ITEM 1. BUSINESS
DA Consulting Group, Inc. ("DACG" or "the Company") is a global consulting firm specializing in learning solutions, employee education, business process mapping, business process improvement, and support for effective change. From its offices in America, Canada, the UK, France, Germany, Singapore and Australia, DACG enables clients to use technology and improve productivity by managing and changing what their employees know.
DACG's core business is:
Process documentation and business process mapping Business process improvement Training for system implementations Change communication Organizational learning solutions Employee performance support E-learning within an organization
MANAGEMENT OF DACG
Significant changes in the management of DACG took place in August 2001. The officers of the Company are:
Chairman Dr. B K Prasad President & CEO Virginia L. (Val) Pierpont Chief Financial Officer Dennis Fairchild Chief Operating Officer Malcolm Wright
The Company was founded in 1984 in Houston, Texas by Val Pierpont, who resumed the CEO role in August 2001. Offering documentation services to the oil and gas industry, it participated in the early implementations of ERP systems in that sector. End-user training was a natural extension of its core expertise and was added to the Company's portfolio in 1989. DACG was well positioned to take advantage of the demand for ERP expertise when that market emerged in the l990's. In particular, there was strong demand for its services in SAP implementations. The new systems were as demanding as they were powerful and DACG created a specialist niche for itself in customized documentation, training and change communication in the Global 2000 market.
The decade from 1988 through 1998 was marked by explosive growth in the Company. In the five years from 1993 to 1998 the average rate of growth was 80% per annum. DACG developed several proprietary tools in this period which captured its knowledge and expertise. Today these continue to help the Company deliver consistently high standards of work at significant savings in time and cost including the following:
DA Passport, a contact sensitive employee performance support system DA Learning Center, a web-enabled repository for all components of corporate learning DA Cornerstone, proprietary methodology DA Foundation, proprietary content and reference materials DA Reporter, a tool for measuring training effectiveness.
DACG is continuing its work with Customer Relationship Management systems, in particular, Siebel, Vantive and SAP. The Company has also significantly expanded its work in the Public Sector.
MARKET
DACG participates in three marketplaces - education, software support tools and documentation and training for ERP (enterprise resource planning) and CRM (customer relationship management) systems. According to industry experts, these markets had a combined value in excess of $8 billion worldwide in 2001. It is expected that they will continue to grow at double digit rates for the near future. There are many service providers in the education and end-user support markets. The providers who compete directly with DACG include software developers, computer training companies, consulting firms and e-learning companies. There is also competition from large international system integrators and technology vendors who provide end-user support programs with their proprietary software.
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DACG's ability to increase revenues in the ERP and CRM training and documentation markets is dependent upon the license sales of the ERP and CRM software. The Company believes the turndown in the ERP marketplace in the second half of 1999 through the first half of 2000 was caused by the diversion of customers' resources to Y2K compliance. This had a decidedly negative impact on the demand for DACG's services. The current trend in the ERP market is towards system upgrades which incorporate internet capability, linking back office functions with the front office and the extended enterprise. In Europe, growth in the ERP market has been partially driven by the need for companies to comply with European Union regulations.
Most of DACG's current revenue is earned in upgrades to ERP systems and new implementations of CRM systems. There is also steady growth in the sale of DACG's proprietary software, including EPSS (electronic performance support systems) and computer based training systems.
New market opportunities for the Company will come with the expansion of e-Learning. A significant investment by DACG in e-Learning software was made in 2000 and 2001 building a proprietary software system called Dynamic IQ. It led to the development of two new software tools, The Learning Center and DA Reporter. Both of these have been well received by the market and provide excellent value in generating new customer relationships as well as useful revenues. Dynamic IQ itself is currently for sale.
BUSINESS STRATEGY
DACG's mission is to support Global 2000 customers who seek to improve what their employees do by managing and changing what their employees know.
DACG will grow a strong and healthy business offering its core expertise to the Global 2000. It will continue to be the leader in its niche by respecting and nurturing relationships with its clients. New developments and new markets will be pursued if they are a natural extension of our core skills and offer a good return on investment. DACG management will focus on cash profits as a measure of its success as custodian of the business, and will at all times protect the interests of both the shareholders and the stakeholders in the Company.
New initiatives for the Company are the Global Account Program and Strategic Alliances and Partnerships. Both of these are driven by an interest in looking after our clients as completely as possible. DACG management believes a prosperous future for the Company can only be secured by linking its goals to the best interests of its clients. Therefore, these programs are important vehicles for growth in the future. The Company has announced the following alliances and partnerships with AXON, Global Knowledge and X-Help.
Maintain Independence and Leverage Existing Client Relationships
The Company provides its consulting and software services independent of the ERP, CRM and e-Learning solutions providers. The Company provides its customers with solutions that are best suited to their environment, budget and technical preferences.
Since 1984 , DACG has provided services to more than 650 of the global Fortune 2000 companies. DACG's strategy is to continue to develop these relationships, particularly as they seek to become continuous learning organizations. Relationships with these companies have been an important source of business leads and referrals. During 2001, approximately 84% of DACG's business came from previous or existing customers. The Company believes that its brand recognition and reputation are important assets in its market and differentiate it from its e-Learning competitors.
Diversify into e-Learning
The lessons learned in 2001 taught us that the market is not receptive to full scale Learning Management Systems (LMS). While everyone can appreciate the benefit of LMS, very few are willing to inflict on their business the cost and disruption that an LMS implementation entails.
DACG has found ready acceptance for The Learning Center, its on-line repository for learning and support content which sells at a fraction of the cost of a full scale LMS. The Learning Center is simple and painless to install; it uses content that DACG has already developed over the course of a project. It differs from an LMS in that it only affects employees who will be end-users. In the course of a typical project, DACG will have already done significant work in Change Management for these people, and that can be re-cycled into The Learning Center.
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The corporate e-Learning marketplace is currently estimated to be $1.7 billion in the U.S. alone and is forecasted to grow to $11 billion by 2003, which is an estimated compound annual growth rate (CAGR) of 65%. Industry estimates put the European marketplace for e-Learning services at $4 billion by 2004. The Company expects to see continued growth in its software tool market, both its own and those of its Alliance Partners.
PRODUCTS AND SERVICES
The Company delivers employee support solutions designed to secure the return on information technology investments of its clients that take into account an organization's individual needs, resources, and requirements. New technology has a significant impact on the business processes of a corporation. Managing a smooth transition during the implementation of a new system, and providing support for end users in the future is essential.
DACG reviews the procedures and tasks that client employees will need to learn once the new system is in place and incorporate them into the end user support.
DA Passport provides on-line context sensitive end-user support, customized to individual jobs.
DACG's proprietary methodology, DA Cornerstone(TM) supports all the project work undertaken by the Company.
Learning and Change Management
Change management is another DACG deliverable. Companies transforming themselves into continuously learning organizations commit themselves to long term change. Clients' employees are affected by this change, seeing it on the desktop in new software and in day-to-day business activities in new procedures and policies. A first step in managing this change is establishing executive management support. However, the real key to successful cultural transformation is eliciting the support of employees, as well as those within the extended enterprise, such as customers and suppliers. Effective utilization of new technology is critical to the success of the learning organization. Common change management deliverables provided by the Company include kick-off meetings, speeches, facilitated collaborative work groups, multimedia presentations, video presentations, and newsletters. These deliverables, in addition to providing critical information, help to ensure a successful and ongoing cultural transformation.
Education
The Company develops educational programs customized to individual client's needs, taking into account the client's infrastructure and resources, the scope of the client's information technology system, language and cultural requirements. In order to influence the way an employee works while getting the best out of a new system, DACG develops training programs that focus on specific end-user job responsibilities, as well as the overall business processes that impact the end-user. DA Foundation is a library of training content material collected over the years that the Company can draw on for these projects.
The Company consults with the client to determine the appropriate format for delivering training such as instructor-led training, computer-based training, and e-Learning. Most clients choose a combination of instructor led and on-line training, supported by DA Passport and The Learning Center post-implementation.
Many companies, particularly those with large and geographically dispersed operations, are increasingly seeking ways to use computer-based training to decrease costs and minimize employee time away from the job. DACG offers both custom and off the shelf computer-based training modules.
DACG offers both synchronous and asynchronous capabilities for computer-based distance learning. Using Symposium software from Centra Software, Inc., DACG provides synchronous distance learning, where many students can follow a single event. DACG provides asynchronous distance learning through custom and SmartForce courses that allow students to work independently and at their own pace. Both of these methods are used by companies with remote user audiences and require only basic information technology infrastructures because they involve distributing content by wide area networks (WAN), corporate intranets, and audio conferencing technology. Typically a client implementing an ERP system or another new business technology will have the required infrastructure already in place. E-Learning is effective in situations where travel, time away from work and cost are important.
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Performance Support
A critical component of the Company's end-user support solution is the documentation of business processes. DACG's documentation is designed to support employees during training and after implementation. The best support should be readily accessed on-line without interrupting the task in hand because the real cost of training is the cost of time off the job. Giving an end-user exactly the information required to perform a specific procedure is crucial to getting a return on investment from a new system.
DACG consultants work with each client to assess ongoing documentation and performance support needs of the particular audience of end-users. Using DA Foundation as a resource, the Company develops support content, creating clearly defined policies, processes, and procedures which the end user will follow in the future in conjunction with the new technology.
More sophisticated performance support solutions are delivered via the client's corporate intranet. Clients are offered a choice of support media according to need, budget and time constraints. Quick reference guides and printed documentation in hard copy are used less often, but can be useful in certain circumstances.
DA Passport is the Company's electronic performance support system ("EPSS"). It provides comprehensive end-user support on-line at the desktop, minimizing interruptions to end users. DA Passport is context sensitive, which means it can track the location of end-users in the client's ERP system. It provides support on a particular application in use at transactional or task level. DACG can link system tasks, business procedures, training, and computer-based training files to ERP transactions using DA Passport technology to provide sophisticated support to end-users.
CLIENTS AND REPRESENTATIVE ENGAGEMENTS
The Company provides custom support solutions around the world to large and mid-sized companies, many of which have information intensive, multinational operations. The Company has provided services to more than 685 clients, including many of the world's leading corporations in a broad range of industries, including oil and gas, information technology, pharmaceutical, chemicals, utilities, telecommunications, consumer products, and manufacturing. The following is a selection of DACG's 2001 clients and representative engagements.
The Company's ten largest clients, in the aggregate, accounted for approximately 38%, 55% and 61% of its billed hour revenue in 1999, 2000, and 2001, respectively. One client accounted approximately 18% of the Company's revenue in 2001.
UNILEVER
Unilever is one of the largest consumer goods businesses in the world. Unilever operates with two global divisions: Unilever BestFoods whose top performing categories are Spreads, Dressings and Leaf Tea, and include brand names such as Flora, Lipton and Knorr; Unilever Home and Personal Care, whose broad range of categories includes fabric cleaning, deodorants, oral care, household cleaning, and hair care with brand names such as Dove, Domestos, Timotei and Persil.
Each of these divisions is implementing and upgrading SAP and DACG is providing the education solution for both. By adopting common information systems and sharing best practices Unilever will achieve better cost-control as well as visibility of costs. All in all, Unilever intends that the introduction of common business practices and systems will support profitable growth for the Company.
