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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, 2001
Commission File No.00-24055
DA CONSULTING GROUP, INC.
(Exact name of registrant as specified in charter)
TEXAS 76-0418488
(State or other jurisdiction (IRS employer incorporation
of organization) identification No.)
5847 SAN FELIPE, SUITE 1100
HOUSTON, TEXAS 77057
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (713) 361-3000
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 April 11, 2002 the aggregate market value of the voting stock held
by non-affiliates was $4,820,466.
As of April 11, 2002, 8,418,604 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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DA CONSULTING GROUP, INC.
FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . 13
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. . . . . . . 14
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . 21
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . . . . . . . 21
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . 21
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . 21
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . 26
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . 28
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . 28
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Page 2 of 51
PART I
ITEM 1. BUSINESS
DA Consulting Group, Inc. ("DACG" or "the Company") is a global consulting
firm specializing in learning solutions, employee education, business process
mapping, business process improvement, and support for effective change. From
its offices in America, Canada, the UK, France, Germany, Singapore and
Australia, DACG enables clients to use technology and improve productivity by
managing and changing what their employees know.
DACG's core business is:
Process documentation and business process mapping
Business process improvement
Training for system implementations
Change communication
Organizational learning solutions
Employee performance support
E-learning within an organization
MANAGEMENT OF DACG
Significant changes in the management of DACG took place in August 2001.
The officers of the Company are:
Chairman Dr. B K Prasad
President & CEO Virginia L. (Val) Pierpont
Chief Financial Officer Dennis Fairchild
Chief Operating Officer Malcolm Wright
The Company was founded in 1984 in Houston, Texas by Val Pierpont, who
resumed the CEO role in August 2001. Offering documentation services to the oil
and gas industry, it participated in the early implementations of ERP systems in
that sector. End-user training was a natural extension of its core expertise
and was added to the Company's portfolio in 1989. DACG was well positioned to
take advantage of the demand for ERP expertise when that market emerged in the
l990's. In particular, there was strong demand for its services in SAP
implementations. The new systems were as demanding as they were powerful and
DACG created a specialist niche for itself in customized documentation, training
and change communication in the Global 2000 market.
The decade from 1988 through 1998 was marked by explosive growth in the
Company. In the five years from 1993 to 1998 the average rate of growth was 80%
per annum. DACG developed several proprietary tools in this period which
captured its knowledge and expertise. Today these continue to help the Company
deliver consistently high standards of work at significant savings in time and
cost including the following:
DA Passport, a contact sensitive employee performance support system
DA Learning Center, a web-enabled repository for all components of
corporate learning
DA Cornerstone, proprietary methodology
DA Foundation, proprietary content and reference materials
DA Reporter, a tool for measuring training effectiveness.
DACG is continuing its work with Customer Relationship Management systems,
in particular, Siebel, Vantive and SAP. The Company has also significantly
expanded its work in the Public Sector.
MARKET
DACG participates in three marketplaces - education, software support tools
and documentation and training for ERP (enterprise resource planning) and CRM
(customer relationship management) systems. According to industry experts,
these markets had a combined value in excess of $8 billion worldwide in 2001.
It is expected that they will continue to grow at double digit rates for the
near future. There are many service providers in the education and end-user
support markets. The providers who compete directly with DACG include software
developers, computer training companies, consulting firms and e-learning
companies. There is also competition from large international system
integrators and technology vendors who provide end-user support programs with
their proprietary software.
Page 3 of 51
DACG's ability to increase revenues in the ERP and CRM training and
documentation markets is dependent upon the license sales of the ERP and CRM
software. The Company believes the turndown in the ERP marketplace in the
second half of 1999 through the first half of 2000 was caused by the diversion
of customers' resources to Y2K compliance. This had a decidedly negative impact
on the demand for DACG's services. The current trend in the ERP market is
towards system upgrades which incorporate internet capability, linking back
office functions with the front office and the extended enterprise. In Europe,
growth in the ERP market has been partially driven by the need for companies to
comply with European Union regulations.
Most of DACG's current revenue is earned in upgrades to ERP systems and new
implementations of CRM systems. There is also steady growth in the sale of
DACG's proprietary software, including EPSS (electronic performance support
systems) and computer based training systems.
New market opportunities for the Company will come with the expansion of
e-Learning. A significant investment by DACG in e-Learning software was made in
2000 and 2001 building a proprietary software system called Dynamic IQ. It led
to the development of two new software tools, The Learning Center and DA
Reporter. Both of these have been well received by the market and provide
excellent value in generating new customer relationships as well as useful
revenues. Dynamic IQ itself is currently for sale.
BUSINESS STRATEGY
DACG's mission is to support Global 2000 customers who seek to improve what
their employees do by managing and changing what their employees know.
DACG will grow a strong and healthy business offering its core expertise to
the Global 2000. It will continue to be the leader in its niche by respecting
and nurturing relationships with its clients. New developments and new markets
will be pursued if they are a natural extension of our core skills and offer a
good return on investment. DACG management will focus on cash profits as a
measure of its success as custodian of the business, and will at all times
protect the interests of both the shareholders and the stakeholders in the
Company.
New initiatives for the Company are the Global Account Program and
Strategic Alliances and Partnerships. Both of these are driven by an interest in
looking after our clients as completely as possible. DACG management believes a
prosperous future for the Company can only be secured by linking its goals to
the best interests of its clients. Therefore, these programs are important
vehicles for growth in the future. The Company has announced the following
alliances and partnerships with AXON, Global Knowledge and X-Help.
Maintain Independence and Leverage Existing Client Relationships
The Company provides its consulting and software services independent of
the ERP, CRM and e-Learning solutions providers. The Company provides its
customers with solutions that are best suited to their environment, budget and
technical preferences.
Since 1984 , DACG has provided services to more than 650 of the global
Fortune 2000 companies. DACG's strategy is to continue to develop these
relationships, particularly as they seek to become continuous learning
organizations. Relationships with these companies have been an important source
of business leads and referrals. During 2001, approximately 84% of DACG's
business came from previous or existing customers. The Company believes that
its brand recognition and reputation are important assets in its market and
differentiate it from its e-Learning competitors.
Diversify into e-Learning
The lessons learned in 2001 taught us that the market is not receptive to
full scale Learning Management Systems (LMS). While everyone can appreciate the
benefit of LMS, very few are willing to inflict on their business the cost and
disruption that an LMS implementation entails.
DACG has found ready acceptance for The Learning Center, its on-line
repository for learning and support content which sells at a fraction of the
cost of a full scale LMS. The Learning Center is simple and painless to install;
it uses content that DACG has already developed over the course of a project. It
differs from an LMS in that it only affects employees who will be end-users. In
the course of a typical project, DACG will have already done significant work in
Change Management for these people, and that can be re-cycled into The Learning
Center.
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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. The Company expects to see continued growth in its software tool market,
both its own and those of its Alliance Partners.
PRODUCTS AND SERVICES
The Company delivers employee support solutions designed to secure the
return on information technology investments of its clients that take into
account an organization's individual needs, resources, and requirements. New
technology has a significant impact on the business processes of a corporation.
Managing a smooth transition during the implementation of a new system, and
providing support for end users in the future is essential.
DACG reviews the procedures and tasks that client employees will need to
learn once the new system is in place and incorporate them into the end user
support.
DA Passport provides on-line context sensitive end-user support, customized
to individual jobs.
DACG's proprietary methodology, DA Cornerstone(TM) supports all the project
work undertaken by the Company.
Learning and Change Management
Change management is another DACG deliverable. 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 new software and in day-to-day business activities in new procedures
and policies. A first step in managing this change is establishing executive
management support. However, the real key to successful cultural transformation
is eliciting the support of employees, as well as those within the extended
enterprise, such as customers and suppliers. Effective utilization of new
technology is critical to the success of the learning organization. Common
change management deliverables provided by the Company include kick-off
meetings, 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.
Education
The Company develops educational programs customized to individual client's
needs, taking into account the client's infrastructure and resources, the scope
of the client's information technology system, language and cultural
requirements. In order to influence the way an employee works while getting the
best out of a new system, DACG develops training programs that focus on specific
end-user job responsibilities, as well as the overall business processes that
impact the end-user. DA Foundation is a library of training content material
collected over the years that the Company can draw on for these projects.
The Company consults with the client to determine the appropriate format
for delivering training such as instructor-led training, computer-based
training, and e-Learning. Most clients choose a combination of instructor led
and on-line training, supported by DA Passport and The Learning Center
post-implementation.
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 off the shelf computer-based training modules.
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 wide area networks (WAN), corporate
intranets, and audio conferencing technology. Typically a client implementing
an ERP system or another new business technology will have the required
infrastructure already in place. E-Learning is effective in situations where
travel, time away from work and cost are important.
Page 5 of 51
Performance Support
A critical component of the Company's end-user support solution is the
documentation of business processes. DACG's documentation is designed to support
employees during training and after implementation. The best support should be
readily accessed on-line without interrupting the task in hand because the real
cost of training is the cost of time off the job. Giving an end-user exactly
the information required to perform a specific procedure is crucial to getting a
return on investment from a new system.
DACG consultants work with each client to assess ongoing documentation and
performance support needs of the particular audience of end-users. Using DA
Foundation as a resource, the Company develops support content, creating clearly
defined policies, processes, and procedures which the end user will follow in
the future in conjunction with the new technology.
More sophisticated performance support solutions are delivered via the
client's corporate intranet. Clients are offered a choice of support media
according to need, budget and time constraints. Quick reference guides and
printed documentation in hard copy are used less often, but can be useful in
certain circumstances.
DA Passport is the Company's electronic performance support system
("EPSS"). It provides comprehensive end-user support on-line at the desktop,
minimizing interruptions to end users. DA Passport is context sensitive, which
means it can track the location of end-users in the client's ERP system. It
provides support on a particular application in use at transactional or task
level. DACG can link system tasks, business procedures, training, and
computer-based training files to ERP transactions using DA Passport technology
to provide sophisticated support to end-users.
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 685 clients,
including many of the world's leading corporations in a broad range of
industries, including oil and gas, information technology, pharmaceutical,
chemicals, utilities, telecommunications, consumer products, and manufacturing.
The following is a selection of DACG's 2001 clients and representative
engagements.
The Company's ten largest clients, in the aggregate, accounted for
approximately 38%, 55% and 61% of its billed hour revenue in 1999, 2000, and
2001, respectively. One client accounted approximately 18% of the Company's
revenue in 2001.
UNILEVER
Unilever is one of the largest consumer goods businesses in the world.
Unilever operates with two global divisions: Unilever BestFoods whose top
performing categories are Spreads, Dressings and Leaf Tea, and include brand
names such as Flora, Lipton and Knorr; Unilever Home and Personal Care, whose
broad range of categories includes fabric cleaning, deodorants, oral care,
household cleaning, and hair care with brand names such as Dove, Domestos,
Timotei and Persil.
Each of these divisions is implementing and upgrading SAP and DACG is
providing the education solution for both. By adopting common information
systems and sharing best practices Unilever will achieve better cost-control as
well as visibility of costs. All in all, Unilever intends that the introduction
of common business practices and systems will support profitable growth for the
Company.
DACG was awarded Gold at the 2002 IT Training Awards, for working with
Unilever providing education solutions. The multilingual project included
delivery in seven different languages to countries across Europe and encompassed
cutting-edge technology, change communications, innovative training and support
techniques, and strong project management. DACG developed a tailor-made
electronic performance support solution using DA Learning Center, a web-enabled
flexible learning management tool to deliver custom training programs to over
20,000 employees. DACG used a sophisticated context-sensitive end-user help
tool, DA Passport, that delivers customized business process and application
support on demand to the employee's desktop. The repository provides access to
role-based business processes, mapped by DACG, designed to increase user
productivity.
DIAGEO
Diageo, the world's leading player in the premium drinks industry, was
formed out of the 1997 merger of Guinness and GrandMet. The move amassed a large
number of premium brands, such as Guinness, Smirnoff, Baileys and Johnnie
Walker.
Page 6 of 51
DACG was contracted by Diageo Business Services (DBS) in May 2001 as a training
partner to develop an on-line learning solution, to support business service
centres within Europe and North America, as well as other business units within
these regions. DBS is responsible for creating effective global process
solutions for finance and HR functions, such as dealing with customers,
suppliers and employees, paying bills and taking orders. The project encompasses
implementation of SAP 4.6, PeopleSoft 8.s and Concur (Travel and Entertainment
software).
