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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
Commission File No.00-24055
DA CONSULTING GROUP, INC.
(Exact name of registrant as specified in charter)
TEXAS 76-0418488
(State or other jurisdiction of (IRS employer
incorporation or organization) identification No.)
ONE EXETER PLAZA, 4TH FLOOR
BOSTON, MASSACHUSETTS 02116
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (617) 375-2800
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Class:
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COMMON SHARES, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
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 or any amendment to this
Form 10-K [ ].
As of March 29, 2001 the aggregate market value of the voting stock held by
non-affiliates was $5,060,000.
As of March 30, 2001, 8,418,604 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of the definitive Proxy Statement for the 2001 Annual Meeting
of Stockholders of DA Consulting Group, Inc. are incorporated
by reference in Part III of this report.
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DA CONSULTING GROUP, INC.
FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . 15
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters . . . . . . 15
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . 23
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . . . . . . . 23
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . 23
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . 23
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . 24
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . 24
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . 24
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
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PART I
ITEM 1. BUSINESS
DA Consulting Group, Inc. ("DACG(TM) together with its subsidiaries, the
"Company") is a leading international provider of employee education and
software solutions to companies investing in business information technology.
Through its offices in seven countries, DACG delivers customized services for:
- documentation and training necessary for implementation of extended
enterprise software applications;
- technical and non-technical employee education and continuous learning
programs;
- e-Learning applications such as computer-based-training and learning
management systems; and
- consulting on human resource management, change management and change
communications.
Since 1988, the Company has provided services to over 650 clients,
including more than 125 of the Fortune Global 500. Customers have included
companies such as Guinness, Compaq, BASF, Nabisco, Eastman Kodak, Corning
Consumer Products, Scott Paper Limited, Comp USA, Great Spring Water of America
(Perrier Worldwide) and McKessonHBOC. The Company's client base is diversified,
with its largest client representing less than 8% of the Company's revenue in
2000. Recognizing the global nature of the information technology market and the
importance of being able to serve multi-national clients, the Company has built
a substantial international presence and provides services in North America,
Europe and Asia-Pacific. The Company has offices in the U.S., Canada, United
Kingdom, France, Germany, Australia and Singapore.
DACG was founded in 1984 in Houston, Texas as an employee support company
providing documentation services to the oil and gas industry. In 1988, the
Company expanded its employee support services to include training in connection
with one of the first major English language installations of SAP AG software in
the world. During the 1990's, enterprise resource planning (ERP) represented the
substantial market opportunity for the Company's services. DACG made ERP
end-user support its primary focus. In 2000, revenue from clients implementing
SAP software represented 90% of the Company's billed consulting revenue. By
focusing on end-user support services, the Company has been successful in
institutionalizing its knowledge base and has developed proprietary content and
reference materials, the DA Foundation(TM), that are applied in developing
customized solutions for each client. DACG has also developed DA
Cornerstone(TM), the Company's methodology for delivering consistently high
quality service to its clients. DACG has broadened its complement of end-user
support services by also providing Customer Relationship Management (CRM)
solutions for the major CRM applications, including SAP, Vantive and Seibel
systems. During the fourth quarter of 2000, the Company introduced its web-based
learning management system - Dynamic IQ(TM), a flexible learning environment for
web-enabled, extended-enterprise continuous learning solutions.
MARKET
DACG participates in three marketplaces - education, software and end-user
support for applications in enterprise resource planning (ERP), customer
relationship management (CRM) and e-Learning. According to industry experts,
these markets had a combined value in excess of $8 billion, worldwide in 2000.
Growth of these marketplaces is estimated at a compound 11% for ERP, 33% for CRM
and more than 60% for e-Learning. There are many service providers in the
education and end-user support markets and the providers that directly compete
with the Company include software developers, computer training companies,
consulting firms, and internet-based learning companies. DACG also has
competitive pressure from large international system integrators and technology
vendors that provide end-user support programs to supplement their proprietary
software.
The Company's growth in past years was directly impacted by the significant
growth experienced within the ERP market for first time implementations. DACG's
ability to increase revenue in the ERP and CRM training markets is directly
correlated to the respective new and upgrade ERP and CRM license sales in the
countries in which it operates. The Company believes the turn-down in the ERP
marketplace in the second half of 1999 and through the first half of 2000 was
caused by the diversion of resources to Y2K compliance. This resulted in a
significantly negative impact on the demand for DACG's services. The worldwide
trend for ERP solutions has moved towards upgrades that take advantage of
web-enabled software and applications which link the back-office with the
front-office and the extended enterprise. Growth in Europe is additionally
driven by the regulatory need for companies operating within the European
Monetary Union (EMU) region to implement EMU-compliant systems by February 2002.
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Most of DACG's current revenue stems from major upgrades to ERP systems as
well as new implementations of CRM applications. DACG is deriving
proportionately increased revenue from its proprietary software applications,
including electronic performance support systems, computer-based learning and
CD-ROM based learning applications.
E-Learning is a major new marketplace for DACG. The marketplace is divided
into software, content and services and there are few companies providing
complete solutions across all three areas. Software includes learning
management systems (LMS) as well as computer-based-training (CBT) applications
and virtual classrooms. Content services are further divided into technical or
"hard" skills and non-technical or "soft" skills. Services include technical
implementation, content customization and human resource consulting. Most
growth is forecast to occur in services and in soft skills content.
During 2000, the Company invested significantly in the development of its
own proprietary learning management system, Dynamic IQ(TM). The Company intends
to leverage its relationship with the world's largest companies to drive
implementations of its software and related services. In the fourth quarter of
2000, the Company signed an agreement with SkillSoft to distribute their soft
skills content via its LMS implementations. The Company expects to sign further
content distribution agreements during 2001.
BUSINESS STRATEGY
The Company's mission is to enable the Global Fortune 2000 to transform
into continuous learning organizations through the deployment of education,
change management programs and supporting infrastructure and learning
applications. Its execution strategy revolves around profitable growth and
diversification within its chosen markets and the niche of corporate adult
education.
Grow Core Business and Diversify into Related Applications
The core of the Company's business will continue to be professional
consulting services for employee development and performance support for
technology systems implementations. DACG will continue to support the roll-out
of back office systems such as SAP, PeopleSoft, J. D. Edwards, and Oracle
software, as well as increasing services in front office systems such as
customer relationship management. As SAP is the largest ERP vendor and the
Company has a significant portion of current core business in SAP training, the
Company's business is dependent on the continued success of SAP.
At $2.8 billion in 2000, the CRM training marketplace has overtaken the ERP
training marketplace in size and is forecast to grow at a compound 33% through
to 2004. While there is a need for CRM technology implementation training, most
growth will occur in the areas of CRM soft skills - areas such as negotiation
skills and customer care. DACG will be positioning its CRM offering alongside
its soft skills e-Learning content and its Dynamic IQ(TM) learning management
system in order to capitalize on this growth opportunity. The Company was
engaged in three CRM projects during 2000 and expects the proportion of its
revenue derived from CRM engagements to increase during 2001.
The Company maintains offices in the three principal geographies of North
America, Europe and Asia-Pacific. DACG believes that it must continue with a
global presence in order to attract contracts from multi-national and global
companies. During 2000, the Company ceased operations in South Africa, Mexico
and Latin America, preferring to focus management attention on the developed
economies where consulting services are most highly valued.
The market for the Company's core business has broadened from the Fortune
Global 500 to include the Fortune 2000, and during 2001 the Company plans to
diversify further into the middle market.
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Maintain Independence and Leverage Existing Client Relationships
The Company provides its consulting and software services independent of
the marketplace for ERP, CRM and e-Learning solutions providers. The Company
provides its customers with solutions that are best suited to their environment,
budget and technological preferences. DACG continues to work with SAP,
PeopleSoft, Centra, Interwise and other companies in the deliverance of its
solutions.
Over nearly two decades, DACG has provided services to more than 650 of the
global Fortune 2000 companies. A key component of DACG's strategy is to
leverage these relationships, particularly as these companies determine
strategies to transform into continuous learning organizations. Relationships
with these companies have proven to be a key source of business leads and
referrals. During 2000, around 50% of DACG's business was derived from past or
existing customers. The Company believes that its brand recognition and
reputation are important assets in the learning marketplaces and are key
differentiators with its e-Learning competitors. The main benefit of DACG's
market position is translated into a proportionately lower need to spend on
sales and marketing.
Diversify into e-Learning
The Company will diversify into e-Learning applications through rapid
deployment of its Dynamic IQ(TM) learning management software. DACG is also
developing Human Resource (HR) services for performance-related employee and
extended enterprise management. Additionally, the Company is developing
relationships with content providers, such as SkillSoft, to provide a complete
range of e-Learning solutions.
The corporate e-learning marketplace is currently estimated to be $1.7
billion in the U.S. alone and is forecasted to grow to $11 billion by 2003,
which is an estimated compound annual growth rate (CAGR) of 65%. Industry
estimates put the European marketplace for e-Learning services at $4 billion by
2004. Development of the company's web-based learning system, Dynamic IQ(TM),
was the major focus for the research and development department during 2000. The
company launched Dynamic IQ(TM) during the fourth quarter of 2000. The Company
installed its first beta site with a client in France during the first quarter
of 2001 and expects to derive an increasing proportion of its revenue from
e-learning software, services and content.
PRODUCTS AND SERVICES
The Company delivers employee support solutions designed to maximize the
return on clients' business information technology investments while taking into
account each client's individual needs, resources, and requirements. New
business software has a significant direct impact on the working patterns of a
corporation, which must be managed in relation to both implementation of the
software and support of that software over time. The Company performs a thorough
review of the procedures and jobs that employees will need to perform and uses
this information to develop the requisite end-user support solution for the
client. The Company offers DA Passport for clients to provide their employees
context-sensitive help on-demand at their desktop computers. Such solutions
utilize the Company's proprietary methodology, DA Cornerstone(TM), in the
delivery of services consisting of change communications, education, and
performance support programs developed by the Company.
Learning and Change Management
During 2000, DACG expanded its change communication services to provide
consulting in change management as companies transform into learning
organizations. Companies transforming themselves into continuously learning
organizations commit themselves to long term change. Clients' employees are
affected by this change, seeing it on the desktop in the form of new software
functionality and in day-to-day business activities in the form of new
procedures and policies. Typical approaches to managing this change focus on
establishing executive management support. However, the key to successful
cultural transformation is obtaining the support of employees and those within
the extended enterprise, such as customers and suppliers. Effective utilization
of technology is critical to the success of the learning organization. Common
change communications deliverables provided by the Company to its clients
include kick-off meetings and speeches, facilitated collaborative work groups,
multimedia presentations, video presentations, and newsletters. These
deliverables, in addition to providing critical information, help to ensure a
successful and ongoing cultural transformation.
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Education
The Company develops educational programs specific to each client's needs,
taking into account the client's infrastructure and resources, the scope of the
client's information technology system, and the client's language and cultural
requirements. In order to influence the way an employee works and optimizes his
or her utilization of a new system, educational programs are developed that
focus on specific end-user job responsibilities, as well as on the overall
business processes that impact the end-user. In developing educational content
for a client, the Company utilizes its DA Foundation(R) library, which contains
training content to address job roles and processes common to complex business
software.
The Company consults with the client to determine the appropriate media to
use for delivering the educational content: instructor-led training,
computer-based training, and/or distance learning. Virtually all the Company's
clients utilize instructor-led training courses, which the Company customizes to
meet the particular client's specifications and needs.
Many companies, particularly those with large and geographically dispersed
operations, are increasingly seeking ways to use computer-based training to
decrease costs and minimize employee time away from the job. DACG offers both
custom and standardized computer-based training modules, utilizing the resources
of the DA Foundation library and standardized courseware co-developed with
SmartForce as well as soft skills from SkillSoft.
DACG offers both synchronous and asynchronous capabilities for
computer-based distance learning. Using Symposium software from Centra Software,
Inc., DACG provides synchronous distance learning, where many students can
follow a single event. DACG provides asynchronous distance learning through
custom and SmartForce courses that allow students to work independently and at
their own pace. Both of these methods are used by companies with remote user
audiences and require only basic information technology infrastructures because
they involve distributing content by using wide area networks, corporate
intranets, and audio conferencing technology. Typically a client implementing
an ERP system or another new business technology will have the required
infrastructure. Distance learning or "e-learning" is effective in situations
where travel, time away from work and cost are important.
Performance Support
A critical component of the Company's end-user support solution is the
documentation of business processes that affect end-users. This documentation is
designed to assist workers in performing their jobs after training. In utilizing
a new system, end-users of technology frequently encounter situations in which
they require assistance. In order to limit workers' downtime and provide workers
with easy access to assistance, on-line references containing relevant policies,
processes, and procedures are utilized. In coordination with the design of
educational programs, the Company works with each client to assess the ongoing
documentation and performance support needs of the particular audience of
end-users. Utilizing the DA Foundation, the Company then develops support
content for the client, creating a clearly defined set of policies, processes,
and procedures relating to the particular business software application.
Based upon the client's information technology infrastructure, budget, and
timing needs, the appropriate media for performance support are determined.
Quick reference guides and printed documentation are used as hard copies to
deliver performance support for the employee. Those clients who have limited
time frames in which to develop an end-user support solution most often use this
type of performance support solution. These clients can migrate to a more
technologically advanced solution at a later date. More sophisticated
performance support solutions can be delivered through the client's corporate
intranet, where DACG will design and maintain a repository of the end-user
support deliverables.
DACG's most sophisticated performance support solution is an electronic
performance support system ("EPSS") which provides comprehensive end-user
support on demand at the desktop so that end-users can minimize interruptions in
seeking help or information relating to a job task. End-users can access the
EPSS from their own desktop and find the answers to the questions they have
about a particular task. Building a comprehensive EPSS solution can be
challenging and costly. To simplify its development, the Company has created a
proprietary software technology, DA Passport. DA Passport is context sensitive,
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which means it can track the location of the client end-users in the client's
ERP system, in order to provide support based on the particular application
being run, thereby allowing the Company to create customized ERP end-user
support accessible at a transactional or task level. The Company can link system
tasks, business procedures, training, and computer-based training files to ERP
transactions using the DA Passport technology to provide sophisticated support
to end-users. A DA Passport solution is typically recommended to clients with
corporate intranets, although the Company can consult with a client to construct
a corporate intranet site if required.
Web-based Learning Management System: Dynamic IQ(TM)
Dynamic IQ is designed to optimize an organization's learning and
development process in order to maximize individual performance and achieve
defined business objectives. It is a customizable, collaborative and
interactive system that will help organizations make their investment in
employee development more efficient, effective and at a lower cost, while
helping individuals meet their career goals.
Dynamic IQ is designed to track and enhance employee performance, learning
and development through systematic assessment testing and engaging interactive
online content. The primary objective of Dynamic IQ is to leverage web-based
technologies to give enterprises a competitive advantage by increasing
measurable workforce performance through competency-based training and tracking
tools.
