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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, 2002
Commission File No.00-24055
DA CONSULTING GROUP, INC.
(Exact name of registrant as specified in charter)
TEXAS 76-0418488
(State or other jurisdiction (IRS employer incorporation
of organization) identification No.)
5847 SAN FELIPE, SUITE 1100
HOUSTON, TEXAS 77057
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (713) 361-3000
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Class:
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COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) [ ].
Aggregate market value of voting and non-voting common equity held by
non-affiliates, computed by reference to the price at which the common equity
was last sold as reported by the NASDAQ National Market as of June 28, 2002, the
last business day of the registrant's most recently completed second fiscal
quarter: $1,597,942.
Number of shares of common stock, no par value, outstanding as of March 28,
2003: 8,418,604.
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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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . 15
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. . . . . . 15
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . 25
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . . . . . . 25
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 25
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . 25
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . 29
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . 31
Item 14. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . 32
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Page 2 of 59
PART I
ITEM 1. BUSINESS
DA Consulting Group, Inc. ("DACG" or "the Company") is a global consulting
firm specializing in learning solutions, employee education, business process
mapping, business process improvement, and support for effective change. From
its offices in America, Canada, the UK, France, Germany, Singapore and
Australia, DACG enables clients to use technology and improve productivity by
managing and changing what their employees know.
DACG's core business is:
Process documentation and business process mapping
Business process improvement
Training for system implementations
Change communication
Organizational learning solutions
Employee performance support
E-learning within an organization
MANAGEMENT OF DACG
Significant changes in the management of DACG took place in August 2001.
The officers of the Company are:
Chairman Dr. B K Prasad
President & CEO Virginia L. (Val) Pierpont
Chief Financial Officer Dennis Fairchild
Chief Operating Officer Malcolm Wright
The Company was founded in 1984 in Houston, Texas by Val Pierpont, who
resumed the CEO role in August 2001. Offering documentation services to the oil
and gas industry, it participated in the early implementations of ERP systems in
that sector. End-user training was a natural extension of its core expertise
and was added to the Company's portfolio in 1989. DACG was well positioned to
take advantage of the demand for ERP expertise when that market emerged in the
l990's. In particular, there was strong demand for its services in SAP
implementations. The new systems were as demanding as they were powerful and
DACG created a specialist niche for itself in customized documentation, training
and change communication in the Global 2000 market.
The decade from 1988 through 1998 was marked by explosive growth in the
Company. In the five years from 1993 to 1998 the average rate of growth was 80%
per annum. DACG developed several proprietary tools in this period which
captured its knowledge and expertise. Today these continue to help the Company
deliver consistently high standards of work at significant savings in time and
cost including the following:
DA Passport, a contact sensitive employee performance support system
DA Learning Center, a web-enabled repository for all components of
corporate learning
DA Cornerstone, proprietary methodology
DA Foundation, proprietary content and reference materials
DA Reporter, a tool for measuring training effectiveness.
DACG is continuing its work with Customer Relationship Management systems,
in particular, Siebel, Vantive and SAP. The Company also does significant work
in the Public Sector.
MARKET
DACG participates in three marketplaces - education, software support tools
and documentation and training for ERP (enterprise resource planning) and CRM
(customer relationship management) systems. There are many service providers in
the education and end-user support markets. The providers who compete directly
with DACG include software developers, computer training companies, consulting
firms and e-learning companies. There is also competition from large
international system integrators and technology vendors who provide end-user
support programs with their proprietary software.
Page 3 of 59
DACG's ability to increase revenues in the ERP and CRM training and
documentation markets is dependent upon the license sales of the ERP and CRM
software. The Company believes the turndown in the ERP marketplace in the
second half of 1999 through the first half of 2000 was caused by the diversion
of customers' resources to Y2K compliance. This had a decidedly negative impact
on the demand for DACG's services. The current trend in the ERP market is
towards system upgrades which incorporate internet capability, linking back
office functions with the front office and the extended enterprise. In Europe,
growth in the ERP market has been partially driven by the need for companies to
comply with European Union regulations.
Most of DACG's current revenue is earned in upgrades to ERP systems and new
implementations of CRM systems. There is also steady growth in the sale of
DACG's proprietary EPSS (electronic performance support systems) and computer
based training systems.
New market opportunities for the Company will come with the expansion of
e-Learning. A significant investment by DACG in e-Learning software was made in
2000 and 2001 building a proprietary software system called Dynamic IQ. It led
to the development of two new software tools, The Learning Center and DA
Reporter. Both of these have been well received by the market and provide
excellent value in generating new customer relationships as well as useful
revenues. Dynamic IQ itself is currently for sale.
BUSINESS STRATEGY
DACG's mission is to support Global 2000 customers who seek to improve what
their employees do by managing and changing what their employees know.
DACG will continue its efforts to grow a strong and healthy business
offering its core expertise to the Global 2000. It will continue to be the
leader in its niche by respecting and nurturing relationships with its clients.
New developments and new markets will be pursued if they are a natural extension
of our core skills and offer a good return on investment. DACG management will
focus on cash profits as a measure of its success as custodian of the business,
and will at all times protect the interests of both the shareholders and the
stakeholders in the Company.
New initiatives for the Company are the Global Account Program and
Strategic Alliances and Partnerships. Both of these are driven by an interest
in looking after our clients as completely as possible. DACG management
believes a prosperous future for the Company can only be secured by linking its
goals to the best interests of its clients. Therefore, these programs are
important vehicles for growth in the future. The Company has announced the
following alliances and partnerships with AXON, Global Knowledge and X-Help.
Maintain Independence and Leverage Existing Client Relationships
The Company provides its consulting and software services independent of
the ERP, CRM and e-Learning solutions providers. The Company provides its
customers with solutions that are best suited to their environment, budget and
technical preferences.
Since 1984 , DACG has provided services to more than 720 of the global
Fortune 2000 companies. DACG's strategy is to continue to develop these
relationships, particularly as they seek to become continuous learning
organizations. Relationships with these companies have been an important source
of business leads and referrals. During 2002, approximately 76% of DACG's
business came from previous or existing customers. The Company believes that
its brand recognition and reputation are important assets in its market and
differentiate it from its e-Learning competitors.
Diversify into e-Learning
The lessons learned in 2001 taught us that the market is not receptive to
full scale Learning Management Systems (LMS). While everyone can appreciate the
benefit of LMS, very few are willing to inflict on their business the cost and
disruption that an LMS implementation entails.
DACG has found ready acceptance for The Learning Center, its on-line
repository for learning and support content which sells at a fraction of the
cost of a full scale LMS. The Learning Center is simple and painless to
install; it uses content that DACG has already developed over the course of a
project. It differs from an LMS in that it only affects employees who will be
end-users. In the course of a typical project, DACG will have already done
significant work in Change Management for these people, and that can be
re-cycled into The Learning Center.
Page 4 of 59
The Company expects to see continued growth in its software tool market,
both its own and those of its Alliance Partners.
PRODUCTS AND SERVICES
The Company delivers employee support solutions designed to secure the
return on information technology investments of its clients that take into
account an organization's individual needs, resources, and requirements. New
technology has a significant impact on the business processes of a corporation.
Managing a smooth transition during the implementation of a new system, and
providing support for end users in the future is essential.
DACG reviews the procedures and tasks that client employees will need to
learn once the new system is in place and incorporates them into the end-user
support.
DA Passport provides on-line context sensitive end-user support, customized
to individual jobs.
DACG's proprietary methodology, DA Cornerstone(TM) supports all the project
work undertaken by the Company.
Learning and Change Management
Change management is another DACG deliverable. Companies transforming
themselves into continuously learning organizations commit themselves to long
term change. Clients' employees are affected by this change, seeing it on the
desktop in new software and in day-to-day business activities in new procedures
and policies. A first step in managing this change is establishing executive
management support. However, the real key to successful cultural transformation
is eliciting the support of employees, as well as those within the extended
enterprise, such as customers and suppliers. Effective utilization of new
technology is critical to the success of the learning organization. Common
change management deliverables provided by the Company include kick-off
meetings, speeches, facilitated collaborative work groups, multimedia
presentations, video presentations, and newsletters. These deliverables, in
addition to providing critical information, help to ensure a successful and
ongoing cultural transformation.
Education
The Company develops educational programs customized to individual client's
needs, taking into account the client's infrastructure and resources, the scope
of the client's information technology system, language and cultural
requirements. In order to influence the way an employee works while getting the
best out of a new system, DACG develops training programs that focus on specific
end-user job responsibilities, as well as the overall business processes that
impact the end-user. DA Foundation is a library of training content material
collected over the years that the Company can draw on for these projects.
The Company consults with the client to determine the appropriate format
for delivering training such as instructor-led training, computer-based
training, and e-Learning. Most clients choose a combination of instructor led
and on-line training, supported by DA Passport and The Learning Center
post-implementation.
Many companies, particularly those with large and geographically dispersed
operations, are increasingly seeking ways to use computer-based training to
decrease costs and minimize employee time away from the job. DACG offers both
custom and off the shelf computer-based training modules.
DACG offers both synchronous and asynchronous capabilities for
computer-based distance learning. Using Symposium software from Centra Software,
Inc., DACG provides synchronous distance learning, where many students can
follow a single event. DACG provides asynchronous distance learning through
custom courses that allow students to work independently and at their own pace.
Both of these methods are used by companies with remote user audiences and
require only basic information technology infrastructures because they involve
distributing content by wide area networks (WAN), corporate intranets, and audio
conferencing technology. Typically a client implementing an ERP system or
another new business technology will have the required infrastructure already in
place. E-Learning is effective in situations where travel, time away from work
and cost are important.
Page 5 of 59
Performance Support
A critical component of the Company's end-user support solution is the
documentation of business processes. DACG's documentation is designed to support
employees during training and after implementation. The best support should be
readily accessed on-line without interrupting the task in hand because the real
cost of training is the cost of time off the job. Giving an end-user exactly
the information required to perform a specific procedure is crucial to getting a
return on investment from a new system.
DACG consultants work with each client to assess ongoing documentation and
performance support needs of the particular audience of end users. Using DA
Foundation as a resource, the Company develops support content, creating clearly
defined policies, processes, and procedures which the end user will follow in
the future in conjunction with the new technology.
More sophisticated performance support solutions are delivered via the
client's corporate intranet. Clients are offered a choice of support media
according to need, budget and time constraints. Quick reference guides and
printed documentation in hard copy are used less often, but can be useful in
certain circumstances.
DA Passport is the Company's electronic performance support system
("EPSS"). It provides comprehensive end-user support on-line at the desktop,
minimizing interruptions to end users. DA Passport is context sensitive, which
means it can track the location of end-users in the client's ERP system. It
provides support on a particular application in use at transactional or task
level. DACG can link system tasks, business procedures, training, and
computer-based training files to ERP transactions using DA Passport technology
to provide sophisticated support to end-users.
CLIENTS AND REPRESENTATIVE ENGAGEMENTS
The Company provides custom support solutions around the world to large and
mid-sized companies, many of which have information intensive, multinational
operations. The Company has provided services to more than 720 clients,
including many of the world's leading corporations in a broad range of
industries, including oil and gas, information technology, pharmaceutical,
chemicals, utilities, telecommunications, consumer products, and manufacturing.
The Company's ten largest clients, in the aggregate, accounted for
approximately 55% , 61% and 59% of its billed hour revenue in 2000, 2001 and
2002, respectively. One client accounted for approximately 18% and 12% of the
Company's revenue in 2001 and 2002, respectively. The possible loss of the
Company's largest customer, Unilever, would have a significant impact upon the
Company. The following is a selection of DACG's 2002 clients and representative
engagements.
Unilever
Unilever is one of the largest consumer goods businesses in the world.
Unilever operates with two global divisions: Unilever BestFoods whose top
performing categories are Spreads, Dressings and Leaf Tea, and include brand
names such as Flora, Lipton and Knorr; Unilever Home and Personal Care, whose
broad range of categories includes fabric cleaning, deodorants, oral care,
household cleaning, and hair care with brand names such as Dove, Domestos,
Timotei and Persil.
Each of these divisions is implementing and upgrading SAP and DACG is
providing the education solution for both. By adopting common information
systems and sharing best practices Unilever will achieve better cost-control as
well as visibility of costs. All in all, Unilever intends that the introduction
of common business practices and systems will support profitable growth for the
company.
DACG was awarded Gold at the 2002 IT Training Awards, for working with
Unilever providing education solutions. The multilingual project included
delivery in seven different languages to countries across Europe and encompassed
cutting-edge technology, change communications, innovative training and support
techniques, and strong project management. DACG developed a tailor-made
electronic performance support solution using DA Learning Center, a web-enabled
flexible learning management tool to deliver custom training programs to over
20,000 employees. DACG used a sophisticated context-sensitive end-user help
tool, DA Passport, that delivers customized business process and application
support on demand to the employee's desktop. The repository provides access to
role-based business processes, mapped by DACG, designed to increase user
productivity.
Diageo
Diageo, the world's leading player in the premium drinks industry, was
formed out of the 1997 merger of Guinness and GrandMet. The move amassed a large
number of premium brands, such as Guinness, Smirnoff, Baileys and Johnnie
Walker.
Page 6 of 59
DACG was contracted by Diageo Business Services (DBS) in May 2001 as a
training partner to develop an on-line learning solution, to support business
service centres within Europe and North America, as well as other business units
within these regions. DBS is responsible for creating effective global process
solutions for finance and HR functions, such as dealing with customers,
suppliers and employees, paying bills and taking orders. The project encompasses
implementation of SAP 4.6, PeopleSoft 8.s and Concur (Travel and Entertainment
software).
A detailed training needs analysis revealed that a new solution had to be
developed to manage and store all the business process documentation. DA
Learning Centre was used to create documentation from the system blueprint
facilitating use of an online help system called DA Passport. On line
simulation lessons are delivered using the web-enabled front end. Classroom
training is delivered from the same materials. Competencies are checked by post
training tests and role playing business scenarios. The results are analyzed
using DA Reporter. The worldwide program will be delivered to around 15,000
people and each training implementation will be customized to suit the needs of
the specific individual market.
GlaxoSmithKline
GlaxoSmithKline (GSK) is a world leading research-based pharmaceutical
company in four major therapeutic areas - anti-infectives, central nervous
system (CNS), respiratory and gastro-intestinal/metabolic. In addition, it is a
leader in the important area of vaccines and has a growing portfolio of oncology
products. GSK's mission is to improve the quality of human life by enabling
people to do more, feel better and live longer. Headquartered in the UK and
with operations based in the US, the company is one of the industry leaders,
with an estimated seven per cent of the world's pharmaceutical market. The
company also has a Consumer Healthcare portfolio comprising over-the-counter
(OTC) medicines, oral care products and nutritional healthcare drinks, all of
which are among the market leaders. GSK has over 100,000 employees worldwide.
GlaxoSmithKline realized the need to upgrade their enterprise resource
planning system, SAP, and turned to DACG to support them for their
end-user-training program from SAP R/3 to version 4.6. DACG performed an initial
training needs analysis and developed a targeted training concept, delivering
documentation solutions with the use of help cards and bespoke training
workshops aimed at ensuring staff self sufficiency and a high knowledge of the
system. DACG also produced customized courses, reference-based training,
workshops and technical and instructional post go-live support.
Airservices Australia
Airservices Australia is a government-owned commercial authority
responsible for the provision of safe and environmentally sound air traffic
management, and related services, to the aviation industry in the Australian
Flight Information Region. The Australian Flight Information Region includes
Australia's sovereign airspace as well as international airspace over the
Pacific and Indian oceans, encompassing approximately 11 percent of the world's
airspace. Airservices Australia provides air traffic management and related
services such as, in route and terminal air traffic services; aeronautical data
services, tower services, aviation rescue and fire fighting services, design and
management of airspace usage; and the management of the Australian national air
navigation infrastructure. Airservices Australia provides services to over
three million aircraft movements annually at 600 sites around Australia.
Airservices Australia is undergoing an SAP implementation in Canberra and
Brisbane focusing on essential business components which include, procurement
and billing; rostering and payroll; asset management and maintenance; customer
relationship management; and executive information systems. Included in the
project will be the enhancement of the core SAP R/3 implementation with four key
SAP Extended Enterprise Solutions to include Strategic Enterprise Management,
Business Warehouse, Enterprise Buyer Professional and SAP Portals.
DACG was selected to implement a comprehensive Change Management and
Learning solution. Phase I: Planning and Strategy of Change Management has been
completed with a focus turning toward Phase II: Transition of Management
activities. These include change sponsor and change agent management and
development, communications, and regular change readiness assessment. The
Learning solution is powered by DACG's Learning Centre, a portal to all the
training and support materials required by Airservices Australia. The objective
is to complete a blended learning solution, incorporating SAPTutor and
traditional instructor-led materials.
Chubb PLC
Chubb is a leading worldwide security services provider, differentiated
from its international competitors by the breadth of its security services
offering and its ability to integrate these services for the benefit of its
customers. These services include electronic access control, intrusion
detection, CCTV, fire detection and suppression systems, alarm monitoring,
emergency response and security personnel services. The Chubb brand has
provided security applications for 184 years. The company has over 49,000
employees and two million customers around the world, with leading market
position on four continents.
Page 7 of 59
Chubb is currently implementing the Atlas Program, a global business
solution using PeopleSoft. Upon completion this solution will impact up to
49,000 employees in more than 11 countries over the next two to three years.
DACG has been chosen to manage and provide a comprehensive Learning and
Performance solution for the Atlas Program. The solution includes a combination
of e-learning lessons, OnDemand Personal Navigator system simulations and more
traditional instructor-led materials. These components are then integrated
using the DA Learning Centre, DACG's learning and performance support portal.
RMC Group p.l.c.
RMC Group p.l.c. is one of the world's leading producers of building
materials with operations in 27 countries and a global turnover in excess of 5
billion. Established in 1930, the company employs over 31,000 people worldwide,
8,000 of whom work in RMC's four core businesses in the UK producing ready mixed
concrete, cement, aggregates and concrete products.