A detailed training needs analysis revealed that a new solution had to be
developed to manage and store all the business process documentation. DA
Learning Centre was used to create documentation from the system blueprint
facilitating use of an online help system called DA Passport. On line
simulation lessons are delivered using the web-enabled front end. Classroom
training is delivered from the same materials. Competencies are checked by post
training tests and role playing business scenarios. The results are analyzed
using DA Reporter. The worldwide program will be delivered to around 15,000
people and each training implementation will be customized to suit the needs of
the specific individual market.
GlaxoSmithKline
GlaxoSmithKline (GSK) is a world leading research-based pharmaceutical
company in four major therapeutic areas - anti-infectives, central nervous
system (CNS), respiratory and gastro-intestinal/metabolic. In addition, it is a
leader in the important area of vaccines and has a growing portfolio of oncology
products. GSK's mission is to improve the quality of human life by enabling
people to do more, feel better and live longer. Headquartered in the UK and
with operations based in the US, the company is one of the industry leaders,
with an estimated seven per cent of the world's pharmaceutical market. The
company also has a Consumer Healthcare portfolio comprising over-the-counter
(OTC) medicines, oral care products and nutritional healthcare drinks, all of
which are among the market leaders. GSK has over 100,000 employees worldwide.
GlaxoSmithKline realized the need to upgrade their enterprise resource
planning system, SAP, and turned to DACG to support them for their
end-user-training program from SAP R/3 to version 4.6. DACG performed an initial
training needs analysis and developed a targeted training concept, delivering
documentation solutions with the use of help cards and bespoke training
workshops aimed at ensuring staff self sufficiency and a high knowledge of the
system. DACG also produced customized courses, reference-based training,
workshops and technical and instructional post go-live support.
BHP Billiton
BHP Billiton is a new global leader in the resources industry, employing
more than 60,000 staff across more than 30 countries. BHP Billiton conducted
the GSAP project to deploy a global SAP solution as a key enabler of future
business benefits.
DACG was engaged as a key element in developing the knowledge and education
solution to support the GSAP project. DACG consultants were responsible for:
- supporting and developing the Knowledge Warehouse infrastructure
- design and development of comprehensive training courseware
- training support and delivery to BHP Billiton sites world wide
BHP is in the process of successfully deploying the global SAP solution,
with the education and knowledge program a cornerstone of that success.
Normandy Mining
Normandy Mining is one of the world's leading gold mining and exploration
companies. An SAP 4.6 upgrade created a challenge to develop a sustainable and
effective SAP learning and support environment.
DACG was engaged to develop this environment. Specific responsibilities
included:
- creating effective on-line training courses and workshop agendas
- developing SAP system simulations using SAP's iTutor tool
- implementing a web-based Performance Support capability
- developing and delivering appropriate communications material
The SAP 4.6 upgrade was achieved successfully and Normandy now has a
learning and performance support foundation to encourage innovation and
improvement of job skills.
Page 7 of 51
The following is a sample list of clients that the Company provided
services for during 2001:
24 Seven Utility services Edeka National Australia Bank
BBC EuroDisney Normandy Mining
BHP Billiton Fairchild-Dornier Gmbh PaperlinX
BNFL Georgia Pacific Perrier
Abbott Laboratories Gillette Australia Phillips Fox
Agriculture Fisheries & Forestry (AFFA) Guinness Phillips Petroleum
Air Products Hampshire County Council Promodes
Australian Defence Organisation Karstadt RMC Limited
Aventis Pasteur Kimberly-Clark Australia Robert Bosch Australia
Basell International Lkinikum Sydney Ports
Bic Media Accounting Services Toyota Australia
Centrelink Merck Sharp & Dohme UDV Diageo
Citibank NSW Dept. of Community Services UK College of Environment & Transport
Compaq NSW Dept. of Transport Unilever
Dun & Bradstreet NSW Roads & Traffic Authority Woolworth's
COMPANY ORGANIZATION AND PROJECT MANAGEMENT METHODOLOGY
Organization
The Company has three principal operating divisions: the Americas, which
includes the USA and Canada; Europe, which includes the UK, France and Germany
as well as mobile services provided in other European countries; and Asia
Pacific, which includes 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, human resources and
management information services. 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.
Corporate management consists of the offices of the CEO, CFO, and COO.
Project Methodology Management
The Company's DA Cornerstone(TM) project management methodology is
essential to its delivery of quality end-user support solutions. DA Cornerstone
is a 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 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 and
Designs establishes 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.
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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 programs 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.
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, sometimes in joint sales calls and marketing materials, with its
Alliance Partners.
The Company's direct sales efforts are the responsibility of 23 full-time
sales and marketing personnel, most of whom have either a local or regional
territory. The sales personnel generate leads from several sources, including
referrals from the Company's existing clients and from attendance at industry
trade shows. 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 2002, the Company plans to focus its marketing on the ERP, CRM and
e-Learning marketplaces.
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. The Company also maintains
partnerships with integrators and providers of tools for use in documentation
and training such as Global Knowledge, X-ayce InterWise, X-Help and Axon. The
Company develops and delivers to potential clients proposals in collaboration
with Strategic Alliance Partners, including proposals covering software
applications, software implementation services, and end-user support solutions.
During 2001, DACG continued to expand its capability to develop and manage
partnerships. In this capacity, DACG plans to create revenue from partners
selling DACG products and services and by DACG reselling partner products and
services.
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 needs 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.
RECRUITING AND PROFESSIONAL DEVELOPMENT
As of February 28, 2002, DACG's personnel consisted of 212 billable
employees, 23 sales and marketing personnel, 2 development staff and 32
administrative employees. The Company believes that its success depends 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. 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
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 and The Learning Center 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.
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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
2001 the primary focus was on the modification of tools to work with a broader
range of software. During 2000, the primary focus of this department was the
development of Dynamic IQ, a virtual learning environment with complementary
consulting services and ongoing maintenance of DA Passport, DA Foundation, the
Company's proprietary toolset used for rapid deployment of end-user support
solutions.
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, e-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 2002.
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 if clients 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.
Page 10 of 51
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, 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), DA Learning Centre, DA Learning Center, DA Reporter
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.
RISK FACTORS
History of losses
The Company has incurred net losses totaling approximately $27.2 million
during 1999, 2000 and 2001. The Company began a restructuring process in 2000,
which was completed during 2001. As a result of the restructuring the Company
has returned to profitability, although the United States has continued to
generate losses. There can be no assurance that overall profits will continue
and the losses in the United States will not continue. Thus, the Company may be
required to record additional charges to decrease the carrying value of the
deferred tax asset.
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. Software vendors are currently
customers and direct competitors. 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,
Page 11 of 51
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.
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, 2001, 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.
Page 12 of 51
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, 2001, 81% 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 5847 San Felipe, Suite 1100, Houston, Texas. This lease expires in July
2004. The Company also maintains foreign offices in Toronto, London, Paris,
Melbourne, Sydney, Singapore, and Canberra. The Company has operations in
Dallas, Chicago, Philadelphia, Boston 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.
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 December 11, 2001,
the shareholders of the Company voted on the following matter:
Approval for the election of two Class C Directors, BK Prasad and Dennis
Fairchild.
The voting results were as follows:
Votes For Votes Abstained
--------- ---------------
6,566,685 18,100
Page 13 of 51
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.
2000 High Low
-------------------------
1st Quarter $4.00 $2.50
2nd Quarter 2.63 1.31
3rd Quarter 2.75 1.50
4th Quarter 1.94 0.69
2001
-------------------------
1st Quarter $1.63 $0.66
2nd Quarter 1.80 1.25
3rd Quarter 1.60 0.31
4th Quarter 0.35 0.14
No dividends were declared on the Company's common stock during the years
ended December 31, 2000 and 2001, and the Company does not anticipate declaring
dividends in the foreseeable future.
As of April 11, 2002 there were approximately 100 shareholders of record
and greater than 1,071 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.
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.
Page 14 of 51
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial statement data as of December
31, 2000 and 2001 and for each of the three years in the period ended December
31, 2001 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, 1997, 1998 and 1999 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,
-------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE 1997 1998 1999 2000 2001
AMOUNTS) -------- ------- --------- --------- --------
INCOME STATEMENT DATA:
Revenue. . . . . . . . . . . . . . . . $44,204 $80,132 $ 70,295 $ 30,989 $28,654
Cost of revenue. . . . . . . . . . . . 24,063 40,817 38,717 20,656 16,536
-------- ------- --------- --------- --------
Gross profit . . . . . . . . . . . . . 20,141 39,315 31,578 10,333 12,118
Selling and marketing expense. . . . . 3,726 5,195 7,403 4,945 3,280
Development expense. . . . . . . . . . 1,223 2,124 1,802 3,667 702
General and administrative expense . . 12,436 24,877 33,461 16,884 10,411
Amortization expense . . . . . . . . . 54 29 354 760 592
Restructuring charge . . . . . . . . . - - - 4,666 -
Employee stock-related charge. . . . . 263 - 142 - -
-------- ------- --------- --------- --------
Operating income (loss). . . . . . . . 2,439 7,090 (11,584) (20,589) (2,867)
-------- ------- --------- --------- --------
Other (expense) income, net. . . . . (135) 22 287 25 (326)
-------- ------- --------- --------- --------
Income (loss) before taxes. . . . . . 2,304 7,112 (11,297) (20,564) (3,193)
Provision (benefit) for income taxes. 896 2,813 (3,034) (7,347) 2,507
-------- ------- --------- --------- --------
Net income (loss). . . . . . . . . . . $ 1,408 $ 4,299 $ (8,263) $(13,217) $(5,700)
======== ======= ========= ========= ========
Basic earnings (loss) per share (1) . $ 0.29 $ 0.72 $ (1.28) $ (1.93) $ (0.68)
Weighted average shares outstanding. . 4,808 5,976 6,444 6,841 8,419
Diluted earnings (loss) per share (1). $ 0.28 $ 0.69 $ (1.28) $ (1.93) $ (0.68)
Weighted average shares outstanding. . 5,053 6,233 6 ,444 6,841 8,419
BALANCE SHEET DATA:
Cash and cash equivalents. . . . . . . $ 3,664 $ 9,971 $ 5,795 $ 949 $ 373
Working capital. . . . . . . . . . . . 4,101 25,585 11,007 (1,120) (663)
Total assets . . . . . . . . . . . . . 20,135 48,903 32,918 24,940 17,212
Total debt . . . . . . . . . . . . . . 3,970 - - 154 1,077
Shareholders' equity . . . . . . . . . 7,943 34,944 25,238 16,291 10,303
<FN>
- ----------------
(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.
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.
Page 15 of 51
BUSINESS
The Company is a leading international provider of employee education and
support solutions to companies investing in business information technology.
Through its 272 employees worldwide at December 31,2001, 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 685 clients most of whom are Fortune Global 500
companies.
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 2001, the, Europe, Asia
Pacific and Americas Divisions represented 60%, 21%, and 19% of revenue,
respectively. The number of clients served by the Company has increased
substantially from 52 in 1994 to approximately 685 in 2001. The Company's client
base is diversified, with one client representing 18% of revenue in 2001.
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 87% of
billed consulting revenue for 2001. 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 28% of the Company's total revenue for 2001. 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 approximately 3% 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
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 Europe in the third quarter and
Asia in the fourth quarter. The timing of project start-ups and completions, as
well as holidays and vacations has the most significant impact on fluctuations
in revenue.
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 and early 2001 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
management, physical facilities, depreciation and professional fees. General
and administrative salaries include executive management, accounting,
administrative, information technology, human resources as well as compensation
for the senior management in each of the Company's divisions.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standard Board finalized FASB
Statement No. 141, Business Combinations (SFAS 141), and No. 142 Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires us to recognize acquired intangible assets apart from goodwill if
the acquired intangible asset meets certain criteria. SFAS 141 applies to all
business combinations initiated after June 30, 2001 and for purchase business
Page 16 of 51
combinations completed on or after July 1, 2001. It also requires, upon
adoption of SFAS 142, that we reclassify the carrying amounts of intangible
assets and goodwill based upon the criteria of SFAS 141.