DACG was awarded Gold at the 2002 IT Training Awards, for working with Unilever providing education solutions. The multilingual project included delivery in seven different languages to countries across Europe and encompassed cutting-edge technology, change communications, innovative training and support techniques, and strong project management. DACG developed a tailor-made electronic performance support solution using DA Learning Center, a web-enabled flexible learning management tool to deliver custom training programs to over 20,000 employees. DACG used a sophisticated context-sensitive end-user help tool, DA Passport, that delivers customized business process and application support on demand to the employee's desktop. The repository provides access to role-based business processes, mapped by DACG, designed to increase user productivity.
DIAGEO
Diageo, the world's leading player in the premium drinks industry, was formed out of the 1997 merger of Guinness and GrandMet. The move amassed a large number of premium brands, such as Guinness, Smirnoff, Baileys and Johnnie Walker.
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DACG was contracted by Diageo Business Services (DBS) in May 2001 as a training partner to develop an on-line learning solution, to support business service centres within Europe and North America, as well as other business units within these regions. DBS is responsible for creating effective global process solutions for finance and HR functions, such as dealing with customers, suppliers and employees, paying bills and taking orders. The project encompasses implementation of SAP 4.6, PeopleSoft 8.s and Concur (Travel and Entertainment software).
A detailed training needs analysis revealed that a new solution had to be developed to manage and store all the business process documentation. DA Learning Centre was used to create documentation from the system blueprint facilitating use of an online help system called DA Passport. On line simulation lessons are delivered using the web-enabled front end. Classroom training is delivered from the same materials. Competencies are checked by post training tests and role playing business scenarios. The results are analyzed using DA Reporter. The worldwide program will be delivered to around 15,000 people and each training implementation will be customized to suit the needs of the specific individual market.
GlaxoSmithKline
GlaxoSmithKline (GSK) is a world leading research-based pharmaceutical company in four major therapeutic areas - anti-infectives, central nervous system (CNS), respiratory and gastro-intestinal/metabolic. In addition, it is a leader in the important area of vaccines and has a growing portfolio of oncology products. GSK's mission is to improve the quality of human life by enabling people to do more, feel better and live longer. Headquartered in the UK and with operations based in the US, the company is one of the industry leaders, with an estimated seven per cent of the world's pharmaceutical market. The company also has a Consumer Healthcare portfolio comprising over-the-counter (OTC) medicines, oral care products and nutritional healthcare drinks, all of which are among the market leaders. GSK has over 100,000 employees worldwide.
GlaxoSmithKline realized the need to upgrade their enterprise resource planning system, SAP, and turned to DACG to support them for their end-user-training program from SAP R/3 to version 4.6. DACG performed an initial training needs analysis and developed a targeted training concept, delivering documentation solutions with the use of help cards and bespoke training workshops aimed at ensuring staff self sufficiency and a high knowledge of the system. DACG also produced customized courses, reference-based training, workshops and technical and instructional post go-live support.
BHP Billiton
BHP Billiton is a new global leader in the resources industry, employing more than 60,000 staff across more than 30 countries. BHP Billiton conducted the GSAP project to deploy a global SAP solution as a key enabler of future business benefits.
DACG was engaged as a key element in developing the knowledge and education solution to support the GSAP project. DACG consultants were responsible for:
- supporting and developing the Knowledge Warehouse infrastructure - design and development of comprehensive training courseware - training support and delivery to BHP Billiton sites world wide
BHP is in the process of successfully deploying the global SAP solution, with the education and knowledge program a cornerstone of that success.
Normandy Mining
Normandy Mining is one of the world's leading gold mining and exploration companies. An SAP 4.6 upgrade created a challenge to develop a sustainable and effective SAP learning and support environment.
DACG was engaged to develop this environment. Specific responsibilities included:
- creating effective on-line training courses and workshop agendas - developing SAP system simulations using SAP's iTutor tool - implementing a web-based Performance Support capability - developing and delivering appropriate communications material
The SAP 4.6 upgrade was achieved successfully and Normandy now has a learning and performance support foundation to encourage innovation and improvement of job skills.
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The following is a sample list of clients that the Company provided services for during 2001:
COMPANY ORGANIZATION AND PROJECT MANAGEMENT METHODOLOGY
Organization
The Company has three principal operating divisions: the Americas, which includes the USA and Canada; Europe, which includes the UK, France and Germany as well as mobile services provided in other European countries; and Asia Pacific, which includes operations in Australia and Singapore as well as mobile services provided in Asia.
Within each division there are administrative, sales and marketing and operations functions. Administration consists of finance, human resources and management information services. Operations performs all of the functions of the consulting services and product implementation and support.
The Company has two corporate functions: research and development and corporate management. Research and development is responsible for on-going support of software products as well as the development of new products. Corporate management consists of the offices of the CEO, CFO, and COO.
Project Methodology Management
The Company's DA Cornerstone(TM) project management methodology is essential to its delivery of quality end-user support solutions. DA Cornerstone is a comprehensive six phase, end-user support methodology that addresses key end-user support program deliverables, activities, and milestones throughout the lifecycle of a business information technology implementation. Each phase has associated tools that facilitate the completion of activities and deliverables.
DA Cornerstone phases include:
Analyze: DACG analyzes the client needs, resources, and requirements and submits to the client an end-user support strategy and proposed deliverables for approval.
Prototype and When the strategies are approved, DACG designs, deliverables and Designs establishes appropriate development strategies. The client must approve the strategic program design.
Develop: DACG executes the strategies and submits all deliverables for frequent internal and client review.
Implement: DACG delivers the final work to the end-users.
Evaluate: After implementation and as part of the services to the client, DACG evaluates the effectiveness of the services using appropriate tools.
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Support: DACG will arrange and set up the post implementation and long-term maintenance strategy for the educational program, end-user support, change communications or other programs created by DACG for the client.
The Company's project staff develops each end-user support component through an iterative draft and review process that directly involves client end-users in the development of content specific to their needs. This review process typically consists of three stages and has quality control steps embedded in each stage as formal checkpoints. These checkpoints are intended to ensure that the client is satisfied with the deliverables, that the content is accurate and adheres to the Company's own standards, and that the project is delivered in a cost-effective and timely manner. The success of a given project engagement from a cost, time, and client satisfaction standpoint is the responsibility of the assigned operations and project managers.
SALES AND MARKETING
The Company generates business through a field sales force that sells directly and pursues referrals and trade show leads. In addition, the Company co-markets, sometimes in joint sales calls and marketing materials, with its Alliance Partners.
The Company's direct sales efforts are the responsibility of 23 full-time sales and marketing personnel, most of whom have either a local or regional territory. The sales personnel generate leads from several sources, including referrals from the Company's existing clients and from attendance at industry trade shows. The Company also uses Internet-based marketing, tele-marketing, direct mail, corporate presentations, joint marketing events, and networking through regional business communities to generate potential sources for new business. In 2002, the Company plans to focus its marketing on the ERP, CRM and e-Learning marketplaces.
DACG is recognized by SAP, PeopleSoft, and J.D. Edwards as a preferred or qualified provider of end-user support services. DACG is recognized as a Global Consulting Partner and a mySAP.com Global Consulting Partner by SAP and a Global Education Services Alliance Partner by PeopleSoft. The Company also maintains partnerships with integrators and providers of tools for use in documentation and training such as Global Knowledge, X-ayce InterWise, X-Help and Axon. The Company develops and delivers to potential clients proposals in collaboration with Strategic Alliance Partners, including proposals covering software applications, software implementation services, and end-user support solutions. During 2001, DACG continued to expand its capability to develop and manage partnerships. In this capacity, DACG plans to create revenue from partners selling DACG products and services and by DACG reselling partner products and services.
The Company's services require a substantial financial commitment by clients and, therefore, typically involve a long sales cycle. Once a lead is generated, the Company needs to understand quickly the potential client's business needs and objectives in order to develop the appropriate solution and bid accordingly. The Company's operations and project managers are involved throughout the sales cycle to ensure mutual understanding of client goals, including time to completion and technological requirements. Sales cycles for end-user support solution projects typically range from one to six months from the time the Company initially meets with a prospective client until the client decides whether to authorize commencement of an engagement. The retention of the Company typically occurs at the beginning of the design/prototype stage of the software implementation.
RECRUITING AND PROFESSIONAL DEVELOPMENT
As of February 28, 2002, DACG's personnel consisted of 212 billable employees, 23 sales and marketing personnel, 2 development staff and 32 administrative employees. The Company believes that its success depends on its ability to attract, retain, and motivate talented, creative, and professional employees at all levels. For core business, the Company seeks to hire personnel with prior consulting experience in end-user education programs, education professionals with a background in information technology, and information technology professionals with education or communication program experience. Strong project management, analytical and communications skills and international experience are also considered. Recruiting is coordinated Company-wide through the Company's human resources department.
Training and mentoring are integral parts of the Company's staff development program. The Company's training programs ensure that its professional staff understands the impact of technology on people, is able to communicate effectively at all levels within a client organization, and has the ability to communicate with its clients' technical, business and management staff to provide value-added content to its clients. Ongoing training includes in-house and external training. In-house training includes basic training, more detailed software education, project management, consultancy skills, and leadership training. The use of DA Foundation materials and the application of performance support technologies such as DA Passport and The Learning Center are also covered. In addition, all consultants are required to attend a DA Cornerstone methodology training program, and to be approved for its use before being assigned to any consulting project.
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The Company believes that its culture is central to its ability to attract and retain highly skilled and motivated professionals. Extensive technical, management, and sales training enable DACG professionals to expand their skills and attain increasing levels of responsibility within the organization. The technical career path provides opportunities for advancement outside the traditional management career ladder. The technical career path builds technical skills, provides compensation incentives, and at a macro level, supports the development of DACG's current and future core competencies. Through planned job assignment and rotations, special projects and structural development events, high potential management candidates are prepared to assume greater management roles. The Company attracts and motivates its professional and administrative staff by offering competitive packages of base and incentive compensation and benefits. All professional staff members are eligible for bonuses. The Company appreciates the importance of recognition and a promotion track for its administrative staff and fully integrates its staff into the conduct of its business. All of the Company's employees are eligible to receive stock options.
During 2000, the Company rolled-out its internal implementation of a learning management system, eCampus, based on its Dynamic IQ platform. Additionally, the company is providing employees with access to SkillSoft courses as part of its commitment to distribute SkillSoft content. All employees have received training on e-Campus and are developing personal development plans, including mentoring programs.
RESEARCH AND DEVELOPMENT
DACG established a research and development department in 1995 to support and maintain its end-user support content and consulting methodologies. During 2001 the primary focus was on the modification of tools to work with a broader range of software. During 2000, the primary focus of this department was the development of Dynamic IQ, a virtual learning environment with complementary consulting services and ongoing maintenance of DA Passport, DA Foundation, the Company's proprietary toolset used for rapid deployment of end-user support solutions.
The Company's research and development department continually applies technology developments to the Company's content and tools. As technology advances, DACG has kept pace, expanding its deliverables from traditional hard copy materials and instructor led training to include on-line documentation, multimedia training, employee performance support systems, e-learning and web-based education and performance support solutions. The Company will maintain its commitment to innovative and collaborative research and development and anticipates a broadening of this function through partnering in 2002.
COMPETITION
The global markets for end-user performance support services for business information technology and e-Learning services are large, highly fragmented, change rapidly, and are subject to low barriers to entry. DACG has various market areas for competition, including:
- - Competition from the ERP software developers and other applications developers, which includes the software that DACG trains on, including SAP and other vendors; - - Competition from large international systems integrators, such as the consulting practices of the large international accounting firms, which are focused principally on systems integration and implementation but also provide end-user support as a secondary service; - - Competition from the professional services groups of many large technology and management consulting companies and a large number of smaller organizations that specialize in employee support services, generally serving a limited geographic area and having a smaller base of technical and managerial resources; - - Competition if clients elect to use internal resources to satisfy their needs for training services the Company provides; and - - In e-Learning, the Company faces a number of competitors in the form of software start-ups, established software companies and consulting companies as well as other niche operators.
