002 net operating losses to be carried back five years. The
effect of this change in tax law resulted in the recording of a tax refund of
$7,400 during the three months ended March 31, 2002.
Other sources of cash in the March 2002 quarter were $120 of payments received
on a note from the acquirer of a discontinued operation.
The Company's management believes that the remaining cash on hand will provide
adequate cash to fund its anticipated cash working capital needs at least
through next year.
---------------------------------------------------------------------------------------------------
Payments Due by Period
---------------------------------------------------------------------------------------------------
Less than 1 to 3 4 to 5 After 5
Contractual Cash Obligations: Total 1 Year Years Years Years
---------------------------------------------------------------------------------------------------
Obligations due sellers of an acquired business $ 653 $ 332 $ 321 $ -- $--
---------------------------------------------------------------------------------------------------
Operating leases $5,933 $1,840 $3,483 $610 $--
---------------------------------------------------------------------------------------------------
Total contractual obligation $6,586 $2,172 $3,804 $610
---------------------------------------------------------------------------------------------------
Critical Accounting Policies
Allowance for Doubtful Accounts
The Company provides an allowance for potentially uncollectible accounts
receivable under the provisions of SFAS No. 5, "Accounting for Contingencies,"
in the ordinary course of business. The allowance is derived as the result of
periodic and thorough reviews of aged and known problem accounts during each
quarter. In addition, the Company reserves for unknown issues in its receivables
at the balance sheet date using a formula consistent from quarter to quarter.
Management believes that its approach is appropriate to reserve for potentially
uncollectible receivables. Should management have taken another approach to
developing its reserve, the allowance for doubtful accounts may have been
different than that reported.
Revenue Recognition
The Company accounts for time and materials revenue under the provisions of SAB
101, "Staff Accounting Bulletin No. 101: Revenue Recognition in Financial
Statements", which requires revenue to be recorded when there is evidence of an
agreement, a fixed or determinable fee, collectibility is reasonably assured,
and delivery has occurred. Revenues include reimbursable expenses charged to and
collected from clients. Revenues pursuant to fixed-fee contracts are generally
recognized as services are rendered on the percentage-of-completion method of
accounting based on hours incurred to total estimated labor hours to complete.
Revenues earned for software license sales and service contracts are recorded
based on the provisions of AICPA SOP 97-2, "Software Revenue Recognition", which
shares the basic criteria of SAB No. 101.
Restructuring Liabilities
As part of the Company's efforts to streamline its operations commensurate with
its revenue base, the Company identified opportunities to reduce its cost
structure by reducing headcount and closing certain operating facilities to
conform to the Company's changing operating structure in June 1999, December
2000, and September 2001. These restructuring obligations were calculated using
information known at the date of the respective accruals based on the provisions
of EITF 94-3, "Liability Recognition for
16
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.
Management periodically reviews the accuracy of the restructuring liabilities,
and accounts for any necessary adjustments due to changes in estimates in the
statement of operations as originally provided.
Accounting for Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes." This pronouncement requires using an asset and liability approach to
recognize deferred tax assets and liabilities for the tax consequences of
temporary differences by applying enacted statutory tax rates to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities. The Company has not given benefit to any deferred tax
assets or net operating losses in the previous two fiscal years due to
uncertainty of realizing these assets in future periods, except a) in the first
quarter of 2001, the Company recognized an income tax benefit related to a net
operating loss generated through March 31, 2001 that was carried back to early
years and for which a refund of taxes was received and b) in the first quarter
of 2002, Congress approved the Job Creation and Worker Assistance Act of 2002,
allowing March 31, 2002 net operating losses to be carried back five years.
Under SFAS No. 109, the effect of this change in tax law was reflected in the
March 31, 2002 financial statements as changes in tax law must be reflected in
the period of enactment. In addition, the financial statements have provided
reserves for certain tax positions taken by the Company in the March 31, 1999,
2000 and 2001 tax returns based on enacted tax laws during those periods.
17
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COTELLIGENT, INC.
Date: January 6, 2003 /s/ Curtis J. Parker
-----------------------------------------
Curtis J. Parker
Executive Vice President,
Chief Financial Officer and Treasurer
19
Certifications Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
I, James R. Lavelle, certify that:
1. I have reviewed this Amendment No. 1 to Quarterly Report on Form 10-Q/A of
Cotelligent, Inc.;
2. Based on my knowledge, this Amendment No. 1 to Quarterly Report on Form
10-Q/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. 1 to Quarterly Report on Form
10-Q/A; and
3. Based on my knowledge, the financial statements, and other financial
information included in this Amendment No. 1 to Quarterly Report on Form 10-Q/A,
fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods
presented in this Amendment No. 1 to Quarterly Report on Form 10-Q/A.
Date: January 6, 2003
/s/ James R. Lavelle
-------------------------------
James R. Lavelle
Chairman of the Board and
Chief Executive Officer
20
Certifications Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
I, Curtis J. Parker, certify that:
1. I have reviewed this Amendment No. 1 to Quarterly Report on Form 10-Q/A of
Cotelligent, Inc.;
2. Based on my knowledge, this Amendment No. 1 to Quarterly Report on Form
10-Q/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. 1 to Quarterly Report on Form
10-Q/A; and
3. Based on my knowledge, the financial statements, and other financial
information included in this Amendment No. 1 to Quarterly Report on Form 10-Q/A,
fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods
presented in this Amendment No. 1 to Quarterly Report on Form 10-Q/A.
Date: January 6, 2003
/s/ Curtis J. Parker
-------------------------------
Curtis J. Parker
Executive Vice President and
Chief Financial Officer
21