In order to combat increasing competition within the marketplace, RMC
decided it needed to undertake a major change to its UK business. This meant
reducing its cost base by becoming more efficient, and increasing revenue by
improving its business practices and streamlining processes. RMC decided to
implement SAP 4.6 and required a comprehensive training programme to ensure that
employees at all levels - across 400 UK locations - would be able to make the
most of the IT investment.
The program involved the training in two of the company's divisions
Readymix and Aggregates as well as the new Shared Service Centre. DACG employed
a variety of training methods, including computer-based training and
instructor-led classroom training. One of the most important elements of the
computer-based training was the introduction of a Learning Gateway, RMC's
version of DACG's proprietary DA Learning Centre(TM) which features full details
of all training courses, course codes and training materials that were
specifically developed for the RMC project. This information can be easily
accessed by staff wherever they are located, and was vital if the tight
timescales were to be met, with minimal disruption to the business. This,
together with a planned series of classroom-based courses, formed part of a
'blended approach', which, for many users, included basic training on IT systems
so they could be competent and confident. Additional elements for post-go-live
support included face-to-face coaching or floor-walking, coaching and monitoring
to ensure a comprehensive result. By the end of the project, DACG's consultants
provided 7,217 delegate training days in four waves, each of four weeks.
Alstom
ALSTOM's Lincoln-based Gas Turbine business (part of ALSTOM, the global
specialist in energy and transport infrastructure) manufactures a range of Gas
Turbines and focuses on the operational efficiency and quality of power
generation systems; continually strengthening it's position in the gas turbine
market by producing new and more competitive products.
SAP was implemented consolidating over 400 disparate IT systems across the
business with a single integrated ERP system enabling faster access to better
quality information while adopting a common information system. Sharing best
practice will also deliver better cost-control and visibility at the same time
as supporting profitable growth for the company.
A blended training approach has been achieved via a mixture of traditional
instructor led training and facilitated courses using simulated training
exercises all accessible for post-training support 24-hours a day, 365 days a
year through ALSTOM's customised web portal, the DACG Learning Centre. 54
training courses have been developed and over 500 simulation lessons have been
created (plus additional training support items - helpcards). Training
attendance figures are averaging at 95% and quality of instructional delivery is
scoring an average of 90%. The Learning Centre has proved an easy and intuitive
tool, which has been well accepted by the end-user audience.
24seven Utility Services Limited
24seven Utility Services Limited is a 300m utility network operator,
serving 5.3 million homes and businesses in South East and East Anglia - that's
about one in four of the UK's population. Since January 2002, the company has
been a wholly owned subsidiary of LE Group, a part of the giant international
utility, EDF. At its inception in April 2000, the company inherited a number of
legacy systems. The company's growth aspirations, coupled with its commitment to
efficiency, led to a decision to implement SAP.
Page 8 of 59
DACG was selected as 24seven's Training and End User Support partner for
the SAP implementation and worked closely with the 24seven project team to
develop a full suite of Reference Based Training materials to cover the SAP
modules of Work Management, Projects, Finance, Controlling, Purchasing and
Inventory Management. These materials were supported by the creation of
customised STT (Simulation Training Tool) simulation lessons, which provide a
safe and realistic learning environment for the new users. The training and
support materials were made available to all users via DACG's Learning
Centre(TM), which was specifically customised for 24seven. The final piece in
the support puzzle was DA Passport(TM), DACG's proprietary Electronic
Performance Support System (EPSS) which provides a context-sensitive link to a
24seven customised on-line help system for all users from within their SAP
transactions.
24seven chose 25 employees from across the business areas as Local
Champions to deliver training for each project. Each successfully completed a
Train the Trainer course from the DA DiplomA certification programme and was
subsequently trained on the relevant SAP functionality by DACG. They then
delivered the courses themselves. Several months later, DACG returned to the
site to perform a User Performance Gap Analysis, using their post go-live
analysis methodology DA Snapshot. The findings of the DA Snapshot report
prompted 24seven to engage DACG to carry out a refresher and ongoing support
and change communications programme. Training feedback evaluations revealed that
92% of the participants now feel much better prepared to do their SAP tasks.
The following is a sample list of clients that the Company provided
services for during 2002:
24seven Utility Services Edeka Novartis
Abbott Laboratories Georgia Pacific Ortho-Clinical Diagnostics
Agriculture Fisheries & Forestry (AFFA) GlaxoSmithKline PaperlinX
Airservices Australia Guinness Pfizer Canada
Alstom Hampshire County Council PWC Consulting
Australian Defence Organisation Infineum RMC Limited
BBC Jacobs Bakery Ltd. Robert Bosch Australia
BHP Billiton KPMG Royal & Sun Alliance
BNFL Karstadt STN Atlas
Basell International Kuwait Petroleum Schneider Electric
Castle Cement Linde Gase Schneider Foods
Centrelink Linfox Sydney Ports
Christian Dior NSW Dept. of Community Services Toyota Australia
Chubb PLC NSW Dept. of Transport UDV Diageo
Citibank NSW Roads & Traffic Authority UK College of Environment & Transport
Damovo Newmont Unilever
Diageo
COMPANY ORGANIZATION AND PROJECT MANAGEMENT METHODOLOGY
Organization
The Company has three principal operating divisions: the Americas, which
includes the USA and Canada; Europe, which includes the UK, France and Germany
as well as mobile services provided in other European countries; and Asia
Pacific, which includes operations in Australia and mobile services provided in
Asia.
Within each division there are administrative, sales and marketing and
operations functions. Administration consists of finance, human resources and
management information services. Operations performs all of the functions of
the consulting services and product implementation and support.
The Company has two corporate functions: research and development and
corporate management. Research and development is responsible for on-going
support of software products as well as the development of new products.
Corporate management consists of the offices of the CEO, CFO, and COO.
Project Methodology Management
The Company's DA Cornerstone(TM) project management methodology is
essential to its delivery of quality end-user support solutions. DA Cornerstone
is a comprehensive six phase, end-user support methodology that addresses key
end-user support program deliverables, activities, and milestones throughout the
lifecycle of a business information technology implementation. Each phase has
associated tools that facilitate the completion of activities and deliverables.
Page 9 of 59
DA Cornerstone phases include:
Analyze: DACG analyzes the client needs, resources, and requirements
and submits to the client an end-user support strategy and
proposed deliverables for approval.
Prototype and When the strategies are approved, DACG designs,
Designs deliverables and establishes appropriate development
strategies. The client must approve the strategic program
design.
Develop: DACG executes the strategies and submits all deliverables
For frequent internal and client review.
Implement: DACG delivers the final work to the end-users.
Evaluate: After implementation and as part of the services to the
client, DACG evaluates the effectiveness of the services
using appropriate tools.
Support: DACG will arrange and set up the post implementation and
long-term maintenance strategy for the educational program,
end-user support, change communications or other programs
created by DACG for the client.
The Company's project staff develops each end-user support component
through an iterative draft and review process that directly involves client
end-users in the development of content specific to their needs. This review
process typically consists of three stages and has quality control steps
embedded in each stage as formal checkpoints. These checkpoints are intended to
ensure that the client is satisfied with the deliverables, that the content is
accurate and adheres to the Company's own standards, and that the project is
delivered in a cost-effective and timely manner. The success of a given project
engagement from a cost, time, and client satisfaction standpoint is the
responsibility of the assigned operations and project managers.
SALES AND MARKETING
The Company generates business through a field sales force that sells
directly and pursues referrals and trade show leads. In addition, the Company
co-markets, sometimes in joint sales calls and marketing materials, with its
Alliance Partners.
The Company's direct sales efforts are the responsibility of 23 full-time
sales and marketing personnel, most of whom have either a local or regional
territory. The sales personnel generate leads from several sources, including
referrals from the Company's existing clients and from attendance at industry
trade shows. The Company also uses Internet-based marketing, tele-marketing,
direct mail, corporate presentations, joint marketing events, and networking
through regional business communities to generate potential sources for new
business. In 2003, the Company plans to focus its marketing on the ERP, CRM and
e-Learning marketplaces.
The Company maintains partnerships with integrators and providers of tools
for use in documentation and training such as Global Knowledge, X-ayce
InterWise, X-Help and Axon. The Company develops and delivers to potential
clients proposals in collaboration with Strategic Alliance Partners, including
proposals covering software applications, software implementation services, and
end-user support solutions.
The Company's services require a substantial financial commitment by
clients and, therefore, typically involve a long sales cycle. Once a lead is
generated, the Company needs to understand quickly the potential client's
business needs and objectives in order to develop the appropriate solution and
bid accordingly. The Company's operations and project managers are involved
throughout the sales cycle to ensure mutual understanding of client goals,
including time to completion and technological requirements. Sales cycles for
end-user support solution projects typically range from one to six months from
the time the Company initially meets with a prospective client until the client
decides whether to authorize commencement of an engagement. The retention of the
Company typically occurs at the beginning of the design/prototype stage of the
software implementation.
RECRUITING AND PROFESSIONAL DEVELOPMENT
As of February 28, 2003, DACG's personnel consisted of 159 billable
employees, 23 sales and marketing personnel, 2 development staff and 28
administrative employees. The Company believes that its success depends on its
ability to attract, retain, and motivate talented, creative, and professional
employees at all levels. For core business, the Company seeks to hire personnel
with prior consulting experience in end-user education programs, education
professionals with a background in information technology, and information
technology professionals with education or communication program experience.
Strong project management, analytical and communications skills and
international experience are also considered. Recruiting is coordinated
Company-wide through the Company's human resources department.
Page 10 of 59
Training and mentoring are integral parts of the Company's staff
development program. The Company's training programs ensure that its
professional staff understands the impact of technology on people, is able to
communicate effectively at all levels within a client organization, and has the
ability to communicate with its clients' technical, business and management
staff to provide value-added content to its clients. Ongoing training includes
in-house and external training. In-house training includes basic training, more
detailed software education, project management, consultancy skills, and
leadership training. The use of DA Foundation materials and the application of
performance support technologies such as DA Passport and The Learning Center are
also covered. In addition, all consultants are required to attend a DA
Cornerstone methodology training program, and to be approved for its use before
being assigned to any consulting project.
The Company believes that its culture is central to its ability to attract
and retain highly skilled and motivated professionals. Extensive technical,
management, and sales training enable DACG professionals to expand their skills
and attain increasing levels of responsibility within the organization. The
technical career path provides opportunities for advancement outside the
traditional management career ladder. The technical career path builds
technical skills, provides compensation incentives, and at a macro level,
supports the development of DACG's current and future core competencies. Through
planned job assignment and rotations, special projects and structural
development events, high potential management candidates are prepared to assume
greater management roles. The Company attracts and motivates its professional
and administrative staff by offering competitive packages of base and incentive
compensation and benefits. All professional staff members are eligible for
bonuses. The Company appreciates the importance of recognition and a promotion
track for its administrative staff and fully integrates its staff into the
conduct of its business. All of the Company's employees are eligible to receive
stock options.
During 2000, the Company rolled-out its internal implementation of a
learning management system, eCampus, based on its Dynamic IQ platform.
Additionally, the company is providing employees with access to SkillSoft
courses as part of its commitment to distribute SkillSoft content. All
employees have received training on e-Campus and are developing personal
development plans, including mentoring programs.
RESEARCH AND DEVELOPMENT
DACG established a research and development department in 1995 to support
and maintain its end-user support content and consulting methodologies. During
2000 the primary focus of this department was the development of Dynamic IQ, a
virtual learning environment with complementary consulting services and ongoing
maintenance of DA Passport, DA Foundation, the Company's proprietary toolset
used for rapid deployment of end-user support solutions. During 2001 and 2002
the primary focus was on the modification of tools to work with a broader range
of software.
The Company's research and development department continually applies
technology developments to the Company's content and tools. As technology
advances, DACG has kept pace, expanding its deliverables from traditional hard
copy materials and instructor led training to include on-line documentation,
multimedia training, employee performance support systems, e-learning and
web-based education and performance support solutions. The Company will maintain
its commitment to innovative and collaborative research and development and
anticipates a broadening of this function through partnering. Development
expense was $3.7 million, $0.7 million and $0.2 million for the fiscal years
2000, 2001 and 2002, respectively.
COMPETITION
The global markets for end-user performance support services for business
information technology and e-Learning services are large, highly fragmented,
change rapidly, and are subject to low barriers to entry. DACG has various
market areas for competition, including:
- - Competition from the ERP software developers and other applications
developers, which includes the software that DACG trains on, including SAP
and other vendors;
- - Competition from large international systems integrators, such as the
consulting practices of the large international accounting firms, which are
focused principally on systems integration and implementation but also
provide end-user support as a secondary service;
Page 11 of 59
- - Competition from the professional services groups of many large technology
and management consulting companies and a large number of smaller
organizations that specialize in employee support services, generally
serving a limited geographic area and having a smaller base of technical
and managerial resources;
- - Competition if clients elect to use internal resources to satisfy their
needs for training services the Company provides; and
- - In e-Learning, the Company faces a number of competitors in the form of
software start-ups, established software companies and consulting companies
as well as other niche operators.
In all markets, DACG faces competition for client assignments from a number
of companies having significantly greater financial, technical, marketing
resources and name recognition. The Company believes key competitive factors
forming the basis upon which these companies compete are experience, reputation,
industry focus, international presence, service and technology offerings, and
price relative to the value of the services provided.
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(TM) and computer-bas ed training software), the benefit of
which the Company provides to the client by royalty-free license.
Dynamic IQ, DA Foundation(R), DA Team Teach(R) and DA Consulting Group(R)
are registered trademarks and/or service marks of the Company. The Company also
claims common law trademark rights in DACG and design, the globe and temple
logo, Fast Implementation Toolkit(TM), Fast Implementation Toolset(TM), DA
Cornerstone(TM), and DA Passport(TM), for each of which the Company has filed an
application for registration in the United States Patent and Trademark Office.
Furthermore, the Company claims common law trademark rights in DACG(TM), DA
FIT/Fast Implementation Toolkit(TM), FastED(TM), DA ASK(TM), DA Quickweb(TM), DA
Learning Centre, DA Learning Center, DA Reporter and the slogan mark "Solutions
for People and Technology"(TM), but as to these has decided at present not to
file applications for trademark registration. The Company holds no patents.
The Company has registered the copyright in the computer programs titled "DA
Basic Skills Training for SAP R/3" and "DA Basic Skills Training for SAP R/3
v2.0 US." The Company also claims the copyright in numerous other works and may
elect to register such copyrights on a case-by-case basis.
RISK FACTORS
History of losses
The Company has incurred losses before income tax totaling approximately
$20.6, $3.2, and $1.6 million during 2000, 2001 and 2002, respectively. The
Company began a restructuring process in 2000, which was completed during 2001.
There can be no assurance that overall profits will be achieved in the future as
a result of this process. Thus, the Company may be required to record
additional charges to decrease the carrying value of the deferred tax asset.
Our business operations are dependent on SAP and the ERP software market.
A substantial portion of our revenue is derived from the provision of
end-user support services in connection with ERP software implementations by our
clients. These relationships and authorizations are generally subject to
termination on short notice. In addition, these licensors could further modify
their software in order to make the implementation cycles for its new releases
shorter and less complicated, thereby possibly reducing the need for customized
end-user support, or they could increase their provision of end-user support
services for their software applications. Software vendors are currently
customers and direct competitors. They could also cease referring us to their
customers as a provider of end-user support services. Any one or more of these
circumstances could have a material adverse effect on our business and revenue.
Page 12 of 59
We may not be able to keep up with rapid technological changes.
Our future success will depend on our ability to gain expertise in
technological advances, such as the latest releases from ERP software vendors,
and to respond quickly to evolving industry trends and client needs. Our efforts
to gain technological expertise and to develop new technologies require us to
incur significant expense. There can be no assurance that we will be successful
in adapting to these advances in technology or in addressing changing client
needs on a timely basis. In addition, there can be no assurance that the
services or technologies developed by others will not significantly reduce
demand for our services or render our services obsolete. Any significant
reduction in the demand for our services will have a material adverse effect on
our results of operations.
Our stock price has been volatile.
Stock prices may be subject to wide swings, particularly on a quarterly
basis, in response to variations in operating and financial results,
fluctuations in earnings, competitive pressures, market place conditions,
failure to meet revenue expectations and other similar factors. It is difficult
to forecast the timing of revenue because project cycles depend on factors such
as the size and scope of assignments, circumstances specific to particular
clients or industries, the number and nature of client projects commenced or
completed during a period, and the utilization rates of our professional staff.
Were we to fail to meet expectations of our anticipated revenue in a period, or
if we were to experience a negative change in our perceived long-term growth
prospects, either would likely have an adverse effect on our stock price.
The shares of our stock were previously listed on The NASDAQ National
Market (the "National Market"). We received notification from Nasdaq on August
23, 2002 (the "Nasdaq Notification") that our common stock would be delisted
from the National Market because we did not comply with Nasdaq's minimum bid
price requirements. Specifically, we did not comply with NASD Marketplace Rule
4450(a)(5) when the bid price of our common stock closed at less than $1.00 per
share for 30 consecutive trading days.
Nasdaq approved the transfer of our common stock to the SmallCap Market
effective September 2002. As does the National Market, the SmallCap Market
requires listed companies to have a minimum closing bid price of $1.00 per
share. As such, we have been afforded a grace period to evidence compliance with
the $1.00 minimum closing bid price requirement. Subsequent correspondence from
Nasdaq following the Nasdaq Notification provided us until June 3, 2003 to
achieve compliance with the bid price requirement. This subsequent
correspondence made reference to proposed revisions to Marketplace Rule 4310
providing that SmallCap issuers that satisfy one of several minimum requirements
would be granted at least one additional 180-day grace period to satisfy the
minimum bid requirements. Nasdaq has since adopted these revisions to
Marketplace Rule 4310 and, as a result of this adoption, the grace period may
(but not necessarily will) be extended past the specified June 3, 2003 date. If
so extended, it is unclear how much of an extension we would receive.
