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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, 1999
Commission File No.00-24055
DA CONSULTING GROUP, INC.
(Exact name of registrant as specified in charter)
TEXAS 76-0418488
(State or other jurisdiction of (IRS employer incorporation
or organization) identification No.)
5847 SAN FELIPE, SUITE 3700
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 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 [_].
As of March 24, 2000 the aggregate market value of the voting stock held by
non-affiliates was $9,807,000.
As of March 24, 2000, 6,418,604 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders of DA Consulting Group, Inc. to be held on June 6, 2000 are
incorporated by reference in Part III of this report.
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DA CONSULTING GROUP, INC.
FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business.............................................. 3
Item 2. Properties............................................ 14
Item 3. Legal Proceedings..................................... 15
Item 4. Submission of Matters to a Vote of Security Holders... 15
PART II
Item 5. Market for the Company's Common Equity and Related
Stockholder Matters.................................. 15
Item 6. Selected Consolidated Financial Data.................. 16
Item 7. Management's Discussion and Analysis of Financial
Condition And Results of Operations.................. 17
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk................................................. 23
Item 8. Financial Statements.................................. 23
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 23
PART III
Item 10. Directors and Executive Officers of DA Consulting
Group, Inc........................................... 23
Item 11. Executive Compensation................................ 24
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................... 24
Item 13. Certain Relationships and Related Transactions........ 24
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K............................................... 24
SIGNATURES......................................................... 26
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PART I
ITEM 1. BUSINESS
DA Consulting Group, Inc. ("DACG(TM) and together with its subsidiaries,
the "Company") is a leading international provider of employee education and
support solutions to companies investing in business information technology.
Through its worldwide offices and locations, DACG delivers customized services
for:
. documentation and training necessary for implementation of large enterprise
computer systems;
. technical and non-technical employee education on enterprise computer
systems; and
. consulting on change management and change communications.
In addition to services, the Company markets its proprietary software and
business systems content as pre-packaged products.
Since 1988, the Company has provided services to over 450 clients,
including more than 70 of the Fortune Global 500, providing services to such
companies as Guinness, Compaq, BASF, Nabisco, Eastman Kodak, Corning Consumer
Products, Scott Paper Limited, Comp USA, Great Spring Water of America (Perrier
Worldwide) and McKessonHBOC. The Company's client base is diversified, with its
largest client representing less than 6% of the Company's revenue in 1999.
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 on six continents.
The Company has offices in the U.S., Canada, United Kingdom, France, Germany,
South Africa, Australia, Singapore.
DACG was founded in 1984 in Houston, Texas as an employee support company
providing documentation services to the oil and gas industry. In 1988, the
Company expanded its employee support services to include training in connection
with one of the first major English language installations of SAP AG software in
the world. During the 1990's, enterprise resource planning (ERP) represented the
substantial market opportunity for the Company's services. DACG made ERP end-
user support its primary focus. In 1999, revenue from clients implementing SAP
software represented 90% of the Company's billed consulting revenue. By focusing
on end-user support services, the Company has been successful in
institutionalizing its knowledge base and has developed proprietary content and
reference materials, the DA Foundation(TM), that is applied in developing
customized solutions for each client. DACG has also developed DA
Cornerstone(TM), the Company's methodology for delivering consistently high
quality service to its clients. DACG has broadened its complement of end-user
support services by also providing change communications consulting and on-line
help tools with SmartForce and Centra Software strategic relationships and by
expanding its ERP capabilities to include applications such as J.D. Edwards
("JDE"), BaaN, Oracle and PeopleSoft. Most recently, the Company introduced a
pre-packaged software solution coupled with minimal consulting, called
FastED(TM). FastED(TM) is targeted to meet the needs of many first time small or
mid-sized organizations desiring to provide their own documentation and training
programs when implementing ERP systems or upgrading existing systems.
MARKET
According to industry experts, the 1999 worldwide market for IT education and
training was $18.4 billion and is growing at a compound annual rate of 11% to
reach $27.8 billion in 2003. The Company's primary target market within ERP
training comprises approximately 7% of the IT training market, or over $1
billion. Julian, Ellen H. and Dankes, Anne-Spohie, "Worldwide & US Education
and Training Markets, 1998-2003", International Data Corporation, May 1999,
Report 19144, page 3.There are many service providers in the training market and
the providers that directly compete with the Company include software
developers, computer training companies, consulting firms, and internet-based
learning companies. DACG also has competitive pressure from large international
system integrators and technology vendors that provide end-user support programs
to supplement their proprietary software.
The Company's growth in the past years was directly impacted by the
significant growth experienced within the ERP market for first time
implementations. DACG's ability to increase revenues in the ERP and IT training
market is directly impacted by the respective growth rates within the worldwide
regions and countries in which it provides services. The worldwide trend for new
ERP implementations has generally moved from the West to the East. In the U.S.,
there is a growing saturation of ERP in large companies, which has led to
shrinking or declining growth in this market, whereas Europe has flattened
growth rates, and Asia has accelerated growth in first time ERP implementations.
An extension of DACG's current market stems from companies experiencing
what industry analysts have termed "Second Wave". The "Second Wave" phenomenon
is a term that describes many companies' need to derive further value from
already installed systems. These companies are increasingly recognizing the
importance of providing employees with the training and
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tools necessary to more fully utilize the potential of their systems on an on-
going basis. DACG is concentrating its operations on "Second Wave"
opportunities.
New markets for DACG include e-business and e-learning. The Internet push has
shifted the business IT market from ERP to e-business and has opened three
training and consulting opportunities for the Company. These include:
. Employee learning for extensions of ERP systems into other business functions
such as sales force automation (SFA), client relationship management (CRM),
and supply chain automation (SCA), as well as ERP upgrades and add-ons of
additional components of existing ERP software;
. Transforming the Company's educational services into a Web-based learning
(WBL) system for the clients and for creation of custom on-line learning
environments (commonly known as "virtual universities"); and
. Implementing e-business software with consultative services.
BUSINESS STRATEGY
The Company's mission is to improve the performance of people and
organizations as they learn, change and use technology. The Company's core focus
has been documentation and training for enterprise resource planning (ERP)
systems. Over 90% of our revenues are derived from new system implementations.
During 1999, the ERP market experienced a dramatic decline in new
implementations as companies shifted focus and resources to Y2K concerns and the
growing IT areas of e-commerce and e-business. The IT training market for ERP
experienced a similar swing and which resulted in the first ever declining
period of revenues and earnings for the Company. To minimize risk to the
shareholders, during 1999 the Company downsized its workforce, reorganized some
of its operations and furthered diversification plans to reduce ERP dependency
and enter new markets. See "Risk Factors".
Maintain Core Business
The core of the Company's business will continue to be professional
consulting services for employee training and performance support for technology
systems implementations. During 1999, the Company underwent a significant
downsizing in reaction to a marketplace that was negatively impacted globally by
a Y2K slowdown. With the current organization, DACG will continue ongoing
support of back office systems such as SAP, JDE, PeopleSoft, BaaN, and Oracle
software, as well as increasing our services in front office systems such as
customer relationship management, supply chain automation, and sales force
automation. As SAP is the largest ERP vendor and the Company has a significant
portion of current core business in SAP training, the Company's business is
dependent on the continued success of SAP.
The market for the Company's core business has broadened from the Fortune
Global 500 to include the Fortune 1000, which includes companies with revenues
over and including $2.5 billion. To serve this broader market, the Company is
offering FastED(TM), a package of proprietary software and services that
delivers to the client a customizable learning system at a reduced cost. DACG
will continue to develop products and services that meet the core business
demands of this clientele. See "Risk Factors."
Expand and Diversify into Internet-Leveraged Services
The Company has chosen e-learning and e-business as areas of internal
strength and opportunities that can be leveraged more broadly with today's
modern electronic technology to create a more diversified organization. The
Company will use the growth of the Internet to enter new lines of business,
including custom creation of websites for virtual learning for corporate
clientele, implementation of e-business software for integration of ERP systems
and websites, and consultancy for technology change management.
The areas of e-learning and e-business have been selected not only for
their `good fit' with existing core business, but also for their impressive
market growth potential. 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%. Julian, Ellen H and Andersen, Cushing, "The US Corporate Learning Market
Forecast, 1998-2003", International Data Corporation, Jan 2000, Report # 21323,
page 1. Development of a web-based learning system will be the major focus for
the Research and Development group during 2000. The worldwide e-business
implementation service market is estimated at $12.9 billion, and is estimated to
grow at a CAGR of 59% to reach $78.6 billion by 2003. The e-business consulting
market is growing at over 230% annually and was estimated in 1999 to be $7
billion. The Company will enter the e-business market by providing e-business
implementations and delivering technology change consultancy, business process
consultancy, and end-user training centered on the implementation of enterprise
information portals (EIP). E-business is a new market entrance for the Company
and it does not expect that it will result in significant short-term revenue.
See "Risk Factors".
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Maintain International Presence
DACG believes maintaining geographically dispersed consulting operations are
necessary for attracting and retaining a Fortune Global 500 client base.
Therefore, the Company will retain international presence by maintaining current
locations and adding further locations when justified by ongoing market demand.
See "--Company Organization and Project Management Methodology" and
"--Properties."
Maintain and Expand Strong Relationships with ERP Software Vendors and Existing
Clients
The Company provides employee performance support solutions to clients
installing large enterprise software systems. DACG's expertise includes SAP,
JDE, Oracle, BaaN, and PeopleSoft. Because the quality of end-user performance
support can substantially impact the success of an ERP installation, SAP has
developed its own list of a limited number of preferred or qualified service
providers. DACG is recognized by SAP as a Global Consulting Partner. The Company
believes this status is important in enabling it to receive referrals from SAP
for new business opportunities. In late 1998, the Company was named a Global
Education Services Alliance Partner with PeopleSoft, Inc. In both relationships,
the Company is the only education specialist.
As part of the Company's restructuring in 1999, DACG refocused key sales
people to concentrate on account management at large multi-national accounts and
vertically within a specific industry. DACG's strategic account management and
vertical specialists will allow the company to:
. More broadly leverage in-depth knowledge of certain verticals;
. Facilitate improved growth for delivering expanded services;
. Improve effective coordination of work involving multi-national locations and
clients; and
. Assist in obtaining repeat business with its current and past clients
See "--Sales and Marketing" and "Risk Factors."
Leverage Large, Diversified, Blue-Chip Client Base
Since 1988, the Company has provided services to over 70 of the Fortune
Global 500 companies as well as other large companies worldwide. This blue-chip
client base provides the Company with substantial credibility when soliciting
business from potential new customers and has proven to be an important source
of referrals. In addition, these customers are usually geographically dispersed
with large numbers of employees requiring performance support services and
upgrades, thereby providing the Company with a source of additional revenue
opportunities. The Company's client base is diversified with the ten largest
clients accounting for approximately 38% of the Company's revenue in 1999. The
Company's largest client accounted for less than 6% of the Company's revenue in
1999. See "--Clients" and "Risk Factors."
Extend Service Offerings
The Company has a significant commitment to continual expansion of its
service offerings. During 1999, the Company expanded service lines in the areas
of change communications, customer relationship management, and supply-chain
management. Areas of growth in 2000 are planned to be in knowledge management
and change management. Additionally, Research and Development is focused on four
development areas:
. Customized on-line learning environment for clients desiring a proprietary
web-based learning system;
. Technology-based solutions that allow the Company's consultants to generate
improved efficiencies as they develop employee support solutions for clients;
. Tools and content specific to the software applications produced by major
front office and back office vendors; and
. Service solutions for areas complementary to existing businesses that support
the Company's clients' needs for education and performance support beyond
their ERP systems.
The Company believes its proprietary toolset, its relationship with
SmartForce to develop computer-based training titles, and its relationship with
Centra to develop and market interactive Web-based distance learning are all
important means of expanding services and gaining market share in the growing
market for complex business software.
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SERVICES
The Company delivers employee support solutions designed to maximize the
return on clients' business information technology investments while taking into
account each client's individual needs, resources, and requirements. New
business software has a significant direct impact on the working patterns of a
corporation, which must be managed in relation to both implementation of the
software and support of that software over time. The Company performs a thorough
review of the procedures and jobs that employees will need to perform and uses
this information to develop the requisite end-user support solution for the
client. The Company offers DA Passport(TM) for clients to offer their employees
context-sensitive help on-demand at their desktop computers. Such solutions
utilize the Company's proprietary methodology, DA Cornerstone(TM), in the
delivery of services consisting of change communications, education, and
performance support programs developed by the Company.
In response to the strong demand for SAP R/3 implementation using SAP's
Accelerated SAP Roadmap(TM) methodology, DACG introduced DA FIT/Fast
Implementation Toolkit(TM) ("DA FIT") in 1998 and a comprehensive package,
FastED(TM), in 1999. DA FIT enables consultants to extract key information from
Accelerated SAP ("ASAP") tools and processes and integrate it with DACG content
and tools to quickly produce customized, effective end-user support solutions.
FastED allows clients to perform their own end-user support solution, which
includes DA FIT.
Change Communications
In 1999, DACG introduced change communication consulting as a new service
line. Clients introducing complex business software systems commit themselves to
long term change. Clients' employees are affected by this change, seeing it on
the desktop in the form of new software functionality and in day-to-day business
activities in the form of new procedures and policies. Typical approaches to
managing this change focus on establishing executive management support.
However, the key to successful business systems implementations is obtaining the
support of end-users. Effective utilization of technology is critical to the
success of business software investments. Accordingly, the companies change
communications programs are primarily focused on the end-user. Common change
communications deliverables provided by the Company to its clients include kick-
off meetings and speeches, facilitated collaborative work groups, multimedia
presentations, video presentations, and newsletters. These deliverables, in
addition to providing critical information, also serve to minimize a client's
business disruption by preparing the employees for the impact of complex
business software related changes.
