-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GFGgg8CBVZWF6wP+hhFskVQziBIzYZ/MF19a7Oro4AVS7i5CCBxz6W3xE/J6JgsA /9++L7USIlxJG5tNOJTlmA== 0000899243-00-000691.txt : 20000331 0000899243-00-000691.hdr.sgml : 20000331 ACCESSION NUMBER: 0000899243-00-000691 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DA CONSULTING GROUP INC CENTRAL INDEX KEY: 0001051209 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 760418488 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24055 FILM NUMBER: 587053 BUSINESS ADDRESS: STREET 1: 5847 SAN FELIPE RD STE 3700 CITY: HOUSTON STATE: TX ZIP: 77057 BUSINESS PHONE: 7133613000 MAIL ADDRESS: STREET 1: 5847 SAN FELIPE RD STREET 2: STE 3700 CITY: HOUSTON STATE: TX ZIP: 77057 10-K 1 FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 Commission File No.00-24055 DA CONSULTING GROUP, INC. (Exact name of registrant as specified in charter) TEXAS 76-0418488 (State or other jurisdiction of (IRS employer incorporation or organization) identification No.) 5847 SAN FELIPE, SUITE 3700 HOUSTON, TEXAS 77057 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (713) 361-3000 Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: Title of Class: --------------- COMMON SHARES, PAR VALUE $.01 PER SHARE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K [_]. As of March 24, 2000 the aggregate market value of the voting stock held by non-affiliates was $9,807,000. As of March 24, 2000, 6,418,604 shares of common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Specified portions of the definitive Proxy Statement for the Annual Meeting of Stockholders of DA Consulting Group, Inc. to be held on June 6, 2000 are incorporated by reference in Part III of this report. ================================================================================ Page 1 of 42 DA CONSULTING GROUP, INC. FORM 10-K TABLE OF CONTENTS PART I Item 1. Business.............................................. 3 Item 2. Properties............................................ 14 Item 3. Legal Proceedings..................................... 15 Item 4. Submission of Matters to a Vote of Security Holders... 15 PART II Item 5. Market for the Company's Common Equity and Related Stockholder Matters.................................. 15 Item 6. Selected Consolidated Financial Data.................. 16 Item 7. Management's Discussion and Analysis of Financial Condition And Results of Operations.................. 17 Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................................. 23 Item 8. Financial Statements.................................. 23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................. 23 PART III Item 10. Directors and Executive Officers of DA Consulting Group, Inc........................................... 23 Item 11. Executive Compensation................................ 24 Item 12. Security Ownership of Certain Beneficial Owners and Management........................................... 24 Item 13. Certain Relationships and Related Transactions........ 24 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................... 24 SIGNATURES......................................................... 26 Page 2 of 42 PART I ITEM 1. BUSINESS DA Consulting Group, Inc. ("DACG(TM) and together with its subsidiaries, the "Company") is a leading international provider of employee education and support solutions to companies investing in business information technology. Through its worldwide offices and locations, DACG delivers customized services for: . documentation and training necessary for implementation of large enterprise computer systems; . technical and non-technical employee education on enterprise computer systems; and . consulting on change management and change communications. In addition to services, the Company markets its proprietary software and business systems content as pre-packaged products. Since 1988, the Company has provided services to over 450 clients, including more than 70 of the Fortune Global 500, providing services to such companies as Guinness, Compaq, BASF, Nabisco, Eastman Kodak, Corning Consumer Products, Scott Paper Limited, Comp USA, Great Spring Water of America (Perrier Worldwide) and McKessonHBOC. The Company's client base is diversified, with its largest client representing less than 6% of the Company's revenue in 1999. Recognizing the global nature of the information technology market and the importance of being able to serve multi-national clients, the Company has built a substantial international presence and provides services on six continents. The Company has offices in the U.S., Canada, United Kingdom, France, Germany, South Africa, Australia, Singapore. DACG was founded in 1984 in Houston, Texas as an employee support company providing documentation services to the oil and gas industry. In 1988, the Company expanded its employee support services to include training in connection with one of the first major English language installations of SAP AG software in the world. During the 1990's, enterprise resource planning (ERP) represented the substantial market opportunity for the Company's services. DACG made ERP end- user support its primary focus. In 1999, revenue from clients implementing SAP software represented 90% of the Company's billed consulting revenue. By focusing on end-user support services, the Company has been successful in institutionalizing its knowledge base and has developed proprietary content and reference materials, the DA Foundation(TM), that is applied in developing customized solutions for each client. DACG has also developed DA Cornerstone(TM), the Company's methodology for delivering consistently high quality service to its clients. DACG has broadened its complement of end-user support services by also providing change communications consulting and on-line help tools with SmartForce and Centra Software strategic relationships and by expanding its ERP capabilities to