DACG's competency-based approach to specific training links employees to
the roles they perform. Dynamic IQ is designed around building specialized
learning plans to provide targeted courseware and support learning objects
applicable to each employee's job role. For example, when a student enters the
system, it displays a personalized development plan, listing only those courses
required to help the individual meet his or her performance goals.
DACG's unique approach includes:
- Customizable web-front end where the users will log in, view
personalized development plans based on their role in the
organization, as well as register, enroll, launch courses and take
associated assessments.
- A web-based learning management system that will manage both
customized and generic content.
- An Open-architecture developed on a JAVA-based framework to ensure
flexibility and compatibility with interfaces to ERP and other legacy
systems.
- Full spectrum of consulting services on education, performance, and
technical issues concerning:
- Pre- and post-assessment of employee abilities;
- Performance measurements;
- Migration of the client's proprietary training information into
web-based environment;
- Technical systems integration to connect Dynamic IQ to the
client's human resources system;
- Customization of the web front end;
- Customization of the content;
- Partnership service to gather third-party courseware the client
would like to license; and
- Maintenance support.
Dynamic IQ is completely scaleable and customizable to meet the needs of
both Fortune 2000 and small-to-medium size enterprises. It is suitable for both
a small training rollout, requiring only a few hours of training and minimal IT
involvement, or larger-scaled implementations with expansive learning needs.
CLIENTS AND REPRESENTATIVE ENGAGEMENTS
The Company provides custom support solutions around the world to large and
mid-sized companies, many of which have information intensive, multinational
operations. The Company has provided services to more than 650 clients,
including many of the world's leading corporations in a broad range of
industries such as oil and gas, technology, pharmaceutical and chemicals,
utilities and telecommunications, consumer products, and manufacturing. The
following is a selection of DACG's 2000 clients and representative engagements.
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BIC Consumer Products (BIC)
BIC Consumer Products is a division of BIC USA Inc., a subsidiary of
Societe BIC of France. BIC is one of the world's leading providers of consumer
goods such as stationery, lighters and shavers. DACG was chosen to help BIC
educate over 400 of its employees in the United States on the newly implemented
JD Edwards OneWorld system. DACG performed a detailed training needs analysis,
and developed a highly targeted and customized training program utilizing DACG's
Cornerstone Methodology, a phased and flexible guideline used to develop
education programs unique to each client that has been used in over 750
implementations worldwide. During the course of the six month project, DACG
developed customized training materials and tools that were delivered in various
forms, including instructor led in a classroom setting, over the company's
intranet and through computer based courseware.
BP Amoco
BP Amoco is the third largest integrated energy company in the world. BP
Amoco turned to DACG for help in educating over 600 employees on their
PeopleSoft implementation which focused on multiple modules specific to
accounting. DACG developed computer based training courses, quick reference
guides, help cards and documentation exercises that were delivered via classroom
training sessions, the intranet and to BP Amoco's "Super Users"; internal
employees devoted to learning specifics about the software and responsible for
assisting less experienced colleagues during and after implementation. BP Amoco
was directed to DACG through the Company's reputation as a dependable provider
of exceptional training and education services.
EDEKA Minden-Hannover (EDEKA)
EDEKA is one of the largest supermarket chains and food wholesalers in
Germany. During the fiscal year ending December 31, 1999, their turnover
equaled approximately 7 billion DEM. EDEKA decided to use the SAP 4.6c RETAIL
solution in 2000 to completely integrate its main functional areas such as
Finance, Controlling and Material Management into one system, to accomplish the
ultimate results in Material Management and Data Integration. EDEKA chose DACG
to educate over 800 users in 30 locations throughout Germany because of the
Company's proven competence and focus on the education of the end user. DACG
performed an initial training needs analysis and developed a targeted training
concept, delivering on-line help and documentation solutions on over 300
transactions and 60 business processes. DACG also developed customized courses,
reference based training and a train-the-trainer program aimed at educating
approximately 12 EDEKA employees to deliver future training programs based on
materials developed by DACG. Currently, this is the largest RETAIL
implementation in Europe.
Siemens Information and Communication Mobile LLC (Siemens)
Siemens is a leading provider of multi-line, multi-user expandable cordless
phone systems in the United States, and is a subsidiary of Siemens Corporation,
a global leader in electrical engineering and electronics. During the year
2000, Siemens realized the need to upgrade their enterprise resource planning
system, SAP, and turned to DACG to support their Communication Devices Digital
Products division's upgrade from SAP R/3 to the more user-friendly version, SAP
4.6. Upon completion of a thorough needs analysis, DACG devised a unique,
multi-faceted learning program for Siemens. DACG developed business process
flows, walk through workbooks and help cards as well as provided Siemens with
its highly acclaimed SAP 4.6 web-based training CD-ROM. Upon completion of
development of these materials, DACG delivered these tools to selected
individuals within Siemens who then performed the necessary training and
education of the division.
The Company's ten largest clients, in the aggregate, accounted for
approximately 31%, 38%, and 55% of its billed hour revenue in 1998, 1999, and
2000, respectively. No single client of the Company accounted for more than 8%
of the Company's revenue in 2000.
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The following is a sample list of clients that the Company provided
services for during 2000:
24/7 Eirecom Nokia
Air Products George Western Foods Normandy Mining
Australian Broadcasting Georgia-Pacific Nova Chemicals
Australian Defence Finance Gillette Perrier
Burton's Biscuits Gleason Corporation Philips Petroleum
China Light and Power Lloyds TSB Singapore International Airlines
Compaq Montell Toyota of Australia
Dun & Bradstreet NatSteel Unilever
COMPANY ORGANIZATION AND PROJECT MANAGEMENT METHODOLOGY
Organization
The Company is organized around three principal operating divisions: the
Americas Division, which includes its operations in the USA and Canada; the
Europe Division, which includes its operations in the UK, France and Germany as
well as mobile services provided in other European countries; and the Asia
Pacific Division, which includes its operations in Australia and Singapore as
well as mobile services provided in Asia.
Within each division there are administrative, sales and marketing and
operations functions. Administration consists of finance and planning, and
operations performs all of the functions of the consulting services and product
implementation and support.
The Company has two corporate functions: research and development and
corporate management. Research and development is responsible for on-going
support of software products as well as the development of new products such as
Dynamic IQ. Corporate management consists of the offices of the CEO, CFO, COO
and investor relations.
Project Methodology Management
The Company's DA Cornerstone(TM) project management methodology is a key
component in its delivery of quality end-user support solutions to its clients.
DA Cornerstone is DACG's comprehensive six phase, end-user support methodology
that addresses key end-user support program deliverables, activities, and
milestones throughout the lifecycle of a business information technology
implementation. Each phase has associated tools that facilitate the completion
of that phase's activities and deliverables.
DA Cornerstone phases include:
Analyze: DACG analyzes the client needs, resources, and requirements
and submits to the client an end-user support strategy and
proposed deliverables for approval.
Prototype and When the strategies are approved, DACG designs deliverables
Design: and sets up appropriate development strategies. The client
must approve the strategic program design.
Develop: DACG executes the strategies and submits all deliverables
for frequent internal and client review.
Implement: DACG delivers the final work to the end-users.
Evaluate: After implementation and as part of the services to the
client, DACG evaluates the effectiveness of the services
using appropriate tools.
Support: DACG will arrange and set up the post implementation and
long-term maintenance strategy for the educational program,
end-user support, change communications or other program
created by DACG for the client.
The Company's project staff develops each end-user support component
through an iterative draft and review process that directly involves client
end-users in the development of content specific to their needs. This review
process typically consists of three stages and has quality control steps
embedded in each stage as formal checkpoints. These checkpoints are intended to
ensure that the client is satisfied with the deliverables, that the content is
accurate and adheres to the Company's own standards, and that the project is
delivered in a cost-effective and timely manner. The success of a given project
engagement from a cost, time, and client satisfaction standpoint is the
responsibility of the assigned operations and project managers.
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SALES AND MARKETING
The Company generates business through a field sales force that sells
directly and pursues referrals and trade show leads. In addition, the Company
co-markets, in the form of joint sales calls and marketing materials, with SAP,
PeopleSoft and other ERP vendors, Interwise Ltd., SkillSoft UK Limited and
others.
The Company's direct sales efforts are performed worldwide by its 22
full-time sales personnel, each of whom has either a branch territory or
regional focus. The sales personnel generate leads from several sources,
including referrals from the Company's existing clients and from attendance at
industry trade shows. Among its sales and marketing efforts, the Company's sales
force has presented the Company's expertise at SAPPHIRE, the annual SAP America
conference for SAP service providers and end-users. The Company also
participates and has an opportunity to demonstrate its expertise at conferences
around the world with all leading ERP vendors as well as the numerous e-Learning
conferences. The Company also uses Internet-based marketing, tele-marketing,
direct mail, corporate presentations, joint marketing events, and networking
through regional business communities to generate potential sources for new
business. In 2001, the Company plans to focus its marketing on the ERP, CRM and
e-Learning marketplaces.
The Company's strategic business alliances, including relationships the
Company maintains with SAP, PeopleSoft, J.D. Edwards, and Interwise, are a
source of new business. DACG is recognized by SAP, PeopleSoft, and J.D. Edwards
as a preferred or qualified provider of end-user support services. DACG is
recognized as a Global Consulting Partner and a mySAP.com Global Consulting
Partner by SAP and a Global Education Services Alliance Partner by PeopleSoft.
In addition, the Company develops and delivers to potential clients, joint
proposals in collaboration with these business alliance partners, with the
proposals covering software applications, software implementation services, and
end-user support solutions. The Company has been successful in obtaining new
business through these joint proposals. During 2000, DACG continued to expand
its capability to develop and manage partnerships. This expanded capability has
shown signs of bringing a larger partner community onboard with an expanded
focus, including not only referral selling, but true value-added reseller
relationships. In this capacity, DACG will look to create bi-directional
revenue derived from partners selling DACG products and services and by DACG
reselling partner products and services.
Through a business alliance with InterWise Ltd., the market leader in
business-to-business live e-Learning, the Company will integrate InterWise
Millennium with its new e-Learning application, Dynamic IQ, the Company's total
learning management environment launched in the fourth quarter of 2000.
InterWise Millennium is a software-based solution enabling the transfer of
information, relationship management with customers, partners, suppliers and
distributors, into the client's organizational learning system. This agreement
enables the Company to provide the latest technological innovation in
e-Learning, allowing the Company to offer its courseware quickly and
efficiently, regardless of the time of day or location of instructors.
Through a business alliance with SkillSoft UK Limited, the Company offers
its clients the option of more than 400 e-Learning courses. These courses span
twenty various curricula, including but not limited to, management, leadership,
communication, customer service, finance, marketing and sales. The addition of
these courses enhances the Company's bank of courseware and job aids available,
securing a more robust education solution for the client.
The Company's services require a substantial financial commitment by
clients and, therefore, typically involve a long sales cycle. Once a lead is
generated, the Company endeavors to understand quickly the potential client's
business needs and objectives in order to develop the appropriate solution and
bid accordingly. The Company's operations and project managers are involved
throughout the sales cycle to ensure mutual understanding of client goals,
including time to completion and technological requirements. Sales cycles for
end-user support solution projects typically range from one to six months from
the time the Company initially meets with a prospective client until the client
decides whether to authorize commencement of an engagement. The retention of the
Company typically occurs at the beginning of the design/prototype stage of the
software implementation.
-10-
RECRUITING AND PROFESSIONAL DEVELOPMENT
As of March 31, 2001, DACG's personnel consisted of 263 billable employees,
29 sales and marketing personnel, 7 development staff and 40 administrative
employees. The Company believes that its success depends mainly on its ability
to attract, retain, and motivate talented, creative, and professional employees
at all levels. For core business, the Company seeks to hire personnel with prior
consulting experience in end-user education programs, education professionals
with a background in information technology, and information technology
professionals with education or communication program experience. Strong project
management, analytical and communications skills and international experience
are also considered. For the new programs such as e-learning and e-business, the
company seeks individuals with systems design, web design, and system
architecture capabilities. Recruiting is coordinated company-wide through the
Company's human resources department.
Training and mentoring are integral parts of the Company's staff
development program. The Company's training programs ensure that its
professional staff understands the impact of technology on people, is able to
communicate effectively at all levels within a client organization, and has the
ability to communicate with its clients' technical, business and management
staff to provide value-added content to its clients. Ongoing training includes a
blend of in-house and external training. In-house training includes basic
training, more detailed software education, project management, consultancy
skills, and leadership training. The use of DA Foundation materials and the
application of performance support technologies such as DA Passport are also
covered. In addition, all consultants are required to attend a DA Cornerstone
methodology training program, and to be approved for its use before being
assigned to any consulting project. External training programs focus on project
and time management skills.
The Company believes that its culture is central to its ability to attract
and retain highly skilled and motivated professionals. Extensive technical,
management, and sales training enable DACG professionals to expand their skills
and attain increasing levels of responsibility within the organization. The
technical career path provides opportunities for advancement outside the
traditional management career ladder. The technical career path builds
technical skills, provides compensation incentives, and at a macro level,
supports the development of DACG's current and future core competencies. Through
planned job assignment and rotations, special projects and structural
development events, high potential management candidates are prepared to assume
greater management roles. The Company attracts and motivates its professional
and administrative staff by offering competitive packages of base and incentive
compensation and benefits. All professional staff members are eligible for
bonuses. The Company appreciates the importance of recognition and a promotion
track for its administrative staff and fully integrates its staff into the
conduct of its business. All of the Company's employees are eligible to receive
stock options.
During 2000, the Company rolled-out its internal implementation of a learning
management system, eCampus, based on its Dynamic IQ platform. Additionally, the
company is providing employees with access to SkillSoft courses as part of its
commitment to distribute SkillSoft content. All employees have received
training on e-Campus and are developing personal development plans, including
mentoring programs.
RESEARCH AND DEVELOPMENT
DACG established a research and development department in 1995 to support
and maintain its end-user support content and consulting methodologies. During
2000, the primary focus of this department was the development of Dynamic IQ, a
virtual learning environment with complementary consulting services, ongoing
maintenance of DA Passport, DA Foundation, and the Company's proprietary toolset
used for rapid deployment of end-user support solutions. The department is also
responsible for developing computer-based training in collaboration with
SmartForce and Centra Software.
The Company's research and development department continually applies
technology developments to the Company's content and tools. As technology
advances, DACG has kept pace, expanding its deliverables from traditional hard
copy materials and instructor led training to include on-line documentation,
multimedia training, employee performance support systems, distance learning
and web-based education and performance support solutions. The Company will
maintain its commitment to innovative and collaborative research and development
and anticipates a broadening of this function through partnering in 2001.