In all markets, DACG faces competition for client assignments from a number of companies having significantly greater financial, technical, marketing resources and name recognition. The Company believes key competitive factors forming the basis upon which these companies compete are experience, reputation, industry focus, international presence, service and technology offerings, and price relative to the value of the services provided. The Company believes that it competes effectively and will continue to compete effectively worldwide.
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INTELLECTUAL PROPERTY AND OTHER PROPERTY RIGHTS
The Company relies upon a combination of nondisclosure and other contractual arrangements and trade secret laws to protect its proprietary rights. The Company generally enters into confidentiality agreements with its key employees and clients, thereby seeking to limit distribution of proprietary information. There can be no assurance that the steps taken by the Company in this regard will be adequate to deter misappropriation of proprietary information or that the Company will be able to detect unauthorized use of and take appropriate steps to enforce its intellectual property rights. Software developed and other materials prepared by the Company in connection with client engagements are usually assigned to the Company's clients following the termination of the engagement. The Company retains the right to use the general know-how developed by the Company in the course of the engagement, and this accumulated knowledge is the basis for the DA Foundation. The Company also retains all rights to certain of its proprietary methodologies and software (such as DA PASSPORT and computer-based training software), the benefit of which the Company provides to the client by royalty-free license.
Dynamic IQ(R), DA Foundation(R), DA Team Teach(R) and DA Consulting Group(R) are registered trademarks and/or service marks of the Company. The Company also claims common law trademark rights in DACG and design, the globe and temple logo, Fast Implementation Toolkit(TM), Fast Implementation Toolset(TM), DA Cornerstone(TM), and DA Passport(TM), for each of which the Company has filed an application for registration in the United States Patent and Trademark Office. Furthermore, the Company claims common law trademark rights in DACG(TM), DA FIT/Fast Implementation Toolkit(TM), FastED(TM), DA ASK(TM), DA Quickweb(TM), DA Learning Centre, DA Learning Center, DA Reporter and the slogan mark "Solutions for People and Technology"(TM), but as to these has decided at present not to file applications for trademark registration. The Company holds no patents. The Company has registered the copyright in the computer programs titled "DA Basic Skills Training for SAP R/3" and "DA Basic Skills Training for SAP R/3 v2.0 US." The Company also claims the copyright in numerous other works and may elect to register such copyrights on a case-by-case basis.
RISK FACTORS
History of losses
The Company has incurred net losses totaling approximately $27.2 million during 1999, 2000 and 2001. The Company began a restructuring process in 2000, which was completed during 2001. As a result of the restructuring the Company has returned to profitability, although the United States has continued to generate losses. There can be no assurance that overall profits will continue and the losses in the United States will not continue. Thus, the Company may be required to record additional charges to decrease the carrying value of the deferred tax asset.
Our business operations are dependent on SAP and the ERP software market.
A substantial portion of our revenue is derived from the provision of end-user support services in connection with ERP software implementations by our clients. These relationships and authorizations are generally subject to termination on short notice. In addition, these licensors could further modify their software in order to make the implementation cycles for its new releases shorter and less complicated, thereby possibly reducing the need for customized end-user support, or they could increase their provision of end-user support services for their software applications. Software vendors are currently customers and direct competitors. They could also cease referring us to their customers as a provider of end-user support services. Any one or more of these circumstances could have a material adverse effect on our business and revenue.
We may not be able to keep up with rapid technological changes.
Our future success will depend on our ability to gain expertise in technological advances, such as the latest releases from ERP software vendors, and to respond quickly to evolving industry trends and client needs. Our efforts to gain technological expertise and to develop new technologies require us to incur significant expense. There can be no assurance that we will be successful in adapting to these advances in technology or in addressing changing client needs on a timely basis. In addition, there can be no assurance that the services or technologies developed by others will not significantly reduce demand for our services or render our services obsolete. Any significant reduction in the demand for our services will have a material adverse effect on our results of operations.
Our stock price has been volatile.
Stock prices may be subject to wide swings, particularly on a quarterly basis, in response to variations in operating and financial results, fluctuations in earnings, competitive pressures, market place conditions,
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failure to meet revenue expectations and other similar factors. It is difficult to forecast the timing of revenue because project cycles depend on factors such as the size and scope of assignments, circumstances specific to particular clients or industries, the number and nature of client projects commenced or completed during a period, and the utilization rates of our professional staff. Were we to fail to meet expectations of our anticipated revenue in a period, or if we were to experience a negative change in our perceived long-term growth prospects, either would likely have an adverse effect on our stock price.
We may continue to experience increased competition from competitors with greater resources than ours, from potential clients performing services "in house" and from suppliers delivering a complete package to their customers.
The information technology services industry is highly competitive. It is served by many national, regional and local companies, including full service agencies and specialized temporary service agencies. It has limited barriers to entry, in part due to rapidly changing technologies. Our primary competitors come from a variety of market segments, including "Big Five" accounting firms, large systems consulting and implementation firms and large general management consulting firms. Many of these competitors have significantly greater financial, technical and marketing resources and greater name recognition. Such advantages may enable these competitors to attract more clients and provide faster service at less cost. In addition, our potential clients have increasingly decided to dedicate sufficient internal resources to performing the services that we provide "in house", particularly where these resources represent a fixed cost to the client. We are also increasingly finding that software licensors are implementing their own software packages, as well as educating their customers' employees in how to use them. Such competition may impose additional pricing pressures. We expect that the level of competition will remain high in the future. Increased competition could have a material adverse effect on our ability to profitably operate our business.
We may not be able to attract and retain qualified information technology consultants.
Our continued success will depend in large part on our ability to attract, retain and motivate highly skilled employees, particularly project managers and other senior technical personnel. The qualified project managers that we require are in great demand and are likely to remain a limited resource for the foreseeable future. Many of the companies with which we compete for qualified professionals have substantially greater financial and other resources than we do. There can be no assurance that we will be able to recruit, develop, and retain a sufficient number of highly skilled, motivated professionals to compete successfully. In addition, competition for qualified personnel may also lead to increased costs for such personnel which we may not be able to offset by increases in billing rates. The loss of a significant number of professional personnel is likely to have a material adverse effect on us, particularly our ability to complete existing projects or secure new projects.
Failure to adequately estimate costs, or efficiently manage fixed-bid and not-to-exceed projects could have a material adverse effect on our profitability.
Certain of our projects are undertaken on a fixed bid basis, pursuant to which we charge our clients a flat rate for our services, or on a not-to-exceed basis, pursuant to which we limit the maximum fee that we will charge our client. For the year ended December 31, 2001, we realized the majority of our revenue from fixed-bid or not-to-exceed projects. Were we to fail to adequately estimate the actual cost to us of completing a project under the guaranteed not-to-exceed or fixed fee price set forth in certain of our contracts, or were we to fail to efficiently manage these projects after entering into the not-to-exceed or fixed fee contract, we could become exposed to unrecoverable budget overruns, which could materially adversely affect our profitability. Additionally, client engagements are generally terminable with little or no notice or penalty, and our failure to meet a client's expectations could damage our relationship with that client and cause the client to terminate our engagement. A client's unanticipated decision to terminate or postpone a project may result in higher than expected numbers of unassigned professionals or severance costs, which could materially adversely affect our results of operations.
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We do not have any patents to protect our intellectual property rights from misappropriation.
Our success in the information technology services business depends upon our software deployment and methodology and other proprietary intellectual property rights. We do not hold any patents. We rely on a combination of trade secret, nondisclosure and other contractual arrangements and technical measures, and copyright and trademark laws to protect our proprietary rights. We generally enter into confidentiality agreements with our employees, consultants, clients and potential clients and limit access to and distribution of our proprietary information. There can be no assurance that the steps that we have taken will be adequate to prevent misappropriation of our intellectual property rights or that third parties will not independently develop functionally equivalent or superior methodologies or software. Moreover, there can be no assurance that third parties will not assert infringement claims against us in the future that would result in costly litigation or license arrangements regardless of the merits of such claims. Additionally, because our engagements are typically work-for-hire based, we assign ownership of, or grant a royalty-free license to use, the materials that we develop specifically for our clients to those clients upon project completion.
Significant exposure to international markets.
We currently have international operations in Singapore, Australia, England, France, Germany and Canada. As of December 31, 2001, 81% of our revenue resulted from our international operations. The successful operation of such geographically dispersed offices requires considerable management and financial resources and results in significant ongoing expense. International operations and the provision of services in foreign markets are subject to risks involving trade barriers, exchange controls, national and regional labor strikes, civil disturbances and war, and increases in duties, taxes, and governmental royalties, multiple and possibly overlapping tax structures, as well as changes in laws and policies governing operations of foreign-based companies. We may also experience difficulties relating to the global administration of our business. Any of such factors may have a material adverse effect on the Company.
ITEM 2.
ITEM 2. PROPERTIES
Recognizing the global nature of the information technology market and the importance of being able to serve multi-national clients, the Company has built a substantial international presence and provides services in North America, Europe and Asia-Pacific. The Company has offices in the U.S., Canada, United Kingdom, France, Germany, Australia and Singapore. The Company's headquarters is at 5847 San Felipe, Suite 1100, Houston, Texas. This lease expires in July 2004. The Company also maintains foreign offices in Toronto, London, Paris, Melbourne, Sydney, Singapore, and Canberra. The Company has operations in Dallas, Chicago, Philadelphia, Boston and New York, but does not maintain a physical office. Each operation is located near one or more significant clients of the Company, and the physical facilities have terms that will expire between one and five years (exclusive of renewal options exercisable by the Company). All of the Company's operations are electronically linked together and have access to all of the Company's capabilities and core consulting tools. From time to time, the Company uses office space provided at client sites to facilitate performance of its services and maximize client contact. Where the Company operates in areas without an established office, operations are handled on a mobile basis with corporate support being delivered from one of its regional centers in Houston, London or Sydney. The Company believes its current facilities are adequate for its needs. The Company is in the process of subleasing several branch facilities that were vacated as a result of cost reduction measures and may further reduce the size of various facilities.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is a party to routine litigation in the ordinary course of business. The Company does not believe that such litigation will have a material impact on the financial statements.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Special Meeting of Shareholders held on December 11, 2001, the shareholders of the Company voted on the following matter:
Approval for the election of two Class C Directors, BK Prasad and Dennis Fairchild.
The voting results were as follows:
Votes For Votes Abstained --------- --------------- 6,566,685 18,100
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PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock has traded on the NASDAQ Stock Market under the symbol DACG. The following table sets forth, for each quarterly period indicated, the high and low closing sale price for the common stock as reported by the NASDAQ National Market.
2000 High Low ------------------------- 1st Quarter $4.00 $2.50 2nd Quarter 2.63 1.31 3rd Quarter 2.75 1.50 4th Quarter 1.94 0.69
------------------------- 1st Quarter $1.63 $0.66 2nd Quarter 1.80 1.25 3rd Quarter 1.60 0.31 4th Quarter 0.35 0.14
No dividends were declared on the Company's common stock during the years ended December 31, 2000 and 2001, and the Company does not anticipate declaring dividends in the foreseeable future.
As of April 11, 2002 there were approximately 100 shareholders of record and greater than 1,071 beneficial shareholders.