If during the grace period, the closing bid price of our common stock is
$1.00 per share or more for 10 consecutive trading days, we will have regained
compliance with Nasdaq's minimum bid price requirements and may also be
eligible to transfer our common stock back to the Nasdaq National Market,
provided that we have maintained compliance with other continued listing
requirements on that market. If during the grace period, the closing bid price
of our common stock remains below $1.00, we will be deemed to be out of
compliance with the Nasdaq requirements and will have to explore certain
avenues, including a potential reverse stock split, to increase our stock price
above $1.00 and thus regain compliance. There can be no assurance that we will
be able to maintain our Nasdaq listing beyond June 3, 2003 or in the future.
Our failure to meet Nasdaq's maintenance criteria may result in the
delisting of our common stock from Nasdaq. In such event, trading, if any, in
our common stock may then continue to be conducted in the non-Nasdaq
over-the-counter market in what are commonly referred to as the electronic
bulletin board and the 'pink sheets'. As a result, an investor may find it more
difficult to dispose of or obtain accurate quotations as to the market value of
our common stock. Additionally, delisting of our common stock would also make
it more difficult for us to raise additional capital. We would also incur
additional costs under state blue-sky laws to sell equity if we are delisted.
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 large systems consulting and
implementation firms and large general management consulting firms. Many of
these competitors have significantly greater financial, technical and marketing
resources and greater name recognition. Such advantages may enable these
competitors to attract more clients and provide faster service at less cost. In
addition, our potential clients have increasingly decided to dedicate sufficient
internal resources to performing the services that we provide "in house",
particularly where these resources represent a fixed cost to the client. We are
also increasingly finding that software licensors are implementing their own
software packages, as well as educating their customers' employees in how to use
them. Such competition may impose additional pricing pressures. We expect that
the level of competition will remain high in the future. Increased competition
could have a material adverse effect on our ability to profitably operate our
business.
We may not be able to attract and retain qualified information technology
consultants.
Our continued success will depend in large part on our ability to attract,
retain and motivate highly skilled employees, particularly project managers and
other senior technical personnel. The qualified project managers that we require
are in great demand and are likely to remain a limited resource for the
foreseeable future. Many of the companies with which we compete for qualified
professionals have substantially greater financial and other resources than we
do. There can be no assurance that we will be able to recruit, develop, and
retain a sufficient number of highly skilled, motivated professionals to compete
successfully. In addition, competition for qualified personnel may also lead to
increased costs for such personnel which we may not be able to offset by
increases in billing rates. The loss of a significant number of professional
personnel is likely to have a material adverse effect on us, particularly our
ability to complete existing projects or secure new projects.
Failure to adequately estimate costs, or efficiently manage fixed-bid and
not-to-exceed projects could have a material adverse effect on our
profitability.
Certain of our projects are undertaken on a fixed bid basis, pursuant to
which we charge our clients a flat rate for our services, or on a not-to-exceed
basis, pursuant to which we limit the maximum fee that we will charge our
client. For the year ended December 31, 2002, we realized the majority of our
revenue from fixed-bid or not-to-exceed projects. Were we to fail to adequately
estimate the actual cost to us of completing a project under the guaranteed
not-to-exceed or fixed fee price set forth in certain of our contracts, or were
we to fail to efficiently manage these projects after entering into the
not-to-exceed or fixed fee contract, we could become exposed to unrecoverable
budget overruns, which could materially adversely affect our profitability.
Additionally, client engagements are generally terminable with little or no
notice or penalty, and our failure to meet a client's expectations could damage
our relationship with that client and cause the client to terminate our
engagement. A client's unanticipated decision to terminate or postpone a
project may result in higher than expected numbers of unassigned professionals
or severance costs, which could materially adversely affect our results of
operations.
Page 13 of 59
We do not have any patents to protect our intellectual property rights from
misappropriation.
Our success in the information technology services business depends upon
our software deployment and methodology and other proprietary intellectual
property rights. We do not hold any patents. We rely on a combination of trade
secret, nondisclosure and other contractual arrangements and technical measures,
and copyright and trademark laws to protect our proprietary rights. We generally
enter into confidentiality agreements with our employees, consultants, clients
and potential clients and limit access to and distribution of our proprietary
information. There can be no assurance that the steps that we have taken will be
adequate to prevent misappropriation of our intellectual property rights or that
third parties will not independently develop functionally equivalent or superior
methodologies or software. Moreover, there can be no assurance that third
parties will not assert infringement claims against us in the future that would
result in costly litigation or license arrangements regardless of the merits of
such claims. Additionally, because our engagements are typically work-for-hire
based, we assign ownership of, or grant a royalty-free license to use, the
materials that we develop specifically for our clients to those clients upon
project completion.
Significant exposure to international markets.
We currently have international operations in Singapore, Australia,
England, France, Germany and Canada. As of December 31, 2002, 83% of our
revenue resulted from our international operations. The successful operation of
such geographically dispersed offices requires considerable management and
financial resources and results in significant ongoing expense. International
operations and the provision of services in foreign markets are subject to risks
involving trade barriers, exchange controls, national and regional labor
strikes, civil disturbances and war, and increases in duties, taxes, and
governmental royalties, multiple and possibly overlapping tax structures, as
well as changes in laws and policies governing operations of foreign-based
companies. We may also experience difficulties relating to the global
administration of our business. Any of such factors may have a material adverse
effect on the Company.
ITEM 2. PROPERTIES
Recognizing the global nature of the information technology market and the
importance of being able to serve multi-national clients, the Company has built
a substantial international presence and provides services in North America,
Europe and Asia-Pacific. The Company has offices in the U.S., Canada, United
Kingdom, France, Germany and Australia. The Company's headquarters is at 5847
San Felipe, Suite 1100, Houston, Texas. This lease expires in July 2004. The
Company also maintains foreign offices in Toronto, London, Paris, Melbourne,
Sydney, Essen and Canberra. The Company has operations in Dallas, Chicago,
Philadelphia, Boston and New York, but does not maintain a physical office. Each
operation is located near one or more significant clients of the Company, and
the physical facilities have terms that will expire between one and five years
(exclusive of renewal options exercisable by the Company). All of the Company's
operations are electronically linked together and have access to all of the
Company's capabilities and core consulting tools. From time to time, the Company
uses office space provided at client sites to facilitate performance of its
services and maximize client contact. Where the Company operates in areas
without an established office, operations are handled on a mobile basis with
corporate support being delivered from one of its regional centers in Houston,
London or Sydney. The Company believes its current facilities are adequate for
its needs.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is a party to routine litigation in the
ordinary course of business. The Company does not believe that such litigation
will have a material impact on the financial statements.
Page 14 of 59
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on November 20, 2002,
the shareholders of the Company voted on the following matter:
Approval for the election of two Class A Directors, Nigel W.E. Curlet and
Gunther E.A. Fritze.
The voting results were as follows:
Votes For Votes Abstained
--------- ---------------
7,310,665 231,562
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock has traded under the symbol "DACG" on The NASDAQ
SmallCap Market (the "SmallCap Market") since September 2002, and on The NASDAQ
National Market (the "National Market") from April, 1998 until September 2002.
The following table sets forth, for each quarterly period indicated, the high
and low closing sale price for the common stock as reported by the National
Market and the SmallCap Market (as the case may be).
2001 High Low
- ----------- ----- -----
1st Quarter $1.63 $0.66
2nd Quarter 1.80 1.25
3rd Quarter 1.60 0.31
4th Quarter 0.35 0.14
2002
- ----------- ----- -----
1st Quarter $0.93 $0.24
2nd Quarter 1.25 0.40
3rd Quarter 0.44 0.16
4th Quarter 0.36 0.09
We received notification from Nasdaq on [August 23], 2002 (the "Nasdaq
Notification") that our common stock would be delisted from the National Market
because we did not comply with Nasdaq's minimum bid price requirements.
Specifically, we did not comply with NASD Marketplace Rule 4450(a)(5) when the
bid price of our common stock closed at less than $1.00 per share for 30
consecutive trading days.
Nasdaq approved the transfer of our common stock to the SmallCap Market
effective September 2002. As does the National Market, the SmallCap Market
requires listed companies to have a minimum closing bid price of $1.00 per
share. As such, we have been afforded a grace period to evidence compliance with
the $1.00 minimum closing bid price requirement. Subsequent correspondence from
Nasdaq following the Nasdaq Notification provided us until June 3, 2003 to
achieve compliance with the bid price requirement. This subsequent
correspondence made reference to proposed revisions to Marketplace Rule 4310
providing that SmallCap issuers that satisfy one of several minimum requirements
would be granted at least one additional 180-day grace period to satisfy the
minimum bid requirements. Nasdaq has since adopted these revisions to
Marketplace Rule 4310 and, as a result of this adoption, the grace period may
(but not necessarily will) be extended past the specified June 3, 2003 date. If
so extended, it is unclear how much of an extension we would receive.
If during the grace period, the closing bid price of our common stock is
$1.00 per share or more for 10 consecutive trading days, we will have regained
compliance with Nasdaq's minimum bid price requirements and may also be
eligible to transfer our common stock back to the Nasdaq National Market,
provided that we have maintained compliance with other continued listing
requirements on that market. If during the grace period, the closing bid price
of our common stock remains below $1.00, we will be deemed to be out of
compliance with the Nasdaq requirements and will have to explore certain
avenues, including a potential reverse stock split, to increase our stock price
above $1.00 and thus regain compliance. There can be no assurance that we will
be able to maintain our Nasdaq listing beyond June 3, 2003 or in the future.
Our failure to meet Nasdaq's maintenance criteria may result in the
delisting of our common stock from Nasdaq. In such event, trading, if any, in
our common stock may then continue to be conducted in the non-Nasdaq
over-the-counter market in what are commonly referred to as the electronic
bulletin board and the 'pink sheets'. As a result, an investor may find it more
difficult to dispose of or obtain accurate quotations as to the market value of
our common stock. Additionally, delisting of our common stock would also make
it more difficult for us to raise additional capital. We would also incur
additional costs under state blue-sky laws to sell equity if we are delisted.
No dividends were declared on the Company's common stock during the
years ended December 31, 2001 and 2002, and the Company does not anticipate
declaring dividends in the foreseeable future.
As of March 28, 2003 there were approximately 100 shareholders of
record and 952 beneficial shareholders.
RECENT SALES OF UNREGISTERED SECURITIES
On October 16, 2000, the Company consummated the sale to Purse Holding
Limited, a British Virgin Islands limited company, of two million shares of the
Company's common stock for $4.8 million and warrants to purchase up to three
million shares of the Company's common stock. The sale was effected pursuant to
a Securities Purchase Agreement, dated August 2, 2000, between the Company and
Purse. The Company credited its $2 million loan, received from Purse on August
3, 2000, toward the $4.8 million purchase price of the two million shares of its
common stock.
In accordance with the terms of the Securities Purchase Agreement, the
Company issued (i) two million shares of common stock at a price of $2.40 per
share and (ii) warrants to purchase (a) two million shares of common stock,
exercisable until October 16, 2003, at the greater of $3.00 per share or 85% of
the market price per share of the Company's common stock at the time of
exercise, and (b) one million shares of common stock, exercisable for the period
of time after January 1, 2002, and until October 16, 2003, at $3.00 per share.
The sale of the securities was exempt from registration under Section 4(2)
of the Securities Act of 1933, as amended (the "Securities Act") and Rule 506 of
Regulation D promulgated under the Securities Act, since the sale was made to a
single accredited investor who was acquiring the shares for investment without a
view to further distribution. No underwriters were involved with the issuance
and sale of the securities.
Page 15 of 59
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information as of December 31, 2002 regarding
compensation plans (including individual compensation arrangements) under which
equity securities of DA Consulting Group, Inc are authorized for issuance.
EQUITY COMPENSATION PLAN INFORMATION
Number of Securities
Remaining Available for
Number of Securities to be Future Issuance Under Equity
Issued Upon Exercise of Compensation Plans
Outstanding Options, Weighted Average Exercise (Excluding Securities
Warrants and Rights Price of Outstanding Options, Reflected in Column (a))
Plan Category (in thousands) Warrants and Rights (in thousands)
(a) (b) (c)
Equity Compensation Plans
Approved by Security
Holders(1) 1,960 $ 1.33 ---
Equity Compensation Plans
Not Approved by Security
Holders --- --- ---
(1) This plan is the Company's 1997 Stock Option Plan. The 1997 Stock
Option Plan provides that the number of shares with respect to which options may
be granted, and the number of shares of common stock subject to an outstanding
option, shall be proportionately adjusted in the event of a subdivision or
consolidation of shares or the payment of a stock dividend on common stock, and
the purchase price per share of outstanding options shall be proportionately
revised.
Page 16 of 59
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial statement data as of December
31, 2001 and 2002 and for each of the three years in the period ended December
31, 2002 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, 1998, 1999 and 2000 has been derived from the
audited financial statements of the Company that have been previously included
in the Company's reports under The Securities Exchange Act of 1934, that are not
included herein. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
YEARS ENDED DECEMBER 31,
---------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1999 2000 2001 2002
------- --------- ----------- -------- --------
INCOME STATEMENT DATA:
Revenue $80,132 $ 70,295 $ 30,989 $28,654 $23,671
Cost of revenue 40,817 38,717 20,656 16,536 14,184
------- --------- ----------- -------- --------
Gross profit 39,315 31,578 10,333 12,118 9,487
Selling and marketing expense 5,195 7,403 4,945 3,280 2,342
Development expense 2,124 1,802 3,667 702 165
General and administrative expense 24,877 33,461 16,884 10,411 7,876
Amortization expense 29 354 760 592 574
Restructuring charge - - 4,666 - -
Employee stock-related charge - 142 - - -
------- --------- ----------- -------- --------
Operating income (loss) 7,090 (11,584) (20,589) (2,867) (1,470)
Other (expense) income, net 22 287 25 (326) (125)
------- --------- ----------- -------- --------
Income (loss) before taxes 7,112 (11,297) (20,564) (3,193) (1,595)
Provision (benefit) for income taxes 2,813 (3,034) (7,347) 2,507 5,768
------- --------- ----------- -------- --------
Net income (loss) $ 4,299 $ (8,263) $ (13,217) $(5,700) $(7,363)
======= ========= =========== ======== ========
Basic earnings (loss) per share $ 0.72 $ (1.28) $ (1.93) $ (0.68) $ (0.87)
Weighted average shares outstanding 5,976 6,444 6,841 8,419 8,419
Diluted earnings (loss) per share $ 0.69 $ (1.28) $ (1.93) $ (0.68) $ (0.87)
Weighted average shares outstanding 6,233 6,444 6,841 8,419 8,419
BALANCE SHEET DATA:
Cash and cash equivalents $ 9,971 $ 5,795 $ 949 $ 373 $ 576
Working capital (deficit) 25,585 11,007 (1,120) (663) (1,266)
Total assets 48,903 32,918 24,940 17,212 9,576
Total debt - - 154 1,077 1,335
Shareholders' equity 34,944 25,238 16,291 10,303 3,128
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Annual Report on Form 10-K contains certain statements that are not
historical facts which constitute forward-looking statements within the meaning
of the Private Securities Legislation Reform Act of 1995 which provides a safe
harbor for forward-looking statements. These forward-looking statements are
based on management's belief as well as assumptions made by and information
currently available to management, and are subject to substantial risks and
uncertainties that could cause the Company's actual results, performance or
achievements to differ materially from those expressed or implied by these
forward-looking statements. When used in this report, the words "may," will,"
"anticipate," "believe," "expect" and similar expressions as they relate to the
Company or its management are intended to identify such forward-looking
statements. Actual future results and trends may differ materially from
historical results as a result of certain factors, including those set forth in
the Risk Factors section of this report, in the Liquidity and Capital Resources
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations section in this report and those risk factors set forth in
our other filings with the Securities and Exchange Commission.
Page 17 of 59
BUSINESS
The Company is an international provider of employee education and support
solutions to companies investing in business information technology. Through its
212 employees worldwide at December 31, 2002, 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 720 clients most of whom are Fortune Global 500 companies.
The Company is currently organized into three divisions: the Americas
Division which includes its operations in North America; the Europe Division
which includes its operations in Europe; and the Asia Pacific Division which
includes its operations in Australia. In 2002, the, Europe, Asia Pacific and
Americas Divisions represented 63%, 20%, and 17% of revenue, respectively. The
number of clients served by the Company has increased substantially from 52 in
1994 to approximately 720 in 2002. The Company's client base is diversified,
with one client representing 12% of revenue in 2002.
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 94% of
billed consulting revenue for 2002. The majority of the Company's projects
involve from three to ten consultants, are generally completed in three months
to two years, and result in revenue from $200,000 to $1.5 million. The Company
often performs multiple projects for a client in support of a phased
implementation of the business information technology. The Company's services
are generally provided pursuant to written contracts that can be terminated by
the client with limited advance notice. In the event of such a termination by
the client, the client remains obligated to pay for the services rendered to the
client to the termination date. The Company bills its clients weekly, twice
monthly and monthly for the services provided by its consultants at agreed upon
rates, and where permitted, for expenses. The Company provides services to its
clients primarily on a time and materials basis, although many of its contracts
contain "not-to-exceed" provisions and Company performance obligations. The
remainder of the Company's contracts are on a fixed-price basis, representing
approximately 24% of the Company's total revenue for 2002. Revenue from time and
materials engagements, as well as revenue from fixed price contracts, is
recognized as services are performed and the realization of the revenue is
assured. The Company also receives approximately 3% of total revenue from
license fees related to computer-based training products and other software
products that are developed independently or are co-developed by the Company.