-11-
COMPETITION
The global markets for end-user performance support services for business
information technology and e-Learning services are large, highly fragmented,
change rapidly, and are subject to low barriers to entry. DACG has various
market areas for competition, including:
- Competition from the ERP software developers and other applications
developers, which includes the software that DACG trains on, including
SAP and other vendors;
- Competition from large international systems integrators, such as the
consulting practices of the large international accounting firms,
which are focused principally on systems integration and
implementation but also provide end-user support as a secondary
service;
- Competition from the professional services groups of many large
technology and management consulting companies and a large number of
smaller organizations that specialize in employee support services,
generally serving a limited geographic area and having a smaller base
of technical and managerial resources;
- Competition as clients may elect to use internal resources to satisfy
their needs for training services the Company provides; and
- In e-learning, the company faces a number of competitors in the form
of software start-ups, established software companies and consulting
companies as well as other niche operators.
In all markets, DACG faces competition for client assignments from a number
of companies having significantly greater financial, technical, marketing
resources and name recognition. The Company believes key competitive factors
forming the basis upon which these companies compete are experience, reputation,
industry focus, international presence, service and technology offerings, and
price relative to the value of the services provided. The Company believes that
it competes effectively and will continue to compete effectively worldwide.
INTELLECTUAL PROPERTY AND OTHER PROPERTY RIGHTS
The Company relies upon a combination of nondisclosure and other
contractual arrangements and trade secret laws to protect its proprietary
rights. The Company generally enters into confidentiality agreements with its
key employees and clients, thereby seeking to limit distribution of proprietary
information. There can be no assurance that the steps taken by the Company in
this regard will be adequate to deter misappropriation of proprietary
information or that the Company will be able to detect unauthorized use of and
take appropriate steps to enforce its intellectual property rights. Software
developed and other materials prepared by the Company in connection with client
engagements are usually assigned to the Company's clients following the
termination of the engagement. The Company retains the right to use the general
know-how developed by the Company in the course of the engagement, and this
accumulated knowledge is the basis for the DA Foundation. The Company also
retains all rights to certain of its proprietary methodologies and software
(such as DA PASSPORT and computer-based training software), the benefit of which
the Company provides to the client by royalty-free license.
Dynamic IQ(R), DA Foundation(R), DA Team Teach(R) and DA Consulting
Group(R) are registered trademarks and/or service marks of the Company. The
Company also claims common law trademark rights in DACG and design (new), the
globe and temple logo, Fast Implementation Toolkit(TM), Fast Implementation
Toolset(TM), DA Cornerstone(TM), and DA Passport(TM), for each of which the
Company has filed an application for registration in the United States Patent
and Trademark Office. Furthermore, the Company claims common law trademark
rights in DACG(TM), DA FIT/Fast Implementation Toolkit(TM), FastED(TM), DA
ASK(TM), DA Quickweb(TM), and the slogan mark "Solutions for People and
Technology"(TM), but as to these has decided at present not to file applications
for trademark registration. The Company holds no patents. The Company has
registered the copyright in the computer programs titled "DA Basic Skills
Training for SAP R/3" and "DA Basic Skills Training for SAP R/3 v2.0 US." The
Company also claims the copyright in numerous other works and may elect to
register such copyrights on a case-by-case basis.
-12-
RISK FACTORS
Our business operations are dependent on SAP and the ERP software market.
A substantial portion of our revenue is derived from the provision of
end-user support services in connection with ERP software implementations by our
clients. These relationships and authorizations are generally subject to
termination on short notice. In addition, these licensors could further modify
their software in order to make the implementation cycles for its new releases
shorter and less complicated, thereby possibly reducing the need for customized
end-user support, or they could increase their provision of end-user support
services for their software applications. They could also cease referring us to
their customers as a provider of end-user support services. Any one or more of
these circumstances could have a material adverse effect on our business and
revenue.
We may not be able to keep up with rapid technological changes.
Our future success will depend on our ability to gain expertise in
technological advances, such as the latest releases from ERP software vendors,
and to respond quickly to evolving industry trends and client needs. Our efforts
to gain technological expertise and to develop new technologies require us to
incur significant expense. There can be no assurance that we will be successful
in adapting to these advances in technology or in addressing changing client
needs on a timely basis. In addition, there can be no assurance that the
services or technologies developed by others will not significantly reduce
demand for our services or render our services obsolete. Any significant
reduction in the demand for our services will have a material adverse effect on
our results of operations.
Our stock price has been volatile.
Stock prices may be subject to wide swings, particularly on a quarterly
basis, in response to variations in operating and financial results,
fluctuations in earnings, competitive pressures, market place conditions,
failure to meet revenue expectations and other similar factors. It is difficult
to forecast the timing of revenue because project cycles depend on factors such
as the size and scope of assignments, circumstances specific to particular
clients or industries, the number and nature of client projects commenced or
completed during a period, and the utilization rates of our professional staff.
Were we to fail to meet expectations of our anticipated revenue in a period, or
if we were to experience a negative change in our perceived long-term growth
prospects, either would likely have an adverse effect on our stock price.
We may continue to experience increased competition from competitors with
greater resources than ours, from potential clients performing services "in
house" and from suppliers delivering a complete package to their customers.
The information technology services industry is highly competitive. It is
served by many national, regional and local companies, including full service
agencies and specialized temporary service agencies. It has limited barriers to
entry, in part due to rapidly changing technologies. Our primary competitors
come from a variety of market segments, including "Big Five" accounting firms,
large systems consulting and implementation firms and large general management
consulting firms. Many of these competitors have significantly greater
financial, technical and marketing resources and greater name recognition. Such
advantages may enable these competitors to attract more clients and provide
faster service at less cost. In addition, our potential clients have
increasingly decided to dedicate sufficient internal resources to performing the
services that we provide "in house", particularly where these resources
represent a fixed cost to the client. We are also increasingly finding that
software licensors are implementing their own software packages, as well as
educating their customers' employees in how to use them. Such competition may
impose additional pricing pressures. We expect that the level of competition
will remain high in the future. Increased competition could have a material
adverse effect on our ability to profitably operate our business.
We may not be able to attract and retain qualified information technology
consultants.
Our continued success will depend in large part on our ability to attract,
retain and motivate highly skilled employees, particularly project managers and
other senior technical personnel. The qualified project managers that we require
are in great demand and are likely to remain a limited resource for the
foreseeable future. Many of the companies with which we compete for qualified
professionals have substantially greater financial and other resources than we
do. There can be no assurance that we will be able to recruit, develop, and
retain a sufficient number of highly skilled, motivated professionals to compete
successfully. In addition, competition for qualified personnel may also lead to
increased costs for such personnel which we may not be able to offset by
increases in billing rates. The loss of a significant number of professional
personnel is likely to have a material adverse effect on us, particularly our
ability to complete existing projects or secure new projects.
-13-
Failure to adequately estimate costs, or efficiently manage fixed-bid and
not-to-exceed projects could have a material adverse effect on our
profitability.
Certain of our projects are undertaken on a fixed bid basis, pursuant to
which we charge our clients a flat rate for our services, or on a not-to-exceed
basis, pursuant to which we limit the maximum fee that we will charge our
client. For the year ended December 31, 2000, we realized the majority of our
revenue from fixed-bid or not-to-exceed projects. Were we to fail to adequately
estimate the actual cost to us of completing a project under the guaranteed
not-to-exceed or fixed fee price set forth in certain of our contracts, or were
we to fail to efficiently manage these projects after entering into the
not-to-exceed or fixed fee contract, we could become exposed to unrecoverable
budget overruns, which could materially adversely affect our profitability.
Additionally, client engagements are generally terminable with little or no
notice or penalty, and our failure to meet a client's expectations could damage
our relationship with that client and cause the client to terminate our
engagement. A client's unanticipated decision to terminate or postpone a
project may result in higher than expected numbers of unassigned professionals
or severance costs, which could materially adversely affect our results of
operations.
We do not have any patents to protect our intellectual property rights from
misappropriation.
Our success in the information technology services business depends upon
our software deployment and methodology and other proprietary intellectual
property rights. We do not hold any patents. We rely on a combination of trade
secret, nondisclosure and other contractual arrangements and technical measures,
and copyright and trademark laws to protect our proprietary rights. We generally
enter into confidentiality agreements with our employees, consultants, clients
and potential clients and limit access to and distribution of our proprietary
information. There can be no assurance that the steps that we have taken will be
adequate to prevent misappropriation of our intellectual property rights or that
third parties will not independently develop functionally equivalent or superior
methodologies or software. Moreover, there can be no assurance that third
parties will not assert infringement claims against us in the future that would
result in costly litigation or license arrangements regardless of the merits of
such claims. Additionally, because our engagements are typically work- for-hire
based, we assign ownership of, or grant a royalty-free license to use, the
materials that we develop specifically for our clients to those clients upon
project completion.
Significant exposure to international markets.
We currently have international operations in Singapore, Australia,
England, France, Germany and Canada. As of December 31, 2000, 62% of our
revenue resulted from our international operations. The successful operation of
such geographically dispersed offices requires considerable management and
financial resources and results in significant ongoing expense. International
operations and the provision of services in foreign markets are subject to risks
involving trade barriers, exchange controls, national and regional labor
strikes, civil disturbances and war, and increases in duties, taxes, and
governmental royalties, multiple and possibly overlapping tax structures, as
well as changes in laws and policies governing operations of foreign-based
companies. We may also experience difficulties relating to the global
administration of our business. Any of such factors may have a material adverse
effect on the Company.
ITEM 2. PROPERTIES
Recognizing the global nature of the information technology market and the
importance of being able to serve multi-national clients, the Company has built
a substantial international presence and provides services in North America,
Europe and Asia-Pacific. The Company has offices in the U.S., Canada, United
Kingdom, France, Germany, Australia and Singapore. The Company's headquarters
is at One Exeter Plaza, 4th floor Boston, Massachusetts. This lease expires in
December 2005. The Company also maintains domestic offices in the metropolitan
areas of Houston and Boston, and foreign offices in Toronto, London, Paris,
Melbourne, Sydney, Singapore, and Canberra. The company has operations in
Dallas, Chicago, Philadelphia and New York but does not maintain a physical
office. Each operation is located near one or more significant clients of the
Company, and the physical facilities have terms that will expire between one and
five years (exclusive of renewal options exercisable by the Company). All of
the Company's operations are electronically linked together and have access to
all of the Company's capabilities and core consulting tools. From time to time,
the Company uses office space provided at client sites to facilitate performance
of its services and maximize client contact. Where the Company operates in areas
without an established office, operations are handled on a mobile basis with
corporate support being delivered from one of its regional centers in Houston,
London or Sydney. The Company believes its current facilities are adequate for
its needs. The Company is in the process of subleasing several branch
facilities that were vacated as a result of cost reduction measures and may
further reduce the size of various facilities.
-14-
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is a party to routine litigation in the
ordinary course of business. The Company does not believe that such litigation
will have a material impact on the financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Special Meeting of Shareholders held on October 12, 2000,
the shareholders of the Company voted on the following matter:
Approval of the Securities Purchase Agreement ("the Agreement") between the
Company and Purse Holding Limited ("Purse"), a British Virgin Islands limited
company, dated August 2, 2000, and in connection therewith to approve, (i) the
issuance to Purse of two million shares of common stock, (ii) the issuance to
Purse of warrants to purchase up to three million shares of common stock and the
exercisability thereof, and (iii) the Board of Directors representation rights
granted to Purse, all as set forth in the Agreement.
The voting results were as follows:
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
3,517,036 486,426 74,900
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock has traded on the NASDAQ Stock Market under the
symbol DACG. The following table sets forth, for each quarterly period
indicated, the high and low closing sale price for the common stock as reported
by the NASDAQ National Market.
1999 High Low
--------------------------
1st Quarter $21.00 $7.63
2nd Quarter 12.63 5.13
3rd Quarter 6.38 4.38
4th Quarter 5.06 3.00
2000
--------------------------
1st Quarter $ 4.00 $2.50
2nd Quarter 2.63 1.31
3rd Quarter 2.75 1.50
4th Quarter 1.94 0.69
No dividends were declared on the Company's common stock during the years
ended December 31, 1999 and 2000, and the Company does not anticipate declaring
dividends in the foreseeable future.
As of March 25, 2001 there were approximately 105 shareholders of record
and greater than 11,349 beneficial shareholders.
On October 16, 2000, the Company consummated the sale to Purse Holding
Limited, a British Virgin Islands limited company, of two million shares of the
Company's common stock for $4.8 million and warrants to purchase up to three
million shares of the Company's common stock. The sale was effected pursuant to
a Securities Purchase Agreement, dated August 2, 2000, between the Company and
Purse. The Company credited its $2 million loan, received from Purse on August
3, 2000, toward the $4.8 million purchase price of the two million shares of its
common stock.
-15-
In accordance with the terms of the Securities Purchase Agreement, the
Company issued (i) two million shares of common stock at a price of $2.40 per
share and (ii) warrants to purchase (a) two million shares of common stock,
exercisable until October 16, 2003, at the greater of $3.00 per share or 85% of
the market price per share of the Company's common stock at the time of
exercise, and (b) one million shares of common stock, exercisable for the period
of time after January 1, 2002, and until October 16, 2003, at $3.00 per share.