On October 16, 2000, the Company consummated the sale to Purse Holding Limited, a British Virgin Islands limited company, of two million shares of the Company's common stock for $4.8 million and warrants to purchase up to three million shares of the Company's common stock. The sale was effected pursuant to a Securities Purchase Agreement, dated August 2, 2000, between the Company and Purse. The Company credited its $2 million loan, received from Purse on August 3, 2000, toward the $4.8 million purchase price of the two million shares of its common stock.
In accordance with the terms of the Securities Purchase Agreement, the Company issued (i) two million shares of common stock at a price of $2.40 per share and (ii) warrants to purchase (a) two million shares of common stock, exercisable until October 16, 2003, at the greater of $3.00 per share or 85% of the market price per share of the Company's common stock at the time of exercise, and (b) one million shares of common stock, exercisable for the period of time after January 1, 2002, and until October 16, 2003, at $3.00 per share.
The sale of the securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act") and Rule 506 of Regulation D promulgated under the Securities Act, since the sale was made to a single accredited investor who was acquiring the shares for investment without a view to further distribution. No underwriters were involved with the issuance and sale of the securities.
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ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial statement data as of December 31, 2000 and 2001 and for each of the three years in the period ended December 31, 2001 is derived from the audited consolidated financial statements of DA Consulting Group, Inc. and its subsidiaries (the "Company") included elsewhere herein. This information should be read in conjunction with such Consolidated Financial Statements and related notes thereto. The selected financial information as of December 31, 1997, 1998 and 1999 has been derived from the audited financial statements of the Company that have been previously included in the Company's reports under The Securities Exchange Act of 1934, that are not included herein. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 7.
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.
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BUSINESS
The Company is a leading international provider of employee education and support solutions to companies investing in business information technology. Through its 272 employees worldwide at December 31,2001, the Company provides employee support solutions through customized change communications, education, and performance support services to clients. Since 1988, the Company has provided services to over 685 clients most of whom are Fortune Global 500 companies.
The Company is currently organized into three divisions: the Americas Division which includes its operations in North America; the Europe Division which includes its operations in Europe; and the Asia Pacific Division which includes its operations in Australia and Singapore. In 2001, the, Europe, Asia Pacific and Americas Divisions represented 60%, 21%, and 19% of revenue, respectively. The number of clients served by the Company has increased substantially from 52 in 1994 to approximately 685 in 2001. The Company's client base is diversified, with one client representing 18% of revenue in 2001.
The Company derives substantially all of its revenue from fees for professional services related to supporting end-users in the implementation of ERP systems. Revenue from clients implementing SAP software represented 87% of billed consulting revenue for 2001. The majority of the Company's projects involve from three to ten consultants, are generally completed in three months to two years, and result in revenue from $200,000 to $1.5 million. The Company often performs multiple projects for a client in support of a phased implementation of the business information technology. The Company's services are generally provided pursuant to written contracts that can be terminated by the client with limited advance notice. In the event of such a termination by the client, the client remains obligated to pay for the services rendered to the client to the termination date. The Company bills its clients weekly, twice monthly and monthly for the services provided by its consultants at agreed upon rates, and where permitted, for expenses. The Company provides services to its clients primarily on a time and materials basis, although many of its contracts contain "not-to-exceed" provisions and Company performance obligations. The remainder of the Company's contracts are on a fixed-price basis, representing approximately 28% of the Company's total revenue for 2001. Revenue from time and materials engagements, as well as revenue from fixed price contracts, is recognized as services are performed and the realization of the revenue is assured. The Company also receives approximately 3% of total revenue from license fees related to computer-based training products and other software products that are developed independently or are co-developed by the Company.
Cost of revenue includes compensation and benefits paid to the Company's professional staff and all direct expenses of performing project work. The Company's financial performance is highly dependent upon staff billing rates, costs, and utilization rates. The Company manages these parameters by establishing and monitoring project budgets and timetables and tracking staffing requirements for projects in progress and anticipated projects. Project terminations, completions, and scheduling delays may result in periods when consultants are not fully utilized. An unanticipated termination of a significant project could cause the Company to experience lower staff utilization. In addition, the establishment of new services or new regional operations, employee vacations and training, and increases in the hiring of consultants may result in periods of lower staff utilization and downward pressure on gross margins. The Company's professional staff are generally employed on a full-time basis, and therefore the Company incurs substantially all of its staff-related costs even during periods of low utilization. In the past, the Company has experienced some seasonality in its business with somewhat lower levels of revenue and profitability in Europe in the third quarter and Asia in the fourth quarter. The timing of project start-ups and completions, as well as holidays and vacations has the most significant impact on fluctuations in revenue.
Selling and marketing expense relates principally to compensation and benefits paid to the Company's dedicated sales staff and all direct costs associated with the sales process. Development expense consists principally of compensation costs for the Company's in-house research and development. These personnel focus on development of methodologies and applications of new technologies, including development of computer-based training courseware and performance support software and content. Development expense also includes personnel who provide technical support for the Company's professional staff in the field. Development expense in 2000 and early 2001 included the cost of creating a web based learning management system named the Dynamic IQ. General and administrative expense consists principally of salaries and benefits for management, physical facilities, depreciation and professional fees. General and administrative salaries include executive management, accounting, administrative, information technology, human resources as well as compensation for the senior management in each of the Company's divisions.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standard Board finalized FASB Statement No. 141, Business Combinations (SFAS 141), and No. 142 Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires us to recognize acquired intangible assets apart from goodwill if the acquired intangible asset meets certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business
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combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that we reclassify the carrying amounts of intangible assets and goodwill based upon the criteria of SFAS 141.
SFAS 142 requires, among other things, that we no longer amortize goodwill, but instead test goodwill for impairment as least annually. In addition, SFAS 142 requires us to identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets and cease amortization of intangible assets with an indefinite useful life. An intangible with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires us to complete a transitional goodwill impairment test six months from the date of adoption. We are also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. Currently, we do not expect that adoption of SFAS 141 and SFAS 142 will have a material impact on our financial position and results of operations.
The Company has approximately $0.2 million of goodwill included in its balance sheet at December 31, 2001. Goodwill amortization for the for the year ended December 31, 2001, is $19,000 before the provisions of SFAS 142 are applied. Implementation of SFAS 142 by the Company will result in the elimination of amortization of goodwill.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, SFAS No. 143, which amends SFAS No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies, is applicable to all companies. SFAS No. 143, which is effective for fiscal years beginning after June 15, 2002, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. As used in SFAS No. 143, a legal obligation is an obligation that a party is required to settle as a result of an existing or enacted law, statute, ordinance, or written or oral contract or by legal construction of a contract under the doctrine of promissory estoppel. While we are not yet required to adopt SFAS No. 143, we do not believe the adoption will have a material effect on our financial condition or results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment of Disposal of Long-lived Assets. SFAS No. 144, which supercedes SFAS No. 121, Accounting for the Impairment of Long-lived Assets for Long-lived Assets to be Disposed of and amends ARB No. 51, Consolidated Financial Statements, addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and interim financials within those fiscal years, with early adoption encouraged. The provisions of SFAS No. 144 are generally to be applied prospectively. As of the date of this filing, we are still assessing the requirements of SFAS No. 144 and have not determined the impact the adoption will have on our financial condition or results of operations.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, income statement data expressed as a percentage of revenue:
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YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Revenue. Revenue decreased by $2.3 million, or 7.5%, from $31.0 million in 2000 to $28.7 million in 2001. The decrease was substantially attributable to a decrease in demand for services that began during the latter part of 1999 and continued throughout 2001, as competition for fewer assignments grew primarily in America. Revenue from the Americas Division decreased by 54.5% from $11.8 million to $5.4 million; revenue from the EMEA Division increased by 37.4% from $12.5 million to $17.1 million; and revenue from the Asia Pacific Division decreased by 8.4% from $6.7 million to $6.1 million. The Company ended the 2001 period with 272 total employees, down from 336 employees at the beginning of the period.
Gross profit. Gross profit increased by $1.8 million, or 17.3%, from $10.3 million in 2000 to $12.1 million in 2001, and increased from 33.3% of revenue in 2000 to 42.3% of revenue in 2001. The increase is primarily attributable to increased bill rates and increased recovery of travel costs.
Selling and marketing expense. Selling and marketing expense decreased by $1.6 million, or 33.7%, from $4.9 million in 2000 to $3.3 million in 2001. The decrease is the result of refocusing marketing efforts on a regional basis. Sales and marketing staff total 23 persons at the end of 2001 compared to 25 at the end of 2000.
Development expense. Development expense decreased by $3.0 million, or 80.9%, from $3.7 million in 2000 to $0.7 million in 2001. Development costs during the year ended December 31, 2000 were due to professional fees incurred for the development of the Company's web-enabled learning management system - Dynamic IQ(TM), which was launched during the fourth quarter of 2000. Development personnel decreased from 18 at year end 2000 to 2 at year end 2001.
General and administrative expense. General and administrative expense decreased by $6.5 million, or 38.3%, from $16.9 million in 2000 to $10.4 million in 2001. The decrease in expense is due primarily to a reduction in headcount in the areas of finance, information systems, administration and human resources. Administrative personnel have been reduced from 59 at year end 2000 to 31 at year end 2001. In addition, facilities costs were reduced by consolidating locations during the year.
Restructuring Charge. During the year ended December 31, 2000 the Company recorded restructuring charges of 4.7 million for termination pay and lease abandonment. No restructuring charge was recorded in 2001. During 2001 a $0.8 million charge to administrative expense was recorded for additional lease abandonment. At December 31, 2001, the Company believes that the remaining provision for lease abandonment is adequate to cover the future costs attributable to this plan. At December 31, 2001 an accrual of approximately $1.1 million remained accrued for future lease payments related to abandoned leases. No liability remained for termination pay. Payments for termination pay charged to the reserve totaled $0.3 million and payments for lease abandonment totaled $1.1 million during 2001.
Amortization expense. Amortization expense decreased by $168,000, or 22.1%, from $760,000 in 2000 to $592,000 in 2001, and decreased as a percentage of revenue from 2.4% in 2000 to 2.1% in 2001. Amortization decreased due to the writeoff of leasehold improvements. Amortization is largely due to the amortization of internal development costs associated with the SAP system placed in service in July 1999. These costs will be amortized over an 84-month period.
Operating loss. Operating loss decreased by $17.7 million or 86.1%, from a loss of $20.6 million in 2000 to $2.9 million in 2001. Operating loss, exclusive of restructuring charges and other intangible asset amortization, was $2.3 million in 2001 as compared to $15.2 million in 2000.
Other income (expense), net. Other income (expense), net decreased from income of $25,000 in 2000 to expense of $326,000 in 2001. Interest income decreased from $31,000 in 2000 to interest expense of $54,000 in 2001. Other expense in 2001 includes the loss on sale and abandonment of fixed assets totaling $157,000 compared to $123,000 in 2000. Other income in 2000 included a $100,000 gain on the sale of a small business.
Provision for income taxes. The increase in the Company's effective tax rate benefit from 35.7% in 2000 to an expense of 78.5% in 2001, relates primarily to the valuation allowance recorded against deferred tax assets in 2001. At December 31, 2001, the Company's deferred tax asset recorded on its balance sheet was approximately $6.6 million, consisting primarily of future tax benefits resulting from net operating loss ("NOL") carryforwards. The Company established a $4.0 million valuation allowance against deferred tax assets. The Company's ability to recognize the entire benefit requires that the Company achieve certain future earnings levels prior to the expiration of the NOL carryforwards. The Company expects to generate the future earnings necessary to utilize the NOL carryforwards through implementation of reasonable tax planning strategies and projected future income. The Company could be required to record
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an additional valuation allowance for a portion or entire deferred tax asset if the market conditions deteriorate and future earnings are below, or projected to be below, current estimates.