The business goals that drive the implementation of business software as
identified by client executive management are used as the starting point for the
development of change communications programs. An analysis is conducted that
determines how the enterprise-wide issues presented by client management will
impact each end-user's daily work routine. These issues are identified through
the Company's use of facilitated collaborative workshops where the Company's
staff works with client employees to identify areas of greatest concern. Based
on this review, a specific change communications program is developed for each
segment of the audience. This program insures the progressive delivery of
messages that start with the basic corporate message and then address issues
that are specific to segments (such as the accounts receivable department) of
the client's organization.
Education
The Company develops educational programs specific to each client's needs,
taking into account the client's infrastructure and resources, the scope of the
client's information technology system, and the client's language and cultural
needs. In order to influence the way an employee works and optimizes his or her
utilization of a new system, educational programs are developed that focus on
specific end-user job responsibilities, as well as on the overall business
processes that impact the end-user. In developing educational content for a
client, the Company utilizes its DA Foundation(R) library, which contains
training content to address job roles and processes common to complex business
software.
The Company consults with the client to determine the appropriate media to
use for delivering the educational content: instructor-led training, computer-
based training, and/or distance learning. Virtually all the Company's clients
utilize instructor-led training courses, which the Company customizes to meet
the particular client's specifications and needs.
Many companies, particularly those with large and geographically dispersed
operations, are increasingly seeking ways to use computer-based training to
decrease costs and minimize employee time away from the job. DACG offers both
custom and standardized computer-based training modules, utilizing the resources
of the DA Foundation library and standardized courseware co-developed with
SmartForce. In 2000, DACG plans to launch its customizable web-based learning
system to the Fortune Global 500.
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DACG offers both synchronous and asynchronous capabilities for computer-based
distance learning. Using Symposium software from Centra Software, Inc., DACG
provides synchronous distance learning, where many students can follow a single
event. DACG provides asynchronous distance learning through custom and
SmartForce courses that allow students to work independently and at their own
pace. Both of these methods are used by companies with remote user audiences and
require only basic information technology infrastructures because they involve
distributing content by using wide area networks, corporate intranets, and audio
conferencing technology. Typically a client implementing an ERP system or
another new business technology will have the required infrastructure. Distance
learning or "e-learning" is effective in situations where travel, time away from
work and cost are important.
Performance Support
A critical component of the Company's end-user support solution is the
documentation of business processes that affect end-users. This documentation is
designed to assist workers in performing their jobs after training. In utilizing
a new system, end-users of technology frequently encounter situations in which
they require assistance. In order to limit workers' downtime and provide workers
with easy access to assistance, on-line references containing relevant policies,
processes, and procedures are utilized. In coordination with the design of
educational programs, the Company works with each client to assess the ongoing
documentation and performance support needs of the particular audience of end-
users. Utilizing the DA Foundation, the Company then develops support content
for the client, creating a clearly defined set of policies, processes, and
procedures relating to the particular business software application.
Based upon the client's information technology infrastructure, budget, and
timing needs, the appropriate media for performance support are determined.
Quick reference guides and printed documentation are used as hard copies to
deliver performance support for the employee. Those clients who have limited
time frames in which to develop an end-user support solution most often use this
type of performance support solution. These clients can migrate to a more
technologically advanced solution at a later date. More sophisticated
performance support solutions can be delivered through the client's corporate
intranet, where DACG will design and maintain a repository of the end-user
support deliverables.
DACG's most sophisticated performance support solution is an electronic
performance support system ("EPSS") which provides comprehensive end-user
support on demand at the desktop so that end-users can minimize interruptions in
seeking help or information relating to a job task. End-users can access the
EPSS from their own desktop and find the answers to the questions they have
about a particular task. Building a comprehensive EPSS solution can be
challenging and costly. To simplify its development, the Company has created a
proprietary software technology, DA Passport. DA Passport is context sensitive,
which means it can track the location of the client end-users in the client's
ERP system, in order to provide support based on the particular application
being run, thereby allowing the Company to create customized ERP end-user
support accessible at a transactional or task level. The Company can link system
tasks, business procedures, training, and computer-based training files to ERP
transactions using the DA Passport technology to provide sophisticated support
to end-users. A DA Passport solution is typically recommended to clients with
corporate intranets, although the Company can consult with a client to construct
a corporate intranet site if required.
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 450 clients,
including many of the world's leading corporations in a broad range of
industries such as oil and gas, technology, pharmaceutical and chemicals,
utilities and telecommunications, consumer products, and manufacturing. The
following is a selection of DACG's 1999 clients and representative engagements.
Guinness Local (Guinness)
Guinness is part of Diageo plc, a world-leading consumer goods company
formed in 1997 through the merger of Grand Met & Guinness. Diageo has 85,000
employees and annual revenue of approximately GBP 14 billion. To meet increased
demand and address Year 2000 issues, Guinness chose to integrate its systems and
processes worldwide by implementing "Year 2000" compliant SAP ERP software.
DACG was chosen to help Guinness train more than 1,200 employees in Ireland and
more than 800 employees in the UK. After providing a detailed training needs
analysis, DACG worked with Guinness to train 300 "Super Users"; internal
employees devoted to learning specifics about the software. The "Super Users"
then assisted colleagues with less experience during and after the
implementation. Altogether, DACG produced over 80 courses and materials for
future reference
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and "job aids" such as help cards as reminders of key tasks. The materials were
customized for each Guinness location and business area in accordance with local
issues and culture.
Rothmans of Pall Mall Berhad (Rothmans)
Rothmans is the number one tobacco manufacturing and marketing company and
ranks among the top five companies in Malaysia. Over the past 13 years, the
company's growth has resulted in a market share increase from 10 to 60 percent.
Rothmans found delivering timely information while managing sustained growth on
a legacy system of disjointed computer systems difficult. To integrate its
systems, Rothmans chose SAP R/3 ERP software using the ASAP methodology. After
evaluating how sister companies implemented end-user training, Rothmans selected
DACG to conduct its training. DACG documented 300 key SAP system tasks with
respective business process flowcharts and process overviews and compiled them
into HTML format for the Rothmans InfoCentre. More than 30 courseware programs
were developed, each targeted to the needs of specific employee groups.
Additionally, a classroom reference-based training methodology was used to
train 230 end-users on the Rothmans InfoCentre.
Compaq Computer Corporation (Compaq)
Founded in 1982, Compaq has grown rapidly to become the second largest
computer company in the world and the largest global supplier of personal
computers. Compaq develops and markets hardware, software, solutions and
services. Compaq's products are sold and supported in more than 100 countries
through a network of authorized Compaq marketing partners. To meet its growing
needs, Compaq acknowledged the need to standardize business systems and
procedures at their headquarters in Houston, TX, and at their sales subsidiaries
in Europe, Asia, Australia, Latin America, Canada and the United States. Compaq
implemented SAP in a phased rollout, converting 47 sales subsidiaries and 6
manufacturing sites over a 30 month period. For its initial rollout, the
Company utilized a team of 17 DACG consultants that developed 52 courses,
managed end-user education programs and assisted in Compaq's intranet
development. Following successful delivery of this solution, DACG was retained
to deliver end-user education at Compaq sites in Mexico, Canada, China and South
Africa.
Baylor College of Medicine (Baylor)
Houston-based Baylor, a renowned medical institution with total research
support of $179.9 million and more than 50 research and patient-care centers,
chose to replace its legacy computer systems with "Year 2000" compliant SAP ERP
software. Recognizing the need for expert help, Baylor chose DACG as its
preferred provider of documentation and training services. One of the greatest
challenges Baylor faced in teaching 1,000 employees how to utilize ERP software
was the vast variation in computing skills across the organization. DACG's
customized approach to employee education addressed this challenge by providing
job-specific training to small groups of people and adjusting teaching methods
to accommodate different learning styles and experiences. In addition, Baylor
benefited from DACG's proprietary on-line help tool, DA PassportTM, which allows
employees to access information specific to their task. Working with Baylor,
DACG facilitated business process definition workshops and created a performance
support system made up of Baylor-specific business process documentation. DACG
also delivered customized training reference materials targeted for the mass end
user audience and for employees who use the system infrequently. DACG delivered
both computer-based and instructor-led training at Baylor.
Anglian Water Services (Anglian)
Anglian is a privatized regional water and sewage service company with
several hundred sites located in the United Kingdom. Its 162 treatment plants
provide water to 4 million people, while more than 1,000 sewage treatment plants
handle the needs of 2.4 million properties. Anglian implemented SAP R/3 to
address "Year 2000" issues, replace legacy systems and to improve the efficiency
of its business processes. SAP modules were implemented in Human Resources and
Payroll; procurement; financial management and capital project management.
After a thorough evaluation of training providers, Anglian selected DACG to
train 1,700 geographically dispersed end-users in just 12 weeks. Working with a
tight deadline, DACG developed 40 courses and workshops, delivering courses in a
variety of methods including, computer-based training (CBT), instructor-led
training, and a "playpit" environment where users can practice their skills in a
realistic environment. The courses were developed in collaboration with Anglian
business and allowed significant skills transfer to take place. Altogether, a
total of 8,000 man-days of training were delivered, encompassing everyone from
front-line operational staff to senior management team. All staff received a
minimum of one day's training, with a high proportion receiving six or seven
days of training.
Public Service Enterprise Group (PSE&G)
PSE&G is a $6.4 billion diversified energy and energy services company
headquartered in New Jersey. Its two principal subsidiaries are PSE&G, New
Jersey's oldest and largest regulated utility, and PSEG Energy Holdings, which
manages unregulated and non-utility businesses. PSE&G serves more than 5.5
million customers and, like utilities across the nation, is preparing for a
deregulated future. In response to heightened competition stemming from
deregulation, PSE&G implemented SAP, allowing the company to respond to
customers faster, manage work better, produce products more efficiently, and
increase the timeliness of information. Moreover, PSE&G wanted its employees to
be able to understand the costs of producing electricity,
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make appropriate decisions as to how to keep costs down through preventive
maintenance, and be able to report any malfunction to ensure quick and cost-
efficient repair. PSE&G knew help was needed to ensure employees had the
necessary training and information they needed to facilitate these changes. DACG
was retained to train PSE&G employees and ensure user readiness. DACG produced
hard-copy materials and used classroom instruction to train 1,200 end-users on
the new system. PSE&G retained DACG to continue the training process after the
completion of the implementation and plans to work with DACG on its next two
implementations -nuclear and energy delivery.
BASF (BASF)
United-Kingdom-based BASF PLC is a division of BASF, a global chemicals
company, employing more than 105,000 people and, with a worldwide turnover of
DM55 billion, BASF PLC chose to implement SAP across its worldwide operations to
replace legacy systems and to provide better customer service by developing
common processes for key operational areas. BASF PLC employees 1001 staff and
has annual revenues of over GBP 790 million. BASF PLC recognized that training
was an important component of the project and chose DACG to achieve desired end
results. Working with DACG, BASF PLC developed documentation for SAP system
tasks and BASF business procedures and developed an on-line help system (DA
Passport) for 750 end-users. DACG developed and administrated training courses
for end-users through a combination of classroom-based courses, one-to-one
sessions and workshops all incorporating DA Passport.
The Company's ten largest clients, in the aggregate, accounted for
approximately 34%, 31%, and 38% of its billed hour revenue in 1997, 1998, and
1999, respectively. No single client of the Company accounted for more than 6.0%
of the Company's revenue in 1999.
The following is a sample list of clients that the Company provided services
for during 1999:
Abbott Laboratories Ericsson Australia Nabisco
Baylor College of Medicine Gleason Corporation Orleans Parish School Board
BBC Worldwide Great Springs Waters of America Praxair
Betz Dearborn Guinness Brewing Raytheon
Compaq Hercules, Inc. Sabre, Inc.
CompUSA Hewlett-Packard Company The American Bottling Company
Corning Consumer Products McKesson Corporation Toyota of Australia
Eastman Kodak Mitel Corporation W.R. Grace & Co.
COMPANY ORGANIZATION AND PROJECT MANAGEMENT METHODOLOGY
Organization
The Company divides its organization into three operating divisions: the
Americas Division, which includes its operations in North, South, and Central
America; the EMEA Division, which includes its operations in Europe, Middle
East, and Africa; and the Asia Pacific Division, which includes its operations
in Australia, Singapore and Asia. Each division is headed by a member of the
Company's management and is further divided into regions that are generally
headed by a Company vice president.
Project Methodology Management
The Company's DA Cornerstone(TM) project management methodology is a key
component in its delivery of quality end-user support solutions to its clients.
DA Cornerstone is DACG's comprehensive six phase, end-user support methodology
that addresses key end-user support program deliverables, activities, and
milestones throughout the lifecycle of a business information technology
implementation. Each phase has associated tools that facilitate the completion
of that phase's activities and deliverables.
DA Cornerstone phases include:
Analyze: DACG analyzes the client needs, resources, and requirements and
submits to the client an end-user support strategy and proposed
deliverables for approval.
Prototype When the strategies are approved, DACG designs deliverables
and and sets up appropriate
Design: 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.
Page 9 of 42
Implement: DACG delivers the final work to the end-users.
Evaluate: After implementation and as part of the services to the client,
DACG evaluates the effectiveness of the services using
appropriate tools.
Support: DACG will arrange and set up the post implementation and long-
term maintenance strategy for the educational program, end-user
support, change communications or other program created by DACG
for the client.