SFAS 142 requires, among other things, that we no longer amortize goodwill,
but instead test goodwill for impairment as least annually. In addition, SFAS
142 requires us to identify reporting units for the purposes of assessing
potential future impairments of goodwill, reassess the useful lives of other
existing recognized intangible assets and cease amortization of intangible
assets with an indefinite useful life. An intangible with an indefinite useful
life should be tested for impairment in accordance with the guidance in SFAS
142. SFAS 142 is required to be applied in fiscal years beginning after
December 15, 2001 to all goodwill and other intangible assets recognized at that
date, regardless of when those assets were initially recognized. SFAS 142
requires us to complete a transitional goodwill impairment test six months from
the date of adoption. We are also required to reassess the useful lives of
other intangible assets within the first interim quarter after adoption of SFAS
142. Currently, we do not expect that adoption of SFAS 141 and SFAS 142 will
have a material impact on our financial position and results of operations.
The Company has approximately $0.2 million of goodwill included in its
balance sheet at December 31, 2001. Goodwill amortization for the for the year
ended December 31, 2001, is $19,000 before the provisions of SFAS 142 are
applied. Implementation of SFAS 142 by the Company will result in the
elimination of amortization of goodwill.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, SFAS No. 143, which amends SFAS No. 19, Financial Accounting and
Reporting by Oil and Gas Producing Companies, is applicable to all companies.
SFAS No. 143, which is effective for fiscal years beginning after June 15, 2002,
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or the normal operation of a long-lived asset, except for certain
obligations of lessees. As used in SFAS No. 143, a legal obligation is an
obligation that a party is required to settle as a result of an existing or
enacted law, statute, ordinance, or written or oral contract or by legal
construction of a contract under the doctrine of promissory estoppel. While we
are not yet required to adopt SFAS No. 143, we do not believe the adoption will
have a material effect on our financial condition or results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
of Disposal of Long-lived Assets. SFAS No. 144, which supercedes SFAS No. 121,
Accounting for the Impairment of Long-lived Assets for Long-lived Assets to be
Disposed of and amends ARB No. 51, Consolidated Financial Statements, addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 is effective for fiscal years beginning after December 15,
2001, and interim financials within those fiscal years, with early adoption
encouraged. The provisions of SFAS No. 144 are generally to be applied
prospectively. As of the date of this filing, we are still assessing the
requirements of SFAS No. 144 and have not determined the impact the adoption
will have on our financial condition or results of operations.
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,
-------------------------
1999 2000 2001
------- ------- -------
Revenue . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of revenue . . . . . . . . . . . 55.1 66.7 57.7
------- ------- -------
Gross profit. . . . . . . . . . . . . 44.9 33.3 42.3
Selling and marketing expense . . . . 10.5 16.0 11.4
Development expense . . . . . . . . . 2.6 11.8 2.5
General and administrative expense. . 47.8 54.5 36.3
Amortization expense. . . . . . . . . 0.5 2.4 2.1
Restructuring charge. . . . . . . . . - 15.0 -
------- ------- -------
Operating income (loss) . . . . . . . (16.5) (66.4) (10.0)
Other (expense) income, net . . . . . 0.4 0.0 (1.1)
------- ------- -------
Income (loss) before taxes. . . . . . (16.1) (66.4) (11.1)
Provision (benefit) for income taxes. (4.3) (23.7) 8.8
------- ------- -------
Net income (loss) . . . . . . . . . . (11.8)% (42.7)% (19.9)%
======= ======= =======
Page 17 of 51
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Revenue. Revenue decreased by $2.3 million, or 7.5%, from $31.0 million
in 2000 to $28.7 million in 2001. The decrease was substantially attributable to
a decrease in demand for services that began during the latter part of 1999 and
continued throughout 2001, as competition for fewer assignments grew primarily
in America. Revenue from the Americas Division decreased by 54.5% from $11.8
million to $5.4 million; revenue from the EMEA Division increased by 37.4% from
$12.5 million to $17.1 million; and revenue from the Asia Pacific Division
decreased by 8.4% from $6.7 million to $6.1 million. The Company ended the 2001
period with 272 total employees, down from 336 employees at the beginning of the
period.
Gross profit. Gross profit increased by $1.8 million, or 17.3%, from
$10.3 million in 2000 to $12.1 million in 2001, and increased from 33.3% of
revenue in 2000 to 42.3% of revenue in 2001. The increase is primarily
attributable to increased bill rates and increased recovery of travel costs.
Selling and marketing expense. Selling and marketing expense decreased by
$1.6 million, or 33.7%, from $4.9 million in 2000 to $3.3 million in 2001. The
decrease is the result of refocusing marketing efforts on a regional basis.
Sales and marketing staff total 23 persons at the end of 2001 compared to 25 at
the end of 2000.
Development expense. Development expense decreased by $3.0 million, or
80.9%, from $3.7 million in 2000 to $0.7 million in 2001. Development costs
during the year ended December 31, 2000 were 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.
Development personnel decreased from 18 at year end 2000 to 2 at year end 2001.
General and administrative expense. General and administrative expense
decreased by $6.5 million, or 38.3%, from $16.9 million in 2000 to $10.4 million
in 2001. The decrease in expense is due primarily to a reduction in headcount
in the areas of finance, information systems, administration and human
resources. Administrative personnel have been reduced from 59 at year end 2000
to 31 at year end 2001. In addition, facilities costs were reduced by
consolidating locations during the year.
Restructuring Charge. During the year ended December 31, 2000 the Company
recorded restructuring charges of 4.7 million for termination pay and lease
abandonment. No restructuring charge was recorded in 2001. During 2001 a $0.8
million charge to administrative expense was recorded for additional lease
abandonment. At December 31, 2001, the Company believes that the
remaining provision for lease abandonment is adequate to cover the future costs
attributable to this plan. At December 31, 2001 an accrual of approximately
$1.1 million remained accrued for future lease payments related to abandoned
leases. No liability remained for termination pay. Payments for termination
pay charged to the reserve totaled $0.3 million and payments for lease
abandonment totaled $1.1 million during 2001.
Amortization expense. Amortization expense decreased by $168,000, or
22.1%, from $760,000 in 2000 to $592,000 in 2001, and decreased as a percentage
of revenue from 2.4% in 2000 to 2.1% in 2001. Amortization decreased due to the
writeoff of leasehold improvements. Amortization is largely 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 loss. Operating loss decreased by $17.7 million or 86.1%, from
a loss of $20.6 million in 2000 to $2.9 million in 2001. Operating loss,
exclusive of restructuring charges and other intangible asset amortization, was
$2.3 million in 2001 as compared to $15.2 million in 2000.
Other income (expense), net. Other income (expense), net decreased from
income of $25,000 in 2000 to expense of $326,000 in 2001. Interest income
decreased from $31,000 in 2000 to interest expense of $54,000 in 2001. Other
expense in 2001 includes the loss on sale and abandonment of fixed assets
totaling $157,000 compared to $123,000 in 2000. Other income in 2000 included a
$100,000 gain on the sale of a small business.
Provision for income taxes. The increase in the Company's effective tax
rate benefit from 35.7% in 2000 to an expense of 78.5% in 2001, relates
primarily to the valuation allowance recorded against deferred tax assets in
2001. At December 31, 2001, the Company's deferred tax asset recorded on its
balance sheet was approximately $6.6 million, consisting primarily of future tax
benefits resulting from net operating loss ("NOL") carryforwards. The Company
established a $4.0 million valuation allowance against deferred tax assets. 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 reasonable tax planning
strategies and projected future income. The Company could be required to record
Page 18 of 51
an additional 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, 2001, the Company had NOL carryforwards of $31.3 million.
Of that amount, $3.0 million expires in 2006 to 2008 and $24.6 million expires
in 2019, 2020 and 2021. The remaining $3.7 million have no expiration. The
Company would need to earn $18.8 million income before taxes to recover all
deferred tax assets.
Net loss. Net loss was $5.7 million in 2001 compared to a loss of $13.2
million in 2000. The loss per share decreased from $1.93 to $0.68 due both the
decrease in the net loss and the increase in the number of shares outstanding.
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.
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 believed 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.
Page 19 of 51
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 2.4% 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 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 loss. Net loss was $13.2 million in 2000 compared to a loss of $8.3
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 $0.4 million at December 31,
2001, compared to $0.9 million at December 31, 2000. The Company's working
capital deficit was $0.7 million at December 31, 2001 compared to working
capital of $1.1 million at December 31, 2000.
The Company's operating activities required cash of $1.5 million for year
ended December 31, 2001, compared to $9.3 million used in operations in 2000.
The decrease in cash used in operations primarily resulted from reduced pretax
operating losses offset by a decrease in deferred income taxes due to
establishing a valuation allowance against previously recorded income tax
benefits. Accounts receivable reductions and income taxes receivable
produced less cash in 2001 than 2000 and payment of accounts payable required
more cash during 2001.
Investing activities provided cash of $0.2 million in the year ended
December 31, 2001, compared to cash provided of $2.4 million for the same period
in 2000. For the year ended December 31, 2001, $0.3 million was provided by the
sale of property and equipment . During 2000 the Company had net sales of
short-term investments of $2.4 million. Sales of property and equipment were
largely offset by the purchase of property and equipment during 2000.
Financing activities provided $0.9 million for the year ended December 31,
2001 as a result of borrowing against a line of credit. 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. In addition, the Company borrowed $154,000 on a short-term line
of credit during the period.
Page 20 of 51
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,
2001, the Company had sold $0.2 million of receivables pursuant to this
agreement. The Company has a credit facility from a bank with a maximum
line of credit of approximately $1.1 million, based on eligible foreign
accounts receivable. At December 31, 2001, the Company had borrowed all funds
available against this line.
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 2002. 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 and 2001,
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 the Company capitalized $3.3 million of implementation costs
related to the Company's primary information system. Such development costs are
amortized over a seven year period.
The Company is 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. The Company 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, 2001 the Company did not hold any short-term investments.
We are subject to market risk exposure related to interest rates on our
credit facilities. At December 31, 2001 our outstanding facility was $1.1
million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company are included in Pages
33 through 49.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has had no disagreements with its accountants on accounting or
financial disclosure issues. The disclosures called for related to changes in
accountants have been previously reported by the Company in Form 8-K's filed by
the Company with the Securities and Exchange Commission on February 4, 2002 and
February 12, 2002.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and present positions of the directors and executive
officers of the Company as well as other relevant information are set forth
below:
Page 21 of 51
Year in Which
---------------
First Became
---------------
Name Age Position with Company Director
- ------------------------ --- ----------------------------- ---------------
Virginia L. Pierpont 60 Chief Executive Officer and 1987
President
Malcolm G. Wright 45 Chief Operating Officer
Dennis C. Fairchild 52 Executive Vice President and 2001
Chief Financial Officer
Nigel W.E. Curlet 56 Director 1996
Gunther E.A. Fritze 65 Director 1996
B.K. Prasad 65 Chairman of the Board 2000
James R. Wilkinson 45 Director 2002
Virginia L. Pierpont, age 60, founded the Company as a sole proprietorship
in 1984, incorporated the business in 1987, and opened its United Kingdom
operation in 1988. Ms. Pierpont was the Chief Executive Officer of the Company
from 1984 to 1993 and served as Chairman of the Board from December 1996 through
August 1998 and again from April 2000 to August 2001. She is a member of the
Company's Compensation Committee. Ms. Pierpont is a Class B Director whose term
expires at the 2003 Annual Meeting.
Malcolm G. Wright, age 45, joined the Company in March 2000 as Vice
President of Europe and, in February 2001, was promoted to Chief Operating
Officer. Prior to joining the Company, Mr. Wright was with Equifax Plc from
November 1996 to January 2000, and his last position was as European & UK
Divisional Director of Commercial Information Services. He also spent 17 years
with Dun & Bradstreet and was Director of Multinational Development at Dun &
Bradstreet Europe from December 1990 to November 1996.