The sale of the securities was exempt from registration under Section 4(2)
of the Securities Act of 1933, as amended (the "Securities Act") and Rule 506 of
Regulation D promulgated under the Securities Act, since the sale was made to a
single accredited investor who was acquiring the shares for investment without a
view to further distribution. No underwriters were involved with the issuance
and sale of the securities.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial statement data as of December
31, 1999 and 2000 and for each of the three years in the period ended December
31, 2000 is derived from the audited consolidated financial statements of DA
Consulting Group, Inc. and its subsidiaries (the "Company") included elsewhere
herein. This information should be read in conjunction with such Consolidated
Financial Statements and related notes thereto. The selected financial
information as of December 31, 1996, 1997 and 1998 has been derived from the
audited financial statements of the Company that have been previously included
in the Company's reports under The Securities Exchange Act of 1934, that are not
included herein. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1996 1997 1998 1999 2000
------- -------- ------- --------- -----------
(in thousands except per share amounts)
INCOME STATEMENT DATA:
Revenue. . . . . . . . . . . . . . . . $26,202 $44,204 $80,132 $ 70,295 $ 30,989
Cost of revenue. . . . . . . . . . . . 14,190 24,063 40,817 38,717 20,656
------- -------- ------- --------- ------------
Gross profit . . . . . . . . . . . . . 12,012 20,141 39,315 31,578 10,333
Selling and marketing expense. . . . . 1,953 3,726 5,195 7,403 4,945
Development expense. . . . . . . . . . 1,250 1,223 2,124 1,802 3,667
General and administrative expense . . 6,597 12,436 24,877 33,461 16,884
Amortization expense . . . . . . . . . 274 54 29 354 760
Restructuring charge . . . . . . . . . - - - - 4,666
Employee stock-related charge. . . . . 1,858 263 - 142 -
------- -------- ------- --------- ------------
Operating income (loss). . . . . . . . 80 2,439 7,090 (11,584) (20,589)
Other (expense) income, net. . . . . . 95 (135) 22 287 25
------- -------- ------- --------- ------------
Income (loss) before taxes. . . . . . 175 2,304 7,112 (11,297) (20,564)
Provision (benefit) for income taxes 141 896 2,813 (3,034) (7,347)
------- -------- ------- --------- ------------
Net income (loss). . . . . . . . . . . $ 34 $ 1,408 $ 4,299 $ (8,263) $ (13,217)
======= ======== ======= ========= ============
Basic earnings (loss) per share (1) . $ 0.01 $ 0.29 $ 0.72 $ (1.28) $ (1.93)
Weighted average shares outstanding. . 4,217 4,808 5,976 6,444 6,841
Diluted earnings (loss) per share (1). $ 0.01 $ 0.28 $ 0.69 $ (1.28) $ (1.93)
Weighted average shares outstanding. . 4,462 5,053 6,233 6,444 6,841
BALANCE SHEET DATA:
Cash and cash equivalents. . . . . . . $ 2,199 $ 3,664 $ 9,971 $ 5,795 $ 949
Working capital. . . . . . . . . . . . 1,629 4,101 25,585 11,007 (1,120)
Total assets . . . . . . . . . . . . . 8,549 20,135 48,903 32,918 24,940
Total debt . . . . . . . . . . . . . . 731 3,970 - - 154
Shareholders' equity . . . . . . . . . 3,071 7,943 34,944 25,238 16,291
(1) Basic and diluted earnings per share for 1997 on a pro forma basis would
have been $0.31 and $0.29, respectively, to give effect to the sale of
Common Stock (at an initial public offering price of $14.50 per share, less
underwriting discounts and commissions and estimated offering expenses) to
repay indebtedness and the associated reduction in interest expense as if
such repayment had occurred on January 1, 1997.
-16-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Annual Report on Form 10-K contains certain statements that are not
historical facts which constitute forward-looking statements within the meaning
of the Private Securities Legislation Reform Act of 1995 which provides a safe
harbor for forward-looking statements. These forward-looking statements are
based on management's belief as well as assumptions made by and information
currently available to management, and are subject to substantial risks and
uncertainties that could cause the Company's actual results, performance or
achievements to differ materially from those expressed or implied by these
forward-looking statements. When used in this report, the words "may," "will,"
"anticipate," "believe," "expect" and similar expressions as they relate to the
Company or its management are intended to identify such forward-looking
statements. Actual future results and trends may differ materially from
historical results as a result of certain factors, including those set forth in
the Risk Factors section of this report, in the Liquidity and Capital Resources
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations section in this report and those risk factors set forth in
our other filings with the Securities and Exchange Commission.
BUSINESS
The Company is a leading international provider of employee education and
support solutions to companies investing in business information technology.
Through its 336 employees worldwide at December 31, 2000, the Company provides
employee support solutions through customized change communications, education,
and performance support services to clients. Since 1988, the Company has
provided services to over 650 clients, including more than 125 of the Fortune
Global 500.
The Company is currently organized into three divisions: the Americas
Division which includes its operations in North America; the Europe Division
which includes its operations in Europe; and the Asia Pacific Division which
includes its operations in Australia and Singapore. In 2000, the Americas,
Europe, and Asia Pacific Divisions represented 38%, 40%, and 22% of revenue,
respectively. The number of clients served by the Company has increased
substantially from 52 in 1994 to approximately 650 in 2000. The Company's client
base is diversified, with no single client representing more than 8% of revenue
in 2000.
The Company derives substantially all of its revenue from fees for
professional services related to supporting end-users in the implementation of
ERP systems. Revenue from clients implementing SAP software represented 90% of
billed consulting revenue for 2000. The majority of the Company's projects
involve from three to ten consultants, are generally completed in three months
to two years, and result in revenue from $200,000 to $1.5 million. The Company
often performs multiple projects for a client in support of a phased
implementation of the business information technology. The Company's services
are generally provided pursuant to written contracts that can be terminated by
the client with limited advance notice. In the event of such a termination by
the client, the client remains obligated to pay for the services rendered to the
client to the termination date. The Company bills its clients weekly, twice
monthly and monthly for the services provided by its consultants at agreed upon
rates, and where permitted, for expenses. The Company provides services to its
clients primarily on a time and materials basis, although many of its contracts
contain "not-to-exceed" provisions and Company performance obligations. The
remainder of the Company's contracts are on a fixed-price basis, representing
approximately 18% of the Company's total revenue for 2000. Revenue from time and
materials engagements, as well as revenue from fixed price contracts, is
recognized as services are performed and the realization of the revenue is
assured. The Company also receives a small percentage of total revenue from
license fees related to computer-based training products and other software
products that are developed independently or are co-developed by the Company.
Cost of revenue includes compensation and benefits paid to the Company's
professional staff and all direct expenses of performing project work. The
Company's financial performance is highly dependent upon staff billing rates,
costs, and utilization rates. The Company manages these parameters by
establishing and monitoring project budgets and timetables and tracking staffing
requirements for projects in progress and anticipated projects. Project
terminations, completions, and scheduling delays may result in periods when
consultants are not fully utilized. An unanticipated termination of a
significant project could cause the Company to experience lower staff
utilization. In addition, the establishment of new services or new regional
operations, employee vacations and training, and increases in the hiring of
-17-
consultants may result in periods of lower staff utilization and downward
pressure on gross margins. The Company's professional staff are generally
employed on a full-time basis, and therefore the Company incurs substantially
all of its staff-related costs even during periods of low utilization. In the
past, the Company has experienced some seasonality in its business, with
somewhat lower levels of revenue and profitability in the first and fourth
quarters of the year due to the timing of project start-ups and completions, as
well as holidays and vacations. During 1999, the Company experienced both a
seasonal downturn in business during the fourth quarter and a downturn in
business demand during the third and fourth quarters due to the slowdown of ERP
spending in anticipation of Year 2000 issues. During 2000 demand for the
companies services grew in quarters two through quarter four.
Selling and marketing expense relates principally to compensation and
benefits paid to the Company's dedicated sales staff and all direct costs
associated with the sales process. Development expense consists principally of
compensation costs for the Company's in-house research and development. These
personnel focus on development of methodologies and applications of new
technologies, including development of computer-based training courseware and
performance support software and content. Development expense also includes
personnel who provide technical support for the Company's professional staff in
the field. Development expense in 2000 included the cost of creating a web based
learning management system named the Dynamic IQ. General and administrative
expense consists principally of salaries and benefits for executive management
and for accounting, administrative, information technology, human resources, and
recruiting and training staff, as well as compensation for the senior management
in each of the Company's divisions.
NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which requires that companies
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The FASB has subsequently issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133," that defers the
requirements of SFAS No. 133 to fiscal years beginning after June 15, 2000. The
Company did not hold any derivative or hedging instruments during the reported
periods.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." The bulletin summarizes certain of the SEC staff's view in
applying generally accepted accounting principles to revenue recognition in
financial statements. This bulletin, through its subsequent revised releases,
SAB No. 101A and SAB No. 101B, was effective for registrants no later than the
fourth fiscal quarter of fiscal years beginning after December 15, 1999. The
implementation of this bulletin did not have any impact on the Company's results
of operations or equity.
-18-
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, income statement
data expressed as a percentage of revenue:
PERCENTAGE OF REVENUE
YEARS ENDED DECEMBER 31,
1998 1999 2000
------ ------ ------
Revenue . . . . . . . . . . . . . . . 100.0% 100.0% 100.0 %
Cost of revenue . . . . . . . . . . . 50.9 55.1 66.7
------ ------ ------
Gross profit. . . . . . . . . . . . . 49.1 44.9 33.3
Selling and marketing expense . . . . 6.5 10.5 16.0
Development expense . . . . . . . . . 2.7 2.6 11.8
General and administrative expense. . 31.0 47.8 54.5
Amortization expense. . . . . . . . . 0.0 0.5 2.5
Restructuring charge. . . . . . . . . - - 15.1
------ ------ ------
Operating income (loss) . . . . . . . 8.8 (16.5) (66.4)
Other (expense) income, net . . . . . 0.0 0.4 0.1
------ ------ ------
Income (loss) before taxes . . . . . 8.8 (16.1) (66.4)
Provision (benefit) for income taxes 3.5 (4.3) (23.7)
------ ------ ------
Net income (loss) . . . . . . . . . . 5.3% (11.8)% (42.7)%
====== ====== ======
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenue. Revenue decreased by $39.3 million, or 55.9%, from $70.3 million
in 1999 to $31.0 million in 2000. The decrease was substantially attributable to
a decrease in demand for services that began during the latter part of 1999 and
continued throughout 2000, as a result of the downturn in the market for complex
computer software as companies focused on Year 2000 readiness and associated
pricing pressures as competition for fewer assignments grew. Revenue from the
Americas Division decreased by 71.6% from $41.5 million to $11.8 million;
revenue from the EMEA Division decreased by 39.0% from $20.5 million to $12.5
million; and revenue from the Asia Pacific Division decreased by 19.3% from $8.3
million to $6.7 million. The Company ended the 2000 period with 336 total
employees, down from 535 employees at the beginning of the period.
Gross profit. Gross profit decreased by $21.3 million, or 67.4%, from
$31.6 million in 1999 to $10.3 million in 2000, and decreased from 44.9% of
revenue in 1999 to 33.3% of revenue in 2000. The decrease is primarily
attributable to maintaining the consultant workforce at lower utilization rates
in anticipation of future demand and pricing pressures due to increased
competition as demand slowed in the second half of 1999 and continued to slow in
2000.
Selling and marketing expense. Selling and marketing expense decreased by
$2.5 million, or 33.8%, from $7.4 million in 1999 to $4.9 million in 2000. The
decrease is the result of cost reduction measures implemented during the
first quarter of 2000 and reduced commissions expense related to the reduced
level of sales in 2000 as compared to the same period of 1999.
Development expense. Development expense increased by $1.9 million, or
105.6%, from $1.8 million in 1999 to $3.7 million in 2000. The increase in
costs during the year ended December 31, 2000 is due to professional fees
incurred for the development of the Company's web-enabled learning management
system - Dynamic IQ(TM), which was launched during the fourth quarter of 2000.
These costs were offset in part by reduced headcount as a result of cost
containment plans implemented during the latter half of 1999 and the first
quarter of 2000.
General and administrative expense. General and administrative expense
decreased by $16.7 million, or 49.7%, from $33.6 million in 1999 to $16.9
million in 2000. The decrease in expense is due primarily to a reduction in
headcount in the areas of finance, information systems, administration and human
resources as a result of the cost containment plans implemented during the
latter half of 1999 and during 2000. In addition, facilities costs were reduced
by consolidating locations during the year.
-19-
Restructuring Charge. During the three month period ended March 31, 2000,
the Company implemented a plan to address the dramatic decline in training and
documentation activity for enterprise resource planning implementations. The
plan consisted of regional base consolidations and downsizing of billable and
non-billable personnel. Charges included the costs of involuntary employee
termination benefits, write-down of certain property and equipment and reserves
for leasehold abandonment. The reduction in workforce consisted of 60 billable
consultants and 44 non-billable administrative personnel. Substantially all of
the employee terminations were completed during the first quarter. The Company
recognized approximately $1.5 million expense attributable to involuntary
employee termination benefits during the first quarter, of which approximately
$1.2 million has been paid at December 31, 2000. In addition the Company has
reserved approximately $0.9 million related to the abandonment of leases and
approximately $1.0 million related to the writedown of leasehold improvements,
furniture and equipment held by its Americas division in the first quarter
of 2000. During the fourth quarter of 2000, due to weakening in the real
estate market, the Company recorded an additional $1.3 million reserve for lease
abandonment resulting in a total annual charge of $2.2 million. Of the $2.2
million reserved for lease abandonment, approximately $0.8 Million has been paid
against the reserve. At December 31, 2000, the Company believes that the
remaining provision is adequate to cover the future costs attributable to this
plan. At December 31, 2000 an accrual of approximately $0.3 million for
severance pay remained related to severance contracts being paid over a
12-month period. In addition, approximately $1.4 million remained accrued for
future lease payments related to abandoned leases.
Amortization expense. Amortization expense increased by $406,000, or
114.7%, from $354,000 in 1999 to $760,000 in 2000, and increased as a percentage
of revenue from 0.5% in 1999 to 2.5% in 2000. The increase is due to the
amortization of internal development costs associated with the SAP system placed
in service in July 1999. These costs will be amortized over an 84-month period.
Operating income (loss). Operating loss increased by $9.0 million or
77.6%, from $11.6 million in 1999 to a loss of $20.6 million in 2000. Operating
loss, exclusive of restructuring charges and other intangible asset
amortization, was $15.2 million. On the same basis the operating loss was $11.2
million in 1999.
Other income (expense), net. Other income (expense), net decreased from
income of $287,000 in 1999 to income of $25,000 in 2000. Interest income
decreased from $366,000 in 1999 to $105,000 in 2000, reflecting investment
income from the investment of proceeds from the Company's initial public
offering completed in April, 1998 (the "Offering".) Prior to completion of the
Offering, the Company borrowed against a line of credit.
Provision for income taxes. The increase in the Company's effective tax
benefit rate from 26.9% in 1999 to a benefit rate of 35.7% in 2000, primarily
relates to losses in lower income tax jurisdictions and non-deductible expenses
during 1999. At December 31, 2000, the Company's deferred tax asset recorded on
its balance sheet was approximately $9.4 million, consisting primarily of future
tax benefits resulting from net operating loss ("NOL") carryforwards. The
Company's ability to recognize the entire benefit requires that the Company
achieve certain future earnings levels prior to the expiration of the NOL
carryforwards. The Company expects to generate the future earnings necessary to
utilize the NOL carryforwards through implementation of the reasonable tax
planning strategies and future income projections. The Company could be
required to record a valuation allowance for a portion or entire deferred tax
asset if the market conditions deteriorate and future earnings are below, or
projected to be below, current estimates.
At December 31, 2000, the Company had NOL carryforwards of $26.7 million.
Of that amount, $1.0 million expires in 2007, $5.0 million expires in 2019, and
$14.5 million in 2020. The remaining $6.2 million have no expiration.
Net income (loss). Net loss was $13.2 million in 2000 compared to a loss
of $8.3 million in 1999.
-20-
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenue. Revenue decreased by $9.8 million, or 12.3%, from $80.1 million
in 1998 to $70.3 million in 1999. The decrease was substantially attributable to
a decrease in demand for services during the second half of 1999 as a result of
the downturn in the market for complex computer software as companies focused on
Year 2000 readiness and associated pricing pressures as competition for fewer
assignments grew. Revenue from the Americas Division decreased by 19.0% from
$51.2 million to $41.5 million; revenue from the EMEA Division decreased by 8.9%
from $22.5 million to $20.5 million; and revenue from the Asia Pacific Division
increased by 29.7% from $6.4 million to $8.3 million. The Company ended the 1999
period with 535 total employees, down from 863 employees at the beginning of the
period.