At December 31, 2001, the Company had NOL carryforwards of $31.3 million. Of that amount, $3.0 million expires in 2006 to 2008 and $24.6 million expires in 2019, 2020 and 2021. The remaining $3.7 million have no expiration. The Company would need to earn $18.8 million income before taxes to recover all deferred tax assets.
Net loss. Net loss was $5.7 million in 2001 compared to a loss of $13.2 million in 2000. The loss per share decreased from $1.93 to $0.68 due both the decrease in the net loss and the increase in the number of shares outstanding.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenue. Revenue decreased by $39.3 million, or 55.9%, from $70.3 million in 1999 to $31.0 million in 2000. The decrease was substantially attributable to a decrease in demand for services that began during the latter part of 1999 and continued throughout 2000, as a result of the downturn in the market for complex computer software as companies focused on Year 2000 readiness and associated pricing pressures as competition for fewer assignments grew. Revenue from the Americas Division decreased by 71.6% from $41.5 million to $11.8 million; revenue from the EMEA Division decreased by 39.0% from $20.5 million to $12.5 million; and revenue from the Asia Pacific Division decreased by 19.3% from $8.3 million to $6.7 million. The Company ended the 2000 period with 336 total employees, down from 535 employees at the beginning of the period.
Gross profit. Gross profit decreased by $21.3 million, or 67.4%, from $31.6 million in 1999 to $10.3 million in 2000, and decreased from 44.9% of revenue in 1999 to 33.3% of revenue in 2000. The decrease is primarily attributable to maintaining the consultant workforce at lower utilization rates in anticipation of future demand and pricing pressures due to increased competition as demand slowed in the second half of 1999 and continued to slow in 2000.
Selling and marketing expense. Selling and marketing expense decreased by $2.5 million, or 33.8%, from $7.4 million in 1999 to $4.9 million in 2000. The decrease is the result of cost reduction measures implemented during the first quarter of 2000 and reduced commissions expense related to the reduced level of sales in 2000 as compared to the same period of 1999.
Development expense. Development expense increased by $1.9 million, or 105.6%, from $1.8 million in 1999 to $3.7 million in 2000. The increase in costs during the year ended December 31, 2000 is due to professional fees incurred for the development of the Company's web-enabled learning management system - Dynamic IQ(TM), which was launched during the fourth quarter of 2000. These costs were offset in part by reduced headcount as a result of cost containment plans implemented during the latter half of 1999 and the first quarter of 2000.
General and administrative expense. General and administrative expense decreased by $16.7 million, or 49.7%, from $33.6 million in 1999 to $16.9 million in 2000. The decrease in expense is due primarily to a reduction in headcount in the areas of finance, information systems, administration and human resources as a result of the cost containment plans implemented during the latter half of 1999 and during 2000. In addition, facilities costs were reduced by consolidating locations during the year.
Restructuring Charge. During the three month period ended March 31, 2000, the Company implemented a plan to address the dramatic decline in training and documentation activity for enterprise resource planning implementations. The plan consisted of regional base consolidations and downsizing of billable and non-billable personnel. Charges included the costs of involuntary employee termination benefits, write-down of certain property and equipment and reserves for leasehold abandonment. The reduction in workforce consisted of 60 billable consultants and 44 non-billable administrative personnel. Substantially all of the employee terminations were completed during the first quarter. The Company recognized approximately $1.5 million expense attributable to involuntary employee termination benefits during the first quarter, of which approximately $1.2 million has been paid at December 31, 2000. In addition the Company has reserved approximately $0.9 million related to the abandonment of leases and approximately $1.0 million related to the writedown of leasehold improvements, furniture and equipment held by its Americas division in the first quarter of 2000. During the fourth quarter of 2000, due to weakening in the real estate market, the Company recorded an additional $1.3 million reserve for lease abandonment resulting in a total annual charge of $2.2 million. Of the $2.2 million reserved for lease abandonment, approximately $0.8 Million has been paid against the reserve. At December 31, 2000, the Company believed that the remaining provision is adequate to cover the future costs attributable to this plan. At December 31, 2000 an accrual of approximately $0.3 million for severance pay remained related to severance contracts being paid over a 12-month period. In addition, approximately $1.4 million remained accrued for future lease payments related to abandoned leases.
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Amortization expense. Amortization expense increased by $406,000, or 114.7%, from $354,000 in 1999 to $760,000 in 2000, and increased as a percentage of revenue from 0.5% in 1999 to 2.4% in 2000. The increase is due to the amortization of internal development costs associated with the SAP system placed in service in July 1999. These costs will be amortized over an 84-month period.
Operating loss. Operating loss increased by $9.0 million or 77.6%, from $11.6 million in 1999 to a loss of $20.6 million in 2000. Operating loss, exclusive of restructuring charges and other intangible asset amortization, was $15.2 million. On the same basis the operating loss was $11.2 million in 1999.
Other income (expense), net. Other income (expense), net decreased from income of $287,000 in 1999 to income of $25,000 in 2000. Interest income decreased from $366,000 in 1999 to $105,000 in 2000, reflecting investment income from the investment of proceeds from the Company's initial public offering completed in April, 1998 (the "Offering".) Prior to completion of the Offering, the Company borrowed against a line of credit.
Provision for income taxes. The increase in the Company's effective tax benefit rate from 26.9% in 1999 to a benefit rate of 35.7% in 2000, primarily relates to losses in lower income tax jurisdictions and non-deductible expenses during 1999. At December 31, 2000, the Company's deferred tax asset recorded on its balance sheet was approximately $9.4 million, consisting primarily of future tax benefits resulting from net operating loss ("NOL") carryforwards. The Company's ability to recognize the entire benefit requires that the Company achieve certain future earnings levels prior to the expiration of the NOL carryforwards. The Company expects to generate the future earnings necessary to utilize the NOL carryforwards through implementation of the reasonable tax planning strategies and future income projections. The Company could be required to record a valuation allowance for a portion or entire deferred tax asset if the market conditions deteriorate and future earnings are below, or projected to be below, current estimates.
At December 31, 2000, the Company had NOL carryforwards of $26.7 million. Of that amount, $1.0 million expires in 2007, $5.0 million expires in 2019, and $14.5 million in 2020. The remaining $6.2 million have no expiration.
Net loss. Net loss was $13.2 million in 2000 compared to a loss of $8.3 million in 1999.
QUARTERLY OPERATING RESULTS
The Company's quarterly operating results are included in the notes to consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has historically financed its operations with cash flow from operations, supplemented by the issuance of common stock and short-term borrowings under revolving line of credit arrangements.
The Company's cash and cash equivalents were $0.4 million at December 31, 2001, compared to $0.9 million at December 31, 2000. The Company's working capital deficit was $0.7 million at December 31, 2001 compared to working capital of $1.1 million at December 31, 2000.
The Company's operating activities required cash of $1.5 million for year ended December 31, 2001, compared to $9.3 million used in operations in 2000. The decrease in cash used in operations primarily resulted from reduced pretax operating losses offset by a decrease in deferred income taxes due to establishing a valuation allowance against previously recorded income tax benefits. Accounts receivable reductions and income taxes receivable produced less cash in 2001 than 2000 and payment of accounts payable required more cash during 2001.
Investing activities provided cash of $0.2 million in the year ended December 31, 2001, compared to cash provided of $2.4 million for the same period in 2000. For the year ended December 31, 2001, $0.3 million was provided by the sale of property and equipment . During 2000 the Company had net sales of short-term investments of $2.4 million. Sales of property and equipment were largely offset by the purchase of property and equipment during 2000.
Financing activities provided $0.9 million for the year ended December 31, 2001 as a result of borrowing against a line of credit. Financing activities provided cash of $4.9 million for the year ended December 31, 2000 as a result of the sale to Purse Holding Limited ("Purse"), a British Virgin Islands limited company, of two million shares of the Company's common stock for $4.8 million and warrants to purchase up to three million shares of the Company's common stock. In addition, the Company borrowed $154,000 on a short-term line of credit during the period.
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The Company has an agreement with a bank, which provides for financing of eligible U.S. accounts receivable under a purchase and sale agreement. The maximum funds available under this agreement is $5 million. At December 31, 2001, the Company had sold $0.2 million of receivables pursuant to this agreement. The Company has a credit facility from a bank with a maximum line of credit of approximately $1.1 million, based on eligible foreign accounts receivable. At December 31, 2001, the Company had borrowed all funds available against this line.
The Company believes its current cash balances, receivable-based financing and cash provided by future operations will be sufficient to meet the Company's working capital and cash needs through 2002. However, there can be no assurance that such sources of funds will be sufficient to meet these future expenses. The Company may seek additional financing through a public or private placement of equity. The Company's need for additional financing will be principally dependent on the degree of market demand for the Company's services. There can be no assurance that the Company will be able to obtain any such additional financing on acceptable terms, if at all.
The Company capitalizes software development costs beginning when product technological feasibility is established and concluding when the product is ready for general release. At such time, software development costs are amortized on the straight-line basis over a maximum of three years or the expected life of the product, whichever is less. During the year 2000 and 2001, all development costs for the companies web based learning management system, Dynamic IQ were expensed. During 1999, the Company capitalized $184,000 of software development costs relating to computer-based training software development which were amortized over 12 months. Research costs related to software development are expensed as incurred.
In 1999 the Company capitalized $3.3 million of implementation costs related to the Company's primary information system. Such development costs are amortized over a seven year period.
The Company is subject to market risk related to fluctuations in the value of the U.S. dollar compared to certain foreign currencies. We have subsidiaries which operate in Canada, the United Kingdom, France, Germany, Australia, and Singapore. We attempt to maintain a balance between assets and liabilities denominated in foreign currencies. The Company does not currently hedge against currency fluctuations.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company from time to time holds short-term investments which consist of variable rate municipal debt instruments. The Company uses a sensitivity analysis technique to evaluate the hypothetical effect that changes in market interest rates may have on the fair value of the Company's investments. At December 31, 2001 the Company did not hold any short-term investments.
We are subject to market risk exposure related to interest rates on our credit facilities. At December 31, 2001 our outstanding facility was $1.1 million.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company are included in Pages 33 through 49.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has had no disagreements with its accountants on accounting or financial disclosure issues. The disclosures called for related to changes in accountants have been previously reported by the Company in Form 8-K's filed by the Company with the Securities and Exchange Commission on February 4, 2002 and February 12, 2002.
PART III
ITEM 10.
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:
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Year in Which --------------- First Became --------------- Name Age Position with Company Director - ------------------------ --- ----------------------------- --------------- Virginia L. Pierpont 60 Chief Executive Officer and 1987 President
Malcolm G. Wright 45 Chief Operating Officer
Dennis C. Fairchild 52 Executive Vice President and 2001 Chief Financial Officer
Nigel W.E. Curlet 56 Director 1996
Gunther E.A. Fritze 65 Director 1996
B.K. Prasad 65 Chairman of the Board 2000
James R. Wilkinson 45 Director 2002
Virginia L. Pierpont, age 60, founded the Company as a sole proprietorship in 1984, incorporated the business in 1987, and opened its United Kingdom operation in 1988. Ms. Pierpont was the Chief Executive Officer of the Company from 1984 to 1993 and served as Chairman of the Board from December 1996 through August 1998 and again from April 2000 to August 2001. She is a member of the Company's Compensation Committee. Ms. Pierpont is a Class B Director whose term expires at the 2003 Annual Meeting.