include applications such as J.D. Edwards ("JDE"), BaaN, Oracle and PeopleSoft. Most recently, the Company introduced a pre-packaged software solution coupled with minimal consulting, called FastED(TM). FastED(TM) is targeted to meet the needs of many first time small or mid-sized organizations desiring to provide their own documentation and training programs when implementing ERP systems or upgrading existing systems. MARKET According to industry experts, the 1999 worldwide market for IT education and training was $18.4 billion and is growing at a compound annual rate of 11% to reach $27.8 billion in 2003. The Company's primary target market within ERP training comprises approximately 7% of the IT training market, or over $1 billion. Julian, Ellen H. and Dankes, Anne-Spohie, "Worldwide & US Education and Training Markets, 1998-2003", International Data Corporation, May 1999, Report 19144, page 3.There are many service providers in the training market and the providers that directly compete with the Company include software developers, computer training companies, consulting firms, and internet-based learning companies. DACG also has competitive pressure from large international system integrators and technology vendors that provide end-user support programs to supplement their proprietary software. The Company's growth in the past years was directly impacted by the significant growth experienced within the ERP market for first time implementations. DACG's ability to increase revenues in the ERP and IT training market is directly impacted by the respective growth rates within the worldwide regions and countries in which it provides services. The worldwide trend for new ERP implementations has generally moved from the West to the East. In the U.S., there is a growing saturation of ERP in large companies, which has led to shrinking or declining growth in this market, whereas Europe has flattened growth rates, and Asia has accelerated growth in first time ERP implementations. An extension of DACG's current market stems from companies experiencing what industry analysts have termed "Second Wave". The "Second Wave" phenomenon is a term that describes many companies' need to derive further value from already installed systems. These companies are increasingly recognizing the importance of providing employees with the training and Page 3 of 42 tools necessary to more fully utilize the potential of their systems on an on- going basis. DACG is concentrating its operations on "Second Wave" opportunities. New markets for DACG include e-business and e-learning. The Internet push has shifted the business IT market from ERP to e-business and has opened three training and consulting opportunities for the Company. These include: . Employee learning for extensions of ERP systems into other business functions such as sales force automation (SFA), client relationship management (CRM), and supply chain automation (SCA), as well as ERP upgrades and add-ons of additional components of existing ERP software; . Transforming the Company's educational services into a Web-based learning (WBL) system for the clients and for creation of custom on-line learning environments (commonly known as "virtual universities"); and . Implementing e-business software with consultative services. BUSINESS STRATEGY The Company's mission is to improve the performance of people and organizations as they learn, change and use technology. The Company's core focus has been documentation and training for enterprise resource planning (ERP) systems. Over 90% of our revenues are derived from new system implementations. During 1999, the ERP market experienced a dramatic decline in new implementations as companies shifted focus and resources to Y2K concerns and the growing IT areas of e-commerce and e-business. The IT training market for ERP experienced a similar swing and which resulted in the first ever declining period of revenues and earnings for the Company. To minimize risk to the shareholders, during 1999 the Company downsized its workforce, reorganized some of its operations and furthered diversification plans to reduce ERP dependency and enter new markets. See "Risk Factors". Maintain Core Business The core of the Company's business will continue to be professional consulting services for employee training and performance support for technology systems implementations. During 1999, the Company underwent a significant downsizing in reaction to a marketplace that was negatively impacted globally by a Y2K slowdown. With the current organization, DACG will continue ongoing support of back office systems such as SAP, JDE, PeopleSoft, BaaN, and Oracle software, as well as increasing our services in front office systems such as customer relationship management, supply chain automation, and sales force automation. As SAP is the largest ERP vendor and the Company has a significant portion of current core business in SAP training, the Company's business is dependent on the continued success of SAP. The market for the Company's core business has broadened from the Fortune Global 500 to include the Fortune 1000, which includes companies with revenues over and including $2.5 billion. To serve this broader market, the Company is offering FastED(TM), a package of proprietary software and services that delivers to the client a customizable learning system at a reduced cost. DACG will continue to develop products and services that meet the core business demands of this clientele. See "Risk Factors." Expand and Diversify into Internet-Leveraged Services The Company has chosen e-learning and e-business as areas of internal strength and opportunities that can be leveraged more broadly with today's modern electronic technology to create a more diversified organization. The Company will use the growth of the Internet to enter new lines of business, including custom creation of websites for virtual learning for corporate clientele, implementation