Cost of revenue includes compensation and benefits paid to the Company's
professional staff and all direct expenses of performing project work. The
Company's financial performance is highly dependent upon staff billing rates,
costs, and utilization rates. The Company manages these parameters by
establishing and monitoring project budgets and timetables and tracking staffing
requirements for projects in progress and anticipated projects. Project
terminations, completions, and scheduling delays may result in periods when
consultants are not fully utilized. An unanticipated termination of a
significant project could cause the Company to experience lower staff
utilization. In addition, the establishment of new services or new regional
operations, employee vacations and training, and increases in the hiring of
consultants may result in periods of lower staff utilization and downward
pressure on gross margins. The Company's professional staff are generally
employed on a full-time basis, and therefore the Company incurs substantially
all of its staff-related costs even during periods of low utilization. In the
past, the Company has experienced some seasonality in its business with somewhat
lower levels of revenue and profitability in Europe in the third quarter and
Asia in the fourth quarter. The timing of project start-ups and completions, as
well as holidays and vacations has the most significant impact on fluctuations
in revenue.
Selling and marketing expense relates principally to compensation and
benefits paid to the Company's dedicated sales staff and all direct costs
associated with the sales process. Development expense consists principally of
compensation costs for the Company's in-house research and development. These
personnel focus on development of methodologies and applications of new
technologies, including development of computer-based training courseware and
performance support software and content. Development expense also includes
personnel who provide technical support for the Company's professional staff in
the field. Development expense in 2000 and early 2001 included the cost of
creating a web based learning management system named the Dynamic IQ. General
and administrative expense consists principally of salaries and benefits for
management, physical facilities, depreciation and professional fees. General
and administrative salaries include executive management, accounting,
administrative, information technology, human resources as well as compensation
for the senior management in each of the Company's divisions.
CRITICAL ACCOUNTING POLICIES
Income Taxes
The Company recognizes deferred income taxes for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are determined based on
the difference between the financial statement carrying amount and tax basis of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. A valuation allowance is provided
against deferred tax assets which management considers more likely than not will
fail to be realized.
Page 18 of 59
For the years ended December 31, 2000, 2001 and 2002, the Company incurred
losses before income taxes of $20.6 million, $3.2 million and $1.6 million,
respectively. At December 31, 2002, the Company had generated net operating
loss carryforwards for tax reporting purposes of approximately $32.7 million
recording $11.9 million of deferred tax assets of which the Company has
recorded a valuation allowance of approximately $10.3 million resulting in $1.6
million of deferred tax assets from net operating loss carryover net of the
allowance based upon management's estimate of future taxable income, against the
deferred tax asset generated from the net operating loss carryforwards.
There can be no assurance that management's restructuring plan will yield
sufficient future taxable income necessary to utilize the net operating loss
carryforwards recorded as a deferred tax asset by the Company. The ultimate
realization of the deferred tax asset is dependent upon management's ability to
grow the revenues of the Company, adhere to the cost saving measures put in
place during the restructuring and generate sufficient future taxable income.
Any future decline, if any, in the demand for the Company's services or the
Company's inability to return to profitability will result in the Company being
required to increase the valuation allowance against the deferred tax asset
which would adversely affect the Company's financial position and operating
results.
Long-lived Assets
Management reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount exceeds the fair value of the assets which considers the discounted
future net cash flows. Assets to be disposed of are reported at the lower of
the carrying amount or the fair value less costs of disposal.
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. The Company
recognizes product revenue upon shipment to the client if no further services
are required.
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 intrinsic vale of the
Company's common stock exceeds the exercise price on the date of grant. The
amount of compensation cost, if any, is charged to income over the vesting
period.
Property and Equipment
Property and equipment are stated at cost. Expenditures for substantial
renewals and betterments are capitalized, while repairs and maintenance are
charged to expense as incurred. Assets are depreciated or amortized using the
straight-line method for financial reporting purposes and accelerated methods
for tax purposes over their estimated useful lives. Computer equipment is
depreciated over a useful life of three to five years. Furniture is depreciated
over a seven year useful life. Leasehold improvements are amortized over the
term of the lease. In 1999 the Company capitalized $3.3 million in
implementation costs related to the Company's primary information system.
Purchased software and internal software development costs related to the
Company's primary information system are amortized over a seven year period.
Gains or losses from disposals of property and equipment are reflected in other
expense.
Page 19 of 59
NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections (SFAS 145). This statement
eliminates the current requirement that gains and losses on debt extinguishment
must be classified as extraordinary items in the income statement. Instead, such
gains and losses will be classified as extraordinary items only if they are
deemed to be unusual and infrequent, in accordance with the current GAAP
criteria for extraordinary classification. In addition, SFAS 145 eliminates an
inconsistency in lease accounting by requiring that modifications of capital
leases that result in reclassification as operating leases be accounted for
consistent with sale-leaseback accounting rules. The statement also contains
other nonsubstantive corrections to authoritative accounting literature. The
changes related to debt extinguishment will be effective for fiscal years
beginning after May 15, 2002, and the changes related to lease accounting will
be effective for transactions occurring after May 15, 2002. Adoption of this
standard will not have any immediate effect on the Company's consolidated
financial statements. The Company will apply this guidance prospectively.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS 146), which addresses accounting for
restructuring and similar costs. SFAS 146 supersedes previous accounting
guidance, principally Emerging Issues Task Force (EITF) Issue No. 94-3. The
Company will adopt the provisions of SFAS 146 for restructuring activities
initiated after December 31, 2002. SFAS 146 requires that the liability for
costs associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF No. 94-3, a liability for an exit cost was
recognized at the date of a company's commitment to an exit plan. SFAS 146 also
establishes that the liability should initially be measured and recorded at fair
value. Accordingly, SFAS 146 may affect the timing of recognizing future
restructuring costs as well as the amount recognized.
In December 2002, the FASB issued SFAS No. 148, Accounting for stock-Based
Compensation - Transition and Disclosure (SFAS 148), which amended SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS 123). The new standard provides
alternatiuve methods of transition for a voluntary change to the fair velue
based method of accounting for stock-based employee compensation. Additionally,
the statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in the annual and interim financial financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. This statement is effective for
financial statements for fiscal years ending after December 15, 2002. In
compliance with SFAS No. 148, DACG has elected to continue to follow the
intrinsic value method in accounting for its stock-based employee compensation
arrangement as defined by Accounting Principles Board Opinion ("APB") No. 25,
Accounting for Stock Issued to Employee, and has made the applicable disclosures
in note 8 to the consolidated financial statements.
Page 20 of 59
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, income statement
data expressed as a percentage of revenue:
PERCENTAGE OF REVENUE
------------------------
YEARS ENDED DECEMBER 31,
------------------------
2000 2001 2002
------ ------ ------
Revenue. . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of revenue. . . . . . . . . . . 66.7 57.7 59.9
------ ------ ------
Gross profit . . . . . . . . . . . . 33.3 42.3 40.1
Selling and marketing expense. . . . 16.0 11.4 9.9
Development expense. . . . . . . . . 11.8 2.5 0.7
General and administrative expense . 54.5 36.3 33.3
Amortization expense . . . . . . . . 2.4 2.1 2.4
Restructuring charge . . . . . . . . 15.0 - -
------ ------ ------
Operating loss . . . . . . . . . . . (66.4) (10.0) (6.2)
Other (expense) income, net. . . . . 0.0 (1.1) (0.5)
------ ------ ------
Loss before taxes. . . . . . . . . . (66.4) (11.1) (6.7)
Provision (benefit) for income taxes (23.7) 8.8 24.4
------ ------ ------
Net loss . . . . . . . . . . . . . . (42.7)% (19.9)% (31.1)%
====== ====== ======
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Revenue. Revenue decreased by $5.0 million, or 17.4%, from $28.7 million in
2001 to $23.7 million in 2002. The decrease was substantially attributable to a
decrease in demand for services that began during the latter part of 1999 and
continued throughout 2002, as competition for fewer assignments grew. Revenue
from the Americas Division decreased by 25.9% from $5.4 million to $4.0 million;
revenue from the EMEA Division decreased by 12.7% from $17.1 million to $15.0
million; and revenue from the Asia Pacific Division decreased by 23% from $6.1
million to $4.7 million. Revenue included $1.3 million of product sales in 2002
compared to $0.9 million in 2001. The Company ended the year 2002 with 212 total
employees, down from 272 employees at the beginning of the year.
Revenue for the fouth quarter of 2002 was $5.5 million. Revenue for the
first quarter of 2003 will fall short of expectations. Revenue for the first
quarter of 2003 will decline approximately 8 to 10 percent from the fourth
quarter of 2002.
Gross profit. Gross profit decreased by $2.6 million, or 21.7%, from
$12.1 million in 2001 to $9.5 million in 2002, and decreased from 42.3% of
revenue in 2001 to 40.1% of revenue in 2002. The decrease is primarily
attributable to decreased project and product margin and lower staff
utilization.
Selling and marketing expense. Selling and marketing expense decreased by
$1.0 million, or 28.6%, from $3.3 million in 2001 to $2.3 million in 2002. The
decrease is the result of reduced salaries, incentive compensation and outside
marketing services. Sales and marketing staff total 23 persons at the end of
2002 and 2001.
Development expense. Development expense decreased by $0.5 million, or
76.5%, from $0.7 million in 2001 to $0.2 million in 2002. Development costs
were reduced to their current levels in the middle of 2001 by the reduction of
staff. Development personnel were 2 at year end 2001 and 2002.
General and administrative expense. General and administrative expense
decreased by $2.5 million, or 24.3%, from $10.4 million in 2001 to $7.9 million
in 2002. The decrease in expense is due to a reduction in headcount,
professional fees, travel and depreciation. Administrative personnel have been
reduced from 31 at year end 2001 to 28 at year end 2002.
Restructuring Charge. During the year ended December 31, 2000 the Company
recorded restructuring charges of $4.7 million for termination pay and lease
abandonment. No restructuring charge was recorded in 2002 or 2001. During
2002 a $0.3 million charge to administrative expense was recorded for additional
lease abandonment compared to a $0.8 million charge in 2001. At December 31,
2002, the Company believes that the remaining provision for lease
abandonment is adequate to cover the future costs attributable to this plan.
At December 31, 2002 an accrual of approximately $1.1 million remained accrued
for future lease payments related to abandoned leases. No liability remained
for termination pay. Payments charged to the reserve totaled $0.4 million for
lease abandonment during 2002.
Page 21 of 59
Amortization expense. Amortization expense decreased by $18,000, or 3.0%,
from $592,000 in 2001 to $574,000 in 2002, and increased as a percentage of
revenue from 2.1% in 2001 to 2.4% in 2002. Amortization decreased due to the
discontinued amortization of goodwill. Amortization is largely due to the
amortization of internal development costs associated with the SAP system placed
in service in July 1999. These costs are amortized over seven years.
Operating loss. Operating loss decreased by $1.4 million or 48.7%, from a
loss of $2.9 million in 2001 to $1.5 million in 2002. Operating results,
exclusive of restructuring charges, increased lease abandonment reserves and
depreciation and amortization were a $0.7 million profit in 2002 as compared to
a $0.2 million profit in 2001.
YEARS ENDED DECEMBER 31,
------------------------
2001 2002
------ ------
(in millions)
Operating loss $(2.9) $(1.5)
Lease abandonment reserves 0.8 0.4
Depreciation and amortization 2.3 1.8
------ ------
Operating income before lease reserves,
depreciation and amortization $ 0.2 $ 0.7
====== ======
Other income (expense), net. Other income (expense), net decreased from
expense of $326,000 in 2001 to expense of $125,000 in 2002. Interest expense
decreased from $54,000 in 2001 to interest expense of $29,000 in 2002.
Provision for income taxes. The increase in the Company's effective tax
rate from 78.5% in 2001 to an expense of 361.7% in 2002, relates primarily to
the valuation allowance recorded against deferred tax assets in 2001 and 2002.
At December 31, 2002, the Company's deferred tax asset recorded on its balance
sheet was approximately $1.0 million, consisting primarily of future tax
benefits resulting from net operating loss ("NOL") carryforwards. At December
31, 2002, the Company established a $10.3 million valuation allowance against
deferred tax assets. The Company's ability to recognize the entire benefit
requires that the Company achieve certain future earnings levels prior to the
expiration of the NOL carryforwards. The Company expects to generate the future
earnings necessary to utilize the NOL carryforwards through implementation of
reasonable tax planning strategies and projected future income. The Company
could be required to record an additional valuation allowance for a portion or
entire deferred tax asset if the market conditions deteriorate and future
earnings are below, or projected to be below, current estimates.
At December 31, 2002, the Company had NOL carryforwards of $32.7 million.
Of that amount, $3.8 million expires in 2006 to 2008 and $24.9 million expires
in 2019, 2020 and 2021. The remaining $4.0 million have no expiration. The
Company would need to earn $31.5 million income before taxes to recover all
deferred tax assets.
Net loss. Net loss was $7.4 million in 2002 compared to a loss of $5.7
million in 2001. The loss per share increased from $0.68 to $0.87 due to income
taxes partially offset by improved operating income.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Revenue. Revenue decreased by $2.3 million, or 7.5%, from $31.0 million
in 2000 to $28.7 million in 2001. The decrease was substantially attributable to
a decrease in demand for services that began during the latter part of 1999 and
continued throughout 2001, as competition for fewer assignments grew primarily
in America. Revenue from the Americas Division decreased by 54.5% from $11.8
million to $5.4 million; revenue from the EMEA Division increased by 37.4% from
$12.5 million to $17.1 million; and revenue from the Asia Pacific Division
decreased by 8.4% from $6.7 million to $6.1 million. The Company ended the 2001
period with 272 total employees, down from 336 employees at the beginning of the
period.
Gross profit. Gross profit increased by $1.8 million, or 17.3%, from
$10.3 million in 2000 to $12.1 million in 2001, and increased from 33.3% of
revenue in 2000 to 42.3% of revenue in 2001. The increase is primarily
attributable to increased bill rates and increased recovery of travel costs.
Selling and marketing expense. Selling and marketing expense decreased by
$1.6 million, or 33.7%, from $4.9 million in 2000 to $3.3 million in 2001. The
decrease is the result of refocusing marketing efforts on a regional basis.
Sales and marketing staff total 23 persons at the end of 2001 compared to 25 at
the end of 2000.
Development expense. Development expense decreased by $3.0 million, or
80.9%, from $3.7 million in 2000 to $0.7 million in 2001. Development costs
during the year ended December 31, 2000 were due to professional fees incurred
for the development of the Company's web-enabled learning management system -
Dynamic IQ, which was launched during the fourth quarter of 2000. Development
personnel decreased from 18 at year end 2000 to 2 at year end 2001.
Page 22 of 59
General and administrative expense. General and administrative expense
decreased by $6.5 million, or 38.3%, from $16.9 million in 2000 to $10.4 million
in 2001. The decrease in expense is due primarily to a reduction in headcount
in the areas of finance, information systems, administration and human
resources. Administrative personnel have been reduced from 59 at year end 2000
to 31 at year end 2001. In addition, facilities costs were reduced by
consolidating locations during the year.
Restructuring Charge. During the year ended December 31, 2000 the Company
recorded restructuring charges of 4.7 million for termination pay and lease
abandonment. No restructuring charge was recorded in 2001. During 2001 a $0.8
million charge to administrative expense was recorded for additional lease
abandonment. At December 31, 2001, the Company believed that the
remaining provision for lease abandonment was adequate to cover the future
costs attributable to this plan. At December 31, 2001 an accrual of
approximately $1.1 million remained accrued for future lease payments related
to abandoned leases. No liability remained for termination pay. Payments for
termination pay charged to the reserve totaled $0.3 million and payments for
lease abandonment totaled $1.1 million during 2001.
Amortization expense. Amortization expense decreased by $168,000, or
22.1%, from $760,000 in 2000 to $592,000 in 2001, and decreased as a percentage
of revenue from 2.4% in 2000 to 2.1% in 2001. Amortization decreased due to the
writeoff of leasehold improvements. Amortization is largely due to the
amortization of internal development costs associated with the SAP system placed
in service in July 1999. These costs will be amortized over a seven-year
period.
Operating loss. Operating loss decreased by $17.7 million or 86.1%, from a
loss of $20.6 million in 2000 to $2.9 million in 2001. Operating income,
exclusive of lease reserves, restructuring charges, depreciation and
amortization, was $0.2 million in 2001 as compared to a loss of $12.9 million in
2000.
YEARS ENDED DECEMBER 31,
------------------------
2000 2001
------- ------
(in millions)
Operating loss $(20.6) $(2.9)
Lease abandonment reserves 2.4 0.8
Restructuring charges excluding lease charges 2.3 -
Depreciation and amortization 3.0 2.3
------- ------
Operating income (loss) before lease reserves,
restructuring charges, depreciation and amortization $(12.9) $ 0.2
======= ======
Other income (expense), net. Other income (expense), net decreased from
income of $25,000 in 2000 to expense of $326,000 in 2001. Interest income
decreased from $31,000 in 2000 to interest expense of $54,000 in 2001. Other
expense in 2001 includes the loss on sale and abandonment of fixed assets
totaling $157,000 compared to $123,000 in 2000. Other income in 2000 included a
$100,000 gain on the sale of a small business.
Provision for income taxes. The increase in the Company's effective tax
rate benefit from 35.7% in 2000 to an expense of 78.5% in 2001, relates
primarily to the valuation allowance recorded against deferred tax assets in
2001. At December 31, 2001, the Company's deferred tax asset recorded on its
balance sheet was approximately $6.6 million, consisting primarily of future tax
benefits resulting from net operating loss ("NOL") carryforwards. The Company
established a $4.0 million valuation allowance against deferred tax assets. The
Company's ability to recognize the entire benefit requires that the Company
achieve certain future earnings levels prior to the expiration of the NOL
carryforwards. The Company expects to generate the future earnings necessary to
utilize the NOL carryforwards through implementation of reasonable tax planning
strategies and projected future income. The Company could be required to record
an additional valuation allowance for a portion or entire deferred tax asset if
the market conditions deteriorate and future earnings are below, or projected to
be below, current estimates.
At December 31, 2001, the Company had NOL carryforwards of $31.3 million.
Of that amount, $3.0 million expires in 2006 to 2008 and $24.6 million expires
in 2019, 2020 and 2021. The remaining $3.7 million have no expiration.