Malcolm G. Wright, age 45, joined the Company in March 2000 as Vice President of Europe and, in February 2001, was promoted to Chief Operating Officer. Prior to joining the Company, Mr. Wright was with Equifax Plc from November 1996 to January 2000, and his last position was as European & UK Divisional Director of Commercial Information Services. He also spent 17 years with Dun & Bradstreet and was Director of Multinational Development at Dun & Bradstreet Europe from December 1990 to November 1996.
Dennis C. Fairchild, age 52, joined the Company in April 1999 as Executive Vice President and Chief Financial Officer and is primarily responsible for the finance and administrative functions of the Company. Prior to joining the Company, Mr. Fairchild provided consulting services from April 1998 to February 1999. From April 1997 to April 1998, Mr. Fairchild was Chief Financial Officer at National Water & Power. He served as Chief Financial Officer at AmeriQuest Technologies from January 1994 to April 1997 and at Southeast Frozen Foods from March 1990 to January 1994. Mr. Fairchild received his B.A. from Mankato State University. Mr. Fairchild is a Class C Director whose term expires at the 2004 Annual Meeting.
Nigel W.E. Curlet, age 56, has served as a director since December 1996. Since 1976, he has been employed in various capacities by Shell Chemical Company and is currently its Manager-Demand Chain Center of Excellence. Mr. Curlet's prior management roles at Shell were in its information technology, research and development, and operations and strategic planning departments. He is a member of the Company's Audit, Compensation and Stock Option Committees. Mr. Curlet is a Class A director whose term expires at the 2002 Annual Meeting.
Gunther E.A. Fritze, age 65, has served as a director since December 1996. Mr. Fritze is retired. From 1962 to 1999, Mr. Fritze was employed in various capacities by Bank of Boston. Mr. Fritze's most recent position was Manager, Finance Companies. Mr. Fritze is a member of the Company's Audit, Compensation and Stock Option Committees. Mr. Fritze is a Class A Director whose term expires at the 2002 Annual Meeting.
B.K. Prasad, Ph.D., age 65, has served as a director since December 2000 and as Chairman of the Board since August 2001. Dr. Prasad, a corporate strategy and management consultant, was employed as a Director and Vice President by Comcraft Canada Limited since 1987, and by Comcraft Asia (Pte) Ltd. from 1981 to 1987 until retiring in 2001. Prior to joining Comcraft, Dr. Prasad served in various senior finance and management positions in large industrial organizations. Dr. Prasad holds an LLB, MBA, FCMA, FCA and CPA. Dr. Prasad has been designated by Purse Holding Limited ("Purse") to serve as a member of the Board of Directors pursuant to the Stock Purchase Agreement between the Company and Purse under which Purse has the right to
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designate one director for so long as Purse owns at least 25% of the Company's Common Stock that it purchased under the Stock Purchase Agreement. Dr. Prasad is a Class C Director whose term expires at the 2004 Annual Meeting.
James R. Wilkinson, age 45, is the founder of Capstone Funding Ltd., an investment company started in 1990, and of The Strategic CFO, a consulting company started in 1998 where Mr. Wilkinson devotes the majority of his time. Prior to establishing these two entities, Mr. Wilkinson served in executive-level positions in real estate and accounting firms. Mr. Wilkinson is a CPA and a graduate of Texas A&M University. Mr. Wilkinson is a Class B Director whose term expires in 2003.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the Securities and Exchange Commission ("SEC") initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than ten-percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended December 31, 2001, all Section 16(a) filing requirements applicable to the Company's officers, directors and greater than ten-percent beneficial owners were complied.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
CASH AND NON-CASH COMPENSATION PAID TO CERTAIN EXECUTIVE OFFICERS
The following table sets forth, with respect to services rendered during fiscal years 2001, 2000 and 1999, the total compensation earned by each individual who served as the Company's Chief Executive Officer during fiscal year 2001 and the most highly compensated executive officers, other than the Chief Executive Officer, who were serving as executive officers at the end of fiscal year 2001 and whose total annual salary and bonus exceeded $100,000 during 2001:
STOCK OPTIONS GRANTED TO CERTAIN EXECUTIVE OFFICERS DURING LAST FISCAL YEAR
Under the 1997 Stock Option Plan, options to purchase Common Stock are available for grant to directors, officers and other key employees of the Company. The following table sets forth certain information regarding options for the purchase of Common Stock that were awarded to the named executive officers during fiscal year 2001.
STOCK OPTIONS EXERCISED BY NAMED EXECUTIVE OFFICERS DURING FISCAL YEAR 2001 AND HELD BY NAMED EXECUTIVE OFFICERS AT DECEMBER 31, 2001
No options granted by the Company were exercised by the named executive officers during 2001. The following table sets forth certain information regarding options for the purchase of Common Stock that were held by the named executive officers.
COMPENSATION OF DIRECTORS
The Company pays each non-employee director an annual retainer of $12,500 and awards non-employee directors an option to purchase 33,333 shares of Common Stock pursuant to the Company's 1997 Stock Option Plan. The number of options is determined by dividing $10,000 by the fair market value of a share of Common Stock on the date of the Company's Annual Meeting. The Company also reimburses directors for travel expenses incurred on behalf of the Company. The Company pays directors fees on a quarterly basis. Directors fees for the third and fourth quarters of fiscal year 2001 were paid in 2002.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS
The Company entered into an employment agreement with Ms. Pierpont, effective April 4, 2000. Pursuant to her employment agreement, Ms. Pierpont received $150,000 per year and reimbursement for her expenses incurred on behalf of the Company, beginning May 1, 2000, to serve as the Chairman of the Board of Directors. Effective August, 2001, Ms. Pierpont resigned her position as Chairman of the Board and became President and Chief Executive Officer at an annual salary of $150,000. Ms. Pierpont's salary may be increased by the Board upon its annual review at the beginning of each calendar year. Ms. Pierpont serves at the Board's discretion, and, if terminated by the Board, she is entitled to receive her salary for 90 days after she receives notice of termination. If Ms. Pierpont is terminated within 180 days of a change of control of the Company, she is entitled to receive her salary for 180 days after she receives notice of termination. Ms. Pierpont's employment agreement contains a non-compete covenant that is in effect during the term of her employment and for 18 months following her termination.
The Company entered into an employment agreement with Mr. Mitchell, the Company's former President and Chief Executive Officer, on April 4, 2000. Pursuant to his employment agreement, Mr. Mitchell received an initial base salary of (British pounds) 195,000 per year which was subject to increases based on the Board's annual review at the beginning of each calendar year. The annualized salary of Mr. Mitchell for 2001 was $390,000. Mr. Mitchell received customary benefits, including medical, dental, disability and life insurance and other employee benefit plans available to employees at his level. Further, he was eligible for an annual performance bonus, as determined by the Company. The employment agreement defined that Mr. Mitchell could be terminated without cause, upon 90 days written notice. If so terminated, he was entitled to receive
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his salary and benefits for 18 months after termination, including any bonus paid or payable for the calendar year before his termination, and all of his outstanding stock options would become fully vested and exercisable. If Mr. Mitchell voluntarily terminated his employment agreement on 30 days prior written notice with good reason, as defined in the agreement, then he was entitled to receive his salary and benefits for 12 months, including any bonus paid or payable for the previous calendar year, and all of his stock options would become fully vested and exercisable. If Mr. Mitchell terminated his employment agreement on one year's prior written notice, he would have received his salary and benefits for 12 months after the termination is effective, including any bonus paid or payable for the calendar year before the termination. Mr. Mitchell's employment agreement contained a non-compete covenant that was in effect during the term of his employment and for 18 months after his termination, unless termination was by the Company without cause or by Mr. Mitchell for good reason.
The Company also entered into a separation agreement with Mr. Mitchell, effective April 4, 2000, the initial term of which was two years. The Company could, in its sole discretion, extend, terminate or modify the agreement within 60 days from and after its expiration and, if it took no action within 60 days after expiration of the term, the agreement would be automatically extended for an additional two years. Also, the agreement would have remained in force for two years after any change in control of the Company, as defined in the agreement. Under the agreement, if Mr. Mitchell was involuntarily terminated within two years after a change in control of the Company, he would have been entitled to (i) (British pounds) 195,000 as a lump sum in cash, (ii) a lump sum in cash equal to the cost of his benefits for two years, (iii) out-placement services in connection with finding new employment and (iv) the right to immediately exercise all outstanding stock options granted to him by the Company. Mr. Mitchell resigned his position effective August 9, 2001.
The Company entered into an employment agreement with Mr. Wright, the Company's Chief Operating Officer, dated February 6, 2001. Pursuant to his employment agreement, Mr. Wright was entitled to receive an initial base salary of (British pounds) 150,000 per year or such other rate as is shown on his pay slip, subject to annual review, and the Company matches his contributions to his personal pension up to five percent of his total pay. The annualized salary of Mr. Wright for 2001 is $216,000. Each of the Company and Mr. Wright may terminate the employment contract on six months prior notice in writing. Mr. Wright's employment agreement contains a non-compete covenant that is in effect during the term of his employment and for six months following his termination.
Prior to his appointment as Chief Operating Officer of the Company, Mr. Wright entered into a change in control separation agreement with the Company, effective September 30, 1999, the initial term of which was two years. The Company may, in its sole discretion, extend, terminate or modify the agreement within 60 days from and after its expiration and, if it takes no action within 60 days after expiration of the term, the agreement is automatically extended for an additional two years. Also, the agreement remains in force for two years after any change in control of the Company, as defined in the agreement. Under the agreement, if Mr. Wright is involuntarily terminated within two years after a change in control of the Company, he is entitled to (i) (British pounds) 117,000 as a lump sum in cash, (ii) a lump sum in cash equal to the cost of his benefits for two years, (iii) out-placement services in connection with finding new employment and (iv) the right to immediately exercise all outstanding stock options granted to him by the Company.
The Company entered into a change in control separation agreement with Mr. Fairchild, the Company's Chief Financial Officer, effective September 30, 1999, the initial term of which was two years. The Company may, in its sole discretion, extend, terminate or modify the agreement within 60 days from and after its expiration and, if it takes no action within 60 days after expiration of the term, the agreement is automatically extended for an additional two years. Also, the agreement remains in force for two years after any change in control of the Company, as defined in the agreement. Under the agreement, if Mr. Fairchild is involuntarily terminated within two years after a change in control of the Company, he is entitled to (i) $243,250 as a lump sum in cash, (ii) a lump sum in cash equal to the cost of his benefits for two years, (iii) out-placement services in connection with finding new employment and (iv) the right to immediately exercise all outstanding stock options granted to him by the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Ms. Pierpont served as a member of the Company's Compensation Committee in 2001 and also served as the Chairman of the Board of Directors until August, 2001, and as President and Chief Executive Officer thereafter for which she receives a salary of $150,000 annually and reimbursement for her expenses incurred on behalf of the Company.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of March 25, 2002, with respect to the beneficial ownership of shares of Common Stock of the Company by each person who is known to the Company to be the beneficial owner of more than five
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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.
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this Report.
1. The following financial statements of the Company and the related reports of independent accountants are filed herewith:
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2. Schedules for which provisions were made in accordance with applicable accounting regulations of the Securities and Exchange Commission are inapplicable and therefore have been omitted.
(b) Reports on Form 8-K.
On February 4, 2002, the Company filed a Current Report on Form 8-K regarding the termination of its former auditors, PricewaterhouseCoopers LLP.