The Company's project staff develops each end-user support component through
an iterative draft and review process that directly involves client end-users in
the development of content specific to their needs. This review process
typically consists of three stages and has quality control steps embedded in
each stage as formal checkpoints. These checkpoints are intended to ensure that
the client is satisfied with the deliverables, that the content is accurate and
adheres to the Company's own standards, and that the project is delivered in a
cost-effective and timely manner. The success of a given project engagement from
a cost, time, and client satisfaction standpoint is the responsibility of the
assigned operations and project managers.
SALES AND MARKETING
The Company generates business through a field sales force that sells
directly and pursues referrals and trade show leads. In addition, the Company
co-markets, in the form of joint sales calls and marketing materials, with SAP
and other ERP vendors, SmartForce, Centra Software, Insite Objects and others.
The Company's direct sales efforts are performed worldwide by its 22 full-
time sales personnel, each of whom has either a branch territory or regional
focus. The sales personnel generate leads from several sources, including
referrals from the Company's existing clients and from attendance at industry
trade shows. Among its sales and marketing efforts, the Company's sales force
has presented the Company's expertise at SAPPHIRE, the annual SAP America
conference for SAP service providers and end-users. The Company also
participates and has an opportunity to demonstrate its expertise at conferences
around the world with all leading ERP vendors. The Company also uses Internet-
based marketing, direct mail, advertising in trade magazines, corporate
presentations, joint marketing events, and networking through regional business
communities to generate potential sources for new business.
Among its marketing efforts, the Company participates in and demonstrates its
expertise at worldwide conferences with all leading enterprise software vendors
and is a regular participant and speaker at SAPPHIRE, the annual SAP America
conference for SAP service providers and end-users. In 2000, the Company plans
to broaden marketing exposure into general employee education and training
markets. The Company also uses Internet-based marketing, direct mail,
advertising in trade magazines, corporate presentations, joint marketing events,
and networking through regional business communities to generate potential
sources for new business.
The Company's strategic business alliances, including relationships the
Company maintains with SAP, PeopleSoft, J.D. Edwards, and SmartForce, are a
source of generating new business. DACG is recognized by SAP, PeopleSoft, and
J.D. Edwards as a preferred or qualified provider of end-user support services.
DACG is recognized as a Global Consulting Partner by SAP and a Global Education
Services Alliance Partner by PeopleSoft. In addition, the Company develops and
delivers to potential clients, joint proposals in collaboration with these
business alliance partners, with the proposals covering software applications,
software implementation services, and end-user support solutions. The Company
has been successful in obtaining new business through these joint proposals.
To this end, DACG has recently expanded its capability to develop and manage
partnerships. This expanded capability has already shown signs of bringing a
larger partner community onboard with an expanded focus, including not only
referral selling, but true value-added reseller relationships. In this
capacity, DACG will look to create bi-directional revenues derived from partners
selling DACG products and services and by DACG reselling partner products and
services.
Through our business alliances with SmartForce and SAP, the Company has
developed a series of computer-based training courses on SAP. The agreement does
not require the Company to provide cash, but does require the Company to provide
subject matter experts to assist SmartForce with the development of SAP-related
computer-based training software. As of December 31, 1999, 20 of these titles
had been released. The Company considers the development of computer-based
training titles to be an important means of gaining market share in providing
services for Fortune 1000 clients. These clients generally view computer-based
courses as a cost-effective means of training.
Page 10 of 42
Through business alliance with Centra Software Inc., the Company offers
synchronous computer-aided distance learning. 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. This is one method used
for companies with remote user audiences and requires only basic information
technology infrastructures because it involves distributing content by using
wide area networks, corporate intranets, and audio conferencing technology.
Typically a client implementing an ERP system or another new business technology
will have the required infrastructure. Distance learning or "e-learning" is
effective in situations where travel, time away from work and cost are
important.
The Company's services require a substantial financial commitment by clients
and, therefore, typically involve a long sales cycle. Once a lead is generated,
the Company endeavors to understand quickly the potential client's business
needs and objectives in order to develop the appropriate solution and bid
accordingly. The Company's operations and project managers are involved
throughout the sales cycle to ensure mutual understanding of client goals,
including time to completion and technological requirements. Sales cycles for
end-user support solution projects typically range from one to six months from
the time the Company initially meets with a prospective client until the client
decides whether to authorize commencement of an engagement. The retention of the
Company typically occurs at the beginning of the design/prototype stage of the
software implementation.
RECRUITING AND PROFESSIONAL DEVELOPMENT
As of December 31, 1999, DACG's personnel consisted of 377 billable employees
and 158 non-billable staff, which include sales, marketing, development,
executive, and administrative personnel. The Company believes that its success
depends mainly on its ability to attract, retain, and motivate talented,
creative, and professional employees at all levels. For core business, the
Company seeks to hire personnel with prior consulting experience in end-user
education programs, education professionals with a background in information
technology, and information technology professionals with education or
communication program experience. Strong project management, analytical and
communications skills and international experience are also considered. For the
new programs such as e-learning and e-business, the company seeks individuals
with systems design, web design, and system architecture capabilities.
Recruiting is coordinated company-wide through the Company's human resources
department.
Training and mentoring are integral parts of the Company's staff development
program. The Company's training programs ensure that its professional staff
understands the impact of technology on people, is able to communicate
effectively at all levels within a client organization, and has the ability to
communicate with its clients' technical, business and management staff to
provide value-added content to its clients. Ongoing training includes a blend of
in-house and external training. In-house training includes basic training, more
detailed software education, project management, consultancy skills, and
leadership training. The use of DA Foundation materials and the application of
performance support technologies such as DA Passport are also covered. In
addition, all consultants are required to attend a DA Cornerstone methodology
training program, and to be approved for its use before being assigned to any
consulting project. External training programs focus on project and time
management skills.
The Company believes that its culture is central to its ability to attract
and retain highly skilled and motivated professionals. Extensive technical,
management, and sales training enable DACG professionals to expand their skills
and attain increasing levels of responsibility within the organization. The
technical career path provides opportunities for advancement outside the
traditional management career ladder. The technical career path builds
technical skills, provides compensation incentives, and at a macro level,
supports the development of DACG's current and future core competencies. Through
planned job assignment and rotations, special projects and structural
development events, high potential management candidates are prepared to assume
greater management roles. The Company attracts and motivates its professional
and administrative staff by offering competitive packages of base and incentive
compensation and benefits. All professional staff members are eligible for
bonuses. The Company appreciates the importance of recognition and a promotion
track for its administrative staff and fully integrates its staff into the
conduct of its business. All of the Company's employees are eligible to receive
stock options. See "Risk Factors".
RESEARCH AND DEVELOPMENT
DACG established a research and development department in 1995 to support and
maintain its end-user support content and consulting methodologies. During 2000,
the primary focus of this department will be the development of a virtual
learning environment and complimentary consulting services, ongoing maintenance
of DA Passport, DA Foundation, and the Company's proprietary toolset used for
rapid deployment of end-user support solutions. The department is also
responsible for developing computer-based training in collaboration with
SmartForce and Centra Software.
Page 11 of 42
The Company's research and development department continually applies
technology developments to the Company's content and tools. As technology
advances, DACG has kept pace expanding its deliverables from traditional hard
copy materials and instructor led training to include on-line documentation,
multimedia training, employee performance support systems, distance learning
and web-based education and performance support solutions. In 1999, DACG
released two new products and services - Change Communications and FastED(TM).
Change Communications is a complete consultative service designed for
communication of technological change. FastED is a pre-packaged product and
service offering that allows complete but fast implementation of a training and
support activity. FastED is available in English, French, German, Dutch, Spanish
and Italian languages. Research & Development personnel work directly with the
Company's human resources department to ensure that the Company's consultants
are trained to support each new release of the consulting methodologies. The
Company considers research and development crucial to the expansion of its
service offerings into change and knowledge management, supply-chain and
customer relationship management and plans to increase its expenditures in this
area in 2000.
COMPETITION
The global markets for end-user performance support services for business
information technology, e-learning and e-business consulting are large, highly
fragmented, change rapidly, and are subject to low barriers to entry. DACG has
three market areas for competition. These include:
. Competition from the ERP software developers and other applications
developers, which includes the software that DACG trains on, including SAP
and other vendors.
. Competition from large international systems integrators, such as the
consulting practices of the large international accounting firms, which are
focused principally on systems integration and implementation but also
provide end-user support as a secondary service.
. Competition from the professional services groups of many large technology
and management consulting companies and a large number of smaller
organizations that specialize in employee support services, generally serving
a limited geographic area and having a smaller base of technical and
managerial resources.
. Competition as clients may elect to use internal resources to satisfy their
needs for training services the Company provides.
. In e-learning, the company faces a number of additional competitors in the
public and private education systems for training.
. In e-business, the Company has competition from a plethora of small and large
companies entering the implementation and consulting space.
In all markets, DACG faces competition for client assignments from a number
of companies having significantly greater financial, technical, marketing
resources and name recognition. The Company believes key competitive factors
forming the basis upon which these companies compete are experience, reputation,
industry focus, international presence, service and technology offerings, and
price relative to the value of the services provided. The Company believes that
it competes effectively and will continue to compete effectively worldwide.
INTELLECTUAL PROPERTY AND OTHER PROPERTY RIGHTS
The Company relies upon a combination of nondisclosure and other contractual
arrangements and trade secret laws to protect its proprietary rights. The
Company generally enters into confidentiality agreements with its key employees
and clients, thereby seeking to limit distribution of proprietary information.
There can be no assurance that the steps taken by the Company in this regard
will be adequate to deter misappropriation of proprietary information or that
the Company will be able to detect unauthorized use of and take appropriate
steps to enforce its intellectual property rights. Software developed and other
materials prepared by the Company in connection with client engagements are
usually assigned to the Company's clients following the termination of the
engagement. The Company retains the right to use the general know-how developed
by the Company in the course of the engagement, and this accumulated knowledge
is the basis for the DA Foundation. The Company also retains all rights to
certain of its proprietary methodologies and software (such as DA PASSPORT and
computer-based training software), the benefit of which the Company provides to
the client by royalty-free license.
DA Foundation(R), DA Team Teach(R) and DA Consulting Group(R) are registered
trademarks and/or service marks of the Company. The Company also claims common
law trademark rights in DACG and design (new), the globe and temple logo, Fast
Implementation Toolkit(TM), Fast Implementation Toolset(TM), DA Cornerstone(TM),
and DA Passport(TM), for each of which the Company has filed an application for
to register in the United States Patent and Trademark Office. Furthermore, the
Company claims common law trademark rights in DACG(TM), DA FIT/Fast
Implementation Toolkit(TM), FastED(TM), DA ASK(TM), DA Quickweb(TM), and the
slogan mark "Solutions for People and Technology"(TM), but as to these has
decided at present not to file
Page 12 of 42
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
Our business operations are dependent on SAP and the ERP software market.
A substantial portion of our revenue is derived from the provision of end-
user support services in connection with ERP software implementations by our
clients. These relationships and authorizations are generally subject to
termination on short notice. In addition, these licensors could further modify
their software in order to make the implementation cycles for its new releases
shorter and less complicated, thereby possibly reducing the need for customized
end-user support, or they could increase their provision of end-user support
services for their software applications. They could also cease referring us to
their customers as a provider of end-user support services. Any one or more of
these circumstances could have a material adverse effect on our business and
revenues.
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 reduce significantly
demand for our services or render our services obsolete. Any significant
reduction in the demand for our services will have a material adverse effect on
our results of operations.
Our stock price has been volatile
Stock prices may be subject to wide swings, particularly on a quarterly
basis, in response to variations in operating and financial results,
fluctuations in earnings, competitive pressures, market place conditions,
failure to meet revenue expectations and other similar factors. It is difficult
to forecast the timing of revenue because project cycles depend on factors such
as the size and scope of assignments, circumstances specific to particular
clients or industries, the number and nature of client projects commenced or
completed during a period, and the utilization rates of our professional staff.
Were we to fail to meet expectations of our anticipated revenue in a period, or
if we were to experience a negative change in our perceived long-term growth
prospects, either would likely have an adverse effect on our stock price.
We may continue to experience increased competition from competitors with
greater resources than ours, from potential clients performing services "in
house" and from suppliers delivering a complete package to their customers
The information technology services industry is highly competitive. It is
served by many national, regional and local companies, including full service
agencies and specialized temporary service agencies. It has limited barriers to
entry, in part due to rapidly changing technologies. Our primary competitors
come from a variety of market segments, including "Big Five" accounting firms,
large systems consulting and implementation firms and large general management
consulting firms. Many of these competitors have significantly greater
financial, technical and marketing resources and greater name recognition. Such
advantages may enable these competitors to attract more clients and provide
faster service at less cost. In addition, our potential clients have
increasingly decided to dedicate sufficient internal resources to performing the
services that we provide "in house", particularly where these resources
represent a fixed cost to the client. We are also increasingly finding that
software licensors are implementing their own software packages, as well as
educating their customers' employees in how to use them. Such competition may
impose additional pricing pressures. We expect that the level of competition
will remain high in the future. Increased competition could have a material
adverse effect on our ability to profitably operate our business.
We may not be able to attract and retain qualified information technology
consultants
Our continued success will depend in large part on our ability to attract,
retain and motivate highly skilled employees, particularly project managers and
other senior technical personnel. The qualified project managers that we require
are in great demand and are likely to remain a limited resource for the
foreseeable future. Many of the companies with which we compete for qualified
professionals have substantially greater financial and other resources than we
do. There can be no assurance that we will
Page 13 of 42
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, 1999, we realized approximately 11% of
our revenues from fixed-bid or not-to-exceed projects. Were we to fail to
adequately estimate the actual cost to us of completing a project under the
guaranteed not-to-exceed or fixed fee price set forth in certain of our
contracts, or were we to fail to efficiently manage these projects after
entering into the not-to-exceed or fixed fee contract, we could become exposed
to unrecoverable budget overruns, which could materially adversely affect our
profitability. Additionally, client engagements are generally terminable with
little or no notice or penalty, and our failure to meet a client's expectations
could damage our relationship with that client and cause the client to terminate
our engagement. A client's unanticipated decision to terminate or postpone a
project may result in higher than expected numbers of unassigned professionals
or severance costs, which could materially adversely affect our results of
operations.