Net loss. Net loss was $5.7 million in 2001 compared to a loss of $13.2
million in 2000. The loss per share decreased from $1.93 to $0.68 due both the
decrease in the net loss and the increase in the number of shares outstanding.
QUARTERLY OPERATING RESULTS
The Company's unaudited quarterly operating results are included in the
notes to consolidated financial statements.
Page 23 of 59
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has historically financed its operations
with cash flow from operations, supplemented by the issuance of common stock and
short-term borrowings under revolving line of credit arrangements.
The Company's cash and cash equivalents were $0.6 million at December 31,
2002, compared to $0.4 million at December 31, 2001. The Company's working
capital deficit was $1.3 million at December 31, 2002 compared to working
capital deficit of $0.7 million at December 31, 2001.
The Company's operating activities required cash of $0.2 million for year
ended December 31, 2002, compared to $1.5 million used in operations in 2001.
The decrease in cash used in operations primarily resulted from reduced pretax
operating losses offset by a decrease in deferred income taxes due to
establishing a valuation allowance against previously recorded income tax
benefits. Accounts receivable reductions produced less cash in 2002 than 2001
and payment of accounts payable required less cash during 2002.
LIQUIDITY DISCLOSURE
Payment Due by Fiscal Period
--------------------------------------------------
Total 2003 2004-2006 2007-2008 Thereafter
------- ------- --------- --------- ----------
Total debt, leases reserve $ 526 $ - $ 396 $ - $ 130
Operating leases 1,540 966 532 42 -
Operating leases included in long-term debt (396) - (396) - -
Line of credit 1,335 - 1,335 - -
Additional lease liabilities 141 141 - - -
------- ------- --------- --------- ----------
Total contractual obligations $3,146 $ 1,107 $ 1,867 $ 42 $ 130
Investing activities used cash of $9,000 in the year ended December 31,
2002, compared to cash provided of $241,000 for the same period in 2001. For
the year ended December 31, 2002, $30,000 was provided by the sale of property
compared to $295,000 during 2001 and $39,000 was used to purchase new computers
compared to $54,000 during 2001 .
Financing activities provided $0.3 million for the year ended December 31,
2002 as a result of borrowing against a line of credit compared to $0.9 million
for the year ended December 31, 2001.
The Company has an agreement with a bank, which provides for financing of
eligible U.S. accounts receivable under a purchase and sale agreement. The
maximum funds available under this agreement is $2.5 million. At December 31,
2002, the Company had sold no receivables pursuant to this agreement. The
Company has a credit facility from a bank with a maximum line of credit of
approximately $1.2 million, based on eligible foreign accounts receivable.
At December 31, 2002, the Company had borrowed $0.1 in excess of the facility.
The Company believes its current cash balances, receivable-based financing
and cash provided by future operations will be sufficient to meet the Company's
working capital and cash needs through 2003. However, there can be no assurance
that such sources of funds will be sufficient to meet these future expenses. The
Company may seek additional financing through a public or private placement of
equity. The Company's need for additional financing will be principally
dependent on the degree of market demand for the Company's services. There can
be no assurance that the Company will be able to obtain any such additional
financing on acceptable terms, if at all.
The Company capitalizes software development costs beginning when product
technological feasibility is established and concluding when the product is
ready for general release. At such time, software development costs are
amortized on the straight-line basis over a maximum of three years or the
expected life of the product, whichever is less. During the year 2000 and 2001,
all development costs for the companies web based learning management system,
Dynamic IQ were expensed. Research costs related to software development are
expensed as incurred.
In 1999 the Company capitalized $3.3 million of implementation costs
related to the Company's primary information system. Such development costs are
amortized over a seven year period.
The Company is subject to market risk related to fluctuations in the
value of the U.S. dollar compared to certain foreign currencies. We have
subsidiaries which operate in Canada, the United Kingdom, France, Germany and
Australia. We attempt to maintain a balance between assets and liabilities
denominated in foreign currencies. The Company does not currently hedge against
currency fluctuations.
Page 24 of 59
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company from time to time holds short-term investments which consist of
variable rate municipal debt instruments. The Company uses a sensitivity
analysis technique to evaluate the hypothetical effect that changes in market
interest rates may have on the fair value of the Company's investments. At
December 31, 2002 the Company did not hold any short-term investments.
We are subject to market risk exposure related to foreign currency
fluctuations and interest rates on our credit facility. At December 31, 2002 our
outstanding facility was $1.3 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company are included in Pages
33 through 58.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
A change in independent auditors from PricewaterhouseCoopers LLP to BDO
Seidman, LLP was reported in a Current Report on Form 8-K filed by the Company
on February 5, 2002.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and present positions of the directors and executive
officers of the Company as well as other relevant information are set forth
below:
Year in Which
-------------
First Became
-------------
Name Age Position with Company Director
- ------------------------ --- ----------------------------- -------------
Virginia L. Pierpont 61 Chief Executive Officer and 1987
President
Malcolm G. Wright 46 Chief Operating Officer
Dennis C. Fairchild 53 Executive Vice President and 2001
Chief Financial Officer
Nigel W.E. Curlet 57 Director 1996
Gunther E.A. Fritze 66 Director 1996
B.K. Prasad 66 Chairman of the Board 2000
James R. Wilkinson 46 Director 2002
Virginia L. Pierpont, age 61, founded the Company as a sole proprietorship
in 1984, incorporated the business in 1987, and opened its United Kingdom
operation in 1988. Ms. Pierpont was the Chief Executive Officer of the Company
from 1984 to 1993 and served as Chairman of the Board from December 1996 through
August 1998 and again from April 2000 to August 2001. Ms. Pierpont is a Class
B Director whose term expires at the 2003 Annual Meeting.
Page 25 of 59
Malcolm G. Wright, age 46, joined the Company in March 2000 as Vice
President of Europe and, in February 2001, was promoted to Chief Operating
Officer. Prior to joining the Company, Mr. Wright was with Equifax Plc from
November 1996 to January 2000, and his last position was as European & UK
Divisional Director of Commercial Information Services. He also spent 17 years
with Dun & Bradstreet and was Director of Multinational Development at Dun &
Bradstreet Europe from December 1990 to November 1996.
Dennis C. Fairchild, age 53, joined the Company in April 1999 as Executive
Vice President and Chief Financial Officer and is primarily responsible for the
finance and administrative functions of the Company. Prior to joining the
Company, Mr. Fairchild provided consulting services from April 1998 to February
1999. From April 1997 to April 1998, Mr. Fairchild was Chief Financial Officer
at National Water & Power. He served as Chief Financial Officer at AmeriQuest
Technologies from January 1994 to April 1997 and at Southeast Frozen Foods from
March 1990 to January 1994. Mr. Fairchild received his B.A. from Mankato State
University. Mr. Fairchild is a Class C Director whose term expires at the 2004
Annual Meeting.
Nigel W.E. Curlet, age 57, has served as a director since December 1996.
Since 1976, he has been employed in various capacities by Shell Chemical Company
and is currently its Manager-Global Supply Chain Best Practices. Mr. Curlet's
prior management roles at Shell were in its information technology, research and
development, and operations and strategic planning departments. He is a member
of the Company's Audit, Compensation and Stock Option Committees. Mr. Curlet is
a Class A director whose term expires at the 2005 Annual Meeting.
Gunther E.A. Fritze, age 66, has served as a director since December 1996.
Mr. Fritze is retired. From 1962 to 1999, Mr. Fritze was employed in various
capacities by Bank of Boston. Mr. Fritze's most recent position was Manager,
Finance Companies. Mr. Fritze is a member of the Company's Audit, Compensation
and Stock Option Committees. Mr. Fritze is a Class A Director whose term expires
at the 2005 Annual Meeting.
B.K. Prasad, Ph.D., age 66, has served as a director since December 2000
and as the Chairman of the board of directors since August 2001. Dr. Prasad, a
corporate strategy and management consultant, has served as President and Chief
Executive Officer of Moon Macro Systems Inc since July 2002 and as a independent
Corporate Strategy and Management Consultant from January 2002 until June 2002.
Dr. Prasad was employed as a Director and Vice President by Comcraft Canada
Limited from 1987 to December 2001, and by Comcraft Asia (Pte) Ltd from 1981 to
1987. Prior to joining Comcraft, Dr. Prasad served in various senior finance
and management positions in large industrial organizations. Dr. Prasad holds an
LLB, MBA, FCMA, FCA and CPA. Dr. Prasad has been designated by Purse Holding
Limited ("Purse") to serve as a member of the board of directors pursuant to the
Securities Purchase Agreement between DACG and Purse, dated August 2, 2000, and
approved by DACG's shareholders at a special meeting held on October 12, 2000,
under which Purse has the right to designate one director for so long as Purse
owns at least 25% of the common stock that it purchased under the Securities
Purchase Agreement. Dr. Prasad is a Class C Director whose term expires at the
2004 Annual Meeting.
James R. Wilkinson, age 46, is the founder of Capstone Funding Ltd., an
investment company started in 1990, and of The Strategic CFO, a consulting
company started in 1998 where Mr. Wilkinson devotes the majority of his time.
Prior to establishing these two entities, Mr. Wilkinson served in
executive-level positions in real estate and accounting firms. Mr. Wilkinson is
a CPA and a graduate of Texas A&M University. Mr. Wilkinson is a member of the
audit committee, compensation committee and a Class B Director whose term
expires at the 2003 Annual Meeting.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission ("SEC") initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater than ten-percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 2002, all
Section 16(a) filing requirements applicable to the Company's officers,
directors and greater than ten-percent beneficial owners were complied.
ITEM 11. EXECUTIVE COMPENSATION
CASH AND NON-CASH COMPENSATION PAID TO CERTAIN EXECUTIVE OFFICERS
Page 26 of 59
The following table sets forth, with respect to services rendered during
fiscal years 2002, 2001 and 2000, the total compensation earned by each
individual who served as the Company's Chief Executive Officer during fiscal
year 2002 and the most highly compensated executive officers, other than the
Chief Executive Officer, who were serving as executive officers at the end of
fiscal year 2002 and whose total annual salary and bonus exceeded $100,000
during 2002:
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
------------
YEAR ANNUAL COMPENSATION (1) AWARDS
---- ----------------------- ------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) (2) BONUS($) OPTIONS (#) COMPENSATION ($) (3)
- --------------------------- ------------- --------- ----------- ---------------------
Virginia L. Pierpont (4) 2002 $ 179,020 26,008 50,000
President and Chief Executive Officer 2001 $ 112,500 --- 100,000 ---
2000 $ 103,125 --- --- ---
Dennis C. Fairchild (5) 2002 $ 223,117 38,145 50,000 $ 21,483 (7)
Executive Vice President - Finance and 2001 $ 220,000 --- 270,000 $ 18,275
Administration, Chief Financial Officer 2000 $ 189,847 $ 92,000 40,000 $ 17,092
Malcolm G. Wright (6) 2002 $ 265,931 41,093 50,000 $ 30,832 (8)
Chief Operating Officer 2001 $ 213,693 --- 300,000 $ 23,902
2000 $ 147,764 $ 73,237 33,000 $ 19,327
(1) All figures converted to U.S. dollars based upon the exchange rate at the
end of the applicable fiscal year.
(2) Salary includes amounts deferred, if any, pursuant to the Company's 401(k)
plan.
(3) Amounts include compensation expense attributed to employee stock awards,
employer 401(k) contributions and Company perquisites.
(4) Ms. Pierpont receives $150,000 annually, beginning May 1, 2000, under her
employment agreement for her service as Chairman of the Board of Directors and
later as President and Chief Executive Officer. Ms. Pierpont voluntarily
deferred $37,500 of her compensation during 2001 of which all was repaid in
2002. The 2002 bonus is payable when determined by the Board of Directors.
(5) Mr. Fairchild was elected as an Executive Vice President and the Chief
Financial Officer of the Company on April 14, 1999 at a base annual salary of
$175,000. His base salary increased to $220,000 effective November 1, 2000.
Effective June 6, 2002 Mr. Fairchild base salary was increased to $226,800.
The 2002 bonus is payable when determined by the Board of Directors.
(6) Mr. Wright joined the Company on March 21 , 2000 as Vice President of Europe
at a base salary of $169,750 and was elected as the Company's Chief Operating
officer effective February 6, 2001 at a base salary of $213,693. Effective June
6, 2002 Mr. Wright base salary was increased to 157,500 Pounds. The 2002 bonus
is payable when determined by the Board of Directors.
(7) Represents $14,400 in car allowance and $5,500 in employer 401(k)
contributions and $1,583 in life insurance.
(8) Represents $17,292 in car allowance and $11,927 in employer pension
contributions and $1,613 in private medical insurance.
Page 27 of 59
STOCK OPTIONS GRANTED TO CERTAIN EXECUTIVE OFFICERS DURING LAST FISCAL YEAR
Under the 1997 Stock Option Plan, options to purchase Common Stock are
available for grant to directors, officers and other key employees of the
Company. The following table sets forth certain information regarding options
for the purchase of Common Stock that were awarded to the named executive
officers during fiscal year 2002.
OPTION GRANTS IN LAST FISCAL YEAR
Number of
Securities Percent of Total Potential Realizable Gain
Underlying Options Granted to Exercise or at Assumed Annual Rates
Options Employees in Base Price Expiration of Stock Appreciation for Option
Name Granted (#) (1) Last Fiscal Year ($/Sh) (2) Date Terms
- -------------------- --------------- ------------------- ------------ -------------- Compounded Annually
--------------------------
5% ($) 10% ($)
------------- -----------
Virginia L. Pierpont 50,000 (3) 11% 0.17 11/20/2012 $ 5,346 $ 13,547
Dennis Fairchild 50,000 (3) 11% 0.17 11/20/2012 $ 5,346 $ 13,547
Malcolm G. Wright 50,000 (3) 11% 0.17 11/20/2012 $ 5,346 $ 13,547
(1) Unless otherwise, noted, all options vest in one-third installments on the
second, third, and fourth anniversaries of the date of grant.
(2) The exercise price equaled the fair market value of a share of Common Stock
on the date of grant as determined by the Board of Directors. The exercise price
is payable in cash or by delivery of shares of Common Stock having a fair market
value equal to the exercise price of the options exercised.
(3) The options vest in one-third installments beginning November 20, 2003.
STOCK OPTIONS EXERCISED BY NAMED EXECUTIVE OFFICERS DURING FISCAL YEAR 2002 AND
HELD BY NAMED EXECUTIVE OFFICERS AT DECEMBER 31, 2002
No options granted by the Company were exercised by the named executive
officers during 2002. The following table sets forth certain information
regarding options for the purchase of Common Stock that were held by the named
executive officers.
AGGREGATED OPTIONS EXERCISED IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Number of Securities Underlying Value of Unexercised In-the-Money
Shares Unexercised Options at FY-End Options at FY-End
Acquired on Value ----------------------------- -----------------
Name Exercise (#) Realized($) (#) ($) (1)
- -------------------- ------------ ----------- --- -------
Exercisable Unexercisable Exercisable Unexercisable
-------------- -------------- --------------- --------------
Virginia L. Pierpont --- --- 34,358 116,667 --- ---
Dennis C. Fairchild --- --- 260,749 130,001 --- ---
Malcolm G. Wright --- --- 231,000 152,000
(1) Based on $0.16 per share, the closing price of the Common Stock, as reported
by the Nasdaq National Market, on December 31, 2002.
COMPENSATION OF DIRECTORS
The Company pays each non-employee director an annual retainer of $12,500
and awards non-employee directors an option to purchase shares of Common Stock
pursuant to the Company's 1997 Stock Option Plan. The number of options is
determined by dividing $10,000 by the fair market value of a share of Common
Stock on the date of the Company's Annual Meeting. Due to the low stock price at
the time of the annual meeting in 2002 the formula was waived. Options to
purchase 30,000 shares were issued to each non-employee director. The Company
also reimburses directors for travel expenses incurred on behalf of the Company.
The Company pays directors fees on a quarterly basis. Directors fees for the
third and fourth quarters of fiscal year 2001 were paid in 2002.
Page 28 of 59
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
The Company entered into an employment agreement with Ms. Pierpont,
effective April 4, 2000. Pursuant to her employment agreement, Ms. Pierpont
received $150,000 per year and reimbursement for her expenses incurred on behalf
of the Company, beginning May 1, 2000, to serve as the Chairman of the Board of
Directors. Effective August, 2001, Ms. Pierpont resigned her position as
Chairman of the Board and became President and Chief Executive Officer at an
annual salary of $150,000. Ms. Pierpont's salary may be increased by the Board
upon its annual review at the beginning of each calendar year. Ms. Pierpont
serves at the Board's discretion, and, if terminated by the Board, she is
entitled to receive her salary for 90 days after she receives notice of
termination. If Ms. Pierpont is terminated within 180 days of a change of
control of the Company, she is entitled to receive her salary for 180 days after
she receives notice of termination. Ms. Pierpont's employment agreement contains
a non-compete covenant that is in effect during the term of her employment and
for 18 months following her termination.
The Company entered into an employment agreement with Mr. Wright, the
Company's Chief Operating Officer, dated February 6, 2001. Pursuant to his
employment agreement, Mr. Wright was entitled to receive an initial base salary
of (British pounds) 150,000 per year or such other rate as is shown on his pay
slip, subject to annual review, and the Company matches his contributions to his
personal pension up to five percent of his total pay. The annualized salary of
Mr. Wright for 2001 is $216,000. Each of the Company and Mr. Wright may
terminate the employment contract on six months prior notice in writing. Mr.
Wright's employment agreement contains a non-compete covenant that is in effect
during the term of his employment and for six months following his termination.
Prior to his appointment as Chief Operating Officer of the Company, Mr.
Wright entered into a change in control separation agreement with the Company,
effective September 30, 1999, the initial term of which was two years. The
Company may, in its sole discretion, extend, terminate or modify the agreement
within 60 days from and after its expiration and, if it takes no action within
60 days after expiration of the term, the agreement is automatically extended
for an additional two years. Also, the agreement remains in force for two years
after any change in control of the Company, as defined in the agreement. Under
the agreement, if Mr. Wright is involuntarily terminated within two years after
a change in control of the Company, he is entitled to (i) (British pounds)
117,000 as a lump sum in cash, (ii) a lump sum in cash equal to the cost of his
benefits for two years, (iii) out-placement services in connection with finding
new employment and (iv) the right to immediately exercise all outstanding stock
options granted to him by the Company.