Gross profit. Gross profit decreased by $7.7 million, or 19.7%, from
$39.3 million in 1998 to $31.6 million in 1999, and decreased from 49.1% of
revenue in 1998 to 44.9% of revenue in 1999. The decrease is primarily
attributable to maintaining the consultant workforce at lower utilization rates
in anticipation of future demand and pricing pressures due to increased
competition as demand slowed in the second half of 1999.
Selling and marketing expense. Selling and marketing expense increased by
$2.2 million, or 42.5%, from $5.2 million in 1998 to $7.4 million in 1999 and
increased as a percentage of revenue from 6.5% in 1998 to 10.5% in 1999. The
increase was primarily attributable to the expansion of the sales leadership and
global marketing efforts as the Company continued its efforts to maximize
revenue.
Development expense. Development expense decreased by $322,000, or 15.2%,
from $2.1 million in 1998 to $1.8 million in 1999, and remained constant as a
percentage of revenue at 2.7% in 1998 and 2.6% in 1999. Development expense was
significant in 1998 due to the expenditures related to developing key products
including DA FIT and tools to facilitate distance learning. In addition,
development expense decreased during the second half of 1999 due to cost
containment measures.
General and administrative expense. General and administrative expense
increased by $8.6 million, or 34.5%, from $24.9 million in 1998 to $33.5 million
in 1999, and increased as a percentage of revenue from 31.0% in 1998 to 47.6% in
1999. During the first half of 1999, in response to the high growth of the
Company in the prior year, the Company built administrative infrastructure
including staff, systems and facilities. Salaries and benefits increased $3.4
million and facilities costs increased $2.8 million as a result of the increased
infrastructure. During 1999, the Company incurred approximately $1.9 million in
non-capitalized costs related to the implementation of SAP as its primary
information system. The Company incurred severance and leasehold abandonment
expenses related to cost reduction programs implemented during the second half
of 1999. These costs were offset in part by reduced incentive compensation as a
result of slow year over year revenue growth beginning late in the second
quarter of 1999. While the Company incurred no employee stock-related charges
in 1998, the Company did incur charges of $142,000 in 1999, related to the
amendment of exercise dates of certain stock options awarded to an employee
which is included in general and administrative expenses.
Amortization expense. Amortization expense increased by $325,000, or
1,120%, from $29,000 in 1998 to $354,000 in 1999, and increased as a percentage
of revenue from 0.0% in 1998 to 0.5% in 1999. The increase is due to the
amortization of internal development costs associated with the SAP system placed
in service in July 1999. These costs will be amortized over an 84 month period.
Operating income (loss). Operating income decreased by $18.7 million or
263.4%, from $7.1 million in 1998 to a loss of $11.6 million in 1999. Operating
loss, exclusive of employee stock-related charges and other intangible asset
amortization, was (15.8%) of revenue in 1999. On the same basis, operating
income was $7.1 million in 1998 and was 8.9% of revenue.
Other income (expense), net. Other income (expense), net increased from
income of $22,000 in 1998 to income of $287,000 in 1999. Interest income
increased from $299,000 in 1998 to $366,000 in 1999, reflecting investment
income from the investment of proceeds from the Company's initial public
offering completed in April, 1998 (the "Offering".) Prior to completion of the
Offering, the Company borrowed against a line of credit.
Provision for income taxes. The decrease in the Company's effective tax
rate from 39.6% in 1998 to a benefit rate of 26.9% in 1999, primarily relates
to losses in lower income tax jurisdictions and non-deductible expenses. At
December 31, 1999, the Company's deferred tax asset recorded on its balance
sheet was approximately $2.9 million, consisting primarily of $2.3 million of
future tax benefits resulting from net operating loss ("NOL") carryforwards.
The Company's ability to recognize the entire benefit requires that the Company
-21-
achieve certain future earnings levels prior to the expiration of the NOL
carryforwards. The Company expects to generate the future earnings necessary to
utilize the NOL carryforwards through implementation of the reasonable tax
planning strategies and future income projections. The Company could be
required to record a valuation allowance for a portion or entire deferred tax
asset if the market conditions deteriorate and future earnings are below, or
projected to be below, current estimates.
At December 31, 1999, the Company has NOL carryforwards of $6.7 million.
Of the $6.7 million, $5.4 million expires in 2019. The remaining $1.3 million
have no expiration.
Net income (loss). Net loss was $8.3 million in 1999 compared to income
of $4.3 million in 1998. Net loss before other intangible asset amortization
and compensation charges related to stock options awarded to an employee, would
have been $7.8 million in 1999.
Quarterly Operating Results
The Company's quarterly operating results are included in the notes to
consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has historically financed its operations
with cash flow from operations, supplemented by the issuance of common stock and
short-term borrowings under revolving line of credit arrangements.
The Company's cash and cash equivalents were $0.9 million at December 31,
2000, compared to $3.4 million at December 31, 1999. The Company's working
capital deficit was $1.1 million at December 31, 2000 compared to working
capital of $11.0 million at December 31, 1999.
The Company's operating activities required cash of $9.3 million for year
ended December 31, 2000, compared to $6.4 million used in operations in 1999.
The increase in cash used in operations primarily resulted from operating losses
incurred in 2000 partially offset by an increase in deferred income taxes
offset by a reduction in accounts receivable and income taxes receivable.
Investing activities provided cash of $2.4 million in the year ended
December 31, 2000, compared to cash provided of $1.4 million for the same period
in 1999. For the year ended December 31, 2000, $2.4 million was provided by the
sale of short-term investments. During 1999 the Company had net sales of
short-term investments of $7.6 million, offset by $6.2 million for the purchase
of property and equipment.
Financing activities provided cash of $4.9 million for the year ended
December 31, 2000 as a result of the sale to Purse Holding Limited ("Purse"),
a British Virgin Islands limited company, of two million shares of the
Company's common stock for $4.8 million and warrants to purchase up to three
million shares of the Company's common stock. The sale was effected pursuant to
a Securities Purchase Agreement ("the Agreement") dated August 2, 2000, between
the Company and Purse. The Agreement was approved by the Company's
shareholders at a special meeting held on October 12, 2000. The Company
credited its $2 million loan, received from Purse on August 3, 2000, toward
the $4.8 million purchase price of the two million shares of its common stock.
In addition, the Company borrowed $154,000 on a short-term line of credit
during the period. During 1999, financing activities used cash of $1.6
million as a result of the Company repurchasing 200,000 shares of common
stock for $1.9 million offset by $0.3 million in proceeds from stock option
exercises.
The Company has an agreement with a bank, which provides for financing of
eligible U.S. accounts receivable under a purchase and sale agreement. The
maximum funds available under this agreement is $5 million. At December 31,
2000, the Company had sold $147,000 of receivables pursuant to this agreement.
In March 2000, the Company obtained a credit facility from a bank with a maximum
line of credit of approximately $750,000, based on eligible foreign accounts
receivable. At December 31, 2000, the Company had borrowed $154,000 against this
line.
-22-
The Company believes its current cash balances, receivable-based financing
and cash provided by future operations will be sufficient to meet the Company's
working capital and cash needs through 2001. However, there can be no assurance
that such sources of funds will be sufficient to meet these future expenses. The
Company may seek additional financing through a public or private placement of
equity. The Company's need for additional financing will be principally
dependent on the degree of market demand for the Company's services. There can
be no assurance that the Company will be able to obtain any such additional
financing on acceptable terms, if at all.
The Company capitalizes software development costs beginning when product
technological feasibility is established and concluding when the product is
ready for general release. At such time, software development costs are
amortized on the straight-line basis over a maximum of three years or the
expected life of the product, whichever is less. During the year 2000 all
development costs for the companies web based learning management system,
Dynamic IQ were expensed. During 1999, the Company capitalized $184,000 of
software development costs relating to computer-based training software
development which were amortized over 12 months. Research costs related to
software development are expensed as incurred.
In 1999 and 1998, respectively, the Company capitalized $3.3 million and
$728,000 of implementation costs related to the Company's primary information
system. Such development costs are amortized over a seven year period.
Because the Company has been and is currently able to match the local
currency component of client engagements to the amount of operating costs
transacted in local currency, the Company has not needed to and does not
currently hedge against currency fluctuations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company from time to time holds short-term investments which consist of
variable rate municipal debt instruments. The Company uses a sensitivity
analysis technique to evaluate the hypothetical effect that changes in market
interest rates may have on the fair value of the Company's investments. At
December 31, 2000 the Company did not hold any short-term investments.
We are subject to market risk related to fluctuations in the value of the
U.S. dollar compared to certain foreign currencies. We have subsidiaries which
operate in Canada, the United Kingdom, France, Germany, Australia, and
Singapore. We attempt to maintain a balance between assets and liabilities
denominated in foreign currencies, however, such currency level fluctuations are
generally not significant.
We are subject to market risk exposure related to interest rates on our
credit facilities. At December 31, 2000 our outstanding facility was $154,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company are included in pages
33 through 48.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in accountants, disagreements, or other events
requiring reporting under this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the Company's directors and executive officers is
included in the Company's definitive Proxy Statement in connection with its 2001
Annual Meeting of Stockholders (the "2001 Proxy Statement), which will be filed
with the Securities and Exchange Commission within 120 days after the end of the
fiscal year ended December 31, 2000, under the captions "ELECTION OF DIRECTORS -
Nominees", "Section 16(a) Beneficial Ownership Reporting Compliance" and "OTHER
INFORMATION - Directors and Executive Officers" and is incorporated herein by
reference in response to this Item 10.
-23-
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is set forth in the 2001
Proxy Statement under the captions "ELECTION OF DIRECTORS - Compensation of
Directors" and "EXECUTIVE COMPENSATION" and is incorporated herein by reference
in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to ownership of Registrant's Common Stock by
management and certain other beneficial owners is set forth in the 2001 Proxy
Statement under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" and is incorporated herein by reference in response to this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions is
set forth in the 2001 Proxy Statement under the caption "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS" and is incorporated herein by reference in response to
this Item 13.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this Report.
1. The following financial statements of the Company and the related
report of independent accountants are filed herewith:
Page
------
Number
------
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Consolidated Financial Statements:
Balance Sheets at December 31, 1999 and 2000. . . . . . . . . . . . . . . . . . . . . . . 33
Statements of Operations for the years ended December 31, 1998, 1999, and 2000. . . . . . 34
Statements of Stockholders' Equity for the years ended December 31, 1998, 1999 and 2000 . 35
Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000 . . . . . . 36
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . 37
2. Schedules for which provisions were made in accordance with
applicable accounting regulations of the Securities and Exchange
Commission are inapplicable and therefore have been omitted.
(b) Reports on Form 8-K.
On October 27, 2000 the Company filed a Current Report on form 8-K regarding the
consummation of the sale to Purse Holding Limited of shares of common stock and
warrants to purchase shares of common stock on October 16, 2000, pursuant to the
Securities Purchase Agreement, dated August 2, 2000.
-24-
(c) Exhibits
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1* -Amended and Restated Articles of Incorporation of the Company (incorporated by
reference to the Company's Form S-1A filed April 20, 1998).
3.2* -Restated By-Laws of the Company (incorporated by reference to the Company's Form
S-1A filed April 20, 1998).
4.1* -Specimen Stock Certificate (incorporated by reference to the Company's Form S-1A
filed April 20, 1998).
10.1* -Amended and Restated 1997 Stock Option Plan (incorporated by reference to the
Company's Form 10-K filed March 30, 2000).**
10.2* --Employment Agreement between John Mitchell and the Company dated April 4, 2000
(incorporated by reference to the Company" Form 10-Q filed August 14, 2000).**
10.3* -Securities Purchase Agreement dated August 2, 2000 between the Company and Purse
Holding Limited (incorporated by reference to Annex I to the Company's
Definitive Proxy Statement filed September 11, 2000).
10.4* -Change in Control Agreement between Dennis C. Fairchild and the Company dated
September 30, 1999 (incorporated by reference to the Company's Form 10-Q
filed November 13, 1999).**
10.5 -Change in Control Agreement between Malcolm Wright and the Company dated
April, 10 2000**
21.1* -Subsidiaries (incorporated by reference to the Company's Form S-1 filed January 1,
1998).
23.1 -Consent of Independent Accountants
_________
* Incorporated by reference.
**Management contract or compensatory benefit plan or arrangement.
-25-
SIGNATURES
Pursuant to the requirements of Section 13 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 on March 28, 2001.
DA Consulting Group, Inc.
(Registrant)
By: /s/ John E. Mitchell
-----------------------
John E. Mitchell
President and Chief Executive Officer
By: /s/ Dennis C. Fairchild
--------------------------
Dennis C. Fairchild
Chief Financial Officer, Executive Vice
President, Secretary and Treasurer
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 in the capacities indicated on March 28, 2000.
SIGNATURE TITLE
--------- -----
/s/ JOHN E. MITCHELL Chief Executive Officer (Principal Executive
- ---------------------- Officer)
John E. Mitchell
/s/ DENNIS C. FAIRCHILD Chief Financial Officer, Executive Vice
- ------------------------- President, Secretary and Treasurer (Principal
Dennis C. Fairchild Financial and Accounting Officer)
/s/ NIGEL W.E. CURLET Director
- ------------------------
Nigel W.E. Curlet
/s/ GUNTHER E. A. FRITZE Director
- ----------------------------
Gunther E. A. Fritze
/s/ VIRGINIA L. PIERPONT Director and Chair
- ---------------------------
Virginia L. Pierpont
/s/ RICHARD W. THATCHER, JR. Director
- ------------------------------
Richard W. Thatcher, Jr.