Dennis C. Fairchild, age 52, joined the Company in April 1999 as Executive
Vice President and Chief Financial Officer and is primarily responsible for the
finance and administrative functions of the Company. Prior to joining the
Company, Mr. Fairchild provided consulting services from April 1998 to February
1999. From April 1997 to April 1998, Mr. Fairchild was Chief Financial Officer
at National Water & Power. He served as Chief Financial Officer at AmeriQuest
Technologies from January 1994 to April 1997 and at Southeast Frozen Foods from
March 1990 to January 1994. Mr. Fairchild received his B.A. from Mankato State
University. Mr. Fairchild is a Class C Director whose term expires at the 2004
Annual Meeting.
Nigel W.E. Curlet, age 56, has served as a director since December 1996.
Since 1976, he has been employed in various capacities by Shell Chemical Company
and is currently its Manager-Demand Chain Center of Excellence. Mr. Curlet's
prior management roles at Shell were in its information technology, research and
development, and operations and strategic planning departments. He is a member
of the Company's Audit, Compensation and Stock Option Committees. Mr. Curlet is
a Class A director whose term expires at the 2002 Annual Meeting.
Gunther E.A. Fritze, age 65, has served as a director since December 1996.
Mr. Fritze is retired. From 1962 to 1999, Mr. Fritze was employed in various
capacities by Bank of Boston. Mr. Fritze's most recent position was Manager,
Finance Companies. Mr. Fritze is a member of the Company's Audit, Compensation
and Stock Option Committees. Mr. Fritze is a Class A Director whose term expires
at the 2002 Annual Meeting.
B.K. Prasad, Ph.D., age 65, has served as a director since December 2000
and as Chairman of the Board since August 2001. Dr. Prasad, a corporate strategy
and management consultant, was employed as a Director and Vice President by
Comcraft Canada Limited since 1987, and by Comcraft Asia (Pte) Ltd. from 1981 to
1987 until retiring in 2001. Prior to joining Comcraft, Dr. Prasad served in
various senior finance and management positions in large industrial
organizations. Dr. Prasad holds an LLB, MBA, FCMA, FCA and CPA. Dr. Prasad has
been designated by Purse Holding Limited ("Purse") to serve as a member of the
Board of Directors pursuant to the Stock Purchase Agreement between the Company
and Purse under which Purse has the right to
Page 22 of 51
designate one director for so long as Purse owns at least 25% of the Company's
Common Stock that it purchased under the Stock Purchase Agreement. Dr. Prasad is
a Class C Director whose term expires at the 2004 Annual Meeting.
James R. Wilkinson, age 45, is the founder of Capstone Funding Ltd., an
investment company started in 1990, and of The Strategic CFO, a consulting
company started in 1998 where Mr. Wilkinson devotes the majority of his time.
Prior to establishing these two entities, Mr. Wilkinson served in
executive-level positions in real estate and accounting firms. Mr. Wilkinson is
a CPA and a graduate of Texas A&M University. Mr. Wilkinson is a Class B
Director whose term expires in 2003.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission ("SEC") initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater than ten-percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 2001, all
Section 16(a) filing requirements applicable to the Company's officers,
directors and greater than ten-percent beneficial owners were complied.
ITEM 11. EXECUTIVE COMPENSATION
CASH AND NON-CASH COMPENSATION PAID TO CERTAIN EXECUTIVE OFFICERS
The following table sets forth, with respect to services rendered during
fiscal years 2001, 2000 and 1999, the total compensation earned by each
individual who served as the Company's Chief Executive Officer during fiscal
year 2001 and the most highly compensated executive officers, other than the
Chief Executive Officer, who were serving as executive officers at the end of
fiscal year 2001 and whose total annual salary and bonus exceeded $100,000
during 2001:
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
------------
YEAR ANNUAL COMPENSATION (1) AWARDS
---- ----------------------- ------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) (2) BONUS($ OPTIONS (#) COMPENSATION ($) (3)
- --------------------------- -------------- --------------- ------------- --------------------
Virginia L. Pierpont (4) 2001 $ 112,500 100,000
President and Chief Executive Officer 2000 $ 103,125 --- --- ---
1999 $ --- --- 1,025 ---
Dennis C. Fairchild (5) 2001 $ 220,000 $ 92,000 270,000 $ 18,275 (8)
Executive Vice President - Finance and 2000 $ 189,847 $ 92,000 40,000 $ 17,092
Administration, Chief Financial Officer 1999 $ 142,708 $ 55,000 30,750 $ 46,046
Malcolm G. Wright (6) 2001 $ 213,693 $ 73,237 300,000 $ 23,902 (9)
Chief Operating Officer 2000 $ 147,764 --- 33,000 $ 19,327
1999 --- --- --- ---
John E. Mitchell (7) 2001 $ 286,702 $ 186,409 50,000 $ 13,793 (10)
Former President and 2000 $ 311,742 $ 175,500 468,000 $ 16,849
Chief Executive Officer 1999 --- --- --- ---
<FN>
(1) All figures converted to U.S. dollars based upon the exchange rate at the end of the applicable fiscal year.
(2) Salary includes amounts deferred, if any, pursuant to the Company's 401(k) plan.
(3) Amounts include compensation expense attributed to employee stock awards, employer 401(k) contributions and Company
perquisites.
Page 23 of 51
(4) Ms. Pierpont receives $150,000 annually, beginning May 1, 2000, under her employment agreement for her service as
Chairman of the Board of Directors and later as President and Chief Executive Officer. Ms. Pierpont voluntarily deferred
$37,500 of her compensation until 2002.
(5) Mr. Fairchild was elected as an Executive Vice President and the Chief Financial Officer of the Company on April
14, 1999 at a base annual salary of $175,000. His base salary increased to $220,000 effective November 1, 2000.
(6) Mr. Wright joined the Company on March 21 , 2000 as Vice President of Europe at a base salary of $169,750 and was
elected as the Company's Chief Operating officer effective February 6, 2001 at a base salary of $213,693.
(7) Mr. Mitchell joined the Company on October 4, 1999 as president of its Europe, Middle East, Africa division, was
elected as the Company's Chief Operating officer effective February 11, 2000 at a base salary of $270,000, and was
elected as the President and Chief Executive Officer of the Company effective April 4, 2000 at a base annual salary of
$292,500. His base salary increased to $390,000 effective November 1, 2000. Mr. Mitchell resigned his position as
President and Chief Executive Officer effective August 9, 2001.
(8) Represents $14,400 in car allowance and $3,875 in employer 401(k) contributions.
(9) Represents $14,246 in car allowance and $9,656 in employer 401(k) contributions.
(10) Represents $13,973 in car allowance.
STOCK OPTIONS GRANTED TO CERTAIN EXECUTIVE OFFICERS DURING LAST FISCAL YEAR
Under the 1997 Stock Option Plan, options to purchase Common Stock are
available for grant to directors, officers and other key employees of the
Company. The following table sets forth certain information regarding options
for the purchase of Common Stock that were awarded to the named executive
officers during fiscal year 2001.
OPTION GRANTS IN LAST FISCAL YEAR
Number of
Securities Percent of Total Potential Realizable Gain
Underlying Options Granted to Exercise or at Assumed Annual Rates
Options Employees in Base Price Expiration of Stock Appreciation for Option
Name Granted (#) (1) Last Fiscal Year ($/Sh) (2) Date Terms
- -------------------- --------------- ------------------- ------------ -------------- Compounded Annually
--------------------------
5% ($) 10% ($)
------------- -----------
Virginia L. Pierpont 100,000 (3) 9% 0.30 12/11/2011 18,867 47,812
Dennis Fairchild . . 100,000 (3) 9% 0.30 12/11/2011 18,867 47,812
150,000 (4) 13% 0.30 12/11/2011 28,300 71,718
20,000 (5) 3% 0.75 03/07/2011 9,433 23,906
Malcolm G. Wright. . 100,000 (3) 9% 0.30 12/11/2011 18,867 47,812
150,000 (4) 13% 0.30 12/11/2011 28,300 71,718
50,000 (6) 4% 1.00 02/01/2011 31,445 79,687
John E. Mitchell . . 50,000 (7) 4% 0.75 03/07/2011 23,854 59,765
<FN>
(1) Unless otherwise, noted, all options vest in one-third installments on the
second, third, and fourth anniversaries of the date of grant.
(2) The exercise price equaled the fair market value of a share of Common Stock
on the date of grant as determined by the Board of Directors. The exercise price
is payable in cash or by delivery of shares of Common Stock having a fair market
value equal to the exercise price of the options exercised.
(3) The options vest in one-third installments beginning December 11, 2002.
Page 24 of 51
(4) The options vested on issuance.
(5) The options vest in one-third installments: one-third on issuance and
one-third on each anniversary.
(6) The options vest in one-third installments beginning on February 1, 2002.
(7) The option was terminated three months after Mr. Mitchell resigned from the
Company.
STOCK OPTIONS EXERCISED BY NAMED EXECUTIVE OFFICERS DURING FISCAL YEAR 2001 AND
HELD BY NAMED EXECUTIVE OFFICERS AT DECEMBER 31, 2001
No options granted by the Company were exercised by the named executive
officers during 2001. The following table sets forth certain information
regarding options for the purchase of Common Stock that were held by the named
executive officers.
AGGREGATED OPTIONS EXERCISED IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Number of Securities Underlying Value of Unexercised In-the-Money
Shares Unexercised Options at FY-End Options at FY-End
Acquired on Value ----------------------------- -----------------
Name Exercise (#) Realized($) (#) ($) (1)
- -------------------- ------------ ----------- --- -------
Exercisable Unexercisable Exercisable Unexercisable
-------------- -------------- --------------- -------------
Virginia L. Pierpont . --- --- 1,025 100,000 --- ---
Dennis C. Fairchild . . --- --- 227,417 166,667 --- ---
Malcolm G. Wright . . . --- --- 197,667 135,333
John E. Mitchell . . . --- --- --- --- --- ---
<FN>
(1) Based on $0.25 per share, the closing price of the Common Stock, as reported
by the Nasdaq National Market, on December 31, 2001.
COMPENSATION OF DIRECTORS
The Company pays each non-employee director an annual retainer of $12,500
and awards non-employee directors an option to purchase 33,333 shares of Common
Stock pursuant to the Company's 1997 Stock Option Plan. The number of options
is determined by dividing $10,000 by the fair market value of a share of Common
Stock on the date of the Company's Annual Meeting. The Company also reimburses
directors for travel expenses incurred on behalf of the Company. The Company
pays directors fees on a quarterly basis. Directors fees for the third and
fourth quarters of fiscal year 2001 were paid in 2002.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Company entered into an employment agreement with Ms. Pierpont,
effective April 4, 2000. Pursuant to her employment agreement, Ms. Pierpont
received $150,000 per year and reimbursement for her expenses incurred on behalf
of the Company, beginning May 1, 2000, to serve as the Chairman of the Board of
Directors. Effective August, 2001, Ms. Pierpont resigned her position as
Chairman of the Board and became President and Chief Executive Officer at an
annual salary of $150,000. Ms. Pierpont's salary may be increased by the Board
upon its annual review at the beginning of each calendar year. Ms. Pierpont
serves at the Board's discretion, and, if terminated by the Board, she is
entitled to receive her salary for 90 days after she receives notice of
termination. If Ms. Pierpont is terminated within 180 days of a change of
control of the Company, she is entitled to receive her salary for 180 days after
she receives notice of termination. Ms. Pierpont's employment agreement contains
a non-compete covenant that is in effect during the term of her employment and
for 18 months following her termination.
The Company entered into an employment agreement with Mr. Mitchell, the
Company's former President and Chief Executive Officer, on April 4, 2000.
Pursuant to his employment agreement, Mr. Mitchell received an initial base
salary of (British pounds) 195,000 per year which was subject to increases based
on the Board's annual review at the beginning of each calendar year. The
annualized salary of Mr. Mitchell for 2001 was $390,000. Mr. Mitchell received
customary benefits, including medical, dental, disability and life insurance and
other employee benefit plans available to employees at his level. Further, he
was eligible for an annual performance bonus, as determined by the Company. The
employment agreement defined that Mr. Mitchell could be terminated without
cause, upon 90 days written notice. If so terminated, he was entitled to receive
Page 25 of 51
his salary and benefits for 18 months after termination, including any bonus
paid or payable for the calendar year before his termination, and all of his
outstanding stock options would become fully vested and exercisable. If Mr.