The Company entered into a change in control separation agreement with Mr.
Fairchild, the Company's Chief Financial Officer, effective September 30, 1999,
the initial term of which was two years. The Company may, in its sole
discretion, extend, terminate or modify the agreement within 60 days from and
after its expiration and, if it takes no action within 60 days after expiration
of the term, the agreement is automatically extended for an additional two
years. Also, the agreement remains in force for two years after any change in
control of the Company, as defined in the agreement. Under the agreement, if Mr.
Fairchild is involuntarily terminated within two years after a change in control
of the Company, he is entitled to (i) $243,250 as a lump sum in cash, (ii) a
lump sum in cash equal to the cost of his benefits for two years, (iii)
out-placement services in connection with finding new employment and (iv) the
right to immediately exercise all outstanding stock options granted to him by
the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Ms. Pierpont served as a member of the Company's Compensation Committee in
2002 and also served as the Chairman of the Board of Directors until August,
2001, and as President and Chief Executive Officer thereafter for which she
receives a salary of $150,000 annually and reimbursement for her expenses
incurred on behalf of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth in Part II, Item 5 of this Form 10-K under the
caption "Securities Authorized for Issuance Under Equity Compensation Plans" is
hereby incorporated by reference into this Item 12.
The following table sets forth information, as of March 30, 2003, with
respect to the beneficial ownership of shares of Common Stock of the Company by
each person who is known to the Company to be the beneficial owner of more than
five percent of the outstanding Common Stock, by each director or nominee for
director, by each of the named executive officers, and by all directors and
executive officers as a group.
Page 29 of 59
Amount and Nature of Percent of Voting
Name and Address of Beneficial Owner Beneficial Ownership (1) Power
- ------------------------------------------------ ------------------------ -----------------
EXECUTIVE OFFICERS AND DIRECTORS (2)
Virginia L. Pierpont (3) 653,201 7.8%
Dennis C. Fairchild (4) 270,249 3.1%
Malcolm G. Wright (5) 248,666 2.9%
Nigel W.E. Curlet (6) 94,871 1.1%
Gunther E.A. Fritze (7) 111,191 1.3%
B.K. Prasad (8) 63,333 0.7%
James R. Wilkinson (9) 55,000 0.7%
OTHER SHAREHOLDERS
Worcester Discretionary Trust (10) 631,092 7.5%
Woodbourne Discretionary Trust (10) 629,034 7.5%
Dimensional Fund Advisors, Inc. (11) 477,200 5.7%
John Andrew Cowan (11) 1,260,126 15.0%
Roger Geoffrey Barrs (12) 1,260,126 15.0%
Purse Holding Limited (13) 5,000,000 43.8%
All directors and executive officers as a group 1,496,511 16.2%
(7 persons)
* Less than 1%
(1) Each beneficial owner's percentage ownership is determined by assuming that
options that are held by such person (but not those held by any other person)
and that are exercisable within 60 days of March 30, 2003 have been exercised.
Options that are not exercisable within 60 days of March 31, 2003 have been
excluded. Unless otherwise, noted, the Company believes that all persons named
in the above table have sole voting and investment power with respect to all
shares of Common Stock beneficially owned by them.
(2) Unless indicated otherwise, the address of each of these people is: c/o DA
Consulting Group, Inc., 5847 San Felipe, Suite 1100, Houston, Texas 77057.
(3) Includes (i) 370,000 shares owned by Ms. Pierpont's spouse, Nicholas
Marriner, the former President and Chief Executive Officer of the Company and
Chairman of the Board of Directors, (ii) 8,400 shares held by Ms. Pierpont as
custodian for three minors, and (iii) 34,358 shares that may be acquired upon
exercise of stock options. Ms. Pierpont disclaims beneficial ownership of the
shares owned by her spouse and held as custodian for three minors.
(4) Includes 260,749 shares that may be acquired upon exercise of stock
options.
(5) Includes 248,666 shares that may be acquired upon exercise of stock
options.
(6) Represents (i) 11,130 shares owned by Mr. Curlet's spouse, (ii) 1,450 shares
owned by Mr. Curlet's son, and (iii) 82,291 shares that may be acquired upon the
exercise of stock options.
(7) Includes 82,291 shares that may be acquired upon exercise of stock options.
(8) Includes 63,333 shares that may be acquired upon exercise of stock options.
(9) Includes 30,000 shares that may be acquired upon exercise of stock options.
(10) Messrs. John Andrew Cowan and Roger Geoffrey Barrs are the co-trustees of
the trust. The trustees have the power to appoint all or any part of the capital
and income of the trust to one or more of the beneficiaries described in the
trust deed and in such names and proportions and at such time as such trustees
shall in their discretion determine. The address of this stockholder is: Victory
House, 7th Floor, Prospect Hill, Douglas, Isle of Man, British Isle, IM1 1EQ.
(11) Information with respect to the ownership of this stockholder was obtained
from Schedule 13G filed February 10, 2003, with the Securities and Exchange
Commission. The address of this stockholder is: 1299 Ocean Avenue, Eleventh
Floor, Santa Monica, CA 90401.
Page 30 of 59
(12) Represents (i) 631,092 shares held by such stockholder as a co-trustee of
the Worcester Discretionary Trust and (ii) 629,034 shares held by such
stockholder as co-trustee of the Woodbourne Discretionary Trust. Such
stockholder disclaims beneficial ownership of the shares held by the trusts. The
address of this stockholder is: Victory House, 7th Floor, Prospect Hill,
Douglas, Isle of Man, British Isle, IM1 1EQ.
(13) Includes 3,000,000 shares that may be acquired by Purse Holding Limited
("Purse") upon exercise of a warrant, exercisable until October 16, 2003. Purse
is a British Virgin Islands limited company. Chanderia Charitable Foundation
1982 No. 5 ("Foundation") is the sole shareholder of Purse. R&H Trust Co.
(Bermuda) Limited ("Trust") is the Trustee of Foundation. John David Boden and
Paul Barrington Hubbard are the joint owners of Trust. Mr. Boden is also the
President and a Director of Trust. Mr. Hubbard is also the Vice-President and a
Director of Trust and the settlor of Foundation. Purse, Foundation, Trust, and
Messrs. Boden and Hubbard have the shared power to vote or to direct the vote of
or to dispose or direct the disposition of the shares of Common Stock.
Foundation, Trust, and Messrs. Boden and Hubbard disclaim beneficial ownership
of the 5,000,000 shares of Common Stock. The address of Purse is:
Altstetterstrasse 126, P.O. Box 1705, CH-8048, Zurich, Switzerland. The address
of Foundation, Trust and Messrs. Boden and Hubbard is: Corner House, 20
Parliament Street, Hamilton HM 12, Bermuda. Information with respect to these
stockholders was obtained from Schedule 13D filed March 16, 2001 with the
Securities and Exchange Commission.
WARRANTS TO PURCHASE COMMON STOCK
On October 16, 2000, the Company consummated the sale to Purse Holding
Limited, a British Virgin Islands limited company ("Purse"), of two million
shares of the Company's Common Stock for $4.8 million and warrants to purchase
up to three million shares of the Company's Common Stock. The sale was effected
pursuant to a Securities Purchase Agreement, dated August 2, 2000, between the
Company and Purse. In accordance with the terms of the Securities Purchase
Agreement, the Company issued (i) two million shares of Common Stock at a price
of $2.40 per share and (ii) warrants to purchase (a) two million shares of
Common Stock, exercisable until October 16, 2003, at the greater of $3.00 per
share or 85% of the market price per share of the Company's Common Stock at the
time of exercise, and (b) one million shares of Common Stock, exercisable for
the period of time after January 1, 2002, and until October 16, 2003, at $3.00
per share. As of April 30, 2001, there were 8,418,604 shares of the Company's
Common Stock outstanding. Therefore, if Purse exercised the warrants, it would
own 44% of the outstanding shares of Common Stock, assuming there were no other
changes in the number of shares outstanding.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable.
ITEM 14. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains controls and procedures designed to ensure that it is
able to collect the information it is required to disclose in the reports it
files with the SEC, and to process, summarize and disclose this information
within the time periods specified in the rules of the SEC. The Company's Chief
Executive and Chief Financial Officers are responsible for establishing and
maintaining these procedures, and, as required by the rules of the SEC, evaluate
their effectiveness. Based on their evaluation of the Company's disclosure
controls and procedures which took place as of a date within 90 days of the
filing date of this report, the Chief Executive and Chief Financial Officers
believe that these procedures are effective to ensure that the Company is able
to collect, process and disclose the information it is required to disclose in
the reports it files with the SEC within the required time periods.
INTERNAL CONTROLS
The Company maintains a system of internal controls designed to provide
reasonable assurance that: transactions are executed in accordance with
management's general or specific authorization; transactions are recorded as
necessary (1) to permit preparation of financial statements in conformity with
generally accepted accounting principles, and (2) to maintain accountability for
assets; access to assets is permitted only in accordance with management's
general or specific authorization; and the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
Page 31 of 59
Since the date of the most recent evaluation of the Company's internal
controls by the Chief Executive and Chief Financial Officers, there have been no
significant changes in such controls or in other factors that could have
significantly affected those controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this Report.
1. The following financial statements of the Company and the related
reports of independent accountants are filed herewith:
Page
------
Number
------
Reports of Independent Certified Public Accountants 37
Consolidated Financial Statements:
Balance Sheets at December 31, 2001 and 2002 39
Statements of Operations for the years ended December 31, 2000, 2001, and 2002 40
Statements of Shareholders' Equity for the years ended December 31, 2000, 2001 and 2002 41
Statements of Cash Flows for the years ended December 31, 2000, 2001 and 2002 42
Notes to Consolidated Financial Statements 43
2. Schedules for which provisions were made in accordance with applicable
accounting regulations of the Securities and Exchange Commission are
inapplicable and therefore have been omitted.
(b) Reports on Form 8-K.
None
Page 32 of 59
(c) Exhibits
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1* - Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to the Company's Form S-1/A filed
April 20, 1998).
3.2* - Bylaws of the Company, amended on August 6, 1999 (incorporated
by reference to the Company's Form 10-Q filed November 15,
1999).
4.1* - Specimen Stock Certificate (incorporated by reference to the
Company's Form S-1/A filed April 20, 1998).
10.1* + - Amended and Restated 1997 Stock Option Plan (incorporated by
reference to the Company's Form 10-K filed March 30, 2000).+
10.2* - Securities Purchase Agreement dated August 2, 2000 between the
Company and Purse Holding Limited (incorporated by reference
to Annex I to the Company's Definitive Proxy Statement filed
September 11, 2000).
10.3* + - Change in Control Agreement between Dennis C. Fairchild and the
Company dated September 30, 1999 (incorporated by reference to
the Company's Form 10-Q filed November 13, 1999).+
10.4* + - Change in Control Agreement between Malcolm Wright and the
Company dated April 10, 2000. (incorporated by reference to the
Company's Form 10-K filed April 2, 2001). +
10.5* + - Conditions of Employment Agreement between Malcolm Wright and DA
Consulting Services Limited dated February 6, 2001.
(incorporated by reference to the Company's Form 10-K/A filed
April 30, 2001). +
10.6* + - Employment Agreement between the Company and Virginia L.
Pierpont dated October 12, 2000. (incorporated by reference to
the Company's Form 10-K/A filed April 30, 2001). +
21.1 - Subsidiaries of the Company. (incorporated by reference to the
Company's Form 10-K/A filed April 30, 2001).
23.1 - Consent of BDO Seidman, LLP.
23.2 - Consent of PricewaterhouseCoopers LLP.
99.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of
Virginia L. Pierpont, President and Chief Executive Officer.
99.2 - Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of
Dennis C. Fairchild, Chief Financial Officer.
+ Management contract or compensatory benefit plan or arrangement.
* Incorporated by reference.
Page 33 of 59
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 31, 2003.
DA Consulting Group, Inc.
(Registrant)
By: /s/ Virginia L. Pierpont
------------------------
Virginia L. Pierpont
President and Chief Executive Officer
By: /s/ Dennis C. Fairchild
-----------------------
Dennis C. Fairchild
Chief Financial Officer, Executive Vice
President, Secretary and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on March 31, 2003.
SIGNATURE TITLE
- ------------------------ -------------------------------------------------------------
/s/ VIRGINIA L. PIERPONT Chief Executive Officer and President (Principal Executive
- ------------------------ Officer)
Virginia L. Pierpont
/s/ DENNIS C. FAIRCHILD Chief Financial Officer, Executive Vice President, Secretary
- ------------------------ and Treasurer (Principal Financial and Accounting Officer)
Dennis C. Fairchild
/s/ NIGEL W.E. CURLET Director
- ------------------------
Nigel W.E. Curlet
/s/ GUNTHER E. A. FRITZE Director
- ------------------------
Gunther E. A. Fritze
/s/ B.K. PRASAD Director and Chairman
- ------------------------
B.K. Prasad
/s/ JAMES R. WILKINSON Director
- ------------------------
James R. Wilkinson
Page 34 of 59
CERTIFICATION PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Virginia L. Pierpont, Chief Executive Officer of DA Consulting Group,
Inc., certify that:
1. I have reviewed this annual report on Form 10-K of DA Consulting Group,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003 /s/ Virginia L. Pierpont
Virginia L. Pierpont
Chief Executive Officer
Page 35 of 59
CERTIFICATION PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Dennis C. Fairchild, Chief Financial Officer of DA Consulting Group,
Inc., certify that:
1. I have reviewed this annual report on Form 10-K of DA Consulting Group,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003 /s/ Dennis C. Fairchild
Dennis C. Fairchild
Chief Financial Officer
Page 36 of 59
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
DA Consulting Group, Inc.:
We have audited the accompanying consolidated balance sheets of DA
Consulting Group, Inc. as of December 31, 2001 and 2002 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
DA Consulting Group, Inc. at December 31, 2001 and 2002, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/BDO Seidman, LLP
Houston, Texas
March 21, 2003
Page 37 of 59
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
DA Consulting Group, Inc.
In our opinion, the consolidated statement of operations, shareholders
equity and cash flows for the year ended December 31, 2000 appearing on pages 40
through 42 of DA Consulting Group, Inc. Annual Report on Form 10-K present
fairly, in all material respects, the results of operations and cash flows of DA
Consulting Group, Inc. and subsidiaries for the year ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Houston, Texas
March 19, 2001
Page 38 of 59
DA CONSULTING GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
--------------------
2001 2002
--------- ---------
ASSETS
------
Current Assets:
Cash and cash equivalents $ 373 $ 576
Accounts receivable, net 4,053 3,615
Unbilled revenue 38 50
Deferred tax asset 629 160
Prepaid expenses and other current assets 352 255
Total current assets 5,445 4,656
--------- ---------
Property and equipment, net 5,394 3,670
Other assets 177 204
Deferred tax asset 5,990 840
Goodwill, net 206 206
--------- ---------
Total assets $ 17,212 $ 9,576
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Revolving line of credit $ 1,077 $ 1,335
Accounts payable 1,759 1,268
Accrued expenses 3,272 3,319
--------- ---------
Total current liabilities 6,108 5,922
--------- ---------
Lease abandonment liabilities 801 526
--------- ---------
Commitments and contingencies (Notes 10 and 11)
Shareholders' equity:
Preferred stock, $0.01 par value: 10,000,000 shares authorized - -
Common stock, $0.01 par value: 40,000,000 shares authorized; 8,571,777 shares
issued and 8,418,604 shares outstanding 85 85
Additional paid-in capital 34,039 34,039
Accumulated deficit (20,782) (28,145)
Accumulated other comprehensive loss (1,517) (1,329)
Treasury stock, at cost: 153,173 shares (1,522) (1,522)
--------- ---------
Total shareholders' equity 10,303 3,128
--------- ---------
Total liabilities and shareholders' equity $ 17,212 $ 9,576
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
Page 39 of 59
DA CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
----------------------------
2000 2001 2002
--------- -------- --------
Revenue $ 30,989 $28,654 $23,671
Cost of revenue 20,656 16,536 14,184
--------- -------- --------
Gross profit 10,333 12,118 9,487
Selling and marketing expense 4,945 3,280 2,342
Development expense 3,667 702 165
General and administrative expense 16,884 10,411 7,876
Amortization expense 760 592 574
Restructuring charge 4,666 - -
--------- -------- --------
Operating loss (20,589) (2,867) (1,470)
--------- -------- --------
Interest income (expense), net 31 (54) (29)
Other expense, net (6) (272) (96)
--------- -------- --------
Total other income (expense), net 25 (326) (125)
--------- -------- --------
Loss before provision for income taxes (20,564) (3,193) (1,595)
--------- -------- --------
Provision for income taxes:
Deferred provision (benefit) (7,347) 2,507 5,768
--------- -------- --------
Provision (benefit) for income taxes (7,347) 2,507 5,768
--------- -------- --------
Net loss $(13,217) $(5,700) $(7,363)
========= ======== ========
Basic and diluted loss per share $ (1.93) $ (0.68) $ (0.87)
Weighted average shares outstanding 6,841 8,419 8,419
The accompanying notes are an integral part of the consolidated financial
statements.