On February 12, 2002, the Company filed a Current Report on Form 8-K regarding the engagement of BDO Seidman, LLP as the Company's new auditors.
(c) Exhibits
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on April 15, 2002.
DA Consulting Group, Inc. (Registrant)
By: /s/ Virginia L. Pierpont ---------------------------------------- Virginia L. Pierpont President and Chief Executive Officer
By: /s/ Dennis C. Fairchild ---------------------------------------- Dennis C. Fairchild Chief Financial Officer, Executive Vice President, Secretary and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on April 15, 2002.
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of DA Consulting Group, Inc.:
We have audited the accompanying consolidated balance sheet of DA Consulting Group, Inc. as of December 31, 2001 and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated statements referred to above present fairly, in all material respects, the consolidated financial position of DA Consulting Group, Inc. at December 31, 2001, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
/s/BDO Seidman, LLP
Houston, Texas March 22, 2002
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REPORT OF INDEPENDENT ACCOUNTANTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders DA Consulting Group, Inc.
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of DA Consulting Group, Inc. and Subsidiaries at December 31, 2000, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Houston, Texas March 19, 2001
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The accompanying notes are an integral part of the consolidated financial statements.
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The accompanying notes are an integral part of the consolidated financial statements.
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The accompanying notes are an integral part of the consolidated financial statements.
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The accompanying notes are an integral part of the consolidated financial statements.
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DA CONSULTING GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations & Basis of Presentation
DA Consulting Group, Inc. and its subsidiaries (the "Company") is a leading international provider of employee education and end-user support solutions to companies which are implementing enterprise resource planning software systems and other business information technology. The consolidated financial statements include the accounts of DA Consulting Group, Inc. and all majority-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
Management Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Expenditures for substantial renewals and betterments are capitalized, while repairs and maintenance are charged to expense as incurred. Assets are depreciated or amortized using the straight-line method for financial reporting purposes and accelerated methods for tax purposes over their estimated useful lives. Computer equipment is depreciated over a useful life of three to five years. Furniture is depreciated over a seven year useful life. Leasehold improvements are depreciated over the term of the lease. In 1999 the Company capitalized $3.3 million in implementation costs related to the Company's primary information system. Purchased software and internal software development costs related to the Company's primary information system are amortized over a seven year period. Gains or losses from disposals of property and equipment are reflected in other expense and in 2000 are partially included in the restructuring charge.
Software Development Costs
The Company capitalizes software development costs beginning when product technological feasibility is established and concluding when the product is ready for general release. At such time, software development costs are amortized on a straight-line basis over the lesser of three years or the expected life of the product. Research costs related to software development are expensed as incurred. During 1999, the Company capitalized $184,000 of software development costs relating to computer-based training software development which was expensed over 12 months. All software development costs for the Company's web based learning management system, Dynamic IQ, were expensed during the years 2000 and 2001.
Income Taxes
The Company recognizes deferred income taxes for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are determined based on the difference between the financial statement carrying amount and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance is provided against deferred tax assets which management considers more likely than not will fail to be realized.
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Foreign Currency Translation and Other Comprehensive Loss
For the Company's foreign subsidiaries, the local currency is the functional currency. For countries with highly inflationary currencies, the Company uses the U.S. dollar as the functional currency. Assets and liabilities are translated at year-end exchange rates, and related revenue and expenses are translated at the average exchange rates in effect during the period. Resulting translation adjustments are recorded as a separate component in shareholders' equity, accumulated other comprehensive loss, which is excluded from net loss.
Other comprehensive loss is added to the net loss to determine the total comprehensive loss of the Company. The components of comprehensive loss are listed below (in thousands):
Risks and Uncertainties
For the years ended December 31, 1999, 2000 and 2001, the Company incurred net losses of $8.2, $13.2 and $5.7 million, respectively. During the above periods, the Company generated net operating loss carryforwards for tax reporting purposes of approximately $31.4 million ($11.1 million deferred of tax assets), of which the Company has recorded a valuation allowance of approximately $4 million, based upon managements estimate of future taxable income in the United States, against the deferred tax asset generated from the net operating loss carryforwards.
During the second quarter of 2000, the Company implemented a strategy to restructure the global operations of the Company. Revenue in the United States continued to decline throughout 2001. Management completed the restructuring during the third quarter of 2001. The Company recorded a $4 million valuation allowance against the deferred tax asset in the United States resulting from management's projections of future taxable income in the United States based upon the size of the business in the United States and realistic future growth rates. Management is confident the Company's restructuring plan will be successful in the United States, and the Company will return to profitability. The plan has already begun to show positive results.
There can be no assurance that management's restructuring plan in the United States will yield sufficient future taxable income necessary to utilize the net operating loss carryforwards recorded as a deferred tax asset by the Company. The ultimate realization of the deferred tax asset is dependent upon management's ability to grow the revenues of the Company in the United States, adhere to the cost saving measures put in place during the restructuring and generate sufficient future taxable income. Any future decline, in the demand for the Company's services or the Company's inability to return to profitability in the United States will result in the Company being required to increase the valuation allowance against the deferred tax asset which would adversely affect the Company's financial position and operating results.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, trade accounts receivable, accounts payable and the revolving line of credit. The Company performs ongoing credit evaluations of its clients and generally does not require collateral for services. Bad debts have not been significant in relation to the volume of revenue. The Company maintains cash deposits and cash equivalents from time to time, which exceed Federally insured limits, with several major financial institutions. Management periodically assesses the financial condition of the financial institutions and investees and believes that any possible credit risk is minimal.
Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, accounts receivable, accounts payable and the revolving line of credit approximate fair values due to the short-term nature of these instruments. The estimated fair values of these instruments have been determined by the Company using available market information.
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Allowance for Accounts Receivable
The Company provides an allowance for accounts receivable that it believes may not be fully collectible or realizable. The balance of the allowance at December 31, 2000 and 2001, was $498,000 and $224,000, respectively.
Intangible Assets
Prior to July 1995, the Company's business was operated through four separate companies located in the United States, the United Kingdom, South Africa and Australia (the "Predecessor Companies"). All of the Companies were under common management. As a result of a stock exchange transaction on July 1, 1995, the Predecessor Companies became wholly-owned subsidiaries of the Company. In the exchange transaction, the net assets of the three acquired Predecessor Companies were recorded at fair market value. As a result, the Company recorded $485,000 of goodwill, which is being amortized over 25 years. Accumulated amortization of goodwill was $105,000 and $124,000 at December 31, 2000 and 2001, respectively.
Management reviews long-lived assets and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets which considers the discounted future net cash flows. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs of disposal. This analysis of the long-lived assets at December 31, 2001 resulted in the writeoff of $155,000 of goodwill net of accumulated amortization related to a closed operating unit. The analysis indicated there were no other impairments of these assets' carrying values.
Revenue Recognition
The majority of the Company's contracts with clients are based on time and expenses incurred with the remainder of the revenue generated from fixed price contracts. Accordingly, service revenue under both types of contracts is recognized as services are performed and the realization of the revenue is assured. Contract costs include direct labor costs and reimbursable expenses, and those indirect costs related to contract performance such as indirect labor. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Unbilled revenue represents the revenue earned in excess of amounts billed and deferred income represents billings in excess of revenue earned. Revenue includes reimbursable expenses directly incurred in providing services to clients. Revenue attributable to reimbursable expenses amounted to $4.9 million, $1.8 million and $2.0 million for the years ended December 31, 1999, 2000 and 2001, respectively. The Company recognizes product revenue upon shipment to the client if no further services are required.
Significant Clients
During the year 2001, one client accounted for approximately 18% of consolidated revenue. During the years 2000 and 1999, no individual client account for more than 10% of consolidated revenue.
Earnings Per Share
Basic earnings per share is based on the weighted average number of common shares outstanding. Diluted earnings per share is based on the weighted average number of common and potential dilutive common shares outstanding and utilizes the average market price per share when applying the treasury stock method in determining potential dilutive shares.
Accounting for Stock Options
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), which sets forth accounting and disclosure requirements for stock option and other stock-based compensation plans. The statement encourages, but does not require, companies to record stock-based compensation expense using a fair-value method, rather than the intrinsic-value method prescribed by Accounting Principles
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Board ("APB") Opinion No. 25. The Company has adopted only the disclosure requirements of SFAS No. 123 and has elected to continue to record stock-based compensation expense using the intrinsic-value approach prescribed by APB No. 25. Accordingly, the Company computes compensation cost as the amount by which the intrinsic vale of the Company's common stock exceeds the exercise price on the date of grant. The amount of compensation cost, if any, is charged to income over the vesting period.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standard Board finalized FASB Statement No. 141, Business Combinations (SFAS 141), and No. 142 Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires us to recognize acquired intangible assets apart from goodwill if the acquired intangible asset meets certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that we reclassify the carrying amounts of intangible assets and goodwill based upon the criteria of SFAS 141.
SFAS 142 requires, among other things, that we no longer amortize goodwill, but instead test goodwill for impairment as least annually. In addition, SFAS 142 requires us to identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets and cease amortization of intangible assets with an indefinite useful life. An intangible with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires us to complete a transitional goodwill impairment test six months from the date of adoption. We are also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. Currently, we do not expect that adoption of SFAS 141 and SFAS 142 will have a material impact on our financial position and results of operations.
The Company has approximately $0.2 million of goodwill included in its balance sheet at December 31, 2001. Goodwill amortization for the for the year ended December 31, 2001, is $19,000 before the provisions of SFAS 142 are applied. Implementation of SFAS 142 by the Company will result in the elimination of amortization of goodwill.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, SFAS No. 143, which amends SFAS No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies, is applicable to all companies. SFAS No. 143, which is effective for fiscal years beginning after June 15, 2002, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. As used in SFAS No. 143, a legal obligation is an obligation that a party is required to settle as a result of an existing or enacted law, statute, ordinance, or written or oral contract or by legal construction of a contract under the doctrine of promissory estoppel. While we are not yet required to adopt SFAS No. 143, we do not believe the adoption will have a material effect on our financial condition or results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment of Disposal of Long-lived Assets. SFAS No. 144, which supercedes SFAS No. 121, Accounting for the Impairment of Long-lived Assets for Long-lived Assets to be Disposed of and amends ARB No. 51, Consolidated Financial Statements, addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and interim financials within those fiscal years, with early adoption encouraged. The provisions of SFAS No. 144 are generally to be applied prospectively. As of the date of this filing, we are still assessing the requirements of SFAS No. 144 and have not determined the impact the adoption will have on our financial condition or results of operations.
2. MANAGEMENT'S RESTRUCTURING AND LIQUIDITY
During the second quarter of 2000, management began to restructure the global operations of the Company. As part of the plan, management was required to downsize the Company based upon current and future projected operating results. Some of the restructuring initiatives taken by management were as follows:
- Reduction in the number of consultants - Reduction of administrative personnel - Reduction in office space - Various other cost cutting measures
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Management completed the restructuring of the Company during the third quarter of 2001 and achieved overall profitability in the fourth quarter of 2001. There can be no assurance that profitability will continue.
The Company believes its current cash balances, line of credit, receivable-based financing and cash provided by future operations will be sufficient to meet the Company's working capital and cash need for the next fiscal year. However, there can be no assurance that such sources will be sufficient to meet these future expenses and the Company's future needs. The Company may seek additional financing through a private or public placement of equity. The Company's need for additional financing will be principally dependent on the degree of market demand for the Company's services. There can be no assurance that the Company will be able to obtain any such additional financing on acceptable terms, if at all.