Mitchell voluntarily terminated his employment agreement on 30 days prior
written notice with good reason, as defined in the agreement, then he was
entitled to receive his salary and benefits for 12 months, including any bonus
paid or payable for the previous calendar year, and all of his stock options
would become fully vested and exercisable. If Mr. Mitchell terminated his
employment agreement on one year's prior written notice, he would have received
his salary and benefits for 12 months after the termination is effective,
including any bonus paid or payable for the calendar year before the
termination. Mr. Mitchell's employment agreement contained a non-compete
covenant that was in effect during the term of his employment and for 18 months
after his termination, unless termination was by the Company without cause or by
Mr. Mitchell for good reason.
The Company also entered into a separation agreement with Mr. Mitchell,
effective April 4, 2000, the initial term of which was two years. The Company
could, in its sole discretion, extend, terminate or modify the agreement within
60 days from and after its expiration and, if it took no action within 60 days
after expiration of the term, the agreement would be automatically extended for
an additional two years. Also, the agreement would have remained in force for
two years after any change in control of the Company, as defined in the
agreement. Under the agreement, if Mr. Mitchell was involuntarily terminated
within two years after a change in control of the Company, he would have been
entitled to (i) (British pounds) 195,000 as a lump sum in cash, (ii) a lump sum
in cash equal to the cost of his benefits for two years, (iii) out-placement
services in connection with finding new employment and (iv) the right to
immediately exercise all outstanding stock options granted to him by the
Company. Mr. Mitchell resigned his position effective August 9, 2001.
The Company entered into an employment agreement with Mr. Wright, the
Company's Chief Operating Officer, dated February 6, 2001. Pursuant to his
employment agreement, Mr. Wright was entitled to receive an initial base salary
of (British pounds) 150,000 per year or such other rate as is shown on his pay
slip, subject to annual review, and the Company matches his contributions to his
personal pension up to five percent of his total pay. The annualized salary of
Mr. Wright for 2001 is $216,000. Each of the Company and Mr. Wright may
terminate the employment contract on six months prior notice in writing. Mr.
Wright's employment agreement contains a non-compete covenant that is in effect
during the term of his employment and for six months following his termination.
Prior to his appointment as Chief Operating Officer of the Company, Mr.
Wright entered into a change in control separation agreement with the Company,
effective September 30, 1999, the initial term of which was two years. The
Company may, in its sole discretion, extend, terminate or modify the agreement
within 60 days from and after its expiration and, if it takes no action within
60 days after expiration of the term, the agreement is automatically extended
for an additional two years. Also, the agreement remains in force for two years
after any change in control of the Company, as defined in the agreement. Under
the agreement, if Mr. Wright is involuntarily terminated within two years after
a change in control of the Company, he is entitled to (i) (British pounds)
117,000 as a lump sum in cash, (ii) a lump sum in cash equal to the cost of his
benefits for two years, (iii) out-placement services in connection with finding
new employment and (iv) the right to immediately exercise all outstanding stock
options granted to him by the Company.
The Company entered into a change in control separation agreement with Mr.
Fairchild, the Company's Chief Financial Officer, effective September 30, 1999,
the initial term of which was two years. The Company may, in its sole
discretion, extend, terminate or modify the agreement within 60 days from and
after its expiration and, if it takes no action within 60 days after expiration
of the term, the agreement is automatically extended for an additional two
years. Also, the agreement remains in force for two years after any change in
control of the Company, as defined in the agreement. Under the agreement, if Mr.
Fairchild is involuntarily terminated within two years after a change in control
of the Company, he is entitled to (i) $243,250 as a lump sum in cash, (ii) a
lump sum in cash equal to the cost of his benefits for two years, (iii)
out-placement services in connection with finding new employment and (iv) the
right to immediately exercise all outstanding stock options granted to him by
the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Ms. Pierpont served as a member of the Company's Compensation Committee in
2001 and also served as the Chairman of the Board of Directors until August,
2001, and as President and Chief Executive Officer thereafter for which she
receives a salary of $150,000 annually and reimbursement for her expenses
incurred on behalf of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of March 25, 2002, with
respect to the beneficial ownership of shares of Common Stock of the Company by
each person who is known to the Company to be the beneficial owner of more than
five
Page 26 of 51
percent of the outstanding Common Stock, by each director or nominee for
director, by each of the named executive officers, and by all directors and
executive officers as a group.
Amount and Nature of Percent of Voting
Name and Address of Beneficial Owner Beneficial Ownership (1) Power
- ------------------------------------------------ ------------------------ ------------------
EXECUTIVE OFFICERS AND DIRECTORS (2)
Virginia L. Pierpont (3) . . . . . . . . . . . . 619,868 7.4%
Dennis C. Fairchild (4). . . . . . . . . . . . . 236,417 2.7%
Malcolm G. Wright (5). . . . . . . . . . . . . . 198,167 2.3%
Nigel W.E. Curlet (6). . . . . . . . . . . . . . 64,871 0.8%
Gunther E.A. Fritze (7). . . . . . . . . . . . . 81,191 1.0%
B.K. Prasad (8). . . . . . . . . . . . . . . . . 33,333 0.4%
James R. Wilkinson . . . . . . . . . . . . . . . --- ---
John E. Mitchell (9) . . . . . . . . . . . . . . 28,700 0.3%
OTHER SHAREHOLDERS
Worcester Discretionary Trust (10). . . . . . . 631,092 7.5%
Woodbourne Discretionary Trust (10) . . . . . . 629,034 7.5%
Dimensional Fund Advisors, Inc. (11) . . . . . 480,000 5.7%
John Andrew Cowan (12) . . . . . . . . . . . . . 1,260,126 15.0%
Roger Geoffrey Barrs (12). . . . . . . . . . . . 1,260,126 15.0%
Purse Holding Limited (13) . . . . . . . . . . . 5,000,000 43.8%
All directors and executive officers as a group 1,233,847 13.7%
(8 persons) . . . . . . . . . . . . . . . .
<FN>
* Less than 1%
(1) Each beneficial owner's percentage ownership is determined by assuming that
options that are held by such person (but not those held by any other person)
and that are exercisable within 60 days of March 25, 2002 have been exercised.
Options that are not exercisable within 60 days of March 25, 2002 have been
excluded. Unless otherwise, noted, the Company believes that all persons named
in the above table have sole voting and investment power with respect to all
shares of Common Stock beneficially owned by them.
(2) Unless indicated otherwise, the address of each of these people is: c/o DA
Consulting Group, Inc., 5847 San Felipe, Suite 1100, Houston, Texas 77057.
(3) Includes (i) 370,000 shares owned by Ms. Pierpont's spouse, Nicholas
Marriner, the former President and Chief Executive Officer of the Company and
Chairman of the Board of Directors, (ii) 8,400 shares held by Ms. Pierpont as
custodian for three minors, and (iii) 1,025 shares that may be acquired upon
exercise of stock options. Ms. Pierpont disclaims beneficial ownership of the
shares owned by her spouse and held as custodian for three minors.
(4) Includes 227,417 shares that may be acquired upon exercise of stock
options.
(5) Includes 197,667 shares that may be acquired upon exercise of stock
options.
(6) Represents (i) 11,130 shares owned by Mr. Curlet's spouse, (ii) 1,450 shares
owned by Mr. Curlet's son, and (iii) 52,291 shares that may be acquired upon the
exercise of stock options.
(7) Includes 52,291 shares that may be acquired upon exercise of stock options.
(8) Includes 33,333 shares that may be acquired upon exercise of stock options.
(9) Mr. Mitchell is a former Director and executive officer.
(10) Messrs. John Andrew Cowan and Roger Geoffrey Barrs are the co-trustees of
the trust. The trustees have the power to appoint all or any part of the capital
and income of the trust to one or more of the beneficiaries described in the
trust deed and in such names and proportions and at such time as such trustees
shall in their discretion determine. The address of this stockholder is: Victory
House, 7th Floor, Prospect Hill, Douglas, Isle of Man, British Isle, IM1 1EQ.
Page 27 of 51
(11) Information with respect to the ownership of this stockholder was obtained
from Schedule 13G filed February 2, 2001 with the Securities and Exchange
Commission. The address of this stockholder is: 1299 Ocean Avenue, Eleventh
Floor, Santa Monica, CA 90401.
(12) Represents (i) 631,092 shares held by such stockholder as a co-trustee of
the Worcester Discretionary Trust and (ii) 629,034 shares held by such
stockholder as co-trustee of the Woodbourne Discretionary Trust. Such
stockholder disclaims beneficial ownership of the shares held by the trusts. The
address of this stockholder is: Victory House, 7th Floor, Prospect Hill,
Douglas, Isle of Man, British Isle, IM1 1EQ.
(13) Includes 3,000,000 shares that may be acquired by Purse Holding Limited
("Purse") upon exercise of a warrant, exercisable until October 16, 2003. Purse
is a British Virgin Islands limited company. Chanderia Charitable Foundation
1982 No. 5 ("Foundation") is the sole shareholder of Purse. R&H Trust Co.
(Bermuda) Limited ("Trust") is the Trustee of Foundation. John David Boden and
Paul Barrington Hubbard are the joint owners of Trust. Mr. Boden is also the
President and a Director of Trust. Mr. Hubbard is also the Vice-President and a
Director of Trust and the settlor of Foundation. Purse, Foundation, Trust, and
Messrs. Boden and Hubbard have the shared power to vote or to direct the vote of
or to dispose or direct the disposition of the shares of Common Stock.
Foundation, Trust, and Messrs. Boden and Hubbard disclaim beneficial ownership
of the 5,000,000 shares of Common Stock. The address of Purse is:
Altstetterstrasse 126, P.O. Box 1705, CH-8048, Zurich, Switzerland. The address
of Foundation, Trust and Messrs. Boden and Hubbard is: Corner House, 20
Parliament Street, Hamilton HM 12, Bermuda. Information with respect to these
stockholders was obtained from Schedule 13D filed March 16, 2001 with the
Securities and Exchange Commission.
WARRANTS TO PURCHASE COMMON STOCK
On October 16, 2000, the Company consummated the sale to Purse Holding
Limited, a British Virgin Islands limited company ("Purse"), 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. 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. As of April 30, 2001, there were 8,418,604 shares of the Company's
Common Stock outstanding. Therefore, if Purse exercised the warrants, it would
own 44% of the outstanding shares of Common Stock, assuming there were no other
changes in the number of shares outstanding.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable
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
reports of independent accountants are filed herewith:
Page
------
Number
------
Reports of Independent Certified Public Accountants
Consolidated Financial Statements:. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Balance Sheets at December 31, 2000 and 2001. . . . . . . . . . . . . . . . . . . . . . 34
Statements of Operations for the years ended December 31, 1999, 2000, and 2001. . . . . 35
Statements of Shareholders' Equity for the years ended December 31, 1999, 2000 and 2001 36
Statements of Cash Flows for the years ended December 31, 1999, 2000 and 2001 . . . . . 37
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 38-49
Page 28 of 51
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 February 4, 2002, the Company filed a Current Report on Form 8-K
regarding the termination of its former auditors, PricewaterhouseCoopers LLP.
On February 12, 2002, the Company filed a Current Report on Form 8-K
regarding the engagement of BDO Seidman, LLP as the Company's new auditors.
(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-1/A filed April 20, 1998).
3.2* - Bylaws of the Company, amended on August 6, 1999 (incorporated by reference
to the Company's Form 10-Q filed November 15, 1999).
4.1* - Specimen Stock Certificate (incorporated by reference to the Company's Form
S-1/A 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 May
15, 2000 (incorporated by reference to the Company's 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. (incorporated by reference to the Company's Form 10-K filed
April 2, 2001). +
10.6* - Conditions of Employment Agreement between Malcolm Wright and DA
Consulting Services Limited dated February 6, 2001. (incorporated by
reference to the Company's Form 10-K/A filed April 30, 2001). +
10.7* - Separation Agreement between the Company and John Mitchell dated May 15,
2000. (incorporated by reference to the Company's Form 10-K/A filed
April 30, 2001). +
10.8* - Employment Agreement between the Company and Virginia L. Pierpont dated
October 12, 2000. (incorporated by reference to the Company's Form 10-K/A
filed April 30, 2001). +
21.1 - Subsidiaries of the Company. (incorporated by reference to the Company's Form
10-K/A filed April 30, 2001).