/s/ B. K. PRASAD Director
- ------------------
B. K. Prasad
-26-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
DA Consulting Group, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity, and cash flows
present fairly, in all material respects, the financial position of DA
Consulting Group, Inc. and its subsidiaries (the "Company") at December 31, 1999
and 2000, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America which
require that we plan and perform the audits 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
March 19, 2001
-27-
DA CONSULTING GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
-------------------
1999 2000
-------- ---------
ASSETS
------
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,406 $ 949
Short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,389 --
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,578 5,226
Unbilled revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 434 206
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,979 --
Deferred tax asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 445 708
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . 456 440
-------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,687 7,529
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,368 8,130
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 254
Deferred tax asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,464 8,647
Intangible assets, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 399 380
-------- ---------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,918 $ 24,940
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Revolving line of credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 154
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,955 1,840
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,613 6,655
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 --
-------- ---------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,680 8,649
-------- ---------
Commitments and contingencies (Note 10)
Shareholders' equity:
Preferred stock, $0.01 par value: 10,000,000 shares authorized. . . . . . . . . . . . . -- --
Common stock, $0.01 par value: 40,000,000 shares authorized; 6,571,777 and
8,571,777 shares issued and 6,418,604 and 8,418,604 shares outstanding, respectively 65 85
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,355 34,039
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,865) (15,082)
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . . . . . . . . . . (795) (1,229)
Treasury stock, at cost: 153,173 shares . . . . . . . . . . . . . . . . . . . . . . . . (1,522) (1,522)
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,238 16,291
Total liabilities and shareholders' equity. . . . . . . . . . . . . . . . . . $32,918 $ 24,940
======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
-28-
DA CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- --------- ---------
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . $80,132 $ 70,295 $ 30,989
Cost of revenue. . . . . . . . . . . . . . . . . . . . . 40,817 38,717 20,656
-------- --------- ---------
Gross profit 39,315 31,578 10,333
Selling and marketing expense. . . . . . . . . . . . . . 5,195 7,403 4,945
Development expense. . . . . . . . . . . . . . . . . . . 2,124 1,802 3,667
General and administrative expense . . . . . . . . . . . 24,877 33,603 16,884
Amortization expense . . . . . . . . . . . . . . . . . . 29 354 760
Restructuring charge . . . . . . . . . . . . . . . . . . -- -- 4,666
-------- --------- ---------
Operating income (loss) . . . . . . . . . . . . . . 7,090 (11,584) (20,589)
Interest income, net . . . . . . . . . . . . . . . . . . 299 366 31
Other expense, net . . . . . . . . . . . . . . . . . . . (277) (79) (6)
-------- --------- ---------
Total other income, net 22 87 25
-------- --------- ---------
Income (loss) before provision for income taxes. 7,112 (11,297) (20,564)
-------- --------- ---------
Provision for income taxes:
Current provision (benefit) . . . . . . . . . . . . 2,867 (960) --
Deferred(benefit) . . . . . . . . . . . . . . . . . (54) (2,074) (7,347)
-------- --------- ---------
Provision (benefit) for income taxes . . . . . 2,813 (3,034) (7,347)
-------- --------- ---------
Net income (loss). . . . . . . . . . . . . . . $ 4,299 $ (8,263) $(13,217)
======== ========= =========
Basic earnings (loss) per share. . . . . . . . . . . . . $ 0.72 $ (1.28) $ (1.93)
Weighted average shares outstanding. . . . . . . . . . . 5,976 6,444 6,841
Diluted earnings (loss) per share. . . . . . . . . . . . $ 0.69 $ (1.28) $ (1.93)
Weighted average shares outstanding. . . . . . . . . . . 6,233 6,444 6,841
The accompanying notes are an integral part of the consolidated financial
statements.
-29-
DA CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
ADDITIONAL RETAINED ACCUMULATED
COMMON STOCK PAID-IN EARNINGS OTHER TREASURY STOCK
------------ (ACCUMULATED COMPREHENSIVE -----------------
NUMBER PAR CAPITAL DEFICIT) LOSS NUMBER COST
------ ---- --------- -------------- --------------- ------- --------
BALANCE AS OF DECEMBER 31, 1997 . . . . 4,829 $ 48 $ 6,449 $ 2,099 $ (59) 21 $ (91)
Issuance of common stock . . . . . 1,743 17 21,129 -- -- -- --
Income tax expense related to
restricted stock plan. . . . . . . -- -- 1,781 -- -- -- --
Employee stock repurchases . . . . -- -- -- -- -- 1 (25)
Repayment of stockholder notes
receivable . . . . . . . . . . . . -- -- -- -- -- -- --
Net income . . . . . . . . . . . . -- -- -- 4,299 -- -- --
Foreign currency translation
adjustment, net of taxes of $459 . -- -- -- -- (703) -- --
- --------------------------------------- ------ ---- --------- -------------- --------------- ------- --------
BALANCE AS OF DECEMBER 31, 1998 . . . . 6,572 65 29,359 6,398 (762) 22 (116)
Stock repurchases. . . . . . . . . -- -- -- -- -- 200 (1,943)
Exercise of employee stock options -- -- (146) -- -- (69) 537
Employee stock compensation. . . . -- -- 142 -- -- -- --
Net loss . . . . . . . . . . . . . -- -- -- (8,263) -- -- --
Foreign currency translation
adjustment, net of taxes of $22 . -- -- -- -- (33) -- --
- --------------------------------------- ------ ---- --------- -------------- --------------- ------- --------
BALANCE AS OF DECEMBER 31, 1999 . . . . 6,572 65 29,355 (1,865) (795) 153 (1,522)
Issuance of common stock . . . . . 2,000 20 2,446 -- -- -- --
Issuance of warrants . . . . . . . -- -- 2,238 -- -- -- --
Net loss . . . . . . . . . . . . . -- -- -- -- (13,217) -- --
Foreign currency translation
adjustment, net of taxes of $241 . -- -- -- -- (434) -- --
- --------------------------------------- ------ ---- --------- -------------- --------------- ------- --------
BALANCE AS OF DECEMBER 31, 2000 . . . . 8,572 $ 85 $ 34,039 $ (15,082) $ (1,229) 153 $(1,522)
- --------------------------------------- ------ ---- --------- -------------- --------------- ------- --------
NOTES
RECEIVABLE TOTAL
FROM SHAREHOLDERS'
SHAREHOLDERS EQUITY
- --------------------------------------- -------------- ---------------
BALANCE AS OF DECEMBER 31, 1997 . . . . $ (503) $ 7,943
Issuance of common stock . . . . . -- 21,146
Income tax expense related to
restricted stock plan. . . . . . . -- 1,781
Employee stock repurchases . . . . -- (25)
Repayment of stockholder notes
receivable . . . . . . . . . . . 503 503
Net income . . . . . . . . . . . . -- 4,299
Foreign currency translation
adjustment, net of taxes of $459 . -- (703)
- --------------------------------------- -------------- ---------------
BALANCE AS OF DECEMBER 31, 1998 . . . . -- 34,944
Stock repurchases. . . . . . . . . -- (1,943)
Exercise of employee stock options -- 391
Employee stock compensation. . . . -- 142
Net loss . . . . . . . . . . . . . -- (8,263)
Foreign currency translation
adjustment, net of taxes of $22. . -- (33)
- --------------------------------------- -------------- ---------------
BALANCE AS OF DECEMBER 31, 1999 . . . . -- 25,238
Issuance of common stock . . . . . -- 2,466
Issuance of warrants . . . . . . . -- 2,238
Net loss . . . . . . . . . . . . . -- (13,217)
Foreign currency translation
adjustment, net of taxes of $241 . -- (434)
- --------------------------------------- -------------- ---------------
BALANCE AS OF DECEMBER 31, 2000 . . . . -- $ 16,291
- --------------------------------------- -------------- ---------------
The accompanying notes are an integral part of the consolidated financial
statements.
-30-
DA CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------
1998 1999 2000
--------- -------- ---------
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,299 $(8,263) $(13,217)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 1,138 2,560 3,010
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . 773 435 662
Writedown of property and equipment and reserve for leasehold
abandonment. . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 3,195
Stock option compensation expense . . . . . . . . . . . . . . . . . . . - 142 -
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . (54) (2,074) (7,347)
(Gain) loss on sale on property and equipment . . . . . . . . . . . . . (1) 80 237
Changes in operating assets and liabilities:
Accounts receivable and unbilled revenue . . . . . . . . . . . . . (5,998) 8,157 2,918
Prepaid expenses and other current assets. . . . . . . . . . . . . (376) 170 16
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . (193) 182 (254)
Accounts payable and accrued liabilities . . . . . . . . . . . . . 4,499 (4,289) (1,367)
Deferred income. . . . . . . . . . . . . . . . . . . . . . . . . . 1,033 (1,233) (112)
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . 730 (2,261) 2,979
--------- -------- ---------
Total Adjustments . . . . . . . . . . . . . . . . . . . . . . 1,551 1,869 3,937
--------- -------- ---------
Net cash provided by (used in) operating activities. . . . . 5,850 (6,394) (9,280)
--------- -------- ---------
Cash flows from investing activities:
Proceeds from sale of property and equipment . . . . . . . . . . . . . . . . 39 19 263
Sale of short-term investments . . . . . . . . . . . . . . . . . . . . . . . - 7,721 2,389
Purchases of short-term investments. . . . . . . . . . . . . . . . . . . . . (10,033) (77) -
Purchases of property and equipment. . . . . . . . . . . . . . . . . . . . . (7,398) (6,249) (253)
--------- -------- ---------
Net cash (used in)provided by investing activities . . . . . (17,392) 1,414 2,399
--------- -------- ---------
Cash flows from financing activities:
Net proceeds from (repayments of) revolving line of credit . . . . . . . . . (3,208) - 154
Proceeds from (repayments of) note payable . . . . . . . . . . . . . . . . . (762) - -
Repayments of notes receivable from shareholders . . . . . . . . . . . . . . 503 - -
Issuance of stock and warrants . . . . . . . . . . . . . . . . . . . . . . . 25,268 - 4,800
Stock repurchases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25) (1,943) -
Proceeds from stock option exercises . . . . . . . . . . . . . . . . . . . . - 391 -
Offering costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,224) - (96)
--------- -------- ---------
Net cash provided by (used in) financing activities . . . . . 18,552 (1,552) 4,858
--------- -------- ---------
Effect of changes in foreign currency exchange rate on cash and cash equivalents. (703) (33) (434)
--------- -------- ---------
Increase (decrease) in cash and cash equivalents . . . . . . 6,307 (6,565) (2,457)
Cash and cash equivalents at beginning of year. . . . . . . . . . . . . . . . . . 3,664 9,971 3,406
--------- -------- ---------
Cash and cash equivalents at end of year. . . . . . . . . . . . . . . . . . . . . $ 9,971 $ 3,406 $ 949
========= ======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
-31-
DA CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations & Basis of Presentation
DA Consulting Group, Inc. and its subsidiaries (the "Company") is a leading
international provider of employee education and end-user support solutions to
companies which are implementing enterprise resource planning software systems
and other business information technology. The consolidated financial
statements include the accounts of DA Consulting Group, Inc. and all
majority-owned subsidiaries. Intercompany balances and transactions have been
eliminated in consolidation.
Management Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Short-Term Investments
Short-term investments are those, that when purchased, have maturities
greater than three months. The short-term investments consist of variable rate
municipal debt instruments. As the Company does not intend to hold the
investments until their stated maturity dates, the Company has classified all
investments as available-for-sale. The Company records its short-term
investments at cost, which approximates market value determined using the
specific identification method.
Property and Equipment
Property and equipment are stated at cost. Expenditures for substantial
renewals and betterments are capitalized, while repairs and maintenance are
charged to expense as incurred. Assets are depreciated or amortized using the
straight-line method for financial reporting purposes and accelerated methods
for tax purposes over their estimated useful lives. Computer equipment is
depreciated over a useful life of three to five years. Furniture is depreciated
over a seven year useful life. Purchased software and internal software
development costs related to the Company's primary information system are
amortized over a seven year period. Gains or losses from disposals of property
and equipment are reflected in operations.
Software Development Costs
The Company capitalizes software development costs beginning when product
technological feasibility is established and concluding when the product is
ready for general release. At such time, software development costs are
amortized on a straight-line basis over the lessor of three years or the
expected life of the product. Research costs related to software development are
expensed as incurred. During 1999, the Company capitalized $184,000 of software
development costs relating to computer-based training software development which
was expensed over 12 months. All software development costs for the company's
web based learning management system, Dynamic IQ, was expensed during the year
2000.
In 1999 the Company capitalized $3.3 million in implementation costs
related to the Company's primary information system. Such costs are being
amortized straight-line over seven years.
Income Taxes
The Company recognizes deferred income taxes for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are determined based on
the difference between the financial statement carrying amount and tax basis of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. A valuation allowance, if necessary,
is provided against deferred tax assets based upon management's assessment as to
their realization.
-32-
Foreign Currency Translation
For the Company's foreign subsidiaries, the local currency is the
functional currency. Assets and liabilities are translated at year-end exchange
rates, and related revenue and expenses are translated at the average exchange
rates in effect during the period. Resulting translation adjustments are
recorded as a separate component in shareholders' equity. For countries with
highly inflationary currencies, the Company uses the U.S. dollar as the
functional currency.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents,
short-term investments and trade accounts receivable. The Company maintains cash
deposits and short-term investments from time to time, which exceed Federally
insured limits, with several major financial institutions. Management
periodically assesses the financial condition of the financial institutions and
investees and believes that any possible credit risk is minimal. The Company
performs ongoing credit evaluations of its clients and generally does not
require collateral for services. Bad debts have not been significant in relation
to the volume of revenue.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, short-term investments,
accounts receivable and accounts payable approximate fair values due to the
short-term nature of these instruments. The estimated fair values of these
instruments have been determined by the Company using available market
information.
Allowance for Doubtful Accounts
The Company provides an allowance for accounts receivable that it believes
may not be fully collectible or realizable. The balance of the allowance at
December 31, 1998, 1999 and 2000, was $650,000, $964,000 and $498,000,
respectively.
Intangible Assets
Prior to July 1995, the Company's business was operated through four
separate companies located in the United States, the United Kingdom, South
Africa and Australia (the "Predecessor Companies"). All of the Companies were
under common management. As a result of a stock exchange transaction on July 1,
1995, the Predecessor Companies became wholly-owned subsidiaries of the Company.
In the exchange transaction, the net assets of the three acquired Predecessor
Companies were recorded at fair market value. As a result, the Company recorded
$485,000 of goodwill, which is being amortized over 25 years. Accumulated
amortization of goodwill was $86,000 and $105,000 at December 31, 1999 and 2000,
respectively.
Revenue Recognition
The majority of the Company's contracts with clients are based on time and
expenses incurred with the remainder of the revenue generated from fixed price
contracts. Accordingly, service revenue under both types of contracts is
recognized as services are performed and the realization of the revenue is
assured. Contract costs include direct labor costs and reimbursable expenses,
and those indirect costs related to contract performance such as indirect labor.
Selling, general and administrative costs are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in job performance, job conditions
and estimated profitability may result in revisions to costs and income and are
recognized in the period in which the revisions are determined. Unbilled revenue
represents the revenue earned in excess of amounts billed and deferred income
represents billings in excess of revenue earned. Revenue includes reimbursable
expenses directly incurred in providing services to clients. Revenue
attributable to reimbursable expenses amounted to $7.7 million, $4.9 million and
$1.8 million for the years ended December 31, 1998, 1999 and 2000, respectively.
The Company recognizes product revenue upon shipment to the client if no further
services are required.
Significant Clients
No individual client accounted for more than 10% of consolidated revenue
for any period presented.