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
The components of prepaid expenses and other current assets were as follows (in thousands):
4. PROPERTY AND EQUIPMENT, NET
The components of property and equipment were as follows (in thousands):
5. DEBT
Revolving Line of Credit
The Company has a credit facility from a foreign bank with an available line of approximately $1.1 million (750,000 Great Britain Pounds), collateralized by and based on eligible foreign accounts receivable, secured by a mortgage deed against all the assets of the Europe Division and guaranteed by the Company. At December 31, 2001, the Company had used the entire line available. The interest rate on this line of credit was 6.0% at December 31, 2001. The line is available through March 2003, however, may become due upon demand. At March 22, 2002 the amount borrowed against the line of credit was $400,000.
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Accounts Receivable Financing
The Company has an agreement with a bank, which provides for financing of eligible U.S. accounts receivable under a purchase and sale agreement. The maximum funds available under the agreement is $5 million. The agreement allows for the bank to request repurchase of an account receivable under certain conditions. The bank has never requested repurchase of an account receivable. At December 31, 2001, the Company had sold $0.2 million in accounts receivable pursuant to this agreement. At March 22, 2002 their were $13,000 in receivables sold under the agreement.
6. ACCRUED EXPENSES
The components of accrued expenses were as follows (in thousands):
7. INCOME TAXES
The following is a summary of the significant components of the Company's deferred income taxes (in thousands):
At December 31, 2001, for US Federal income tax reporting purposes, the Company had $24.6 million of unused net operating losses available for carryforward to future years. The benefit from carryforward of such net operating losses will expire in 2019, 2020 and 2021.
At December 31, 2001, the Company also had foreign net operating loss carryforwards totaling $6.7 million with $3.0 million expiring in 2006. The remaining $3.7 million have no expiration date.
The benefit from utilization of net operating loss carryforwards could be subject to limitations if significant ownership changes occur in the Company. The Company's ability to realize the entire benefit of its deferred tax asset requires that the Company achieve certain future earnings levels prior to the expiration of its NOL carryforwards. The Company recorded a $4.0 million valuation allowance against deferred tax assets during 2001. The Company believes it will generate sufficient taxable income to realize the remaining $6.6 million in deferred tax assets. The Company could be required to record a
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valuation allowance for a portion or all of its deferred tax asset if market conditions deteriorate and future earnings are below, or projected to be below, its current estimates and management believes it is more likely than not the deferred tax assets will fail to be realized.
The components of the Company's provision for income taxes were as follows (in thousands):
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:
The U.S. components of income (loss) before taxes were $(3.9), $(13.7) and $(3.4) million in 1999, 2000 and 2001, respectively, and the foreign components were $(7.4), $(6.9) and $0.2 million in 1999, 2000 and 2001, respectively.
8. STOCK-BASED COMPENSATION PLANS
Stock Options
The Company's 1997 Stock Option Plan, as amended in December 1999 (the "Option Plan"), is a stock-based incentive compensation plan. Under the Option Plan, the Company is authorized to issue 1,960,000 shares of common stock pursuant to "awards" granted in the form of incentive stock options (intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended) and non-qualified stock options not intended to qualify under Section 422. Awards may be granted to selected employees, directors, independent contractors, and consultants of the Company or any subsidiary. Stock options granted have contractual terms of 10 years. Unless otherwise specified in the terms of an award, all options vest on a schedule: 33% per year for 3 years, beginning on the second anniversary of the date of grant. Options granted under the Option Plan are at prices equal to the fair market value of the stock on the date of the grant, as determined by the Company's Board of Directors. To date, no stock options have been granted to independent contractors and consultants of the Company.
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The following table sets forth pertinent information regarding stock option transactions and stock option prices during the years ended December 31, 1999, 2000 and 2001:
The fair value of each stock option granted is estimated on the date of grant using the minimum value method of option pricing based on the following weighted-average assumptions: dividend yield of 0%; risk-free interest rates ranging from 4.38% to 6.77%; volatility of 90% and expected life of 5 years.
The following table sets forth pertinent information regarding the outstanding stock options at December 31, 2001:
Pro Forma Net Loss and Loss Per Share
Had the compensation cost for the Company's stock-based compensation plan been determined consistent with SFAS No. 123, the Company's net loss per share at December 31, 1999, 2000 and 2001 would approximate the pro forma amounts below (in thousands except per share amounts):
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The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts.
9. SHAREHOLDERS' EQUITY
Stock Repurchase Plan
In March 1999, the Company established a plan to repurchase up to 250,000 shares of its outstanding common stock. During the second quarter of 1999, the Company repurchased 200,000 shares at an average of $9.70 per share totaling $1.9 million. The Company suspended the plan at the end of the second quarter of 1999.
Issuance of Common Stock and Stock Warrants
On October 16, 2000, the Company consummated the sale to Purse Holding Limited ("Purse"), a British Virgin Islands limited company, of two million shares of the Company's common stock for $4.8 million and warrants to purchase up to three million shares of the Company's common stock. The sale was effected pursuant to a Securities Purchase Agreement ("the Agreement") dated August 2, 2000, between the Company and Purse. The Agreement was approved by the Company's shareholders at a special meeting held on October 12, 2000. The Company credited its $2 million loan, received from Purse on August 3, 2000, toward the $4.8 million purchase price of the two million shares of its common stock.
In accordance with the terms of the Agreement, the Company issued two million shares of common stock at a price of $2.40 per share including warrants to purchase (a) two million shares of common stock, exercisable until October 16, 2003, at the greater of $3.00 per share or 85% of the market price per share of common stock at the time of exercise, and (b) one million shares of common stock, exercisable for the period of time after January 1, 2002, and until October 16, 2003, at $3.00 per share.
Loss Per Share
The following table summarizes the Company's computation of loss per share for the years ended December 31, 1999, 2000 and 2001 (in thousands, except per share amounts). The calculation of diluted weighted average shares outstanding excludes 1.0 million, 4.3 million and 4.5 million common shares pursuant to outstanding options and warrants for the year ended December 31, 1999, 2000, and 2001, respectively, because their effect was antidilutive.
10. COMMITMENTS AND CONTINGENCIES
The Company leases various office facilities under non-cancelable operating lease agreements. Rent expense amounted to $3,100,000, $2,656,000 and $ 2,541,000 for the years ended December 31, 1999, 2000, and 2001, respectively.
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At December 31, 2001, future lease payments (in thousands) under non-cancelable leases with terms of more than one year are as follows:
Lease Sublease Payments Receipts --------- --------- 2002 . . . . . $ 2,444 $ 1,120 2003 . . . . . 2,037 1,043 2004 . . . . . 882 519 2005 . . . . . 333 - 2006 . . . . . 51 - Thereafter - - --------- --------- 5,747 $ 2,682 ========= Less subleases 2,682 --------- Total . . $ 3,065 =========
The Company has employment agreements with certain officers and key members of management of the Company, which automatically renew for one-year terms. The agreements provide for minimum salary levels, incentive bonuses at the discretion of the Company's Board of Directors and customary benefits including insurance coverage. In addition, the employment agreements further provide for severance pay ranging from six months to two year's base salary, bonus, and benefits, depending on the cause of termination and in the event of a change in corporate control.
From time to time, the Company is a party to routine litigation in the ordinary course of business. The Company does not believe that such litigation will have a material impact on the financial statements.
11.EMPLOYEE BENEFIT PLANS
401(k) Plan
The Company sponsors a 401(k) profit sharing plan (the "401(k) Plan") which covers substantially all of its U.S. employees. Employees are eligible to participate after completing three months of service. The 401(k) Plan provides for elective contributions by employees up to the maximum limit allowed by the Internal Revenue Code. The Company currently matches 50% of the amount deferred by participants, on deferral amounts up to 7.5% of compensation. Although the Company has not made any profit sharing contributions, the 401(k) Plan permits the Company to make a discretionary profit sharing contribution which, if made, is allocated to the accounts of participants who have been credited with 1,000 hours of service during a plan year and who are employed on the last day of a plan year. The Company made matching contributions equal to $0.50 for the years ended December 31, 1999, 2000 and 2001 for each dollar contributed to the 401(k) Plan, subject to the limits noted above, by employees. These amounts have been included in general and administrative expenses on the statements of operations. An employee is fully vested in the matching contributions after six years of employment, or earlier upon attainment of appropriate retirement age, upon retirement due to disability, or upon death. The Company made contributions to the 401(k) Plan aggregating approximately $648,000, $287,000 and $117,000 during the years ended December 31, 1999, 2000 and 2001, respectively. Payment of benefits is generally made in the form of a single lump sum or in installments. The Company sponsors similar plans in Canada and the United Kingdom and previously in Mexico, South Africa and Venezuela, pursuant to which employees may defer specified percentages of compensation which the Company matches at a rate of 50-100% on the first 3-5% of compensation deferred.
Incentive Compensation and Profit Sharing Policies
The Company has implemented incentive compensation and profit sharing policies that cover substantially all salaried employees. Employees in positions at project manager or below, as well as administrative staff, are eligible for discretionary profit sharing payments. Each employee's profit sharing payment is based on a formula and is contingent upon his or her level of salary and length of service. Employees in positions at project manager or above are eligible for incentive compensation payments based on satisfaction of applicable performance criteria. The Company approved and made incentive compensation and profit sharing payments aggregating approximately $2,882,000, $1,304,000 and $1,586,000 for the years ended December 31, 1999, 2000, and 2001, respectively, which are included in sales, general and administrative expense.
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12. RESTRUCTURING CHARGE AND LEASE ABANDONMENT
During the three month period ended March 31, 2000, the Company implemented a plan to address the dramatic decline in training and documentation activity for enterprise resource planning implementations. The plan consisted of regional base consolidations and downsizing of billable and non-billable personnel. Charges included the costs of involuntary employee termination benefits, write-down of certain property and equipment and reserves for leasehold abandonment.
The reduction in workforce consisted of 60 billable consultants and 44 non-billable administrative personnel. Substantially all of the employee terminations were completed during the first quarter. The Company recognized approximately $1.5 million expense attributable to involuntary employee termination benefits during the first quarter, of which approximately $1.2 million had been paid at December 31, 2000. The remaining $0.3 million in termination pay was paid during 2001.
During the three months ended March 31, 2000 the Company reserved approximately $0.9 million related to the abandonment of leases and approximately $1.0 million related to the writedown of leasehold improvements, furniture and equipment held by its Americas division. During the fourth quarter of 2000 due to weakening in the real estate market, the Company recorded an additional $1.3 million reserve for lease abandonment resulting in a total annual charge of $2.2 million. During 2000 payments of approximately $0.8 million were charged against the reserve for lease abandonment, resulting in a remaining reserve at December 31, 2000 of approximately $1.4 million.
During the three months ended June 30, 2001 the Company recorded a $0.8 million charge for the abandonment of additional leases. The charge was included in general and administrative costs. Payments for unutilized leased office space totaling $1.1 million were charged against the reserve in 2001. At December 31, 2001, the Company has a remaining accrual of $1.1 million of which $0.8 million is included in long term liabilities.
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
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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:
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15. QUARTERLY OPERATING RESULTS (UNAUDITED)
The following tables set forth unaudited income statement data for each of the eight quarters in the period beginning January 1, 2000 and ending December 31, 2001, as well as the percentage of the Company's total revenue represented by each item. In management's opinion, this unaudited information has been prepared on a basis consistent with the Company's audited annual financial statements and includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the quarters presented, when read in conjunction with the Financial Statements and related Notes thereto included elsewhere in this Yearly Report Form 10K. The operating results for any quarter are not necessarily indicative of results for any future period.
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