of e-business software for integration of ERP systems and websites, and consultancy for technology change management. The areas of e-learning and e-business have been selected not only for their `good fit' with existing core business, but also for their impressive market growth potential. The corporate e-learning marketplace is currently estimated to be $1.7 billion in the U.S. alone and is forecasted to grow to $11 billion by 2003, which is an estimated compound annual growth rate (CAGR) of 65%. Julian, Ellen H and Andersen, Cushing, "The US Corporate Learning Market Forecast, 1998-2003", International Data Corporation, Jan 2000, Report # 21323, page 1. Development of a web-based learning system will be the major focus for the Research and Development group during 2000. The worldwide e-business implementation service market is estimated at $12.9 billion, and is estimated to grow at a CAGR of 59% to reach $78.6 billion by 2003. The e-business consulting market is growing at over 230% annually and was estimated in 1999 to be $7 billion. The Company will enter the e-business market by providing e-business implementations and delivering technology change consultancy, business process consultancy, and end-user training centered on the implementation of enterprise information portals (EIP). E-business is a new market entrance for the Company and it does not expect that it will result in significant short-term revenue. See "Risk Factors". Page 4 of 42 Maintain International Presence DACG believes maintaining geographically dispersed consulting operations are necessary for attracting and retaining a Fortune Global 500 client base. Therefore, the Company will retain international presence by maintaining current locations and adding further locations when justified by ongoing market demand. See "--Company Organization and Project Management Methodology" and "--Properties." Maintain and Expand Strong Relationships with ERP Software Vendors and Existing Clients The Company provides employee performance support solutions to clients installing large enterprise software systems. DACG's expertise includes SAP, JDE, Oracle, BaaN, and PeopleSoft. Because the quality of end-user performance support can substantially impact the success of an ERP installation, SAP has developed its own list of a limited number of preferred or qualified service providers. DACG is recognized by SAP as a Global Consulting Partner. The Company believes this status is important in enabling it to receive referrals from SAP for new business opportunities. In late 1998, the Company was named a Global Education Services Alliance Partner with PeopleSoft, Inc. In both relationships, the Company is the only education specialist. As part of the Company's restructuring in 1999, DACG refocused key sales people to concentrate on account management at large multi-national accounts and vertically within a specific industry. DACG's strategic account management and vertical specialists will allow the company to: . More broadly leverage in-depth knowledge of certain verticals; . Facilitate improved growth for delivering expanded services; . Improve effective coordination of work involving multi-national locations and clients; and . Assist in obtaining repeat business with its current and past clients See "--Sales and Marketing" and "Risk Factors." Leverage Large, Diversified, Blue-Chip Client Base Since 1988, the Company has provided services to over 70 of the Fortune Global 500 companies as well as other large companies worldwide. This blue-chip client base provides the Company with substantial credibility when soliciting business from potential new customers and has proven to be an important source of referrals. In addition, these customers are usually geographically dispersed with large numbers of employees requiring performance support services and upgrades, thereby providing the Company with a source of additional revenue opportunities. The Company's client base is diversified with the ten largest clients accounting for approximately 38% of the Company's revenue in 1999. The Company's largest client accounted for less than 6% of the Company's revenue in 1999. See "--Clients" and "Risk Factors." Extend Service Offerings The Company has a significant commitment to continual expansion of its service offerings. During 1999, the Company expanded service lines in the areas of change communications, customer relationship management, and supply-chain management. Areas of growth in 2000 are planned to be in knowledge management and change management. Additionally, Research and Development is focused on four development areas: . Customized on-line learning environment for clients desiring a proprietary web-based learning system; . Technology-based solutions that allow the Company's consultants to generate improved efficiencies as they develop employee support solutions for clients; . Tools and content specific to the software applications produced by major front office and back office vendors; and . Service solutions for areas complementary to existing businesses that support the Company's clients' needs for education and performance support beyond their ERP systems. The Company believes its proprietary toolset, its relationship with SmartForce to develop computer-based training titles, and its relationship with Centra to develop and market interactive Web-based distance learning are all important means of expanding services and gaining market share in the growing market for complex business software. Page 5 of 42 SERVICES The Company delivers employee support solutions designed to maximize the return on clients' business information technology investments while taking into account each client's individual needs, resources, and requirements. New business software has a significant direct impact on the working patterns of a corporation, which must be managed in relation to both implementation of the software and support of