23.1 - Consent of BDO Seidman, LLP.
23.2 - Consent of PricewaterhouseCoopers LLP.
<FN>
+ Management contract or compensatory benefit plan or arrangement.
* Incorporated by reference.
Page 29 of 51
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 April 15, 2002.
DA Consulting Group, Inc.
(Registrant)
By: /s/ Virginia L. Pierpont
----------------------------------------
Virginia L. Pierpont
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 April 15, 2002.
SIGNATURE TITLE
--------- -----
/s/ VIRGINIA L. PIERPONT Chief Executive Officer and President (Principal Executive
- ------------------------ Officer)
Virginia L. Pierpont
/s/ DENNIS C. FAIRCHILD Chief Financial Officer, Executive Vice President, Secretary
- ------------------------ and Treasurer (Principal Financial and Accounting Officer)
Dennis C. Fairchild
/s/ NIGEL W.E. CURLET Director
- ------------------------
Nigel W.E. Curlet
/s/ GUNTHER E. A. FRITZE Director
- ------------------------
Gunther E. A. Fritze
/s/ B.K. PRASAD Director and Chairman
- ------------------------
B.K. Prasad
/s/ JAMES R. WILKINSON Director
- ------------------------
James R. Wilkinson
Page 30 of 51
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
DA Consulting Group, Inc.:
We have audited the accompanying consolidated balance sheet of DA
Consulting Group, Inc. as of December 31, 2001 and the related consolidated
statements of operations, shareholders' equity, and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with the auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated statements referred to above present
fairly, in all material respects, the consolidated financial position of DA
Consulting Group, Inc. at December 31, 2001, and the results of their operations
and their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/BDO Seidman, LLP
Houston, Texas
March 22, 2002
Page 31 of 51
REPORT OF INDEPENDENT ACCOUNTANTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
DA Consulting Group, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows present fairly, in all material respects, the financial position of DA
Consulting Group, Inc. and Subsidiaries at December 31, 2000, and the results of
their operations and their cash flows for each of the two 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 financial statements in accordance with auditing standards
generally accepted in the United States of America which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, 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 the opinion expressed
above.
PricewaterhouseCoopers LLP
Houston, Texas
March 19, 2001
Page 32 of 51
DA CONSULTING GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
--------------------
2000 2001
--------- ---------
ASSETS
------
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 949 $ 373
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,226 4,053
Unbilled revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 38
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 708 629
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . . 440 352
--------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 7,529 5,445
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . 8,130 5,394
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254 177
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,647 5,990
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 380 206
--------- ---------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,940 $ 17,212
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Revolving line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 154 $ 1,077
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,840 1,759
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,655 3,272
--------- ---------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . 8,649 6,108
--------- ---------
Lease abandonment liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . - 801
--------- ---------
Commitments and contingencies (Notes 10 and 11)
Shareholders' equity:
Preferred stock, $0.01 par value: 10,000,000 shares authorized . . . . . . . . - -
Common stock, $0.01 par value: 40,000,000 shares authorized; 8,571,777 shares
issued and 8,418,604 shares outstanding. . . . . . . . . . . . . . . . . . . . 85 85
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 34,039 34,039
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,082) (20,782)
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . (1,229) (1,517)
Treasury stock, at cost: 153,173 shares. . . . . . . . . . . . . . . . . . . . (1,522) (1,522)
--------- ---------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . 16,291 10,303
--------- ---------
Total liabilities and shareholders' equity. . . . . . . . . . . $ 24,940 $ 17,212
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
Page 33 of 51
DA CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
------------------------------
1999 2000 2001
--------- --------- --------
Revenue. . . . . . . . . . . . . . . . . . . . . . . $ 70,295 $ 30,989 $28,654
Cost of revenue. . . . . . . . . . . . . . . . . . . 38,717 20,656 16,536
--------- --------- --------
Gross profit. . . . . . . . . . . . . . . . . . 31,578 10,333 12,118
Selling and marketing expense. . . . . . . . . . . . 7,403 4,945 3,280
Development expense. . . . . . . . . . . . . . . . . 1,802 3,667 702
General and administrative expense . . . . . . . . . 33,603 16,884 10,411
Amortization expense . . . . . . . . . . . . . . . . 354 760 592
Restructuring charge . . . . . . . . . . . . . . . . - 4,666 -
--------- --------- --------
Operating loss. . . . . . . . . . . . . . . . . (11,584) (20,589) (2,867)
--------- --------- --------
Interest income (expense), net . . . . . . . . . . . 366 31 (54)
Other expense, net . . . . . . . . . . . . . . . . . (79) (6) (272)
--------- --------- --------
Total other income (expense), net . . . . . . . 287 25 (326)
--------- --------- --------
Loss before provision for income taxes . . . (11,297) (20,564) (3,193)
--------- --------- --------
Provision for income taxes:
Current benefit. . . . . . . . . . . . . . . (960) - -
Deferred provision (benefit) . . . . . . . . (2,074) (7,347) 2,507
--------- --------- --------
Provision (benefit) for income taxes. (3,034) (7,347) 2,507
--------- --------- --------
Net loss. . . . . . . . . . . . . . . $ (8,263) $(13,217) $(5,700)
========= ========= ========
Basic and diluted loss per share . . . . . . . . . . $ (1.28) $ (1.93) $ (0.68)
Weighted average shares outstanding. . . . . . . . . 6,444 6,841 8,419
The accompanying notes are an integral part of the consolidated financial
statements.
Page 34 of 51
DA CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
ADDITIONAL RETAINED ACCUMULATED
COMMON STOCK PAID-IN EARNINGS OTHER TREASURY STOCK TOTAL
------------ (ACCUMUATED COMPREENSIVE ----------------- SHAREHOLDERS'
NUMBER PAR CAPITAL DEFICIT) LOSS NUMBER COST EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 1998 . . . 6,572 $ 65 $ 29,359 $ 6,398 $ (762) 22 $ (116) $ 34,944
Stock repurchases. . . . . . . . . --- --- --- --- --- 200 (1,943) (1,943)
Exercise of employee stock options --- --- (146) --- --- (69) 537 391
Employee stock compensation. . . . --- --- 142 --- --- --- --- 142
Net loss . . . . . . . . . . . . . --- --- --- (8,263) --- --- --- (8,263)
Foreign currency translation
Adjustment, net of taxes of $22 . --- --- --- --- (33) --- --- (33)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 1999 . . . 6,572 65 29,355 (1,865) (795) 153 (1,522) 25,238
Issuance of common stock . . . . . 2,000 20 2,446 --- --- --- --- 2,466
Issuance of warrants . . . . . . . --- --- 2,238 --- --- --- --- 2,238
Net loss . . . . . . . . . . . . . --- --- --- (13,217) --- --- --- (13,217)
Foreign currency translation
Adjustment, net of taxes of $241 . --- --- --- --- (434) --- --- (434)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2000 . . . 8,572 85 34,039 (15,082) (1,229) 153 (1,522) 16,291
Net loss . . . . . . . . . . . . . --- --- --- (5,700) --- --- --- (5,700)
Foreign currency translation
Adjustment, net of taxes of $176 . --- --- --- --- (288) --- --- (288)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2001 . . . 8,572 $ 85 $ 34,039 $ (20,782) $ (1,517) 153 $(1,522) $ 10,303
- ---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Page 35 of 51
DA CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-----------------------------
1999 2000 2001
-------- --------- --------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(8,263) $(13,217) $(5,700)
-------- --------- --------
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 2,560 3,010 2,306
Provision for (recovery of) doubtful accounts . . . . . . . . . . . . . . 435 662 (274)
Writedown of property and equipment, goodwill and reserve for leasehold
abandonment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 3,195 155
Stock option compensation expense . . . . . . . . . . . . . . . . . . . . 142
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . (2,074) (7,347) 2,507
Loss on sale on property and equipment. . . . . . . . . . . . . . . . . . 80 237 157
Changes in operating assets and liabilities:
Accounts receivable and unbilled revenue . . . . . . . . . . . . . . 8,157 2,918 1,615
Prepaid expenses and other current assets. . . . . . . . . . . . . . 170 16 88
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 (254) 77
Accounts payable and accrued liabilities . . . . . . . . . . . . . . (4,289) (1,367) (2,383)
Deferred income. . . . . . . . . . . . . . . . . . . . . . . . . . . (1,233) (112) -
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . (2,261) 2,979 -
-------- --------- --------
Total Adjustments . . . . . . . . . . . . . . . . . . . . . . . 1,869 3,937 4,248
-------- --------- --------
Net cash used in operating activities . . . . . . . . . . . . . (6,394) (9,280) (1,452)
-------- --------- --------
Cash flows from investing activities:
Proceeds from sale of property and equipment . . . . . . . . . . . . . . . . . 19 263 295
Sale of short-term investments . . . . . . . . . . . . . . . . . . . . . . . . 7,721 2,389 -
Purchases of short-term investments. . . . . . . . . . . . . . . . . . . . . . (77) - -
Purchases of property and equipment. . . . . . . . . . . . . . . . . . . . . . (6,249) (253) (54)
-------- --------- --------
Net cash provided by investing activities. . . . . . . . . . . 1,414 2,399 241
-------- --------- --------
Cash flows from financing activities:
Net proceeds from revolving line of credit . . . . . . . . . . . . . . . . . . - 154 923
Issuance of stock and warrants . . . . . . . . . . . . . . . . . . . . . . . . - 4,800 -
Stock repurchases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,943) - -
Proceeds from stock option exercises . . . . . . . . . . . . . . . . . . . . . 391 - -
Offering costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (96) -
-------- --------- --------
Net cash provided by (used in) financing activities . . . . . . (1,552) 4,858 923
-------- --------- --------
Effect of changes in foreign currency exchange rate on cash and cash equivalents. . (33) (434) (288)
-------- --------- --------
Decrease in cash and cash equivalents. . . . . . . . . . . . . (6,565) (2,457) (576)
Cash and cash equivalents at beginning of year. . . . . . . . . . . . . . . . . . . 9,971 3,406 949
-------- --------- --------
Cash and cash equivalents at end of year. . . . . . . . . . . . . . . . . . . . . . $ 3,406 $ 949 $ 373
======== ========= ========
The accompanying notes are an integral part of the consolidated financial
statements.
Page 36 of 51
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 materially
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.
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. Leasehold improvements are depreciated over the
term of the lease. In 1999 the Company capitalized $3.3 million in
implementation costs related to the Company's primary information system.
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 other
expense and in 2000 are partially included in the restructuring charge.
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 lesser 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, were expensed during the years
2000 and 2001.
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 is provided
against deferred tax assets which management considers more likely than not will
fail to be realized.
Page 37 of 51
Foreign Currency Translation and Other Comprehensive Loss
For the Company's foreign subsidiaries, the local currency is the
functional currency. For countries with highly inflationary currencies, the
Company uses the U.S. dollar as 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, accumulated other comprehensive loss, which is excluded from net loss.
Other comprehensive loss is added to the net loss to determine the total
comprehensive loss of the Company. The components of comprehensive loss are
listed below (in thousands):
YEARS ENDED DECEMBER 31,
-----------------------------
1999 2000 2001
-------- --------- --------
Net loss . . . . . . . . $(8,263) $(13,217) $(5,700)
Other comprehensive loss (33) (434) (288)
-------- --------- --------
Comprehensive loss . . . $(8,296) $(13,651) $(5,988)
======== ========= ========
Risks and Uncertainties
For the years ended December 31, 1999, 2000 and 2001, the Company incurred
net losses of $8.2, $13.2 and $5.7 million, respectively. During the above
periods, the Company generated net operating loss carryforwards for tax
reporting purposes of approximately $31.4 million ($11.1 million deferred of tax
assets), of which the Company has recorded a valuation allowance of
approximately $4 million, based upon managements estimate of future taxable
income in the United States, against the deferred tax asset generated from the
net operating loss carryforwards.
During the second quarter of 2000, the Company implemented a strategy to
restructure the global operations of the Company. Revenue in the United States
continued to decline throughout 2001. Management completed the restructuring
during the third quarter of 2001. The Company recorded a $4 million valuation
allowance against the deferred tax asset in the United States resulting from
management's projections of future taxable income in the United States based
upon the size of the business in the United States and realistic future growth
rates. Management is confident the Company's restructuring plan will be
successful in the United States, and the Company will return to profitability.