We do not have any patents to protect our intellectual property rights from
misappropriation
Our success in the information technology services business depends upon our
software deployment and methodology and other proprietary intellectual property
rights. We do not hold any patents. We rely on a combination of trade secret,
nondisclosure and other contractual arrangements and technical measures, and
copyright and trademark laws to protect our proprietary rights. We generally
enter into confidentiality agreements with our employees, consultants, clients
and potential clients and limit access to and distribution of our proprietary
information. There can be no assurance that the steps that we have taken will be
adequate to prevent misappropriation of our intellectual property rights or that
third parties will not independently develop functionally equivalent or superior
methodologies or software. Moreover, there can be no assurance that third
parties will not assert infringement claims against us in the future that would
result in costly litigation or license arrangements regardless of the merits of
such claims. Additionally, because our engagements are typically work- for-hire
based, we assign ownership of, or grant a royalty-free license to use, the
materials that we develop specifically for our clients to those clients upon
project completion.
Significant Exposure to International Markets
We currently have international operations in Singapore, Australia, England,
France, Germany, South Africa and Canada. As of December 31, 1999, 50% of our
revenues 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
Currently, the Company maintains 16 offices on six continents. The
Company's headquarters is at 5847 San Felipe Road, Suite 3700, Houston, Texas,
where it leases approximately 57,000 square feet of space. This lease expires in
June 2004. The Company also maintains domestic offices in the metropolitan areas
of Boston, Chicago, Dallas, Philadelphia, and San Francisco, and foreign offices
in Toronto, London, Paris, Melbourne, Sydney, Durban, Johannesburg, Cape Town,
Singapore, and Canberra. Each of these offices is located near one or more
significant clients of the Company, and, except for Durban, have terms that will
expire between one and five years (exclusive of renewal options exercisable by
the Company). All of the Company's offices 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 a country 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, Sydney, or Johannesburg. The Company
believes that its facilities are adequate for its current needs and that
additional facilities can be leased to meet future needs. In addition, the
Company is in the process of subleasing several branch facilities that were
vacated as a result of cost reduction measures.
Page 14 of 42
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 the eventual
outcome of such litigation will have a material effect on the Company's
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 7, 1999, at a Special Meeting of Shareholders, the holders of
common stock approved the Company's 1997 Stock Option Plan (the "Plan") as
amended, increasing the aggregate number of shares of common stock for which
options may be granted under the Plan from 1,260,000 to 1,960,000.
Votes For Votes Against Votes Abstained
- --------- ------------- ---------------
3,394,064 768,592 1,630
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock has traded on the Nasdaq Stock Market since its
initial public offering on April 24, 1998. Its trading symbol is DACG. The
following table sets forth, for each quarterly period indicated, the high and
low sale price for the common stock as reported by the Nasdaq National Market.
1998 High Low
- -----------------------------------------------------
2nd Quarter $18.50 $13.00
3rd Quarter 18.00 12.50
4th Quarter 21.88 10.25
1999
- -----------------------------------------------------
1st Quarter $21.00 $ 7.63
2nd Quarter 12.63 5.13
3rd Quarter 6.38 4.38
4th Quarter 5.06 3.00
No dividends were declared on the Company's common stock during the years
ended December 31, 1998 and 1999, and the Company does not anticipate declaring
dividends in the foreseeable future.
As of March 1, 2000 there were approximately 107 shareholders of record and
greater than 1,200 beneficial shareholders.
Page 15 of 42
ITEM 6. SELECTED COMBINED AND CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial statement data as of December 31,
1998 and 1999 and for the three years ended December 31, 1999 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,
1995, 1996 and 1997 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
SIX MONTHS ENDED DECEMBER 31,
--------------------------------------- ---------------------------------------
JUNE 30, DECEMBER 31,
1995 1995 1995 1996 1997 1998 1999
-------------------------------------------------------------------------------------------
COMBINED(1) CONSOLIDATED(1) PRO FORMA(2) CONSOLIDATED(1)
INCOME STATEMENT DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue.............................. $6,299 $8,319 $14,618 $26,202 $44,204 $80,132 $ 70,295
Cost of revenue...................... 3,412 4,249 7,661 14,190 24,063 40,817 38,717
------ ------ ------- ------- ------- ------- --------
Gross profit......................... 2,887 4,070 6,957 12,012 20,141 39,315 31,578
Selling and marketing expense........ 407 665 1,072 1,953 3,726 5,195 7,403
Development expense.................. 296 411 707 1,250 1,223 2,124 1,802
General and administrative expense... 1,657 2,357 4,014 6,597 12,436 24,877 33,461
Amortization expense(3).............. -- 230 459 274 54 29 354
Employee stock-related charge........ -- -- -- 1,858 263 -- 142
------ ------ ------- ------- ------- ------- --------
Operating income (loss).............. 527 407 705 80 2,439 7,090 (11,584)
Other (expense) income, net.......... (23) (61) (84) 95 (135) 22 287
------ ------ ------- ------- ------- ------- --------
Income (loss) before taxes.......... 504 346 621 175 2,304 7,112 (11,297)
Provision (benefit) for income taxes 189 228 250 141 896 2,813 (3,034)
------ ------ ------- ------- ------- ------- --------
Net income (loss).................... $ 315 $ 118 $ 371 $ 34 $ 1,408 $ 4,299 $ (8,263)
====== ====== ======= ======= ======= ======= ========
Basic earnings (loss) per share(4).. $0.09 $0.03 $0.10 $0.01 $0.29 $0.72 $(1.28)
Weighted average shares outstanding.. 3,623 3,623 3,623 4,217 4,808 5,976 6,444
Diluted earnings (loss) per share(4). $0.08 $0.03 $0.10 $0.01 $0.28 $0.69 $(1.28)
Weighted average shares outstanding.. 3,868 3,868 3,868 4,462 5,053 6,233 6,444
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 585 $ 592 $ 2,199 $ 3,664 $ 9,971 $ 5,795
Working capital...................... 315 761 1,629 4,101 25,585 11,007
Total assets......................... 3,211 5,440 8,549 20,135 48,903 32,918
Total debt........................... 445 562 731 3,970 -- --
Shareholders' equity................. 573 1,891 3,071 7,943 34,944 25,238
(1) Prior to July 1995, the Company's business was operated through four
separate companies located in the United States (U.S.), the United Kingdom
(U.K.), South Africa, and Australia (the "Predecessor Companies"). All of
the Predecessor Companies were under common management. Prior to July 1995,
three of the Predecessor Companies were controlled (based upon record
ownership) by trusts, the sole beneficiaries of which were the controlling
owners of the U.S. company and their children. As a result of a stock
exchange transaction (the "Exchange Transaction") on July 1, 1995, the
Predecessor Companies became wholly-owned subsidiaries of the Company. For
accounting purposes, the acquisition of the U.S. company has been treated as
a recapitalization of the U.S. company, and the U.S. company has been
treated as the acquiror of the other three entities. As a result, the net
assets of the U.S. company were carried forward at historical basis while
the net assets of the acquired Predecessor Companies were recorded at fair
market value using the purchase method of accounting. The financial data for
the six months ended June 30, 1995 represents the combined results of the
Predecessor Companies prior to the Exchange Transaction; the financial data
for the six months ended December 31, 1995 and the years ended December 31,
1996, 1997, 1998 and 1999 represent the consolidated results of the Company
following the Exchange Transaction.
(2) The 1995 pro forma results of operations represent the combined results of
the Predecessor Companies for the six months ended June 30, 1995 and the
consolidated results of the Company for the six months ended December 31,
1995, which reflect the change in basis for the combined Predecessor
Companies and amortization expense assuming the Exchange Transaction had
occurred on January 1, 1995. The 1995 pro forma financial data have been
presented since all of the entities were under common management and
operated as one company for all of the years presented, and such data
therefore represent a meaningful comparison with all of the years presented.
As a result, the pro forma 1995 results include a full year of amortization
expense in 1995 rather than the six months of amortization expense actually
incurred by the Company in 1995.
(3) In the Exchange Transaction, as described in note 1, 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 will be amortized
over 25 years beginning July 1, 1995 and $510,000 of other intangible assets
which were fully amortized between July 1, 1995 and June 30, 1997.
(4) 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.
Page 16 of 42
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 section in this Report and those
risk factors set forth in our other filings with the Securities and Exchange
Commission.
BUSINESS
The Company is a leading international provider of employee education and
support solutions to companies investing in business information technology.
Through its 535 employees in 16 offices worldwide, 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 450 clients, including more than 70 of the Fortune Global 500.
The Company is currently organized into three divisions: the Americas
Division which includes its operations in North, South, and Central America; the
EMEA Division which includes its operations in Europe, Middle East, and Africa;
and the Asia Pacific Division which includes its operations in Australia, New
Zealand, and Asia. In 1999, the Americas, EMEA, and Asia Pacific Divisions
represented 59.1%, 29.1%, and 11.8% of revenue, respectively. The number of
clients served by the Company has increased substantially from 52 in 1994 to
approximately 250 in 1999. The Company's client base is diversified, with no
single client representing more than 6% of revenues in 1999.
The Company derives substantially all of its revenue from fees for
professional services related to supporting end-users in the implementation of
ERP systems. Revenue from clients implementing SAP software represented 90% of
billed consulting revenue for 1999. 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 generally bills its clients 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 11%
of the Company's total revenue for 1999. Revenue from time and materials
engagements, as well as revenue from fixed price contracts, is recognized as
services are performed and the realization of the revenue is assured. The
Company also receives a small percentage of total revenue from license fees
related to computer-based training products and other software products that are
developed independently or are co-developed by the Company.
Cost of revenue includes compensation and benefits paid to the Company's
professional staff and all direct expenses of performing project work. The
Company's financial performance is highly dependent upon staff billing rates,
costs, and utilization rates. The Company manages these parameters by
establishing and monitoring project budgets and timetables and tracking staffing
requirements for projects in progress and anticipated projects. Project
terminations, completions, and scheduling delays may result in periods when
consultants are not fully utilized. An unanticipated termination of a
significant project could cause the Company to experience lower staff
utilization. In addition, the establishment of new services or new offices,
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 the first and fourth quarters of the year due to
the timing of project start-ups and completions, as well as holidays and
vacations. During 1999, the Company experienced both
Page 17 of 42
a seasonal downturn in business during the fourth quarter and a downturn in
business demand during the third and fourth quarters due to the slowdown of ERP
spending in anticipation of Year 2000 issues.
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. General and administrative expense consists principally of salaries
and benefits for executive management and for accounting, administrative,
information technology, human resources, and recruiting and training staff, as
well as compensation for the senior management in each of the Company's
divisions.
NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which requires that companies
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The FASB has subsequently issues
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133," that defers the
requirements of SFAS No. 133 to fiscal years beginning after June 15, 2000. The
Company did not hold any derivative or hedging instruments during the reported
periods.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, income statement
data expressed as a percentage of revenue and the percentage change in such
items versus the previous comparable period.
PERCENTAGE OF REVENUE
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1997 1998 1999
------------- ------------- -------------
Revenue...................................... 100.0% 100.0% 100.0%
Cost of revenue.............................. 54.4 50.9 55.1
---------- ---------- ----------
Gross profit................................. 45.6 49.1 44.9
Selling and marketing expense................ 8.4 6.5 10.5
Development expense.......................... 2.7 2.7 2.6
General and administrative expense........... 28.1 31.0 47.6
Amortization expense......................... 0.1 0.0 0.5
Employee stock-related charge................ 0.6 0.0 0.2
---------- ---------- ----------
Operating income (loss)...................... 5.5 8.8 (16.5)
Other (expense) income, net.................. (0.3) 0.0 0.4
---------- ---------- ----------
Income (loss) before taxes................... 5.2 8.8 (16.1)
Provision (benefit) for income taxes......... 2.0 3.5 (4.3)
---------- ---------- ----------
Net income (loss)............................ 3.2% 5.3% (11.8)%
========== ========== ==========
- ----------
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenue. Revenues decreased by $9.8 million, or 12.3%, from $80.1 million
in 1998 to $70.3 million in 1999. The decrease was substantially attributable to
a decrease in demand for services during the second half of 1999 as a result of
the downturn in the market for complex computer software as companies focused on
Year 2000 readiness and associated pricing pressures as competition for fewer
assignments grew. Revenues from the Americas Division decreased by 19.0% from
$51.2 million to $41.5 million; revenues from the EMEA Division decreased by
8.9% from $22.5 million to $20.5 million; and revenues from the Asia Pacific
Division increased by 29.7% from $6.4 million to $8.3 million. The Company ended
the 1999 period with 535 total employees, down from 863 employees at the
beginning of the period.
Page 18 of 42
Gross profit. Gross profit decreased by $7.7 million, or 19.7%, from $39.3
million in 1998 to $31.6 million in 1999, and decreased from 49.1% of revenue in
1998 to 44.9% of revenue in 1999. The decrease is primarily attributable to
maintaining the consultant workforce at lower utilization rates in anticipation
of future demand and pricing pressures due to increased competition as demand
slowed in the second half of 1999.
Selling and marketing expense. Selling and marketing expense increased by
$2.2 million, or 42.5%, from $5.2 million in 1998 to $7.4 million in 1999 and
increased as a percentage of revenue from 6.5% in 1998 to 10.5% in 1999. The
increase was primarily attributable to the expansion of the sales leadership and
global marketing efforts as the Company continued its efforts to maximize
revenues.