Page 40 of 59
DA CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TREASURY STOCK TOTAL
------------ PAID-IN ACCUMULATED COMPREHENSIVE ------------- SHAREHOLDERS'
NUMBER PAR CAPITAL DEFICIT LOSS NUMBER COST EQUITY
- ------------------------------------ ------ ---- -------- ------------- --------------- ------ -------- ---------------
BALANCE AS OF DECEMBER 31, 1999 6,572 $ 65 $ 29,355 $ (1,865) $ (795) 153 $(1,522) $ 25,238
Issuance of common stock 2,000 20 2,446 - - - - 2,466
Issuance of warrants 2,238 - - - 2,238
- - - (13,217) - - (13,217)
Net loss
Foreign currency translation
Adjustment, net of taxes of $241 - - - - (434) - - (434)
- ------------------------------------ ------ ---- -------- ------------- --------------- ------ -------- ---------------
BALANCE AS OF DECEMBER 31, 2000 8,572 85 34,039 (15,082) (1,229) 153 (1,522) 16,291
Net loss - - - (5,700) - - - (5,700)
Foreign currency translation
Adjustment, net of taxes of $176 - - - - (288) - - (288)
- ------------------------------------ ------ ---- -------- ------------- --------------- ------ -------- ---------------
BALANCE AS OF DECEMBER 31, 2001 8,572 85 34,039 (20,782) (1,517) 153 (1,522) 10,303
Net loss - - - (7,363) - - - (7,363)
Foreign currency translation
Adjustment, net of taxes of $115 - - - - 188 - - 188
- ------------------------------------ ------ ---- -------- ------------- --------------- ------ -------- ---------------
BALANCE AS OF DECEMBER 31, 2002 8,572 $ 85 $ 34,039 $ (28,145) $ (1,329) 153 $(1,522) $ 3,128
- ------------------------------------ ------ ---- -------- ------------- --------------- ------ -------- ---------------
The accompanying notes are an integral part of the consolidated financial
statements.
Page 41 of 59
DA CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-----------------------------
2000 2001 2002
--------- -------- --------
Cash flows from operating activities:
Net loss $(13,217) $(5,700) $(7,363)
--------- -------- --------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,010 2,306 1,779
Provision for (recovery of) doubtful accounts 662 (274) 36
Writedown of property and equipment, goodwill and reserve for leasehold
abandonment 3,195 155 9
Deferred income taxes (7,347) 2,507 5,768
Loss on sale on property and equipment 237 157 25
Changes in operating assets and liabilities:
Accounts receivable and unbilled revenue 2,918 1,615 390
Prepaid expenses and other current assets 16 88 97
Other assets (254) 77 (27)
Accounts payable and accrued liabilities (1,367) (2,383) (1,024)
Deferred income (112) - 76
Income taxes payable 2,979 - -
--------- -------- --------
Total Adjustments 3,937 4,248 7,129
--------- -------- --------
Net cash used in operating activities (9,280) (1,452) (234)
--------- -------- --------
Cash flows from investing activities:
Proceeds from sale of property and equipment 263 295 30
Sale of short-term investments 2,389 - -
Purchases of property and equipment (253) (54) (39)
--------- -------- --------
Net cash provided by (used in) investing activities 2,399 241 (9)
--------- -------- --------
Cash flows from financing activities:
Net proceeds from revolving line of credit 154 923 258
Issuance of stock and warrants 4,800 - -
Offering costs (96) - -
--------- -------- --------
Net cash provided by (used in) financing activities 4,858 923 258
--------- -------- --------
Effect of changes in foreign currency exchange rate on cash and cash equivalents (434) (288) 188
--------- -------- --------
(Increase) Decrease in cash and cash equivalents (2,457) (576) 203
Cash and cash equivalents at beginning of year 3,406 949 373
--------- -------- --------
Cash and cash equivalents at end of year $ 949 $ 373 $ 576
========= ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
Page 42 of 59
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 an
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 wholly
owned subsidiaries. Intercompany balances and transactions have been eliminated
in consolidation.
Management Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ materially
from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Expenditures for substantial
renewals and betterments are capitalized, while repairs and maintenance are
charged to expense as incurred. Assets are depreciated or amortized using the
straight-line method for financial reporting purposes and accelerated methods
for tax purposes over their estimated useful lives. Computer equipment is
depreciated over a useful life of three to five years. Furniture is depreciated
over a seven year useful life. Leasehold improvements are depreciated over the
term of the lease. In 1999 the Company capitalized $3.3 million in
implementation costs related to the Company's primary information system.
Purchased software and internal software development costs related to the
Company's primary information system are amortized over a seven year period.
Management reviews property and equipment for impairment whenever events or
changes in circumstances indicate that the carrying amount of a group of assets
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount exceeds the fair value of the assets which considers the
discounted future net cash flows. Assets to be disposed of are reported at the
lower of the carrying amount or the fair value less costs of disposal. At
December 31, 2002 their was no such impairment of property and equipment.
Software Development Costs
The Company capitalizes software development costs beginning when product
technological feasibility is established and concluding when the product is
ready for general release. At such time, software development costs are
amortized on a straight-line basis over the lesser of three years or the
expected life of the product. Research costs related to software development are
expensed as incurred. All software development costs for the Company's web
based learning management system, Dynamic IQ, were expensed during the years
2000 and 2001.
Income Taxes
The Company recognizes deferred income taxes for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are determined based on
the difference between the financial statement carrying amount and tax basis of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. A valuation allowance is provided
against deferred tax assets which management considers more likely than not will
fail to be realized.
Page 43 of 59
Foreign Currency Translation and Other Comprehensive Loss
For the Company's foreign subsidiaries, the local currency is the
functional currency. For countries with highly inflationary currencies, the
Company uses the U.S. dollar as the functional currency. Assets and liabilities
are translated at year-end exchange rates, and related revenue and expenses are
translated at the average exchange rates in effect during the period. Resulting
translation adjustments are recorded as a separate component in shareholders'
equity, accumulated other comprehensive loss, which is excluded from net loss.
Other comprehensive income (loss) is added to the net loss to determine the
total comprehensive loss of the Company. The components of comprehensive loss
are listed below (in thousands):
YEARS ENDED DECEMBER 31,
------------------------------
2000 2001 2002
--------- -------- --------
Net loss $(13,217) $(5,700) $(7,363)
Other comprehensive income (loss) (434) (288) 188
--------- -------- --------
Comprehensive loss $(13,651) $(5,988) $(7,175)
--------- -------- --------
Risks and Uncertainties
For the years ended December 31, 2000, 2001 and 2002, the Company incurred
losses before income tax totaling approximately $20.6, $3.2, and $1.6 million,
respectively. At December 31, 2002, the Company generated net operating loss
carryforwards for tax reporting purposes of approximately $32.7 million ($11.9
million of deferred tax assets), of which the Company has recorded a valuation
allowance of approximately $10.3 million, because management considered it more
likely than not that this portion of the deferred tax asset will fail to be
realized.
During the second quarter of 2000, the Company implemented a strategy to
restructure the global operations of the Company. Management completed the
restructuring during the third quarter of 2001. Management believes the
Company's restructuring plan will be successful, and the Company will return to
profitability.
There can be no assurance that management's restructuring plan will yield
sufficient future taxable income necessary to utilize the net operating loss
carryforwards recorded as a deferred tax asset by the Company. The ultimate
realization of the deferred tax asset is dependent upon management's ability to
grow the revenues of the Company, adhere to the cost saving measures put in
place during the restructuring and generate sufficient future taxable income.
Any future decline, in the demand for the Company's services or the Company's
inability to return to profitability will result in the Company being required
to increase the valuation allowance against the deferred tax asset which would
adversely affect the Company's financial position and operating results.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, cash equivalents,
trade accounts receivable, accounts payable and the revolving line of credit.
The Company performs ongoing credit evaluations of its clients and generally
does not require collateral for services. Bad debts have not been significant in
relation to the volume of revenue. The Company maintains cash deposits and cash
equivalents from time to time, which exceed Federally insured limits, with
several major financial institutions. Management periodically assesses the
financial condition of the financial institutions and investees and believes
that any possible credit risk is minimal.
Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, accounts receivable,
accounts payable and the revolving line of credit approximate fair values due to
the short-term nature of these instruments. The estimated fair values of these
instruments have been determined by the Company using available market
information.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are customer obligations due under normal trade terms.
We sell our services to a variety of industries including consumer products,
telecommunications and high tech, engineering and construction, retail, public
sector and oil and gas. We perform continuing credit evaluations of our
customers' financial condition.
Page 44 of 59
Senior management reviews accounts receivable on a monthly basis to
determine if any receivables will potentially be uncollectible. We include any
accounts receivable balances that are determined to be uncollectible, along with
a general reserve, in our overall allowance for doubtful accounts. After all
attempts to collect a receivable have failed, the receivable is written off
against the allowance. Based on the information available to us, we believe our
allowance for doubtful accounts as of December 31, 2002 is adequate. However,
actual write-offs might exceed the recorded allowance. The Company provides an
allowance for accounts receivable which, based on management's analysis, may not
be fully collectible or realizable. The balance of the allowance at December
31, 2001 and 2002, was $224,000 and $205,000, respectively.
Goodwill
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 was being amortized over 25 years until December 31,
2001. Accumulated amortization of goodwill was $279,000 at both December 31,
2001 and 2002.
Prior to 2002, goodwill, representing the excess of the purchase price over
the estimated fair value of the net assets of the acquired business, was
amortized over the period of expected benefit of 15 years. However, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets (SFAS 142) which required that the
Company cease amortization of all intangible assets having indefinite useful
economic lives. Such assets, including goodwill, are not to be amortized until
their lives are determined to be finite, however, a recognized intangible asset
with an indefinite useful life should be tested for impairment annually or on an
interim basis if events or circumstances indicate that the fair value of the
asset has decreased below its carrying value. At December 31, 2002, the Company
evaluated its goodwill and determined that fair value had not decreased below
carrying value and no adjustment to impair goodwill was necessary in accordance
with SFAS No. 142. This analysis of the long-lived assets at December 31, 2001
resulted in the writeoff of $155,000 of goodwill net of accumulated amortization
related to a closed operating unit. The analysis indicated there were no other
impairments in the carrying values of the assets at December 31, 2002.
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 $1.8 million, $2.0 million and
$1.3 million for the years ended December 31, 2000, 2001 and 2002, respectively.
The Company recognizes product revenue upon shipment to the client if no further
services are required.
Significant Clients
During the years 2001 and 2002, one client accounted for approximately 18%
and 12% of consolidated revenue, respectively. During the year 2000, no
individual client account for more than 10% of consolidated revenue.
Earnings Per Share
Basic earnings per share is based on the weighted average number of common
shares outstanding. Diluted earnings per share is based on the weighted
average number of common and potential dilutive common shares outstanding and
utilizes the average market price per share when applying the treasury stock
method in determining potential dilutive shares.
Accounting for Stock Options
Page 45 of 59
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 intrinsic vale of the
Company's common stock exceeds the exercise price on the date of grant. The
amount of compensation cost, if any, is charged to income over the vesting
period.
New Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections (SFAS 145). This statement
eliminates the current requirement that gains and losses on debt extinguishment
must be classified as extraordinary items in the income statement. Instead, such
gains and losses will be classified as extraordinary items only if they are
deemed to be unusual and infrequent, in accordance with the current GAAP
criteria for extraordinary classification. In addition, SFAS 145 eliminates an
inconsistency in lease accounting by requiring that modifications of capital
leases that result in reclassification as operating leases be accounted for
consistent with sale-leaseback accounting rules. The statement also contains
other nonsubstantive corrections to authoritative accounting literature. The
changes related to debt extinguishment will be effective for fiscal years
beginning after May 15, 2002, and the changes related to lease accounting will
be effective for transactions occurring after May 15, 2002. Adoption of this
standard will not have any immediate effect on the Company's consolidated
financial statements. The Company will apply this guidance prospectively.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS 146), which addresses accounting for
restructuring and similar costs. SFAS 146 supersedes previous accounting
guidance, principally Emerging Issues Task Force (EITF) Issue No. 94-3. The
Company will adopt the provisions of SFAS 146 for restructuring activities
initiated after December 31, 2002. SFAS 146 requires that the liability for
costs associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF No. 94-3, a liability for an exit cost was
recognized at the date of a company's commitment to an exit plan. SFAS 146 also
establishes that the liability should initially be measured and recorded at fair
value. Accordingly, SFAS 146 may affect the timing of recognizing future
restructuring costs as well as the amount recognized.
In December 2002, the FASB issued SFAS No. 148, Accounting for stock-Based
Compensation - Transition and Disclosure (SFAS 148), which amended SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS 123). The new standard provides
alternatiuve methods of transition for a voluntary change to the fair velue
based method of accounting for stock-based employee compensation. Additionally,
the statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in the annual and interim financial financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. This statement is effective for
financial statements for fiscal years ending after December 15, 2002. In
compliance with SFAS No. 148, DACG has elected to continue to follow the
intrinsic value method in accounting for its stock-based employee compensation
arrangement as defined by APB No. 25, Accounting for Stock Issued to Employee,
and has made the applicable disclosures in note 8 to the consolidated financial
statements.
2. MANAGEMENT'S RESTRUCTURING AND LIQUIDITY
During the first quarter of 2000, management began to restructure the
global operations of the Company. As part of the plan, management was required
to downsize the Company based upon current and future projected operating
results. Some of the restructuring initiatives taken by management were as
follows:
- Reduction in the number of consultants
- Reduction of administrative personnel
- Reduction in office space
- Various other cost cutting measures
Management completed the restructuring of the Company during the third
quarter of 2001. Restructuring has reduced, but not eliminated, operating
losses.
The Company believes its current cash balances, line of credit,
receivable-based financing and cash provided by future operations will be
sufficient to meet the Company's working capital and cash need for the next
fiscal year. However, there can be no assurance that such sources will be
sufficient to meet these future expenses and the Company's future needs. The
Company may seek additional financing through a private or public placement of
equity. The Company's need for additional financing will be principally
dependent on the degree of market demand for the Company's services. There can
be no assurance that the Company will be able to obtain any such additional
financing on acceptable terms, if at all.
Page 46 of 59
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
The components of prepaid expenses and other current assets were as follows
(in thousands):
DECEMBER 31,
------------
2001 2002
----- -----
Prepaid rent $ 185 $ 68
Deposits 26 22
Other 141 165
----- -----
Prepaid expenses and other current assets $ 352 $ 255
===== =====
4. PROPERTY AND EQUIPMENT, NET
The components of property and equipment were as follows (in thousands):
DECEMBER 31,
------------------
2001 2002
-------- --------
Computer equipment $ 4,342 $ 1,260
Furniture and fixtures 900 798
Leasehold improvements 544 140
Software development and implementation costs 4,177 4,207
Purchased software 3,164 3,144
-------- --------
Property and equipment 13,127 9,549
Less accumulated depreciation and amortization (7,733) (5,879)
-------- --------
Property and equipment, net $ 5,394 $ 3,670
======== ========
5. DEBT
Revolving Line of Credit
The Company has a credit facility from a foreign bank with an available
line of approximately $1.2 million (750,000 Great Britain Pounds),
collateralized by and based on eligible foreign accounts receivable, secured by
a mortgage deed against all the assets of the Europe Division and guaranteed by
the Company. At December 31, 2002, the Company had used $0.1 million in excess
of the line available. The interest rate on this line of credit was 6.0% at
December 31, 2002. The line is available through March 2004, however, it may
become due upon demand. At March 21, 2003 the amount borrowed against the line
of credit was $672,000.
Accounts Receivable Financing
The Company has an agreement with a bank, which provides for financing of
eligible U.S. accounts receivable under a purchase and sale agreement. The
maximum funds available under the agreement is $2.5 million. The agreement
allows for the bank to request repurchase of an account receivable under certain
conditions. The bank has never requested repurchase of an account receivable.
At December 31, 2002, the Company had not sold accounts receivable pursuant to
this agreement. At March 21, 2003 there were $339,000 in receivables sold under
the agreement. At December 31, 2001 and 2002, $379,165 and $277,957,
respectively, of eligible accounts receivable under the purchase and sale
agreement were available for financing.
Page 47 of 59
6. ACCRUED EXPENSES
The components of accrued expenses were as follows (in thousands):
DECEMBER 31,
--------------
2001 2002
------ ------
Compensation and related expenses $ 495 $ 589
Bonuses 388 176
Professional fees 427 270
Vacations 442 721
Other taxes 634 464
Leasehold abandonment reserve, current portion 319 622
Other 567 477
------ ------
Accrued expenses $3,272 $3,319
====== ======
7. INCOME TAXES
The following is a summary of the significant components of the Company's
deferred income taxes (in thousands):
DECEMBER 31,
-------------------
2001 2002
-------- ---------
Deferred tax assets:
Net operating loss carryforward $11,100 $ 11,886
Accrued expenses 870 526
Valuation allowance (4,000) (10,319)
-------- ---------
Deferred tax assets 7,970 2,093
-------- ---------
Deferred tax liabilities:
Property and equipment 1,351 1,093
-------- ---------
Deferred tax liabilities 1,351 1,093
-------- ---------
Net, deferred tax assets $ 6,619 $ 1,000
======== =========
At December 31, 2002, for US Federal income tax reporting purposes, the
Company had $24.9 million of unused net operating losses available for
carryforward to future years. The benefit from carryforward of such net
operating losses will expire in 2020, 2021 and 2022.
At December 31, 2002, the Company also had foreign net operating loss
carryforwards totaling $7.8 million with $3.8 million expiring in 2006. The
remaining $4.0 million have no expiration date.
The benefit from utilization of net operating loss carryforwards could be
subject to limitations if significant ownership changes occur in the Company.
The Company's ability to realize the entire benefit of its deferred tax asset
requires that the Company achieve certain future earnings levels prior to the
expiration of its NOL carryforwards. The Company recorded a $4.0 million and
a $6.3 million valuation allowance against deferred tax assets during 2001 and
2002, respectively. The Company believes it will generate sufficient taxable
income to realize the remaining $1.0 million in deferred tax assets. The Company
could be required to record a valuation allowance for the remaining net carrying
value of its deferred tax asset if market conditions deteriorate and future
earnings are below, or projected to be below, its current estimates and
management believes it is more likely than not the deferred tax assets will fail
to be realized.