The plan has already begun to show positive results.
There can be no assurance that management's restructuring plan in the
United States will yield sufficient future taxable income necessary to utilize
the net operating loss carryforwards recorded as a deferred tax asset by the
Company. The ultimate realization of the deferred tax asset is dependent upon
management's ability to grow the revenues of the Company in the United States,
adhere to the cost saving measures put in place during the restructuring and
generate sufficient future taxable income. Any future decline, in the demand for
the Company's services or the Company's inability to return to profitability in
the United States will result in the Company being required to increase the
valuation allowance against the deferred tax asset which would adversely affect
the Company's financial position and operating results.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, cash equivalents,
trade accounts receivable, accounts payable and the revolving line of credit.
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. The Company maintains cash deposits and cash
equivalents 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.
Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, accounts receivable,
accounts payable and the revolving line of credit 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.
Page 38 of 51
Allowance for Accounts Receivable
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, 2000 and 2001, was $498,000 and $224,000, 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 $105,000 and $124,000 at December 31, 2000 and
2001, respectively.
Management reviews long-lived assets and intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future net
cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount exceeds the fair value of the assets which considers
the discounted future net cash flows. Assets to be disposed of are reported at
the lower of the carrying amount or the fair value less costs of disposal. This
analysis of the long-lived assets at December 31, 2001 resulted in the writeoff
of $155,000 of goodwill net of accumulated amortization related to a closed
operating unit. The analysis indicated there were no other impairments of
these assets' carrying values.
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 $4.9 million, $1.8 million and
$2.0 million for the years ended December 31, 1999, 2000 and 2001, respectively.
The Company recognizes product revenue upon shipment to the client if no further
services are required.
Significant Clients
During the year 2001, one client accounted for approximately 18% of
consolidated revenue. During the years 2000 and 1999, no individual client
account for more than 10% of consolidated revenue.
Earnings Per Share
Basic earnings per share is based on the weighted average number of common
shares outstanding. Diluted earnings per share is based on the weighted
average number of common and potential dilutive common shares outstanding and
utilizes the average market price per share when applying the treasury stock
method in determining potential dilutive 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
Page 39 of 51
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 intrinsic vale 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.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standard Board finalized FASB
Statement No. 141, Business Combinations (SFAS 141), and No. 142 Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires us to recognize acquired intangible assets apart from goodwill if
the acquired intangible asset meets certain criteria. SFAS 141 applies to all
business combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires, upon
adoption of SFAS 142, that we reclassify the carrying amounts of intangible
assets and goodwill based upon the criteria of SFAS 141.
SFAS 142 requires, among other things, that we no longer amortize goodwill,
but instead test goodwill for impairment as least annually. In addition, SFAS
142 requires us to identify reporting units for the purposes of assessing
potential future impairments of goodwill, reassess the useful lives of other
existing recognized intangible assets and cease amortization of intangible
assets with an indefinite useful life. An intangible with an indefinite useful
life should be tested for impairment in accordance with the guidance in SFAS
142. SFAS 142 is required to be applied in fiscal years beginning after
December 15, 2001 to all goodwill and other intangible assets recognized at that
date, regardless of when those assets were initially recognized. SFAS 142
requires us to complete a transitional goodwill impairment test six months from
the date of adoption. We are also required to reassess the useful lives of
other intangible assets within the first interim quarter after adoption of SFAS
142. Currently, we do not expect that adoption of SFAS 141 and SFAS 142 will
have a material impact on our financial position and results of operations.
The Company has approximately $0.2 million of goodwill included in its
balance sheet at December 31, 2001. Goodwill amortization for the for the year
ended December 31, 2001, is $19,000 before the provisions of SFAS 142 are
applied. Implementation of SFAS 142 by the Company will result in the
elimination of amortization of goodwill.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, SFAS No. 143, which amends SFAS No. 19, Financial Accounting and
Reporting by Oil and Gas Producing Companies, is applicable to all companies.
SFAS No. 143, which is effective for fiscal years beginning after June 15, 2002,
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or the normal operation of a long-lived asset, except for certain
obligations of lessees. As used in SFAS No. 143, a legal obligation is an
obligation that a party is required to settle as a result of an existing or
enacted law, statute, ordinance, or written or oral contract or by legal
construction of a contract under the doctrine of promissory estoppel. While we
are not yet required to adopt SFAS No. 143, we do not believe the adoption will
have a material effect on our financial condition or results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
of Disposal of Long-lived Assets. SFAS No. 144, which supercedes SFAS No. 121,
Accounting for the Impairment of Long-lived Assets for Long-lived Assets to be
Disposed of and amends ARB No. 51, Consolidated Financial Statements, addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 is effective for fiscal years beginning after December 15,
2001, and interim financials within those fiscal years, with early adoption
encouraged. The provisions of SFAS No. 144 are generally to be applied
prospectively. As of the date of this filing, we are still assessing the
requirements of SFAS No. 144 and have not determined the impact the adoption
will have on our financial condition or results of operations.
2. MANAGEMENT'S RESTRUCTURING AND LIQUIDITY
During the second quarter of 2000, management began to restructure the
global operations of the Company. As part of the plan, management was required
to downsize the Company based upon current and future projected operating
results. Some of the restructuring initiatives taken by management were as
follows:
- Reduction in the number of consultants
- Reduction of administrative personnel
- Reduction in office space
- Various other cost cutting measures
Page 40 of 51
Management completed the restructuring of the Company during the third
quarter of 2001 and achieved overall profitability in the fourth quarter of
2001. There can be no assurance that profitability will continue.
The Company believes its current cash balances, line of credit,
receivable-based financing and cash provided by future operations will be
sufficient to meet the Company's working capital and cash need for the next
fiscal year. However, there can be no assurance that such sources will be
sufficient to meet these future expenses and the Company's future needs. The
Company may seek additional financing through a private or public 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.
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
The components of prepaid expenses and other current assets were as follows
(in thousands):
DECEMBER 31,
------------
2000 2001
----- -----
Prepaid rent. . . . . . . . . . . . . . . . $ 86 $ 185
Deposits. . . . . . . . . . . . . . . . . . 99 26
Other . . . . . . . . . . . . . . . . . . . 255 141
----- -----
Prepaid expenses and other current assets $ 440 $ 352
===== =====
4. PROPERTY AND EQUIPMENT, NET
The components of property and equipment were as follows (in thousands):
DECEMBER 31,
-------------------
2000 2001
--------- --------
Computer equipment . . . . . . . . . . . . . . $ 4,444 $ 4,342
Automobiles. . . . . . . . . . . . . . . . . . 9 -
Furniture and fixtures . . . . . . . . . . . . 1,590 900
Leasehold improvements . . . . . . . . . . . . 782 544
Software development and implementation costs. 4,187 4,177
Purchased software . . . . . . . . . . . . . . 3,186 3,164
--------- --------
Property and equipment . . . . . . . . . . . 14,198 13,127
Less accumulated depreciation and amortization ( 6,068) (7,733)
--------- --------
Property and equipment, net. . . . . . . . . $ 8,130 $ 5,394
========= ========
5. DEBT
Revolving Line of Credit
The Company has a credit facility from a foreign bank with an available
line of approximately $1.1 million (750,000 Great Britain Pounds),
collateralized by and based on eligible foreign accounts receivable, secured by
a mortgage deed against all the assets of the Europe Division and guaranteed by
the Company. At December 31, 2001, the Company had used the entire line
available. The interest rate on this line of credit was 6.0% at December 31,
2001. The line is available through March 2003, however, may become due upon
demand. At March 22, 2002 the amount borrowed against the line of credit was
$400,000.
Page 41 of 51
Accounts Receivable Financing
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 the agreement is $5 million. The agreement allows
for the bank to request repurchase of an account receivable under certain
conditions. The bank has never requested repurchase of an account receivable.
At December 31, 2001, the Company had sold $0.2 million in accounts receivable
pursuant to this agreement. At March 22, 2002 their were $13,000 in receivables
sold under the agreement.
6. ACCRUED EXPENSES
The components of accrued expenses were as follows (in thousands):
DECEMBER 31,
--------------
2000 2001
------ ------
Compensation and related expenses. . . . . . . $1,067 $ 495
Bonuses. . . . . . . . . . . . . . . . . . . . 972 388
Professional fees. . . . . . . . . . . . . . . 856 427
Vacations. . . . . . . . . . . . . . . . . . . 544 442
Other taxes. . . . . . . . . . . . . . . . . . 1,518 634
Leasehold abandonment reserve, current portion 1,410 319
Other. . . . . . . . . . . . . . . . . . . . . 288 412
------ ------
Accrued expenses . . . . . . . . . . . . . . $6,655 $3,272
====== ======
7. INCOME TAXES
The following is a summary of the significant components of the Company's
deferred income taxes (in thousands):
DECEMBER 31,
-----------------
2000 2001
------- --------
Deferred tax assets:
Net operating loss carryforward $ 9,645 $11,100
Accrued expenses. . . . . . . . 1,073 870
Other . . . . . . . . . . . . . 171 -
Valuation allowance . . . . . . - (4,000)
------- --------
Deferred tax assets. . . . 10,889 7,970
------- --------
Deferred tax liabilities:
Property and equipment. . . . . 1,534 1,351
------- --------
Deferred tax liabilities . 1,534 1,351
------- --------
Net, deferred tax assets . $ 9,355 $ 6,619
======= ========
At December 31, 2001, for US Federal income tax reporting purposes, the
Company had $24.6 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, 2020 and 2021.
At December 31, 2001, the Company also had foreign net operating loss
carryforwards totaling $6.7 million with $3.0 million expiring in 2006. The
remaining $3.7 million have no expiration date.
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 recorded a $4.0 million
valuation allowance against deferred tax assets during 2001. The Company
believes it will generate sufficient taxable income to realize the remaining
$6.6 million in deferred tax assets. The Company could be required to record a
Page 42 of 51
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 and management believes it is more likely than not the
deferred tax assets will fail to be realized.
The components of the Company's provision for income taxes were as follows
(in thousands):
DECEMBER 31,
--------------------------
1999 2000 2001
-------- -------- ------
United States federal and state:
Current (benefit). . . . . . . . . . . . . $ (562) $ - $ -
Deferred provision (benefit) . . . . . . . (1,774) (5,121) 2,334
-------- -------- ------
(2,336) (5,121) 2,334
-------- -------- ------
Foreign:
Current (benefit) . . . . . . . . . . . . (398) - -
Deferred provision (benefit). . . . . . . (300) (2,226) 173
-------- -------- ------
(698) (2,226) 173
-------- -------- ------
Provision (benefit) for income taxes. $(3,034) $(7,347) $2,507
======== ======== ======
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,
-------------------------
1999 2000 2001
------- ------- -------
U.S. statutory rate . . . . . . . . . . . . . . (34.0) (34.0)% (34.0)%
Write-off of investment in foreign subsidiaries (2.3) - -
State and local . . . . . . . . . . . . . . . . (3.1) (2.7) (4.3)
Foreign . . . . . . . . . . . . . . . . . . . . 8.5 0.5 (1.1)
Other . . . . . . . . . . . . . . . . . . . . . 4.0 0.5 1.3
Valuation allowance . . . . . . . . . . . . . . - - 116.6
------- ------- -------
Effective tax rate . . . . . . . . . . . . (26.9)% (35.7)% 78.5%
======= ======= =======
The U.S. components of income (loss) before taxes were $(3.9), $(13.7) and
$(3.4) million in 1999, 2000 and 2001, respectively, and the foreign components
were $(7.4), $(6.9) and $0.2 million in 1999, 2000 and 2001, 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.
Page 43 of 51
The following table sets forth pertinent information regarding stock option
transactions and stock option prices during the years ended December 31, 1999,
2000 and 2001:
NUMBER OF WEIGHTED
SHARES OF AVERAGE
UNDERLYING EXERCISE
OPTIONS PRICES
------------ ---------
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
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,172,749 0.38
Exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,010,496) 3.40
------------
Outstanding at December 31, 2001 . . . . . . . . . . . . . . . . . . . . 1,491,850 1.21
Exercisable at December 31, 1999 . . . . . . . . . . . . . . . . . . . . 94,593 6.14
Exercisable at December 31, 2000 . . . . . . . . . . . . . . . . . . . . 262,430 6.04
Exercisable at December 31, 2001 . . . . . . . . . . . . . . . . . . . . 618,957 1.64
============ =========
Weighted average exercise price of options granted during the year ended
December 31, 2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.38
=========
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 4.38% to 6.77%; volatility of 90% and expected life of 5 years.