Development expense. Development expense decreased by $322,000, or 15.2%,
from $2.1 million in 1998 to $1.8 million in 1999, and remained constant as a
percentage of revenue at 2.7% in 1998 and 2.6% in 1999. Development expense was
significant in 1998 due to the expenditures related to developing key products
including DA FIT and tools to facilitate distance learning. In addition,
development expense decreased during the second half of 1999 due to cost
containment measures.
General and administrative expense. General and administrative expense
increased by $8.6 million, or 34.5%, from $24.9 million in 1998 to $33.5 million
in 1999, and increased as a percentage of revenue from 31.0% in 1998 to 47.6% in
1999. During the first half of 1999, in response to the high growth of the
Company in the prior year, the Company built administrative infrastructure
including staff, systems and facilities. Salaries and benefits increased $3.4
million and facilities costs increased $2.8 million as a result of the increased
infrastructure. During 1999, the Company incurred approximately $1.9 million in
non-capitalized costs related to the implementation of SAP as its primary
information system. The Company incurred severance and leasehold abandonment
expenses related to cost reduction programs implemented during the second half
of 1999. These costs were offset in part by reduced incentive compensation as a
result of slow year over year revenue growth beginning late in the second
quarter of 1999.
Amortization expense. Amortization expense increased by $325,000, or 1,120%,
from $29,000 in 1998 to $354,000 in 1999, and increased as a percentage of
revenue from 0.0% in 1998 to 0.5% in 1999. The increase is due to the
amortization of internal development costs associated with the SAP system placed
in service in July 1999. These costs will be amortized over an 84 month period.
Employee stock-related charge. While the Company incurred no employee stock-
related charges in 1998, the Company did incur charges of $142,000 in 1999,
related to the amendment of exercise dates of certain stock options awarded to
an employee.
Operating income (loss). Operating income decreased by $18.7 million or
263.4%, from $7.1 million in 1998 to a loss of $11.6 million in 1999. Operating
loss, exclusive of employee stock-related charges and other intangible asset
amortization, was (15.8%) of revenue in 1999. On the same basis, operating
income was $7.1 million in 1998 and was 8.9% of revenue.
Other income (expense), net. Other income (expense), net increased from
income of $22,000 in 1998 to income of $287,000 in 1999. Interest income
increased from $299,000 in 1998 to $366,000 in 1999, reflecting investment
income from the investment of proceeds from the Company's initial public
offering completed in April, 1998 (the "Offering".) Prior to completion of the
Offering, the Company borrowed against a line of credit.
Provision for income taxes. The decrease in the Company's effective tax rate
from 39.6% in 1998 to a benefit rate of 26.9% in 1999, primarily relates to
losses in lower income tax jurisdictions and non-deductible expenses. At
December 31, 1999, the Company's deferred tax asset recorded on its balance
sheet was approximately $2.9 million, consisting primarily of $2.3 million of
future tax benefits resulting from net operating loss ("NOL") carryforwards.
The Company's ability to recognize the entire benefit requires that the Company
achieve certain future earnings levels prior to the expiration of the NOL
carryforwards. The Company expects to generate the future earnings necessary to
utilize the NOL carryforwards through implementation of the reasonable tax
planning strategies and future income projections. The Company could be
required to record a valuation allowance for a portion or entire deferred tax
asset if the market conditions deteriorate and future earnings are below, or
projected to be below, current estimates.
At December 31, 1999, the Company has NOL carryforwards of $6.7 million.
Of the $6.7 million, $5.4 million expires in 2014. The remaining $1.3 million
have no expiration.
Net income (loss). Net loss was $8.3 million in 1999 compared to income of
$4.3 million in 1998. Net loss before other intangible asset amortization and
compensation charges related to stock options awarded to an employee, would have
been $7.8 million in 1999.
Page 19 of 42
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenue. Revenues increased by $35.9 million, or 81.3%, from $44.2 million
in 1997 to $80.1 million in 1998. The increase was substantially attributable to
an increase in volume of services and is to a lesser extent attributable to rate
increases. The Company experienced growth in all of its divisions. Revenues from
the Americas Division increased by 78.8% from $28.7 million to $51.2 million;
revenues from the EMEA Division increased by 98.4% from $11.3 million to $22.5
million; and revenues from the Asia Pacific Division increased by 52.2% from
$4.2 million to $6.4 million. The Company ended the 1998 period with 863 total
employees, up from 568 employees at the beginning of the period. In addition,
the Company opened four new offices during the period, and closed two smaller
offices, increasing the total number of offices to 17.
Gross profit. Gross profit increased by $19.2 million, or 95.2%, from $20.1
million in 1997 to $39.3 million in 1998, and increased from 45.6% of revenue in
1997 to 49.1% of revenue in 1998. The increase is primarily attributable to
increased consultant productivity through use of the Company's tools developed
to enhance software systems training.
Selling and marketing expense. Selling and marketing expense increased by
$1.5 million, or 39.4%, from $3.7 million in 1997 to $5.2 million in 1998, and
decreased as a percentage of revenue from 8.4% in 1997 to 6.5% in 1998. The
increase was primarily attributable to the growth of the Company's sales and
marketing staff from 23 employees at December 31, 1997 to 27 at December 31,
1998 and the expenses associated with the expanded efforts of those employees.
Development expense. Development expense increased by $900,000, or 73.7%,
from $1.2 million in 1997 to $2.1 million in 1998, and remained constant as a
percentage of revenue at 2.7%. Development expense increased significantly
during 1998 due to the expenditures related to developing key products including
DA FIT and tools to facilitate distance learning. Development expense was also
incurred for continued work on products co-developed with CBT Systems and
continued work on the Company's DA Passport product. Development expense also
includes expenses to develop a conversion plan for the Company's SAP system and
support staff to introduce new products to the sales and field staff.
General and administrative expense. General and administrative expense
increased by $12.4 million, or 100.0%, from $12.4 million in 1997 to $24.9
million in 1998, and increased as a percentage of revenue from 28.1% in 1997 to
31.0% in 1998. Expenses were incurred to continue to build the organization to
support the growth during 1998 and future years. Increases included additional
support staff, the addition of four new offices and the expansion of corporate
headquarters.
Amortization expense. Amortization expense decreased by $35,000, or 64.8%,
from $54,000 in 1997 to $29,000 in 1998, and decreased as a percentage of
revenue from 0.1% in 1997 to 0.0% in 1998. The decrease reflected the completion
by June 30, 1997 of the amortization of other intangible assets created as a
result of the Exchange Transaction on July 1, 1995.
Employee stock-related charge. While the Company incurred no employee stock-
related charges in 1998, the Company did incur charges of $263,000 in 1997,
related to stock awarded to employees and payments in lieu thereof. These
charges had the effect of reducing net income by $163,000 in 1997.
Operating income. Operating income increased by $4.7 million or 190.7%, from
$2.4 million in 1997 to $7.1 million in 1998. Operating income, exclusive of
employee stock-related charges and other intangible asset amortization, was 8.8%
of revenue in 1998. On the same basis, operating income was $2.7 million in
1997 and was 6.2% percent of revenue.
Other income (expense), net. Other income (expense), net increased from an
expense of $135,000 in 1997 to an income of $22,000 in 1998. This change
reflects increased borrowings to support the Company's growth in 1997. Interest
income increased from $30,000 in 1997 to $299,000 in 1998, reflecting investment
income from the investment of proceeds from the Company's initial public
offering on April 24,1998 (the "Offering").
Provision for income taxes. The increase in the Company's effective tax rate
from 38.9% in 1997 to 39.6% in 1998, primarily relates to increased foreign
income.
Net income. Net income was $4.3 million in 1998 compared to $1.4 million in
1997. Exclusive of the charges for other intangible asset amortization and for
compensation charges related to stock awarded to employees and payments in lieu
thereof, net income would have been $1.7 million in 1997.
Page 20 of 42
Quarterly Operating Results
The following tables set forth unaudited income statement data for each of
the eight quarters in the period beginning January 1, 1998 and ending December
31, 1999, 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, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- --------- ---------- ---------- ---------- -------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenue............................. $14,587 $19,703 $21,882 $23,960 $24,129 $22,047 $15,804 $ 8,315
Cost of revenue..................... 7,740 10,278 11,233 11,565 11,586 11,305 8,426 7,400
--------- --------- ---------- ---------- ---------- -------- --------- ----------
Gross profit........................ 6,847 9,425 10,649 12,395 12,543 10,742 7,378 915
Selling and marketing expense....... 1,236 1,217 1,345 1,397 1,864 2,263 1,621 1,655
Development expense................. 355 390 779 601 640 434 350 379
General and administrative expense.. 4,259 5,948 6,427 8,244 7,818 7,600 8,864 9,179
Amortization expense................ 5 5 5 14 4 53 148 148
Employee stock-related charge....... -- -- -- -- -- 142 -- --
--------- --------- ---------- ---------- ---------- -------- --------- ----------
Operating income (loss)............. 992 1,865 2,093 2,139 2,217 250 (3,605) (10,446)
Other income (expense), net......... (113) (159) 159 135 104 25 90 68
--------- --------- ---------- ---------- ---------- -------- --------- ----------
Income (loss) before taxes.......... 879 1,706 2,252 2,274 2,321 275 (3,515) (10,378)
Provision (benefit) for income taxes 334 675 914 888 853 138 (1,318) (2,707)
--------- --------- ---------- ---------- ---------- -------- --------- ----------
Net income (loss).................. $ 545 $ 1,031 $ 1,338 $ 1,386 $ 1,468 $ 137 $(2,197) $ (7,671)
========= ========= ========== ========== ========== ======== ========= ==========
Basic earnings (loss) per share..... $ 0.11 $ 0.17 $ 0.20 $ 0.21 $ 0.22 $ 0.02 $ (0.34) $ (1.20)
Weighted average shares outstanding. 4,808 5,978 6,555 6,547 6,546 6,388 6,418 6,418
Diluted earnings (loss) per share... $ 0.11 $ 0.16 $ 0.20 $ 0.20 $ 0.22 $ 0.02 $ (0.34) $ (1.20)
Weighted average shares outstanding. 5,053 6,264 6,822 6,800 6,737 6,489 6,418 6,418
AS A PERCENTAGE OF REVENUE
----------------------------------------------------------------------------------------------
Revenue............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue..................... 53.1 52.2 51.3 48.3 48.0 51.3 53.3 89.0
--------- --------- ---------- ---------- ---------- -------- --------- ----------
Gross profit........................ 46.9 47.8 48.7 51.7 52.0 48.7 46.7 11.0
Selling and marketing expense....... 8.5 6.2 6.1 5.8 7.7 10.3 10.3 19.9
Development expense................. 2.4 2.0 3.6 2.5 2.7 2.0 2.2 4.6
General and administrative expense.. 29.2 30.2 29.4 34.4 32.4 34.4 56.1 110.4
Amortization expense................ 0.0 0.0 0.0 0.1 0.0 0.2 0.9 1.8
Employee stock-related charge....... 0.0 0.0 0.0 0.0 0.0 0.7 0.0 0.0
--------- --------- ---------- ---------- ---------- -------- --------- ----------
Operating income (loss)............. 6.8 9.5 9.6 8.9 9.2 1.1 (22.8) (125.6)
Other income (expense), net......... (0.7) (0.8) 0.7 0.6 0.5 0.1 0.6 0.8
--------- --------- ---------- ---------- ---------- -------- --------- ----------
Income (loss) before taxes.......... 6.0 8.7 10.3 9.5 9.6 1.2 (22.2) (124.8)
Provision (benefit) for income taxes 2.3 3.4 4.2 3.7 3.5 0.6 (8.3) (32.6)
--------- --------- ---------- ---------- ---------- -------- --------- ----------
Net income (loss)................... 3.7% 5.2% 6.1% 5.8% 6.1% 0.6% (13.9)% (92.3)%
==============================================================================================
- ------------
Liquidity and Capital Resources
Since its inception, the Company has historically financed its operations and
growth with cash flow from operations, supplemented by the issuance of Common
Stock and by short-term borrowings under its revolving bank line of credit and
from shareholders.
The Company's cash and cash equivalents were $3.7 million as of December 31,
1997, $10.0 million as of December 31, 1998 and $3.4 million as of December 31,
1999. The Company's working capital was $4.1 million as of December 31, 1997,
$25.6 million as of December 31, 1998 and $11.0 million as of December 31, 1999.
The Company's operating activities used cash of $6.4 million in 1999,
compared with providing cash of $5.9 million in 1998. The decrease is primarily
attributable to operating losses for 1999 offset in part by a decrease in
accounts receivable. The Company's operating activities used cash of $2.4
million in 1997 compared to providing cash of $5.9 million in 1998. The
increase in cash provided during 1998 was primarily the result of increased net
income.
Page 21 of 42
The Company's investing activities provided cash of $ 1.4 million in 1999
compared to investment of cash of $17.4 million in 1998 and $2.0 million in
1997. The $1.4 million cash provided in 1999 was the result of the Company
selling $7.7 million in short-term investments offset by investing $6.2 million
in fixed assets, primarily attributable to the implementation of SAP as the
Company's primary information system. Of the $17.4 million invested in 1998,
the Company invested $10.0 million from the proceeds from the Offering in short-
term investments and $7.4 million in capitalized fixed assets, including the
costs of implementing the Company's primary information system.
The Company's financing activities used cash of $1.5 million for 1999 and
provided cash of $18.6 million for 1998 and $5.9 million in 1997. Cash used in
financing activities during 1999 were principally attributable to the buyback of
common stock during the first half of the year. The increase in cash from
financing activities in 1998 resulted from private placements of shares and an
initial public offering of common stock. Cash was used to repay notes payable
and the revolving line of credit.