-33-
Earnings Per Share
Basic earnings per share, which is based on the weighted average number of
common shares outstanding, replaces primary earnings per share. Diluted
earnings per share, which is based on the weighted average number of common and
dilutive potential common shares outstanding, replaces fully diluted earnings
per share and utilizes the average market price per share as opposed to the
greater of the average market price per share or ending market price per share
when applying the treasury stock method in determining dilutive potential shares
Accounting for Stock Options
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS No. 123"), which sets forth accounting and disclosure
requirements for stock option and other stock-based compensation plans. The
statement encourages, but does not require, companies to record stock-based
compensation expense using a fair-value method, rather than the intrinsic-value
method prescribed by Accounting Principles Board ("APB") Opinion No. 25. The
Company has adopted only the disclosure requirements of SFAS No. 123 and has
elected to continue to record stock-based compensation expense using the
intrinsic-value approach prescribed by APB No. 25. Accordingly, the Company
computes compensation cost as the amount by which the fair market price of the
Company's common stock exceeds the exercise price on the date of grant. The
amount of compensation cost, if any, is charged to income over the vesting
period.
Comprehensive Income
Comprehensive income consists of net income and foreign currency
translation adjustments and is presented in the Company's statements of
shareholders' equity.
New Accounting Pronouncements
In June, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which requires that companies
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The FASB has subsequently issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133," that defers the
requirements of SFAS No. 133 to fiscal years beginning after June 15, 2000. The
Company did not hold any derivative or hedging instruments during the reported
periods.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." The bulletin summarizes certain of the SEC staff's view in
applying generally accepted accounting principles to revenue recognition in
financial statements. This bulletin, through its subsequent revised releases,
SAB No. 101A and SAB No. 101B, was effective for registrants no later than the
fourth fiscal quarter of fiscal years beginning after December 15, 1999. The
implementation of this bulletin did not have any impact on the Company's results
of operations or equity.
2. LIQUIDITY
The company believes its current cash balances, financing agreements,
receivable-based financing and cash provided by future operations will be
sufficient to meet the Company's working capital and cash needs through the
foreseeable future. However there is no assurance that such sources of funds
will be sufficient to meet these future expenses and our future needs. The
Company may seek additional financing through a public or private placement of
equity. The Company's need for additional financing will be principally
dependent on the degree of market demand for the Company's services. There can
be no assurance that the Company will be able to obtain any such additional
financing on acceptable terms, if at all.
-34-
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
The components of prepaid expenses and other current assets were as follows
(in thousands):
DECEMBER 31,
------------
1999 2000
----- -----
Prepaid rent . . . . . . . . . . . . . . . . . $ 57 $ 86
Deposits . . . . . . . . . . . . . . . . . . . 311 99
Other. . . . . . . . . . . . . . . . . . . . . 88 255
----- -----
Prepaid expenses and other current assets $ 456 $ 440
===== =====
4. PROPERTY AND EQUIPMENT, NET
The components of property and equipment were as follows (in thousands):
DECEMBER 31,
-------------------
1999 2000
-------- ---------
Computer equipment and software. . . . . . . . $ 5,246 $ 4,444
Automobiles. . . . . . . . . . . . . . . . . . 65 9
Furniture and fixtures . . . . . . . . . . . . 2,624 1,590
Leasehold improvements . . . . . . . . . . . . 1,176 782
Software development and implementation costs. 4,199 4,187
Purchased software . . . . . . . . . . . . . . 3,129 3,186
-------- ---------
Property and equipment. . . . . . . . . . 16,439 14,198
Less accumulated depreciation and amortization (4,071) ( 6,068)
-------- ---------
Property and equipment, net. . . . . . . $12,368 $ 8,130
======== =========
5. DEBT
Revolving Line of Credit
In March 2000, the Company signed a credit facility agreement with an
available line of approximately $750,000, based on eligible foreign accounts
receivable. At December 31, 2000, the Company had drawn down $154,000 of this
line. The interest rate on this line of credit was 7.75% at December 31, 2000.
Accounts Receivable Financing
In March 2000, the Company signed an agreement with a bank, which provides
for financing of eligible U.S. accounts receivable under a purchase and sale
agreement. The maximum funds available under the agreement is $5 million. At
December 31, 2000, the Company had sold $147,000 in accounts receivable pursuant
to this agreement.
-35-
6. ACCRUED EXPENSES
The components of accrued expenses were as follows (in thousands):
DECEMBER 31,
--------------
1999 2000
------ ------
Compensation and related expenses $1,272 $1,067
Bonuses . . . . . . . . . . . . . 731 972
Professional fees . . . . . . . . 659 856
Vacations . . . . . . . . . . . . 689 544
Other taxes . . . . . . . . . . . 1,556 1,518
Leasehold abandonment reserve . . 283 1,410
Other . . . . . . . . . . . . . . 423 288
------ ------
Accrued expenses . . . . . . $5,613 $6,655
====== ======
7. INCOME TAXES
The following is a summary of the significant components of the Company's
deferred income taxes (in thousands):
DECEMBER 31,
---------------
1999 2000
------ -------
Deferred tax assets:
Net operating loss carryforward . . . $2,348 $ 9,645
Accrued expenses . . . . . . . . . . 444 1,073
Other . . . . . . . . . . . . . . . . 122 171
Deferred tax assets. . . . . . . 2,914 10,889
Deferred tax liabilities:
Cash to accrual temporary differences 221 -
Property and equipment. . . . . . . . 784 1,534
Deferred tax liabilities . . . . 1,005 1,534
Net, deferred tax assets . . . . $1,909 $ 9,355
At December 31, 2000, for US Federal income tax reporting purposes, the
Company had $19.5 million of unused net operating losses available for
carryforward to future years. The benefit from carryforward of such net
operating losses will expire in 2019 and 2020. The Company believes it will
generate sufficient taxable income to ensure realization of the benefit,
accordingly, no valuation allowance has been provided.
At December 31, 2000, the Company also had foreign net operating loss
carryforwards totaling $7.2 million with $1.0 million expiring in 2007. The
remaining $6.2 million have no expiration date. The Company believes it will
generate sufficient income to utilize all of the foreign net operating loss
carryforwards. Accordingly, no valuation allowance has been provided.
The benefit from utilization of net operating loss carryforwards could be
subject to limitations if significant ownership changes occur in the Company.
The Company's ability to realize the entire benefit of its deferred tax asset
requires that the Company achieve certain future earnings levels prior to the
expiration of its NOL carryforwards. The Company could be required to record a
valuation allowance for a portion or all of its deferred tax asset if market
conditions deteriorate and future earnings are below, or projected to be below,
its current estimates.
-36-
The components of the Company's provision for income taxes were as follows (in
thousands):
DECEMBER 31,
---------------------------
1998 1999 2000
------- -------- --------
United States federal and state:
Current provision (benefit). . . . . . . . $2,073 $ (562) $
Deferred benefit . . . . . . . . . . . . . (182) (1,774) (5,121)
------- -------- --------
1,891 (2,336) (5,121)
------- -------- --------
Foreign:
Current provision (benefit) . . . . . . . 794 (398) -
Deferred provision (benefit). . . . . . . 128 (300) (2,226)
------- -------- --------
922 (698) (2,226)
------- -------- --------
Provision (benefit) for income taxes $2,813 $(3,034) $(7,347)
======= ======== ========
The difference between the effective federal income tax rate reflected in
the provision (benefit) for income taxes and the statutory federal income tax
rate are summarized as follows:
DECEMBER 31,
------------------------
1998 1999 2000
------ ------ ------
U.S. statutory rate . . . . . . . . . . . . . . 34.0% (34.0)% (34.0)%
Write-off of investment in foreign subsidiaries -- (2.3) --
State and local . . . . . . . . . . . . . . . . 2.1 (3.1) (2.7)
Foreign . . . . . . . . . . . . . . . . . . . . 2.9 8.5 0.5
Other . . . . . . . . . . . . . . . . . . . . . 0.6 4.0 0.5
------ ------ ------
Effective tax rate. . . . . . . . . . . . 39.6% (26.9)% (35.7)%
====== ====== ======
The U.S. components of income (loss) before taxes were $5.0, $(3.9) and
$(13.7) million in 1998, 1999 and 2000, respectively, and the foreign components
were $2.1, $(7.4) and $(6.9) million in 1998, 1999 and 2000, respectively.
8. STOCK-BASED COMPENSATION PLANS
Stock Options
The Company's 1997 Stock Option Plan, as amended in December 1999 (the
"Option Plan"), is a stock-based incentive compensation plan. Under the Option
Plan, the Company is authorized to issue 1,960,000 shares of common stock
pursuant to "awards" granted in the form of incentive stock options (intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as amended) and
non-qualified stock options not intended to qualify under Section 422. Awards
may be granted to selected employees, directors, independent contractors, and
consultants of the Company or any subsidiary. Stock options granted have
contractual terms of 10 years. Unless otherwise specified in the terms of an
award, all options vest on a schedule: 33% per year for 3 years, beginning on
the second anniversary of the date of grant. Options granted under the Option
Plan are at prices equal to the fair market value of the stock on the date of
the grant, as determined by the Company's Board of Directors. To date, no stock
options have been granted to independent contractors and consultants of the
Company.
During the year ended December 31, 1998, the Company recognized $1.8
million in compensation expense for excess book versus tax stock option basis as
a result of certain changes to restrictions related to these stock options. The
charge was recognized as a charge to additional paid-in capital.
-37-
The following table sets forth pertinent information regarding stock option
transactions and stock option prices during the years ended December 31, 1998,
1999 and 2000:
NUMBER OF WEIGHTED
SHARES OF AVERAGE
UNDERLYING EXERCISE
OPTIONS PRICES
----------- --------
Outstanding at December 31, 1997 . . . . . . . . . . . . . . . . . . 438,089 $ 5.93
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450,620 14.39
Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (97,279) 9.71
----------- --------
Outstanding at December 31, 1998 . . . . . . . . . . . . . . . . . . 791,430 10.28
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 541,140 9.20
Exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (68,530) 5.71
Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (222,980) 12.12
----------- --------
Outstanding at December 31, 1999 . . . . . . . . . . . . . . . . . . 1,041,060 9.63
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,038,699 1.98
Exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (750,162) 9.48
----------- --------
Outstanding at December 31, 2000 . . . . . . . . . . . . . . . . . . 1,329,597 3.61
Exercisable at December 31, 1998 . . . . . . . . . . . . . . . . . . -- --
Exercisable at December 31, 1999 . . . . . . . . . . . . . . . . . . 94,593 6.14
Exercisable at December 31, 2000 . . . . . . . . . . . . . . . . . . 262,430 6.04
=========== ========
Weighted average fair value of options granted during the year ended
December 31, 2000. . . . . . . . . . . . . . . . . . . . . . . . $ 1.98
========
The fair value of each stock option granted is estimated on the date of
grant using the minimum value method of option pricing based on the following
weighted-average assumptions: dividend yield of 0%; risk-free interest rates
ranging from 4.81% to 6.13%; expected life of 5 years.
The following table sets forth pertinent information regarding the outstanding
stock options at December 31, 2000:
Options Outstanding Options Exercisable
----------------------------------------- -----------------------
Weighted Weighted- Weighted-
Average Average Average
Actual Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
0.78- 1.88 732,749 9.4 $ 1.56 15,999 $ 1.88
2.19- 3.25 243,750 8.9 3.07 57,500 3.25
3.44- 4.50 88,250 6.3 3.80 50,200 3.73
. . .5.37-
6.55 130,236 5.2 5.89 96,006 5.99
9.75-15.25 134,612 6.6 13.43 42,725 14.19
0.78-15.25 1,329,597 8.4 3.61 262,430 6.04
-38-
Pro Forma Net Income and Earnings Per Share
Had the compensation cost for the Company's stock-based compensation plan
been determined consistent with SFAS No. 123, the Company's net income (loss)
per share at December 31, 1998, 1999 and 2000 would approximate the pro forma
amounts below (in thousands except per share amounts):
1998 1999 2000
------ -------- ---------
Net income (loss):
As reported $4,299 $(8,263) $(13,217)
Pro forma 3,891 (9,082) (13,319)
Diluted earnings per share:
As reported . . . . . . . $ 0.69 $ (1.28) $ (1.93)
Pro forma . . . . . . . . 0.62 (1.41) (1.95)
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
9. SHAREHOLDERS' EQUITY
Initial Public Offering
In connection with the consummation of the Company's Offering on April 24,
1998, the Company sold 1.7 million shares of its common stock, par value $0.01
per share. Additionally, on May 28, 1998, the Company sold 42,586 shares of its
common stock pursuant to and in connection with the underwriters' over-allotment
option. The Company received net proceeds of $21.1 million from the sale of
such shares, after deducting the underwriting discount and other offering
expenses.
Additionally, in connection with the Offering, the Company effected a 4.2
for one stock split. All share data included in the accompanying consolidated
financial statements and notes thereto are as if the stock split had occurred
prior to the periods presented.
Stock Repurchase Plan
In March 1999, the Company established a plan to repurchase up to 250,000
shares of its outstanding common stock. During the second quarter of 1999, the
Company repurchased 200,000 shares at an average of $9.70 per share totaling
$1.9 million. The Company suspended the plan at the end of the second quarter
of 1999.
Issuance of Common Stock and Stock Warrants
On October 16, 2000, the Company consummated the sale to Purse Holding
Limited ("Purse"), a British Virgin Islands limited company, of two million
shares of the Company's common stock for $4.8 million and warrants to purchase
up to three million shares of the Company's common stock. The sale was effected
pursuant to a Securities Purchase Agreement ("the Agreement") dated August 2,
2000, between the Company and Purse. The Agreement was approved by the
Company's shareholders at a special meeting held on October 12, 2000. The
Company credited its $2 million loan, received from Purse on August 3, 2000,
toward the $4.8 million purchase price of the two million shares of its common
stock.
In accordance with the terms of the Agreement, the Company issued two
million shares of common stock at a price of $2.40 per share including warrants
to purchase (a) two million shares of common stock, exercisable until October
16, 2003, at the greater of $3.00 per share or 85% of the market price per share
of common stock at the time of exercise, and (b) one million shares of common
stock, exercisable for the period of time after January 1, 2002, and until
October 16, 2003, at $3.00 per share.
-39-
Earnings Per Share
The following table summarizes the Company's computation of earnings per
share for the years ended December 31, 1998, 1999 and 2000 (in thousands, except
per share amounts). The calculation of diluted weighted average shares
outstanding excludes 0.8 million, 1.0 million, and 4.3 million common shares
pursuant to outstanding options and warrants for the year ended December 31,
1998, 1999, and 2000, respectively, because their effect was antidilutive.