The following table sets forth pertinent information regarding the
outstanding stock options at December 31, 2001:
Options Outstanding Options Exercisable
----------------------------------------- ---------------------------
Weighted-
Actual Range Weighted Average Average Weighted-
of Exercise Number Remaining Exercise Number Average
Prices Outstanding Contractual Life Price Exercisable Exercise Price
- ------------- ----------- ---------------- ---------- ----------- --------------
$0.30 - 0.78 1,068,749 9.9 $ .32 413,332 $ 0.32
1.00 - 1.56 149,300 8.7 1.20 45,333 1.39
1.69 - 3.25 148,166 8.5 2.10 64,833 2.23
3.44 - 9.75 100,455 6.4 6.35 80,822 5.90
9.88 - 15.25 25,180 6.4 13.11 14,637 13.59
- ------------- ----------- ---------------- ---------- ----------- --------------
0.30 - 15.25 1,491,850 7.6 1.21 618,957 1.64
Pro Forma Net Loss and Loss 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 loss per share
at December 31, 1999, 2000 and 2001 would approximate the pro forma amounts
below (in thousands except per share amounts):
1999 2000 2001
-------- --------- --------
Net loss:
As reported. . . . . . $(8,263) $(13,217) $(5,700)
Pro forma. . . . . . . (9,501) (14,997) (9,393)
Diluted earnings per share:
As reported. . . . . . $ (1.28) $ (1.93) $ (0.68)
Pro forma. . . . . . . (1.47) (2.19) (1.12)
Page 44 of 51
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
9. SHAREHOLDERS' EQUITY
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.
Loss Per Share
The following table summarizes the Company's computation of loss per share
for the years ended December 31, 1999, 2000 and 2001 (in thousands, except per
share amounts). The calculation of diluted weighted average shares outstanding
excludes 1.0 million, 4.3 million and 4.5 million common shares pursuant to
outstanding options and warrants for the year ended December 31, 1999, 2000, and
2001, respectively, because their effect was
antidilutive.
YEARS ENDED DECEMBER 31,
1999 2000 2001
-------- --------- --------
Basic loss per share . . . . . . . . . . . . . . . . . . . . . . . . . $ (1.28) $ (1.93) $ (0.68)
======== ========= ========
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(8,263) $(13,217) $(5,700)
======== ========= ========
Weighted average shares outstanding. . . . . . . . . . . . . . . . . . 6,444 6,841 8,419
Computation of diluted loss per share:
Common shares issuable under outstanding stock options. . . . . . - - -
Less shares assumed repurchased with proceeds from exercise stock
Options. . . . . . . . . . . . . . . . . . . . . . . . . . . - - -
-------- --------- --------
Adjusted weighted average shares outstanding. . . . . . . . . . . 6,444 6,841 8,419
======== ========= ========
Diluted loss per share. . . . . . . . . . . . . . . . . . . . . . $ (1.28) $ (1.93) $ (0.68)
======== ========= ========
10. COMMITMENTS AND CONTINGENCIES
The Company leases various office facilities under non-cancelable operating
lease agreements. Rent expense amounted to $3,100,000, $2,656,000 and $
2,541,000 for the years ended December 31, 1999, 2000, and 2001, respectively.
Page 45 of 51
At December 31, 2001, future lease payments (in thousands) under
non-cancelable leases with terms of more than one year are as follows:
Lease Sublease
Payments Receipts
--------- ---------
2002 . . . . . $ 2,444 $ 1,120
2003 . . . . . 2,037 1,043
2004 . . . . . 882 519
2005 . . . . . 333 -
2006 . . . . . 51 -
Thereafter - -
--------- ---------
5,747 $ 2,682
=========
Less subleases 2,682
---------
Total . . $ 3,065
=========
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, 1999, 2000 and 2001 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 retirement due to disability, or upon death. The Company made contributions
to the 401(k) Plan aggregating approximately $648,000, $287,000 and $117,000
during the years ended December 31, 1999, 2000 and 2001, 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 approved and made incentive compensation and profit
sharing payments aggregating approximately $2,882,000, $1,304,000 and
$1,586,000 for the years ended December 31, 1999, 2000, and 2001, respectively,
which are included in sales, general and administrative expense.
Page 46 of 51
12. RESTRUCTURING CHARGE AND LEASE ABANDONMENT
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 had been paid at December 31, 2000. The remaining $0.3 million in
termination pay was paid during 2001.
During the three months ended March 31, 2000 the Company 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. 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. During 2000 payments of approximately $0.8
million were charged against the reserve for lease abandonment, resulting in a
remaining reserve at December 31, 2000 of approximately $1.4 million.
During the three months ended June 30, 2001 the Company recorded a $0.8
million charge for the abandonment of additional leases. The charge was
included in general and administrative costs. Payments for unutilized leased
office space totaling $1.1 million were charged against the reserve in 2001. At
December 31, 2001, the Company has a remaining accrual of $1.1 million of which
$0.8 million is included in long term liabilities.
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
YEARS ENDED DECEMBER, 31
1999 2000 2001
-------- -------- ------
Cash paid (received) for interest and income taxes (in thousands):
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 74 $ 62
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . (1,198) (2,697) -
Non-cash activities were (in thousands):
Exercise of stock options using Company stock . . . . . . . . $ 146 $ - $ -
Page 47 of 51
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, 1999
Revenue . . . . . . . . . . . $ 41,500 $ 20,505 $ 8,290 $ 70,295
Operating 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, 2000
Revenue . . . . . . . . . . . $ 11,834 $ 12,476 $ 6,679 $ 30,989
Operating 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, 2001
Revenue . . . . . . . . . . . $ 5,389 $ 17,144 $ 6,121 $ 28,654
Operating income (loss) . . . (3,320) 391 62 (2,867)
Total assets. . . . . . . . . 6,630 7,419 3,163 17,212
Capital expenditures . . . . 4 34 16 54
Depreciation and amortization 695 1,205 406 2,306
Page 48 of 51
15. QUARTERLY OPERATING RESULTS (UNAUDITED)
The following tables set forth unaudited income statement data for each of
the eight quarters in the period beginning January 1, 2000 and ending December
31, 2001, 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,
2000 2000 2000 2000 2001 2001 2001
----------- ---------- ----------- ---------- ----------- ---------- -----------
INCOME STATEMENT DATA:
(in thousands except per share amounts)
Revenue. . . . . . . . . . . . . . . . $ 6,369 $ 8,020 $ 8,148 $ 8,452 $ 8,536 $ 7,607 $ 5,843
Cost of revenue. . . . . . . . . . . . 5,928 5,262 4,224 5,242 4,993 4,572 3,332
----------- ---------- ----------- ---------- ----------- ---------- -----------
Gross profit . . . . . . . . . . . . . 441 2,758 3,924 3,210 3,543 3,035 2,511
Selling and marketing expense. . . . . 1,418 1,305 1,154 1,068 1,058 987 606
Development expense. . . . . . . . . . 469 1,732 923 543 458 174 28
General and administrative expense . . 5,926 4,214 3,550 3,194 3,375 2,851 2,074
Amortization expense . . . . . . . . . 192 191 189 188 148 148 148
Restructuring charge 3,354 - - 1,312 - - -
----------- ---------- ----------- ---------- ----------- ---------- -----------
Operating income (loss). . . . . . . . (10,918) (4,684) (1,892) (3,095) (1,496) (1,125) (345)
Other income (expense), net. . . . . . 26 (30) 58 (29) 0 (39) (243)
----------- ---------- ----------- ---------- ----------- ---------- -----------
Income (loss) before taxes . . . . . . (10,892) (4,714) (1,834) (3,124) (1,496) (1,164) (588)
Provision (benefit) for income taxes . (3,423) (1,641) (950) (1,333) (548) 3,185 (30)
----------- ---------- ----------- ---------- ----------- ---------- -----------
Net income (loss) . . . . . . . . . . $ (7,469) $ (3,073) $ (884) $ (1,791) $ (948) $ (4,349) $ (558)
=========== ========== =========== ========== =========== ========== ===========
Basic earnings (loss) per share. . . . $ (1.16) $ (0.48) $ (0.14) $ (0.22) $ (0.11) $ (0.52) $ (0.07)
Weighted average shares outstanding. . 6,418 6,419 6,419 8,093 8,419 8,419 8,419
Diluted earnings (loss) per share. . . $ (1.16) $ (.48) $ (.14) $ (.22) $ (0.11) $ (0.52) $ (0.07)
Weighted average shares outstanding. . 6,418 6,419 6,419 8,093 8,419 8,419 8,419
As a percent of revenue
Revenue. . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue. . . . . . . . . . . . 93.1 65.6 51.8 62.0 58.5 60.1 57.0
----------- ---------- ----------- ---------- ----------- ---------- -----------
Gross profit . . . . . . . . . . . . . 6.9 34.4 48.2 38.0 41.5 39.9 43.0
Selling and marketing expense. . . . . 22.3 16.3 14.2 12.6 12.4 13.0 10.4
Development expense. . . . . . . . . . 7.3 21.6 11.3 6.4 5.4 2.3 0.5
General and administrative expense . . 93.0 52.5 43.6 37.8 39.5 37.5 35.5
Amortization expense . . . . . . . . . 3.0 2.4 2.3 2.1 1.7 1.9 2.5
Restructuring. . . . . . . . . . . . . 52.7 --- --- 15.5 --- --- ---%
----------- ---------- ----------- ---------- ----------- ---------- -----------
Operating income (loss). . . . . . . . (171.4) (58.4) (23.2) (36.6) (17.5) (14.8) (5.9)
Other income (expense), net. . . . . . 0.4 (0.4) 0.7 (0.4) - (0.5) (4.2)
----------- ---------- ----------- ---------- ----------- ---------- -----------
Income (loss) before taxes . . . . . . (171.0) (58.8) (22.5) (37.0) (17.5) (15.3) (10.1)
Provision (benefit) for income taxes . (53.7) (20.5) (11.7) (15.8) (6.4) 41.9 (0.6)
----------- ---------- ----------- ---------- ----------- ---------- -----------
Net income (loss). . . . . . . . . . . (117.3)% (38.3)% (10.8)% (21.2)% (11.1)% (57.2)% (9.5)%
=========== ========== =========== ========== =========== ========== ===========
----------
DEC. 31,
2001
----------
INCOME STATEMENT DATA:
Revenue. . . . . . . . . . . . . . . . $ 6,668
Cost of revenue. . . . . . . . . . . . 3,639
----------
Gross profit . . . . . . . . . . . . . 3,029
Selling and marketing expense. . . . . 629
Development expense. . . . . . . . . . 42
General and administrative expense . . 2,111
Amortization expense . . . . . . . . . 148
Restructuring charge -
----------
Operating income (loss). . . . . . . . 99
Other income (expense), net. . . . . . (44)
----------
Income (loss) before taxes . . . . . . 55
Provision (benefit) for income taxes . (100)
----------
Net income (loss) . . . . . . . . . . $ 155
==========
Basic earnings (loss) per share. . . . $ 0.02
Weighted average shares outstanding. . 8,419
Diluted earnings (loss) per share. . . $ 0.02
Weighted average shares outstanding. . 8,419
As a percent of revenue
Revenue . . . . . . . . . . . . . . 100.0%
Cost of revenue. . . . . . . . . . . . 54.6
----------
Gross profit . . . . . . . . . . . . . 45.4
Selling and marketing expense. . . . . 9.4
Development expense. . . . . . . . . . 0.6
General and administrative expense . . 31.7
Amortization expense . . . . . . . . . 2.2
Restructuring. . . . . . . . . . . . . ---%
----------
Operating income (loss). . . . . . . . 1.5
Other income (expense), net. . . . . . (0.7)
----------
Income (loss) before taxes . . . . . . 0.8
Provision (benefit) for income taxes . (1.5)
----------
Net income (loss). . . . . . . . . . . 2.3%
==========
Page 49 of 51