During 1996, the Company entered into a credit facility with a financial
institution with a maximum credit limit of $1,000,000, which expired in March
1997. In March 1997 and September 1997, the Company amended and renewed the
credit facility, increasing the available line from $1,000,000 to $3,500,000 and
$5,000,000, respectively. Interest was payable monthly at prime plus 0.5% per
year (9.0% and 8.25% at December 31, 1997 and 1998, respectively). No amounts
were drawn on this line of credit during 1999 and the debt on this line of
credit was fully repaid during the year ended December 31, 1998. The balance
outstanding on the line of credit to expire at December 31, 1997 was $3,208,000.
The company allowed this line of credit to expire at December 31, 1999.
During 2000, the Company expects to make approximately $1 million in capital
expenditures, primarily for computer and office equipment, and leasehold
improvements. Capital expenditures will be financed by a combination of
available cash resources and lease financing.
In March 2000, the Company signed an agreement with a bank, which provides
for financing of eligible U.S. accounts receivable under a purchase and sale
agreement. The maximum funds available under this agreement is $5 million. Also
in March 2000, the Company obtained a credit facility from a bank with a maximum
line of credit of approximately $800,000, secured by eligible foreign accounts
receivable. The Company believes its current cash balances, receivable-based
financings and cash provided by future operations will be sufficient to meet the
Company's working capital and cash needs through 2001. However, there can be no
assurance that such sources of funds will be sufficient to meet these future
expenses. The Company may seek additional financing through a public or private
placement of equity. The Company's need for additional financing will be
principally dependent on the degree of market demand for the Company's services.
There can be no assurance that the Company will be able to obtain any such
additional financing on acceptable terms, if at all.
The Company capitalizes software development costs beginning when product
technological feasibility is established and concluding when the product is
ready for general release. At such time, software development costs are
amortized on the straight-line basis over a maximum of three years or the
expected life of the product, whichever is less. During 1999, the Company
capitalized $184,000 of software development costs relating to computer-based
training software development. The development was completed in 1999 and will
start amortizing in 2000. Research costs related to software development are
expensed as incurred.
In 1999 and 1998, respectively, the Company capitalized $3.3 million and
$728,000 of implementation costs related to the Company's primary information
system. Such development costs are amortized over a seven year period.
Because the Company has been and is currently able to match the local
currency component of client engagements to the amount of operating costs
transacted in local currency, the Company has not needed to and does not
currently hedge against currency fluctuations.
During the three-month period ending March 31, 2000, the Company implemented
a plan to address the recent dramatic decline in training and documentation
activity for enterprise resource planning implementations. The plan consists of
regional base consolidations and down-sizing of billable and non-billable
personnel. Charges include the costs of involuntary employee termination
benefits, write-down of certain fixed assets and reserves for leasehold
abandonment. The Company paid approximately $700,000 attributable primarily
to involuntary employee termination benefits during the three months ended March
31, 2000. In addition the Company has reserved $1.7 million related to
facilities and fixed asset reserves. The Company believes the provision is
adequate to cover the future costs attributable to implementation of the current
plan.
Page 22 of 42
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company 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, 1999, the
potential decrease in the fair value of investments assuming a 10 percent
adverse change in the market rates is not significant.
YEAR 2000 COMPLIANCE ISSUES.
Internal Project: During 1998, the Company began to implement plans to ensure
that its systems continue to meet its internal and external requirements.
During the first quarter of 1999, the Company completed the Year 2000
remediation of its corporate headquarters and Americas division systems. The
Company completed this remediation process for its EMEA and Asia Pacific
divisions in the second quarter of 1999. Implementation of SAP as the Company's
primary information system was completed in the third quarter of 1999.
Internal Systems: In addition to computer and software systems, the Company
recognizes that the use of internal systems such as telephone systems and other
business-related items may be affected by the Year 2000 issue. The Company
addressed during 1999, the potential effects and the cost to mitigate these
effects, and believes that the necessary steps were taken to upgrade or replace
these items without a material effect on the Company's financial position.
Third Parties: The Company has communicated with third parties with which the
Company does business in order to identify, to the extent possible, the status
of such parties' Year 2000 readiness. Although these companies have confirmed
that they were compliant by the Year 2000, the Company has limited or no control
over the actions taken by these third parties. The Company to date has not
experienced any significant events, nor received any significant reports
indicating any material Year 2000 issues from third parties.
Contingency Plan: As of this date, the Company has not experienced any
disturbances or interruption in its ability to transact business with its
customers or its suppliers. Uncertainties exist as to the Company's ability to
detect all Year 2000 problems. The Company continues to monitor its systems,
suppliers and clients for any unanticipated issues that have yet to surface.
The total cost of the Company's current systems conversion was approximately
$8 million, of which substantially all has been incurred. This conversion was
not necessary in order for the Company to become Year 2000 compliant. The cost
of converting only the non-compliant system would have been nominal.
ITEM 8. FINANCIAL STATEMENTS
The consolidated financial statements of the Company are included in pages
27 through 42.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in accountants, disagreements, or other events
requiring reporting under this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF DA CONSULTING GROUP, INC.
MANAGEMENT
Information relating to the Company's directors and executive officers is
included in the Company's definitive Proxy Statement in connection with its 1999
Annual Meeting of Stockholders (the "1999 Proxy Statement), which will be filed
with the Securities and Exchange Commission within 120 days after the end of the
fiscal year ended December 31,1999, under the captions "ELECTION OF DIRECTORS -
Nominees" and "OTHER INFORMATION - Directors and Executive Officers" and is
incorporated herein by reference in response to this Item 10.
Page 23 of 42
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is set forth in the 1999 Proxy
Statement under the captions "ELECTION OF DIRECTORS - Compensation of Directors"
and "EXECUTIVE COMPENSATION" and is incorporated herein by reference in response
to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to ownership of Registrant's Common Stock by management
and certain other beneficial owners is set forth in the 1999 Proxy Statement
under the caption "OTHER INFORMATION - Certain Stockholders" and is incorporated
herein by reference in response to this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions is set
forth in the 1999 Proxy Statement under the caption "OTHER INFORMATION - Related
Transactions" and is incorporated herein by reference in response to this Item
13.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this Report.
1. The following financial statements of the Company and the related report
of independent accountants are filed herewith:
PAGE
NUMBER
--------
Report of Independent Accountants .............................................................. 27
Consolidated Financial Statements:
Balance Sheets as of December 31, 1998 and 1999 .............................................. 28
Statements of Operations for the years ended December 31, 1997, 1998, and 1999 ............... 29
Statements of Stockholders' Equity for the years ended December 31, 1997, 1998 and 1999 ...... 30
Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999 ................ 31
Notes to Consolidated Financial Statements..................................................... 32
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.
3. Exhibits
(A) EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -------------
1.1 --Form of Underwriting Agreement by and among the Company, the
Underwriters and the Selling Shareholders*
3.1 --Amended and Restated Articles of Incorporation of the Company*
3.2 --Restated By-Laws of the Company*
4.1 --Specimen Stock Certificate*
5.1 --Opinion of Pepper Hamilton LLP dated March 20, 1998*
5.2 --Opinion of Pepper Hamilton LLP dated April 16, 1998*
10.1 --Amended and Restated 1997 Stock Option Plan
10.2 --Employment Agreement between the Company and Nick Marriner*
10.5 --Employment Agreement between the Company and Lisa L. Costello*
10.6 --Employment Agreement between the Company and Eric J. Fernette*
Page 24 of 42
EXHIBIT NO. DESCRIPTION
- ----------- -------------
10.17 --Amended and Restated Employment Agreement between the Company and
Lisa Costello*
10.18 --DA Consulting Group, Inc. Deferred Compensation Plan*
11.1 --Computation of Net Income Per Share dated January 9, 1998*
11.2 --Computation of Pro Forma Earnings per Share dated March 2, 1998*
11.3 --Computation of Pro Forma Earnings per Share dated March 31, 1998*
11.4 --Computation of Pro Forma Earnings per Share dated April 22, 1998*
16.1 --Letter re change in certifying accountants dated January 9, 1998*
16.2 --Letter re change in certifying accountants dated March 30, 1998*
21.1 --Subsidiaries*
23.1 --Consent of PricewaterhouseCoopers LLP
23.2 --Consent of Pepper Hamilton LLP (included in Exhibit 5.2)*
24 --Power of Attorney (included on Signature Pages)*
27 --Financial Data Schedule
_________
* Previously filed.
(B) REPORTS ON FORM 8-K.
None were filed during the fourth quarter of 1999.
Page 25 of 42
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on March 28, 2000.
DA Consulting Group, Inc.
(Registrant)
By: /s/ Nicholas H. Marriner
---------------------------
Nicholas H. Marriner
Chairman and Chief Executive Officer
By: /s/ Dennis C. Fairchild
---------------------------
Dennis C. Fairchild
Chief Financial Officer, Executive Vice
President, Secretary and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on March 28, 2000.
SIGNATURE TITLE
--------- -----
/s/ NICHOLAS H. MARRINER Chief Executive Officer and
- -------------------------------- Chairman of the Board (Principal
Nicholas H. Marriner Executive Officer)
/s/ DENNIS C. FAIRCHILD Chief Financial Officer, Executive
- -------------------------------- Vice President, Secretary
Dennis C. Fairchild and Treasurer (Principal Financial
and Accounting Officer)
/s/ NIGEL W.E. CURLET Director
- --------------------------------
Nigel W.E. Curlet
/s/ GUNTHER E. A. FRITZE Director
- --------------------------------
Gunther E. A. Fritze
/s/ VIRGINIA L. PIERPONT Director
- --------------------------------
Virginia L. Pierpont
/s/ RICHARD W. THATCHER, JR. Director
- --------------------------------
Richard W. Thatcher, Jr.
Page 26 of 42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of:
DA Consulting Group, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity, and cash flows
present fairly, in all material respects, the financial position of DA
Consulting Group, Inc. and its subsidiaries (the "Company") at December 31, 1998
and 1999, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States 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.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
March 24, 2000
Page 27 of 42
DA CONSULTING GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
------------------------
1998 1999
------ ------
C>
ASSETS
------
Current Assets:
Cash and cash equivalents...................................... $ 9,971 $ 3,406
Short-term investments......................................... 10,033 2,389
Accounts receivable, trade, net................................ 16,015 8,578
Unbilled revenue............................................... 1,589 434
Income taxes receivable........................................ 1,310 2,979
Deferred tax asset............................................. -- 445
Prepaid expenses and other current assets...................... 626 456
------- -------
Total current assets........................................ 39,544 18,687
Property and equipment, net.................................... 8,759 12,368
Other assets................................................... 182 --
Deferred tax asset............................................. -- 1,464
Intangible assets, net......................................... 418 399
------- -------
Total assets......................................... $48,903 $32,918
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable............................................... $ 2,954 $ 1,955
Accrued expenses............................................... 8,903 5,613
Deferred income................................................ 1,345 112
Income taxes payable........................................... 592 --
Deferred income taxes.......................................... 165 --
------- -------
Total current liabilities................................... 13,959 7,680
------- -------
Commitments and contingencies (Note 8)
Shareholders' equity:
Preferred stock, $0.01 par value: 10,000,000 shares authorized. -- --
Common stock, $0.01 par value: 40,000,000 shares authorized;
6,571,777 shares issued and 6,550,074 and 6,418,604 shares
outstanding, respectively...................................... 65 65
Additional paid-in capital...................................... 29,359 29,355
Retained earnings (accumulated deficit)......................... 6,398 (1,865)
Accumulated other comprehensive loss............................ (762) (795)
Treasury stock, at cost: 21,703 and 153,173 shares, respectively (116) (1,522)
------- -------
Total shareholders' equity................................... 34,944 25,238
------- -------
Total liabilities and shareholders' equity............... $48,903 $32,918
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
Page 28 of 42
DA CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1997 1998 1999
----------- ----------- -----------
Revenue......................................... $44,204 $80,132 $ 70,295
Cost of revenue................................. 24,063 40,817 38,717
------- ------- --------
Gross profit................................. 20,141 39,315 31,578
Selling and marketing expense................... 3,726 5,195 7,403
Development expense............................. 1,223 2,124 1,802
General and administrative expense.............. 12,436 24,877 33,461
Amortization expense............................ 54 29 354
Employee stock-related charge................... 263 -- 142
------- ------- --------
Operating income (loss)...................... 2,439 7,090 (11,584)
Interest income, net............................ 30 299 366
Other expense, net.............................. (165) (277) (79)
------- ------- --------
Total other income (expense), net (135) 22 287
------- ------- --------
Income (loss) before taxes................... 2,304 7,112 (11,297)
------- ------- --------
Provision for income taxes:
Current provision (benefit).................. 888 2,867 (960)
Deferred provision (benefit)................. 8 (54) (2,074)
------- ------- --------
Provision (benefit) for income taxes...... 896 2,813 (3,034)
------- ------- --------
Net income (loss)......................... $ 1,408 $ 4,299 $ (8,263)
======= ======= ========
Basic earnings (loss) per share................. $ 0.29 $ 0.72 $ (1.28)
Weighted average shares outstanding............. 4,808 5,976 6,444
Diluted earnings (loss) per share............... $ 0.28 $ 0.69 $ (1.28)
Weighted average shares outstanding............. 5,053 6,233 6,444
The accompanying notes are an integral part of the consolidated financial
statements.