Page 48 of 59
The components of the Company's provision for income taxes were as follows (in
thousands):
DECEMBER 31,
------------------------
2000 2001 2002
-------- ------ ------
United States federal and state:
Deferred provision (benefit) $(5,121) $2,334 $4,086
-------- ------ ------
(5,121) 2,334 4,086
-------- ------ ------
Foreign:
Deferred provision (benefit) (2,226) 173 1,682
-------- ------ ------
(2,226) 173 1,682
-------- ------ ------
Provision (benefit) for income taxes $(7,347) $2,507 $5,768
======== ====== ======
The difference between the effective federal income tax rate reflected in
the provision (benefit) for income taxes and the statutory federal income tax
rate are summarized as follows:
DECEMBER 31,
-------------------------
2000 2001 2002
------ ------- ------
U.S. statutory rate (34.0)% (34.0)% (34.0)%
State and local (2.7) (4.3) (2.4)
Foreign 0.5 (1.1) 0.7
Other 0.5 1.3 2.2
Valuation allowance. - 116.6 395.2
------ ------- ------
Effective tax rate (35.7)% 78.5 % 361.7 %
====== ======= ======
The U.S. components of income (loss) before taxes were $(13.7), $(3.4) and
$(1.0) million in 2000, 2001 and 2002, respectively, and the foreign components
were $(6.9), $0.2 and $(0.6) million in 2000, 2001 and 2002, respectively.
8. STOCK-BASED COMPENSATION PLANS
Stock Options
The Company's 1997 Stock Option Plan, as amended in December 1999 (the
"Option Plan"), is a stock-based incentive compensation plan. Under the Option
Plan, the Company is authorized to issue 1,960,000 shares of common stock
pursuant to "awards" granted in the form of incentive stock options (intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as amended) and
non-qualified stock options not intended to qualify under Section 422. Awards
may be granted to selected employees, directors, independent contractors, and
consultants of the Company or any subsidiary. Stock options granted have
contractual terms of 10 years. Unless otherwise specified in the terms of an
award, all options vest on a schedule: 33% per year for 3 years, beginning on
the second anniversary of the date of grant. Options granted under the Option
Plan are at prices equal to the fair market value of the stock on the date of
the grant, as determined by the Company's Board of Directors. To date, no stock
options have been granted to independent contractors and consultants of the
Company.
Page 49 of 59
The following table sets forth pertinent information regarding stock option
transactions and stock option prices during the years ended December 31, 2000,
2001 and 2002:
NUMBER OF WEIGHTED
SHARES OF AVERAGE
UNDERLYING EXERCISE
OPTIONS PRICES
------------ --------
Outstanding at December 31, 1999 1,041,060 9.63
Granted 1,038,699 1.98
Exercised
Forfeited (750,162) 9.48
------------
Outstanding at December 31, 2000 1,329,597 3.61
Granted 1,172,749 0.38
Exercised
Forfeited (1,010,496) 3.40
------------
Outstanding at December 31, 2001 1,491,850 1.21
Granted 458,875 .18
Exercised - -
Forfeited ( 53,320) 1.40
------------ --------
Outstanding at December 31, 2002 1,897,405 0.96
------------ --------
Exercisable at December 31, 2000 262,430 6.04
------------ --------
Exercisable at December 31, 2001 618,957 1.64
------------ --------
Exercisable at December 31, 2002 1,045,595 1.33
============ ========
Weighted average exercise price of options granted during the year ended
December 31, 2002 $ 0.18
========
The following table sets forth pertinent information regarding the
outstanding stock options at December 31, 2002:
Options Outstanding Options Exercisable
----------------------------------------- ----------------------------
Weighted-
Actual Range Weighted Average Average Weighted-
of Exercise Number Remaining Exercise Number Average
Prices Outstanding Contractual Life Price Exercisable Exercise Price
- -------------- ----------- ---------------- ---------- ----------- ---------------
$0.00 - 0.17 439,875 9.9 $ 0.17 120,000 $ 0.17
0.30 - 0.78 1,052,899 8.9 0.32 624,831 0.32
1.00 - 1.56 148,950 7.7 1.20 94,983 1.29
1.69 - 3.25 134,366 7.4 2.13 96,066 2.16
3.44 - 15.25 121,315 5.4 7.72 109,715 7.63
- -------------- ----------- ---------------- ---------- ----------- ---------------
0.00 - 15.25 1,897,405 6.8 0.96 1,045,595 1.33
Pro Forma Net Loss and Loss Per Share
Had the compensation cost for the Company's stock-based compensation plan
been determined consistent with SFAS No. 123, the Company's net loss per share
at December 31, 2000, 2001 and 2002 would approximate the pro forma amounts
below (in thousands except per share amounts):
2000 2001 2002
--------- -------- --------
Net loss, as reported $(13,217) $(5,700) $(7,363)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (1,780) (3,693) (1,050)
--------- -------- --------
Pro forma (14,997) (9,393) (8,413)
Basic and diluted earnings per share:
As reported $ (1.93) $ (0.68) $ (0.87)
Pro forma (2.19) (1.12) (1.00)
Page 50 of 59
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 3.13% to 6.77%; volatility ranging from 50% to 137%; and expected
life of 5 years. The effects of applying SFAS No. 123 in this pro forma
disclosure are not indicative of future amounts.
9. SHAREHOLDERS' EQUITY
Issuance of Common Stock and Stock Warrants
On October 16, 2000, the Company consummated the sale to Purse Holding
Limited ("Purse"), a British Virgin Islands limited company, of two million
shares of the Company's common stock for $4.8 million and warrants to purchase
up to three million shares of the Company's common stock. The sale was effected
pursuant to a Securities Purchase Agreement ("the Agreement") dated August 2,
2000, between the Company and Purse. The Agreement was approved by the
Company's shareholders at a special meeting held on October 12, 2000. The
Company credited its $2 million loan, received from Purse on August 3, 2000,
toward the $4.8 million purchase price of the two million shares of its common
stock.
In accordance with the terms of the Agreement, the Company issued two
million shares of common stock at a price of $2.40 per share including warrants
to purchase (a) two million shares of common stock, exercisable until October
16, 2003, at the greater of $3.00 per share or 85% of the market price per share
of common stock at the time of exercise, and (b) one million shares of common
stock, exercisable for the period of time after January 1, 2002, and until
October 16, 2003, at $3.00 per share.
Loss Per Share
The following table summarizes the Company's computation of loss per share
for the years ended December 31, 2000, 2001 and 2002 (in thousands, except per
share amounts). The calculation of diluted weighted average shares outstanding
excludes 4.3 million, 4.5 million and 4.9 million common shares pursuant to
outstanding options and warrants for the year ended December 31, 2000, 2001 and
2002, respectively, because their effect was antidilutive.
YEARS ENDED DECEMBER 31,
2000 2001 2002
--------- -------- --------
Basic loss per share $ (1.93) $ (0.68) $ (0.87)
========= ======== ========
Net loss $(13,217) $(5,700) $(7,363)
========= ======== ========
Weighted average shares outstanding 6,841 8,419 8,419
Computation of diluted loss per share:
Common shares issuable under outstanding stock options - - -
Less shares assumed repurchased with proceeds from exercise stock
Options - - -
--------- -------- --------
Adjusted weighted average shares outstanding 6,841 8,419 8,419
========= ======== ========
Diluted loss per share $ (1.93) $ (0.68) $ (0.87)
========= ======== ========
10. COMMITMENTS AND CONTINGENCIES
The Company leases various office facilities under non-cancelable operating
lease agreements. Rent expense amounted to $2,656,000, $2,541,000 and
$1,785,000 for the years ended December 31, 2000, 2001 and 2002, respectively.
At December 31, 2002, future lease payments (in thousands) under
non-cancelable leases with terms of more than one year are as follows:
Lease Sublease
Payments Receipts
--------- ---------
2003 $ 2,180 $ 1,214
2004 975 619
2005 119 -
2006 57 -
2007 42 -
--------- ---------
$ 3,373 $ 1,833
=========
Less subleases 1,833
---------
Total $ 1,540
=========
Page 51 of 59
The Company has employment agreements with certain officers and key members
of management of the Company, which automatically renew for one-year terms. The
agreements provide for minimum salary levels, incentive bonuses at the
discretion of the Company's Board of Directors and customary benefits including
insurance coverage. In addition, the employment agreements further provide for
severance pay ranging from six months to two year's base salary, bonus, and
benefits, depending on the cause of termination and in the event of a change in
corporate control.
From time to time, the Company is a party to routine litigation in the
ordinary course of business. The Company does not believe that such litigation
will have a material impact on the financial statements.
11. EMPLOYEE BENEFIT PLANS
401(k) Plan
The Company sponsors a 401(k) profit sharing plan (the "401(k) Plan") which
covers substantially all of its U.S. employees. Employees are eligible to
participate after completing three months of service. The 401(k) Plan provides
for elective contributions by employees up to the maximum limit allowed by the
Internal Revenue Code. The Company currently matches 50% of the amount deferred
by participants, on deferral amounts up to 7.5% of compensation. Although the
Company has not made any profit sharing contributions, the 401(k) Plan permits
the Company to make a discretionary profit sharing contribution which, if made,
is allocated to the accounts of participants who have been credited with 1,000
hours of service during a plan year and who are employed on the last day of a
plan year. The Company made matching contributions equal to $0.50 for the years
ended December 31, 2000, 2001 and 2002 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 sponsors similar plans
in Canada and the United Kingdom and previously in Mexico, South Africa and
Venezuela, pursuant to which employees may defer specified percentages of
compensation which the Company matches at a rate of 50-100% on the first 3-5% of
compensation deferred. The Company made contributions to voluntary retirement
plans aggregating approximately $287,000, $117,000 and $172,558 during the years
ended December 31, 2000, 2001 and 2002, respectively. Payment of benefits is
generally made in the form of a single lump sum or in installments.
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 $1,304,000, $1,586,000 and $843,000
for the years ended December 31, 2000, 2001 and 2002, respectively, which are
included in sales, general and administrative expense.
12. RESTRUCTURING CHARGE AND LEASE ABANDONMENT
During the three month period ended March 31, 2000, the Company implemented
a plan to address the dramatic decline in training and documentation activity
for enterprise resource planning implementations. The plan consisted of
regional base consolidations and downsizing of billable and non-billable
personnel. Charges included the costs of involuntary employee termination
benefits, write-down of certain property and equipment and reserves for
leasehold abandonment.
The reduction in workforce consisted of 60 billable consultants and 44
non-billable administrative personnel. Substantially all of the employee
terminations were completed during the first quarter. The Company recognized
approximately $1.5 million expense attributable to involuntary employee
termination benefits during the first quarter, of which approximately $1.2
million had been paid at December 31, 2000. The remaining $0.3 million in
termination pay was paid during 2001.
During the three months ended March 31, 2000 the Company reserved
approximately $0.9 million related to the abandonment of leases and
approximately $1.0 million related to the writedown of leasehold improvements,
furniture and equipment held by its Americas division. During the fourth
quarter of 2000 due to weakening in the real estate market, the Company recorded
an additional $1.3 million reserve for lease abandonment resulting in a total
annual charge of $2.2 million. During 2000 payments of approximately $0.8
million were charged against the reserve for lease abandonment, resulting in a
remaining reserve at December 31, 2000 of approximately $1.4 million.
Page 52 of 59
During the three months ended June 30, 2001 the Company recorded a $0.8
million charge for the abandonment of additional leases. The charge was
included in general and administrative costs. Payments for unutilized leased
office space totaling $1.1 million were charged against the reserve in 2001. At
December 31, 2001, the Company had a remaining accrual of $1.1 million, of which
$0.8 million is included in long-term liabilities.
During the three months ended December 31, 2002 the Company recorded a $0.4
million charge for the abandonment of additional leases. The charge was
included in general and administrative costs. Payments for unutilized leased
office space totaling $0.3 million were charged against the reserve in 2002. At
December 31, 2002, the Company has a remaining accrual of $1.1 million of which
$0.5 million is included in long-term liabilities.
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
YEARS ENDED DECEMBER, 31
2000 2001 2002
-------- ----- -----
Cash paid (received) for interest and income taxes (in thousands):
Interest $ 74 $ 62 $ 39
Income taxes (2,697) - -
14. SEGMENT REPORTING
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments and geographic areas. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the Company's
chief decision making group. This group is comprised of senior management who
are responsible for the allocation of resources and assessment of operating
performance.
Because the Company's operations are geographically based, the organization
is divided into three operating divisions: the Americas Division, which includes
its operations in North America; the EMEA Division, which includes its
operations in Europe, and the Asia Pacific Division, which includes its
operations in Australia, Singapore and Asia. The Company provides employee
education and support services to companies investing in business technology in
all geographic regions.
The Company's reportable segment information was as follows:
EUROPE,
MIDDLE EAST
(in thousands) AMERICAS & AFRICA ASIA PACIFIC TOTAL
---------- ------------- -------------- ---------
YEAR ENDED DECEMBER 31, 2000
Revenue $ 11,834 $ 12,476 $ 6,679 $ 30,989
Operating loss (12,363) (5,033) (3,193) (20,589)
Total assets 14,872 6,440 3,628 24,940
Capital expenditures 151 34 68 253
Depreciation and amortization 1,530 1,076 404 3,010
YEAR ENDED DECEMBER 31, 2001
Revenue $ 5,389 $ 17,144 $ 6,121 $ 28,654
Operating income (loss) (3,320) 391 62 (2,867)
Total assets 6,630 7,419 3,163 17,212
Capital expenditures 4 34 16 54
Depreciation and amortization. 695 1,205 406 2,306
YEAR ENDED DECEMBER 31, 2002
Revenue $ 3,994 $ 14,966 $ 4,711 $ 23,671
Operating (loss) (1,140) (191) (551) (1,470)
Total assets 1,610 5,817 2,149 9,576
Capital expenditures 14 8 17 39
Depreciation and amortization 344 1,128 307 1,779
Page 53 of 59
15. QUARTERLY OPERATING RESULTS (UNAUDITED)
The following tables set forth unaudited income statement data for each of
the eight quarters in the period beginning January 1, 2001 and ending December
31, 2002, 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,
2001 2001 2001 2001 2002 2002 2002 2002
--------- -------- --------- ---------- --------- --------- --------- ---------
INCOME STATEMENT DATA:
( in thousands except per share amounts)
Revenue . . . . . . . . . . . . . . . . $ 8,536 $ 7,607 $ 5,843 $ 6,668 $ 6,898 $ 5,419 $ 5,893 $ 5,461
Cost of revenue . . . . . . . . . . . . 4,993 4,572 3,332 3,639 3,775 3,405 3,414 3,590
--------- -------- --------- ---------- --------- --------- --------- ---------
Gross profit. . . . . . . . . . . . . . 3,543 3,035 2,511 3,029 3,123 2,014 2,479 1,871
Selling and marketing expense . . . . . 1,058 987 606 629 578 606 614 544
Development expense . . . . . . . . . . 458 174 28 42 45 36 40 44
General and administrative expense. . . 3,375 2,851 2,074 2,111 1,978 2,162 1,881 1,856
Amortization expense. . . . . . . . . . 148 148 148 148 143 144 143 144
--------- -------- --------- ---------- --------- --------- --------- ---------
Operating income (loss) . . . . . . . . (1,496) (1,125) (345) 99 379 (933) (199) (717)
Other income (expense), net . . . . . . 0 (39) (243) (44) (58) (7) (32) (28)
--------- -------- --------- ---------- --------- --------- --------- ---------
Income (loss) before taxes. . . . . . . (1,496) (1,164) (588) 55 321 (940) (231) (745)
Provision (benefit) for income taxes. . (548) 3,185 (30) (100) 235 (192) 3,226 2,499
--------- -------- --------- ---------- --------- --------- --------- ---------
Net income (loss). . . . . . . . . . . $ (948) $(4,349) $ (558) $ 155 $ 86 $ (748) $ (3,457) $ (3,244)
========= ======== ========= ========== ========= ========= ========= =========
Basic earnings (loss) per share . . . . $ (0.11) $ (0.52) $ (0.07) $ 0.02 $ .01 $ (0.09) $ (0.41) $ (0.38)
Weighted average shares outstanding . . 8,419 8,419 8,419 8,419 8,419 8,419 8,419 8,419
Diluted earnings (loss) per share . . . $ (0.11) $ (0.52) $ (0.07) $ 0.02 $ .01 $ (0.09) $ (0.41) $ (0.38)
Weighted average shares outstanding 8,419 8,419 8,419 8,419 8,419 8,419 8,419 8,419
As a percent of revenue
Revenue. . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue . . . . . . . . . . . . 58.5 60.1 57.0 54.6 54.7 62.8 57.9 65.7
--------- -------- --------- ---------- --------- --------- --------- ---------
Gross profit. . . . . . . . . . . . . . 41.5 39.9 43.0 45.4 45.3 37.2 42.1 34.3
Selling and marketing expense . . . . . 12.4 13.0 10.4 9.4 8.4 11.2 10.4 10.0
Development expense . . . . . . . . . . 5.4 2.3 0.5 0.6 0.7 0.7 0.7 0.8
General and administrative expense. . . 39.5 37.5 35.5 31.7 28.7 39.9 31.9 34.0
Amortization expense. . . . . . . . . . 1.7 1.9 2.5 2.2 2.1 2.7 2.4 2.6
--------- -------- --------- ---------- --------- --------- --------- ---------
Operating income (loss) . . . . . . . . (17.5) (14.8) (5.9) 1.5 5.5 (17.2) (3.3) (13.1)
Other income (expense), net . . . . . . - (0.5) (4.2) (0.7) (0.8) (0.1) (0.6) (0.5)
--------- -------- --------- ---------- --------- --------- --------- ---------
Income (loss) before taxes. . . . . . . (17.5) (15.3) (10.1) 0.8 4.7 (17.3) (3.9) (13.6)
Provision (benefit) for income taxes. . (6.4) 41.9 (0.6) (1.5) 3.4 (3.5) 54.8 45.7
--------- -------- --------- ---------- --------- --------- --------- ---------
Net income (loss) . . . . . . . . . . . (11.1)% (57.2)% (9.5)% 2.3% 1.2% (13.8)% (58.7)% (59.3)%
========= ======== ========= ========== ========= ========= ========= =========
Page 54 of 59