YEARS ENDED DECEMBER 31,
1998 1999 2000
------- -------- ---------
Basic earnings (loss) per share . . . . . . . . . . . . . . . . . . . . $ 0.72 $ (1.28) $ (1.93)
======= ======== =========
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,299 $(8,263) $(13,217)
======= ======== =========
Weighted average shares outstanding . . . . . . . . . . . . . . . . . . 5,976 6,444 6,841
Computation of diluted earnings per share:
Common shares issuable under outstanding stock options . . . . . . 767 - -
Less shares assumed repurchased with proceeds from exercise stock
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . (510) - -
------- -------- ---------
Adjusted weighted average shares outstanding . . . . . . . . . . . 6,233 6,444 6,841
======= ======== =========
Diluted earnings (loss) per share. . . . . . . . . . . . . . . . . $ 0.69 $ (1.28) $ (1.93)
======= ======== =========
10. COMMITMENTS AND CONTINGENCIES
The Company leases various office facilities under non-cancelable operating
lease agreements. Rent expense amounted to $1,129,000, $3,100,000 and $1,750,000
for the years ended December 31, 1998, 1999 and 2000, respectively.
At December 31, 2000, future lease payments under non-cancelable leases
with terms of more than one year are as follows:
2001 . . . . . . . . . . . . . . . . . $2,279
2002 . . . . . . . . . . . . . . . . . 2,258
2003 . . . . . . . . . . . . . . . . . 1,828
2004 . . . . . . . . . . . . . . . . . 752
2005 . . . . . . . . . . . . . . . . . 202
Thereafter . . . . . . . . . . . . . . 67
--------
$7,386
========
The Company has employment agreements with certain officers and key members
of management of the Company, which automatically renew for one-year terms. The
agreements provide for minimum salary levels, incentive bonuses at the
discretion of the Company's Board of Directors and customary benefits including
insurance coverage. In addition, the employment agreements further provide for
severance pay ranging from six months to two year's base salary, bonus, and
benefits, depending on the cause of termination and in the event of a change in
corporate control.
From time to time, the Company is a party to routine litigation in the
ordinary course of business. The Company does not believe that such litigation
will have a material impact on the financial statements.
11. EMPLOYEE BENEFIT PLANS
401(k) Plan
The Company sponsors a 401(k) profit sharing plan (the "401(k) Plan") which
covers substantially all of its U.S. employees. Employees are eligible to
participate after completing three months of service. The 401(k) Plan provides
for elective contributions by employees up to the maximum limit allowed by the
Internal Revenue Code. The Company currently matches 50% of the amount deferred
by participants, on deferral amounts up to 7.5% of compensation. Although the
Company has not made any profit sharing contributions, the 401(k) Plan permits
the Company to make a discretionary profit sharing contribution which, if made,
is allocated to the accounts of participants who have been credited with 1,000
hours of service during a plan year and who are employed on the last day of a
plan year. The Company made matching contributions equal to $0.50 for the years
ended December 31, 1998, 1999 and 2000 for each dollar contributed to the 401(k)
Plan, subject to the limits noted above, by employees. These amounts have been
included in general and administrative expenses on the statements of operations.
An employee is fully vested in the matching contributions after six years of
employment, or earlier upon attainment of appropriate retirement age, upon
-40-
retirement due to disability, or upon death. The Company made contributions to
the 401(k) Plan aggregating approximately $385,000, $504,000 and $176,000 during
the years ended December 31, 1998, 1999 and 2000, respectively. Payment of
benefits is generally made in the form of a single lump sum or in installments.
The Company sponsors similar plans in Canada and the United Kingdom and
previously in Mexico, South Africa and Venezuela, pursuant to which employees
may defer specified percentages of compensation which the Company matches at a
rate of 50-100% on the first 3-5% of compensation deferred.
Incentive Compensation and Profit Sharing Policies
The Company has implemented incentive compensation and profit sharing
policies that cover substantially all salaried employees. Employees in positions
at project manager or below, as well as administrative staff, are eligible for
discretionary profit sharing payments. Each employee's profit sharing payment is
based on a formula and is contingent upon his or her level of salary and length
of service. Employees in positions at project manager or above are eligible for
incentive compensation payments based on satisfaction of applicable performance
criteria. The Company sponsored a profit sharing plan in the United Kingdom,
pursuant to which 9% of net revenue are paid to employees on a partially
tax-deferred basis. This plan was terminated in December 1998. The Company
continued a discretionary profit sharing plan in the Americas division in 2000
and United Kingdom division for 1999 and 2000. The Company approved and made
incentive compensation and profit sharing payments aggregating approximately
$2,456,000, $2,882,000, and $1,304,000 for the years ended December 31, 1998,
1999, and 2000, respectively, which are included in sales, general and
administrative expense.
12. RESTRUCTURING CHARGE
During the three month period ended March 31, 2000, the Company implemented a
plan to address the dramatic decline in training and documentation activity for
enterprise resource planning implementations. The plan consisted of regional
base consolidations and downsizing of billable and non-billable personnel.
Charges included the costs of involuntary employee termination benefits,
write-down of certain property and equipment and reserves for leasehold
abandonment. The reduction in workforce consisted of 60 billable consultants
and 44 non-billable administrative personnel. Substantially all of the employee
terminations were completed during the first quarter. The Company recognized
approximately $1.5 million expense attributable to involuntary employee
termination benefits during the first quarter, of which approximately $1.2
million has been paid at December 31, 2000. In addition the Company has reserved
approximately $0.9 million related to the abandonment of leases and
approximately $1.0 million related to the writedown of leasehold improvements,
furniture and equipment held by its Americas division in the first quarter of
2000. During the fourth quarter of 2000 due to weakening in the real estate
market, the Company recorded an additional $1.3 million reserve for lease
abandonment resulting in a total annual charge of $2.2 million. Of the $2.2
million reserved for lease abandonment, approximately $0.8 Million has been paid
against the reserve. At December 31, 2000, the Company believes that the
remaining provision is adequate to cover the future costs attributable to this
plan. At December 31, 2000 an accrual of approximately $0.3 million for
severance pay remained related to severance contracts being paid over a 12-month
period. In addition, approximately $1.4 million remained accrued for future
lease payments related to abandoned leases.
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
YEARS ENDED DECEMBER, 31
1998 1999 2000
------- ------ ------
Cash paid (received) for interest and income taxes (in thousands):
Interest $ 271 $ - $ 74
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . 2,137 1,198 2,697
Non-cash activities were (in thousands):
Common stock issued for notes receivable. . . . . . . . . . . $ - $ - $ -
Exercise of stock options using company stock . . . . . . . . - 146 -
Deferred offering costs . . . . . . . . . . . . . . . . . . . (898) - -
Income tax expense related to restricted stock plan . . . . . 1,781 - -
-41-
14. SEGMENT REPORTING
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments and geographic areas. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the Company's
chief decision making group. This group is comprised of senior management who
are responsible for the allocation of resources and assessment of operating
performance.
Because the Company's operations are geographically based, the organization
is divided into three operating divisions: the Americas Division, which includes
its operations in North America; the EMEA Division, which includes its
operations in Europe, and the Asia Pacific Division, which includes its
operations in Australia, Singapore and Asia. The Company provides employee
education and support services to companies investing in business technology in
all geographic regions.
The Company's reportable segment information was as follows:
EUROPE,
MIDDLE EAST
(in thousands) AMERICAS & AFRICA ASIA PACIFIC TOTAL
---------- ------------- -------------- ---------
YEAR ENDED DECEMBER 31, 2000
Revenue. . . . . . . . . . . . $ 11,834 $ 12,476 $ 6,679 $ 30,989
Operating income (loss). . . . (12,363) (5,033) (3,193) (20,589)
Total assets . . . . . . . . . 14,872 6,440 3,628 24,940
Capital expenditures . . . . . 151 34 68 253
Depreciation and amortization. 1,530 1,076 404 3,010
YEAR ENDED DECEMBER 31, 1999
Revenue. . . . . . . . . . . . $ 41,500 $ 20,505 $ 8,290 $ 70,295
Operating income (loss). . . . (7,703) (2,306) (1,575) (11,584)
Total assets . . . . . . . . . 24,409 6,432 2,077 32,918
Capital expenditures . . . . . 4,739 1,310 200 6,249
Depreciation and amortization. 2,190 298 72 2,560
YEAR ENDED DECEMBER 31, 1998
Revenue. . . . . . . . . . . . $ 51,240 $ 22,498 $ 6,394 $ 80,132
Operating income (loss). . . . 4,043 2,843 204 7,090
Total assets . . . . . . . . . 39,083 7,641 2,179 48,903
Capital expenditures . . . . . 7,005 339 54 7,398
Depreciation and amortization. 904 178 56 1,138
-42-
15. QUARTERLY OPERATING RESULTS
The following tables set forth unaudited income statement data for each of
the eight quarters in the period beginning January 1, 1999 and ending December
31, 2000, as well as the percentage of the Company's total revenue represented
by each item. In management's opinion, this unaudited information has been
prepared on a basis consistent with the Company's audited annual financial
statements and includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the information for the
quarters presented, when read in conjunction with the Financial Statements and
related Notes thereto included elsewhere in this Yearly Report Form 10K. The
operating results for any quarter are not necessarily indicative of results for
any future period.
THREE MONTH PERIOD ENDED
--------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1999 1999 1999 1999 2000 2000 2000
----------- ---------- ----------- ---------- ----------- ---------- -----------
INCOME STATEMENT DATA:
(in thousands except per share amounts)
Revenue . . . . . . . . . . . . . . . $ 24,129 $ 22,047 $ 15,804 $ 8,315 $ 6,369 $ 8,020 $ 8,148
Cost of revenue . . . . . . . . . . . 11,586 11,305 8,426 7,400 5,928 5,262 4,224
Gross profit. . . . . . . . . . . . . 12,543 10,742 7,378 915 441 2,758 3,924
----------- ---------- ----------- ---------- ----------- ---------- -----------
Selling and marketing expense . . . . 1,864 2,263 1,621 1,655 1,418 1,305 1,154
Development expense . . . . . . . . . 640 434 350 379 469 1,732 923
General and administrative expense. . 7,818 7,600 8,864 9,179 5,926 4,214 3,550
Amortization expense. . . . . . . . . 4 53 148 148 192 191 189
Restructuring charge. . . . . . . . . - - - - 3,354 - -
Employee stock-related charge . . . . - 142 - - - - -
----------- ---------- ----------- ---------- ----------- ---------- -----------
Operating income (loss) . . . . . . . 2,217 250 (3,605) (10,446) (10,918) (4,684) (1,892)
Other income (expense), net . . . . . 104 25 90 68 26 (30) 58
----------- ---------- ----------- ---------- ----------- ---------- -----------
Income (loss) before taxes. . . . . . 2,321 275 (3,515) (10,378) (10,892) (4,714) (1,834)
Provision (benefit) for income taxes. 853 138 (1,318) (2,707) (3,423) (1,641) (950)
----------- ---------- ----------- ---------- ----------- ---------- -----------
Net income (loss). . . . . . . . . . $ 1,468 $ 137 $ (2,197) $ (7,671) $ (7,469) $ (3,073) $ (884)
=========== ========== =========== ========== =========== ========== ===========
Basic earnings (loss) per share . . . $ 0.22 $ 0.02 $ (0.34) $ (1.20) $ (1.16) $ (.48) $ (.14)
Weighted average shares outstanding . 6,546 6,388 6,418 6,418 6,418 6,419 6,419
Diluted earnings (loss) per share . . $ 0.22 $ 0.02 $ (0.34) $ (1.20) $ (1.16) $ (.48) $ (.14)
Weighted average shares outstanding . 6,737 6,489 6,418 6,418 6,418 6,419 6,419
As a percent of revenue
Revenue . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue . . . . . . . . . . . 48.0 51.3 53.3 89.0 93.1 65.6 51.8
----------- ---------- ----------- ---------- ----------- ---------- -----------
Gross profit. . . . . . . . . . . . . 52.0 48.7 46.7 11.0 6.9 34.4 48.2
Selling and marketing expense . . . . 7.7 10.3 10.3 19.9 22.3 16.3 14.2
Development expense . . . . . . . . . 2.7 2.0 2.2 4.6 7.3 21.6 11.3
General and administrative expense. . 32.4 34.4 56.1 110.4 93.0 52.5 43.6
Amortization expense. . . . . . . . . - 0.2 0.9 1.8 3.0 2.4 2.3
Restructuring . . . . . . . . . . . . - - - - 52.7 - -
Employee stock-related charge . . . . - 0.7 - - - - -
----------- ---------- ----------- ---------- ----------- ---------- -----------
Operating income (loss) . . . . . . . 9.2 1.1 (22.8) (125.6) (171.4) (58.4) (23.2)
Other income (expense), net . . . . . 0.5 0.1 0.6 0.8 0.4 (0.4) 0.7
----------- ---------- ----------- ---------- ----------- ---------- -----------
Income (loss) before taxes. . . . . . 9.6 1.2 (22.2) (124.8) (171.0) (58.8) (22.5)
Provision (benefit) for income taxes. 3.5 0.6 (8.3) (32.6) (53.7) (20.5) (11.7)
----------- ---------- ----------- ---------- ----------- ---------- -----------
Net income (loss) . . . . . . . . . . 6.1% 0.6% (13.9)% (92.3)% (117.3)% (38.3)% (10.8)
========== ========== =========== =========== =========== ========= ===========
DEC. 31,
2000
----------
INCOME STATEMENT DATA:
Revenue . . . . . . . . . . . . . . . $ 8,452
Cost of revenue . . . . . . . . . . . 5,242
----------
Gross profit. . . . . . . . . . . . . 3,210
Selling and marketing expense . . . . 1,068
Development expense . . . . . . . . . 543
General and administrative expense. . 3,194
Amortization expense. . . . . . . . . 188
Restructuring charge. . . . . . . . . 1,312
Employee stock-related charge . . . . -
----------
Operating income (loss) . . . . . . . (3,095)
Other income (expense), net . . . . . (29)
----------
Income (loss) before taxes. . . . . . (3,124)
Provision (benefit) for income taxes. (1,333)
----------
Net income (loss). . . . . . . . . . $ (1,791)
==========
Basic earnings (loss) per share . . . $ (.22)
Weighted average shares outstanding . 8,093
Diluted earnings (loss) per share . . $ (.22)
Weighted average shares outstanding . 8,093
Revenue . . . . . . . . . . . . . . . 100.0%
Cost of revenue . . . . . . . . . . . 62.0
----------
Gross profit. . . . . . . . . . . . . 38.0
Selling and marketing expense . . . . 12.6
Development expense . . . . . . . . . 6.4
General and administrative expense. . 37.8
Amortization expense. . . . . . . . . 2.2
Restructuring . . . . . . . . . . . . 15.5%
Employee stock-related charge . . . . -
----------
Operating income (loss) . . . . . . . (36.6)
Other income (expense), net . . . . . (0.3)
----------
Income (loss) before taxes. . . . . . (37.0)
Provision (benefit) for income taxes. (15.8)
----------
Net income (loss) . . . . . . . . . . (21.2)%
==========
-43-