Page 29 of 42
DA CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
RETAINED ACCUMULATED
COMMON STOCK ADDITIONAL EARNINGS OTHER
------------------- PAID-IN (ACCUMULATED COMPREHENSIVE
NUMBER PAR CAPITAL DEFICIT) INCOME (LOSS)
------ ----- ---------- ------------ -------------
Balance as of December 31, 1996........... 4,435 $44 $ 2,787 $ 691 $ (33)
Issuance of common stock................. 394 4 3,662 -- --
Employee stock repurchases............... -- -- -- -- --
Net income............................... -- -- -- 1,408 --
Foreign currency translation
adjustment, net of taxes of $17......... -- -- -- -- (26)
----- --- ------- ------- -----
BALANCE AS OF DECEMBER 31, 1997........... 4,829 48 6,449 2,099 (59)
Issuance of common stock................. 1,743 17 21,129 -- --
Income tax expense related to -- -- 1,781 -- --
restricted stock plan...................
Employee stock repurchases............... -- -- -- -- --
Repayment of stockholder notes receivable -- -- -- -- --
Net income............................... -- -- -- 4,299 --
Foreign currency translation
adjustment, net of taxes of $459........ -- -- -- -- (703)
----- --- ------- ------- -----
BALANCE AS OF DECEMBER 31, 1998........... 6,572 65 29,359 6,398 (762)
Stock repurchases........................ -- -- -- -- --
Exercise of employee stock options -- -- (146) -- --
Employee stock compensation -- -- 142 -- --
Net loss................................. -- -- -- (8,263) --
Foreign currency translation
adjustment, net of taxes of $22......... -- -- -- -- (33)
----- --- ------- ------- -----
Balance as of December 31, 1999........... 6,572 $65 $29,355 $ 1,865 $(795)
===== === ======= ======= =====
NOTES
TREASURY STOCK RECEIVABLE TOTAL
------------------- FROM SHAREHOLDERS'
NUMBER COST SHAREHOLDERS EQUITY
------ ------ ------------ -------------
Balance as of December 31, 1996........... 221 $ (5) $(413) $ 3,071
Issuance of common stock................. (218) 5 (90) 3,581
Employee stock repurchases............... 18 (91) -- (91)
Net income............................... -- -- -- 1,408
Foreign currency translation
adjustment, net of taxes of $17......... -- -- -- (26)
--- ------- ----- -------
BALANCE AS OF DECEMBER 31, 1997........... 21 (91) (503) 7,943
Issuance of common stock................. -- -- -- 21,146
Income tax expense related to -- -- -- 1,781
restricted stock plan...................
Employee stock repurchases............... 1 (25) -- (25)
Repayment of stockholder notes receivable -- -- 503 503
Net income............................... -- -- -- 4,299
Foreign currency translation
adjustment, net of taxes of $459........ -- -- -- (703)
--- ------- ----- -------
BALANCE AS OF DECEMBER 31, 1998........... 22 (116) -- 34,944
Stock repurchases........................ 200 (1,943) -- (1,943)
Exercise of employee stock options (69) 537 -- 391
Employee stock compensation -- -- -- 142
Net loss................................. -- -- -- (8,263)
Foreign currency translation
adjustment, net of taxes of $22......... -- -- -- (33)
--- ------- ----- -------
Balance as of December 31, 1999........... 153 $(1,522) $ -- $25,238
=== ======= ===== =======
The accompanying notes are an integral part of the consolidated financial
statements.
Page 30 of 42
DA CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
----------------------------------------------
1997 1998 1999
--------- ---------- ----------
Cash flows from operating activities:
Net income (loss)................................................. $ 1,408 $ 4,299 $(8,263)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization................................... 453 1,138 2,560
Provision for doubtful accounts................................. 353 773 435
Stock option compensation expense............................... -- -- 142
Deferred income taxes........................................... 8 (54) (2,074)
(Gain) loss on sale on property and equipment................... -- (1) 80
Changes in operating assets and liabilities:
Accounts receivable and unbilled revenue..................... (8,225) (5,998) 8,157
Prepaid expenses and other current assets.................... 151 (376) 170
Other assets................................................. (45) (193) 182
Accounts payable and accrued liabilities..................... 3,083 4,499 (4,289)
Deferred income.............................................. 312 1,033 (1,233)
Income taxes payable......................................... 72 730 (2,261)
------- -------- -------
Total Adjustments...................................... (3,838) 1,551 1,869
------- -------- -------
Net cash (used in) provided by operating activities... (2,430) 5,850 (6,394)
------- -------- -------
Cash flows from investing activities:
Proceeds from sale of property and equipment...................... -- 39 19
Sale of short-term investments.................................... -- -- 7,721
Purchases of short-term investments............................... -- (10,033) (77)
Purchases of property and equipment............................... (1,955) (7,398) (6,249)
------- -------- -------
Net cash (used in) provided by investing activities.... (1,955) (17,392) 1,414
------- -------- -------
Cash flows from financing activities:
Net proceeds from (repayments of) revolving line of credit........ 2,833 (3,208) --
Proceeds from (repayments of) note payable........................ 762 (762) --
Proceeds from (repayments of) notes payable to shareholders....... (356) -- --
Repayments of notes receivable from shareholders.................. -- 503 --
Issuance of stock................................................. 3,581 25,268 --
Stock repurchases................................................. (91) (25) (1,943)
Proceeds from stock option exercises.............................. -- -- 391
Offering costs.................................................... (853) (3,224) --
------- -------- -------
Net cash provided by (used in) financing activities.... 5,876 18,552 (1,552)
------- -------- -------
Effect of changes in foreign currency exchange rate on
cash and cash equivalents.......................................... (26) (703) (33)
------- -------- -------
Increase (decrease) in cash and cash equivalents...... 1,465 6,307 (6,565)
Cash and cash equivalents at beginning of year...................... 2,199 3,664 9,971
------- -------- -------
Cash and cash equivalents at end of year............................ $ 3,664 $ 9,971 $ 3,406
======= ======== =======
The accompanying notes are an integral part of the consolidated financial
statements.
Page 31 of 42
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 USA 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Short-Term Investments
Short-term investments are those, that when purchased, have maturities greater
that three months. The short-term investments consist of variable rate municipal
debt instruments, which result in no unrealized holding gains or losses. As the
Company does not intend to hold the investments until their stated maturity
dates, the Company has classified all investments as available-for-sale. The
Company records its short-term investments at cost, which approximates market
value determined using the specific identification method.
Property and Equipment
Property and equipment are stated at cost. Expenditures for substantial
renewals and betterments are capitalized, while repairs and maintenance are
charged to expense as incurred. Assets are depreciated or amortized using the
straight-line method for financial reporting purposes and accelerated methods
for tax purposes over their estimated useful lives. Computer equipment is
depreciated over a useful life of three to five years. Furniture is depreciated
over a seven year useful life. Purchased software and internal software
development costs related to the Company's primary information system are
amortized over a seven year period. Gains or losses from disposals of property
and equipment are reflected in operations.
Software Development Costs
The Company capitalizes software development costs beginning when product
technological feasibility is established and concluding when the product is
ready for general release. At such time, software development costs are
amortized on a straight-line basis over the lessor of three years or the
expected life of the product. Research costs related to software development are
expensed as incurred. During 1999, the Company capitalized $184,000 of software
development costs relating to computer-based training software development.
In 1998 and 1999, the Company capitalized $728,000 and $3.3 million,
respectively, of implementation costs related to the Company's primary
information system. Such costs are being amortized straight-line over seven
years.
Income Taxes
The Company recognizes deferred income taxes for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are determined based on
the difference between
Page 32 of 42
the financial statement carrying amounts and tax basis of assets and liabilities
using enacted tax rates in effect in the years in which the differences are
expected to reverse. A valuation allowance, if necessary, is provided against
deferred tax assets based upon managment's assessment as to their realization.
Foreign Currency Translation
For the Company's foreign subsidiaries, the local currency is the functional
currency. Assets and liabilities are translated at year-end exchange rates, and
related revenue and expenses are translated at the average exchange rates in
effect during the period. Resulting translation adjustments are recorded as a
separate component in shareholders' equity. For countries with highly
inflationary currencies, the Company uses the U.S. dollar as the functional
currency.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash and cash equivalents, short-term
investments and trade accounts receivable. The Company maintains cash deposits
and short-term investments, which exceed Federally insured limits, with several
major financial institutions. Management periodically assesses the financial
condition of the financial institutions and investees and believes that any
possible credit risk is minimal. The Company performs ongoing credit evaluations
of its clients and generally does not require collateral for services. Bad debts
have not been significant in relation to the volume of revenue.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, short-term investments,
accounts receivable and accounts payable approximate fair values due to the
short-term nature of these instruments. The estimated fair values of these
instruments have been determined by the Company using available market
information.
Allowance for Doubtful Accounts
The Company provides an allowance for accounts receivable that it believes may
not be fully collectible. The balance of the allowance at December 31, 1998 and
1999, was $650,000 and $964,000, 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 beginning July 1, 1995.
Accumulated amortization of goodwill was $67,000 and $86,000 as of December 31,
1998 and 1999, respectively.
Revenue Recognition
The majority of the Company's contracts with clients are based on time and
expenses incurred with the remainder of the revenue generated from fixed price
contracts. Accordingly, service revenue under both types of contracts is
recognized as services are performed and the realization of the revenue is
assured. Contract costs include direct labor costs and reimbursable expenses,
and those indirect costs related to contract performance such as indirect labor.
Selling, general and administrative costs are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in job performance, job conditions
and estimated profitability may result in revisions to costs and income and are
recognized in the period in which the revisions are determined. Unbilled revenue
represents the revenue earned in excess of amounts billed and deferred income
represents billings in excess of revenue earned. Revenue includes reimbursable
expenses directly incurred in providing services to clients. Revenue
attributable to reimbursable expenses amounted to $3.7 million, $7.7 million and
$4.9 million for the years ended December 31, 1997, 1998 and 1999, respectively.
The Company recognizes product revenue upon shipment of the product to the
client.
Significant Clients
No individual client accounted for more than 10% of consolidated revenue for
any period presented.
Page 33 of 42
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128").
SFAS No. 128 specifies the computation, presentation and disclosure requirements
of earnings per share and supercedes Accounting Principles Board Opinion No. 15,
Earnings Per Share. SFAS No. 128 requires a dual presentation of the basic and
diluted earnings per share. Basic earnings per share, which is based on the
weighted average number of common shares outstanding, replaces primary earnings
per share. Diluted earnings per share, which is based on the weighted average
number of common and dilutive potential common shares outstanding, replaces
fully diluted earnings per share and utilizes the average market price per share
as opposed to the greater of the average market price per share or ending market
price per share when applying the treasury stock method in determining dilutive
potential shares. During 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," and all prior periods have
been retroactively adjusted to conform to this statement.
Accounting for Stock Options
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("SFAS No. 123"), which sets forth accounting and disclosure requirements for
stock option and other stock-based compensation plans. The statement encourages,
but does not require, companies to record stock-based compensation expense using
a fair-value method, rather than the intrinsic-value method prescribed by
Accounting Principles Board ("APB") Opinion No. 25. The Company has adopted only
the disclosure requirements of SFAS No. 123 and has elected to continue to
record stock-based compensation expense using the intrinsic-value approach
prescribed by APB No. 25. Accordingly, the Company computes compensation cost as
the amount by which the fair market price of the Company's common stock exceeds
the exercise price on the date of grant. The amount of compensation cost, if
any, is charged to income over the vesting period.
Comprehensive Income
In 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income
("SFAS" No. 130"). SFAS No. 130 establishes rules for the reporting of
comprehensive income and its components. Comprehensive income consists of net
income and foreign currency translation adjustments and is presented in the
Company's statements of shareholders' equity. The adoption of SFAS 130 had no
impact on total shareholders' equity. Prior year financial statements have been
reclassified to conform to the requirements of SFAS 130.
New Accounting Pronouncements
In June, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which requires that companies
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The FASB has subsequently issues
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133," that defers the
requirements of SFAS No. 133 to fiscal years beginning after June 15, 2000. The
Company did not hold any derivative or hedging instruments during the reported
periods.
Reclassifications
Certain amounts previously reported have been reclassified to conform to
current period presentation. These reclassifications have no effect on
consolidated assets, liabilities, stockholders' equity or net income.
Page 34 of 42
2. PROPERTY AND EQUIPMENT, NET
The components of property and equipment were as follows (in thousands):
YEARS ENDED DECEMBER 31,
------------------------
1998 1999
------ ------
Computer equipment and software................ $ 4,290 $ 5,246
Automobiles.................................... 67 65
Furniture and fixtures......................... 2,045 2,624
Leasehold improvements......................... 567 1,176
Software development and implementation costs.. 728 4,199
Purchased software............................. 2,926 3,129
------- -------
Property and equipment...................... $10,623 $16,439
Less accumulated depreciation and amortization. (1,864) (4,071)
------- -------
Property and equipment, net................. $ 8,759 $12,368
======= =======
3. DEBT
Revolving Line of Credit
In September 1997, the Company amended and renewed the credit facility
increasing the available line to $5,000,000. Interest is payable monthly at
prime plus 0.5% per year. The credit facility matures in November 2000 and is
collateralized by the accounts receivable of the Company's North American
operations. The debt on this line of credit was fully repaid during the year
ended December 31, 1998. The Company allowed such line of credit to expire at
December 31, 1999. In March 2000, the Company signed a credit facility
agreement with an available line of approximately $800,000. Such facility is
secured by eligible foreign accounts receivable.
Notes Payable
In 1997, the Company borrowed approximately $762,000 for the purchase of
furniture and equipment. The borrowing bore an annual interest rate of 9.1%,
with interest and principal of approximately $24,000, payable monthly. The note
payable was repaid in full during the year ended December 31, 1998. The
borrowing was collateralized by the furniture and fixtures purchased. Total
interest expense related to this note for the year ended December 31, 1998
amounted to $68,000.
Accounts Receivable Financing
In March 2000, the Company signed an agreement with a bank, which provides
for financing of eligible U.S. accounts receivable under a purchase and sale
agreement. The maximum funds available under the agreement is $5 million.
Page 35 of 42
4. ACCRUED EXPENSES
The components of accrued expenses were as follows (in thousands):
YEARS ENDED DECEMBER 31,
------------------------
1998 1999
------ ------
Compensation and related expenses..... $2,006 $1,272
Bonuses............................... 3,406 731
Professional fees..................... 979 659
Vacations............................. 770 689
Other taxes........................... 940 1,556
Leasehold abandonment reserve......... -- 283
Other................................. 802 423
------ ------
Accrued expenses................... $8,903 $5,613
====== ======
5. INCOME TAXES
The following is a summary of the significant components of the Company's
deferred income taxes (in thousands):
YEARS ENDED DECEMBER 31,
------------------------
1998 1999
-------- --------
Deferred tax assets:
Net operating loss carryforward........... $ -- $2,348
Accrued expenses.......................... 234 444
Other..................................... 128 122
----- ------
Deferred tax assets................... 362 2,914
----- ------
Deferred tax liabilities:
Cash to accrual temporary differences..... 362 221
Property, plant and equipment............. 165 784
----- ------
Deferred tax liabilities.............. 527 1,005
----- ------
Net, deferred tax assets (liabilities) $(165) $1,909
===== ======
At December 31, 1999, for U.S. federal income tax reporting purposes, the
Company had $5.4 million of unused net operating losses available for
carryforward to future years. The benefit from carryforward of such net
operating losses will expire in 2014. The Company believes it will generate
sufficient taxable income to ensure realization of the benefit, accordingly, no
valuation allowance has been provided.
At December 31, 1999, the Company also had foreign net operating loss
carryforwards totaling $1.3 million with no expiration date. The company
believes it will generate sufficient income to utilize all of the foreign net
operating loss carryforwards. Accordingly, no valuation allowance has been
provided.
The benefit from utilization of net operating losses carryforwards could be
subject to limitations if significant ownership changes occur in the Company.
Page 36 of 42
The components of the Company's provision for income taxes were as follows (in
thousands):
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1998 1999
-------- ------ -------
United States federal and state:
Current provision (benefit).............. $ 652 $2,073 $ (562)
Deferred provision (benefit)............. 110 (182) (1,774)
----- ------ -------
762 1,891 (2,336)
----- ------ -------
Foreign:
Current provision (benefit)............. 236 794 (398)
Deferred provision (benefit)............ (102) 128 (300)
----- ------ -------
134 922 (698)
----- ------ -------
Provision (benefit) for income taxes. $ 896 $2,813 $(3,034)
===== ====== =======
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:
YEARS ENDED DECEMBER 31,
--------------------------
1997 1998 1999
------ ------ ------
U.S. statutory rate............................... 34.0% 34.0% (34.0)%
Write-off of investment in foreign subsidiaries - - (2.3)
State and local................................... 3.0 2.1 (3.1)
Foreign........................................... (1.8) 2.9 8.5
Other 3.7 0.6 4.0
---- ---- -----
Effective tax rate............................. 38.9% 39.6% (26.9)%
==== ==== =====
The U.S. components of income (loss) before taxes were $1.8, $5.0 and $3.9
million in 1997, 1998 and 1999, respectively, and the foreign components were
$0.5, $2.1 and $7.4 million in 1997, 1998 and 1999, respectively.
Applicable U.S. income taxes have not been provided on $1.4 million of
undistributed earnings of the Company's foreign subsidiaries as of December 31,
1999. The Company considers such earnings to be permanently invested outside the
U.S. The earnings could be subject to U.S. income tax if distributed to the
Company as dividends or otherwise. The Company anticipates that foreign tax
credits would substantially reduce the amount of U.S. income tax payable if
these earnings were repatriated.
6. 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. To the extent that stock options were granted to these parties, the
Company would recognize compensation expense equal to the difference between the
fair market value of the stock options granted and the consideration given, if
any, for such options.
Page 37 of 42
During the year ended December 31, 1998, the Company recognized $1.8 million
in compensation expense for excess book versus tax stock option basis as a
result of certain changes to restrictions related to these stock options. The
charge was recognized as a charge to additional paid-in capital.
The following table sets forth pertinent information regarding stock option
transactions and stock option prices during the year ended December 31, 1997,
1998 and 1999:
NUMBER OF WEIGHTED
SHARES OF AVERAGE
UNDERLYING EXERCISE
OPTIONS PRICES
--------- --------
Outstanding as of December 31, 1996 -- $ --
Granted........................................ 478,766 5.92
Forfeited...................................... (40,677) 5.82
--------- ------
Outstanding as of December 31, 1997............ 438,089 $ 5.93
Granted........................................ 450,620 14.39
Forfeited...................................... (97,279) 9.71
--------- ------
Outstanding as of December 31, 1998............ 791,430 $10.28
Granted........................................ 541,140 9.20
Exercised (68,530) 5.71
Forfeited...................................... (222,980) 12.12
---------
Outstanding as of December 31, 1999............ 1,041,060 9.63
========= ======
Exercisable as of December 31, 1997............ -- --
========= ======
Exercisable as of December 31, 1998............ -- --
========= ======
Exercisable as of December 31, 1999............ 94,593 $ 6.14
========= ======
Weighted average fair value of options granted
during the year ended December 31, 1999....... $ 6.28
======
The fair value of each stock option granted is estimated on the date of grant
using the minimum value method of option pricing based on the following
weighted-average assumptions: dividend yield of 0%; risk-free interest rates
ranging from 4.81% to 6.13%; expected life of 5 years.
The following table sets forth pertinent information regarding the outstanding
stock options as of December 31, 1999:
Options Outstanding Options Exercisable
--------------------------------------------------------------- -----------------------------------
Actual Range of Number Weighted Average Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Remaining Exercise Price Exercisable Exercise Price
Contractual Life
$ 3.69- 5.37 256,800 9.8 $ 4.44 -- --
$ 5.71- 6.55 263,780 7.0 5.95 90,493 $5.98
$ 9.75-14.50 330,980 8.3 13.49 4,100 $9.75
$15.00-15.25 189,500 9.1 15.01 -- --
- ------------------------------------------------------------------------------ ----------------------------------
$ 3.69-15.25 1,041,060 8.5 $ 9.63 94,593 $6.14
Page 38 of 42
Pro Forma Net Income and Earnings Per Share
Had the compensation cost for the Company's stock-based compensation plan
been determined consistent with SFAS No. 123, the Company's net income (loss)
and net income (loss) per share as of December 31, 1997, 1998 and 1999 would
approximate the pro forma amounts below:
1997 1998 1999
------ ------ ------
Net Income (loss):
As reported $1,408 $4,299 $(8,263)
Pro forma 1,287 3,891 (9,082)
Diluted Earnings per Share:
As reported $ 0.28 $ 0.69 $ (1.28)
Pro forma 0.25 0.62 (1.41)
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
7. SHAREHOLDERS' EQUITY
Initial Public Offering
In connection with the consummation of the Company's Offering on April 24,
1998, the Company sold 1.7 million shares of its common stock, par value $0.01
per share. Additionally, on May 28, 1998, the Company sold additional 42,586
shares of its common stock pursuant to and in connection with the underwriters'
over-allotment option. The Company received net proceeds of $21.1 million from
the sale of such shares, after deducting the underwriting discount and other
offering expenses.
Additionally, in connection with the Offering, the Company effected a 4.2
for one stock split. All share data included in the accompanying consolidated
financial statements and notes thereto are as if the stock split had occurred
prior to the periods presented.
Employee Stock Purchases
In February 1996, the Company established a plan which allowed certain
employees to purchase shares of common stock at fair market value on such date.
An aggregate of 121,065 shares were purchased pursuant to this plan, at $1.27
per share. No additional shares will be sold under this plan as it has been
terminated. During the year ended December 31, 1997, the Company repurchased
18,375 shares of common stock at fair value from former employees.
Stock Awards to Employees
In December 1997, the Company recognized compensation expense of $263,000
relating to cash payments to a former employee in lieu of an award of shares of
common stock. The tax effect of income tax deductions in excess of compensation
expense under this plan is credited to additional paid-in capital.
Private Placement of Shares
In January 1997, the Company sold 234,990 shares of common stock at $5.71 per
share, representing the fair value at the date of sale. Proceeds to the Company,
net of offering costs, amounted to $1.2 million. In December 1997, the Company
sold 362,208 shares of common stock at $6.55 per share, representing the fair
value at the date of sale, including 43,680 shares (for an aggregate of
approximately $286,000) to directors of the Company, and 52,920 shares (for an
aggregate of approximately $347,000) to officers and employees of the Company.
Total proceeds to the Company amounted to approximately $2.4 million.
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.
Page 39 of 42
Earnings Per Share
The following table summarizes the Company's computation of earnings per
share for the years ended December 31, 1997, 1998 and 1999 (in thousands, except
per share amounts):
YEARS ENDED DECEMBER 31,
1997 1998 1999
------ ------- ------
Basic earnings(loss) per share....................................... $ 0.29 $ 0.72 $ (1.28)
====== ====== =======
Net income(loss) (numerator)......................................... $1,408 $4,299 $(8,263)
====== ====== =======
Weighted average shares outstanding (denominator).................... 4,808 5,976 6,444
Computation of diluted earnings per share: 449 767 --
Common shares issuable under outstanding stock options............
Less shares assumed repurchased with proceeds from exercise stock (204) (510) --
------ ------ -------
Options.......................................................
Adjusted weighted average shares outstanding (denominator)........ 5,053 6,233 6,444
====== ====== =======
Diluted earnings (loss) per share................................. $ 0.28 $ 0.69 $ (1.28)
====== ====== =======
8. COMMITMENTS AND CONTINGENCIES
The Company leases various office facilities under non-cancelable operating
lease agreements. Rent expense amounted to $575,000,$1,129,000 and $3,100,000
for the years ended December 31, 1997, 1998 and 1999, respectively.
The Company leases apartments and housing facilities for certain employees,
and also leases office facilities in foreign cities. The terms of these leases
are less than one year.
As of December 31, 1999, future lease payments under non-cancelable leases
with terms of more than one year are as follows:
2000.................... $ 3,272
2001.................... 2,531
2002.................... 2,115
2003.................... 1,734
2004.................... 749
Thereafter.............. --
-------
$10,401
=======
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, 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.
9. 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
Page 40 of 42
employed on the last day of a plan year. The Company made matching contributions
equal to $0.50 for the years ended December 31, 1997, 1998 and 1999 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
$224,000, $385,000 and $504,000 during the years ended December 31, 1997, 1998
and 1999, 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, Mexico, South Africa, Venezuela, and the United Kingdom, 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 $1,994,000, $2,036,000 and $2,882,000
for the years ended December 31, 1997, 1998 and 1999 in the Americas division,
respectively, which are included in general and administrative expense. The
Company sponsored a profit sharing plan in the United Kingdom, pursuant to which
9% of net revenues are paid to employees on a partially tax-deferred basis. This
plan was terminated in December 1998. The Company made payments pursuant to
this plan aggregating approximately $420,000 in 1998. The Company continued a
discretionary profit sharing plan in the United Kingdom for 1999 for which no
payments were made due to Company performance.
10. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Years ended December, 31
1997 1998 1999
-------------- ------------ ------------
Cash paid for interest and income taxes (in thousands):
Interest $ 80 $ 271 $ --
Income taxes 816 2,137 1,198
Years ended December, 31
1997 1998 1999
-------------- ------------ ------------
Non-cash activities were (in thousands):
Common stock issued for notes receivable $ 90 $ -- $ --
Exercise of stock options using company stock -- -- 146
Deferred offering costs -- (898) --
Income tax expense related to restricted stock plan -- 1,781 --
11. 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, South, and Central America; the EMEA Division, which
includes its operations in Europe, Middle East, and Africa; 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.
Page 41 of 42
The Company's reportable segment information was as follows:
(in thousands) EUROPE, MIDDLE
AMERICAS EAST & AFRICA ASIA PACIFIC TOTAL
--------------- ----------------- --------------- ---------------
YEAR ENDED DECEMBER 31, 1999
Revenues $41,500 $20,505 $ 8,290 $ 70,295
Operating income (loss)........................ (7,703) (2,306) (1,575) (11,584)
Total assets 24,409 6,432 2,077 32,918
Capital expenditures........................... 4,739 1,310 200 6,249
Depreciation and amortization.................. 2,190 298 72 2,560
YEAR ENDED DECEMBER 31, 1998
Revenues $51,240 $22,498 $ 6,394 $ 80,132
Operating income (loss)........................ 4,043 2,843 204 7,090
Total assets 39,083 7,641 2,179 48,903
Capital expenditures........................... 7,005 339 54 7,398
Depreciation and amortization.................. 904 178 56 1,138
YEAR ENDED DECEMBER 31, 1997
Revenues $28,663 $11,341 $ 4,200 $ 44,204
Operating income (loss)........................ 2,007 209 223 2,439
Total assets 15,484 3,230 1,421 20,135
Capital expenditures........................... 1,564 261 130 1,955
Depreciation and amortization.................. 311 121 21 453
12. SUBSEQUENT EVENT
During the three-month period ending March 31, 2000, the Company implemented
a plan to address the recent dramatic decline in training and documentation
activity for enterprise resource planning implementations. The plan consists of
regional base consolidations and down-sizing of billable and non-billable
personnel. Charges include the costs of involuntary employee termination
benefits, write-down of certain fixed assets and reserves for leasehold
abandonment. The Company paid approximately $700,000 attributable primarily
to involuntary employee termination benefits during the three months ended March
31, 2000. In addition the Company has reserved $1.7 million related to
facilities and fixed asset reserves. The Company believes the provision is
adequate to cover the future costs attributable to implementation of the current
plan.
Page 42 of 42