that software over time. The Company performs a thorough review of the procedures and jobs that employees will need to perform and uses this information to develop the requisite end-user support solution for the client. The Company offers DA Passport(TM) for clients to offer their employees context-sensitive help on-demand at their desktop computers. Such solutions utilize the Company's proprietary methodology, DA Cornerstone(TM), in the delivery of services consisting of change communications, education, and performance support programs developed by the Company. In response to the strong demand for SAP R/3 implementation using SAP's Accelerated SAP Roadmap(TM) methodology, DACG introduced DA FIT/Fast Implementation Toolkit(TM) ("DA FIT") in 1998 and a comprehensive package, FastED(TM), in 1999. DA FIT enables consultants to extract key information from Accelerated SAP ("ASAP") tools and processes and integrate it with DACG content and tools to quickly produce customized, effective end-user support solutions. FastED allows clients to perform their own end-user support solution, which includes DA FIT. Change Communications In 1999, DACG introduced change communication consulting as a new service line. Clients introducing complex business software systems commit themselves to long term change. Clients' employees are affected by this change, seeing it on the desktop in the form of new software functionality and in day-to-day business activities in the form of new procedures and policies. Typical approaches to managing this change focus on establishing executive management support. However, the key to successful business systems implementations is obtaining the support of end-users. Effective utilization of technology is critical to the success of business software investments. Accordingly, the companies change communications programs are primarily focused on the end-user. Common change communications deliverables provided by the Company to its clients include kick- off meetings and speeches, facilitated collaborative work groups, multimedia presentations, video presentations, and newsletters. These deliverables, in addition to providing critical information, also serve to minimize a client's business disruption by preparing the employees for the impact of complex business software related changes. The business goals that drive the implementation of business software as identified by client executive management are used as the starting point for the development of change communications programs. An analysis is conducted that determines how the enterprise-wide issues presented by client management will impact each end-user's daily work routine. These issues are identified through the Company's use of facilitated collaborative workshops where the Company's staff works with client employees to identify areas of greatest concern. Based on this review, a specific change communications program is developed for each segment of the audience. This program insures the progressive delivery of messages that start with the basic corporate message and then address issues that are specific to segments (such as the accounts receivable department) of the client's organization. Education The Company develops educational programs specific to each client's needs, taking into account the client's infrastructure and resources, the scope of the client's information technology system, and the client's language and cultural needs. In order to influence the way an employee works and optimizes his or her utilization of a new system, educational programs are developed that focus on specific end-user job responsibilities, as well as on the overall business processes that impact the end-user. In developing educational content for a client, the Company utilizes its DA Foundation(R) library, which contains training content to address job roles and processes common to complex business software. The Company consults with the client to determine the appropriate media to use for delivering the educational content: instructor-led training, computer- based training, and/or distance learning. Virtually all the Company's clients utilize instructor-led training courses, which the Company customizes to meet the particular client's specifications and needs. Many companies, particularly those with large and geographically dispersed operations, are increasingly seeking ways to use computer-based training to decrease costs and minimize employee time away from the job. DACG offers both custom and standardized computer-based training modules, utilizing the resources of the DA Foundation library and standardized courseware co-developed with SmartForce. In 2000, DACG plans to launch its customizable web-based learning system to the Fortune Global 500. Page 6 of 42 DACG offers both synchronous and asynchronous capabilities for computer-based distance learning. Using Symposium software from Centra Software, Inc., DACG provides synchronous distance learning, where many students can follow a single event. DACG provides asynchronous distance learning through custom and SmartForce courses that allow students to work independently and at their own pace. Both of these methods are used by companies with remote user audiences and require only basic information technology infrastructures because they involve distributing content by using wide area networks, corporate intranets, and audio conferencing technology. Typically a client implementing an ERP system or another new business technology will have the required infrastructure. Distance learning or "e-learning" is effective in situations where travel, time away from work and cost are important. Performance Support A critical component of the Company's end-user support solution is the documentation of business processes that affect end-users. This documentation is designed to assist workers in performing their jobs after training. In utilizing a new system, end-users of technology frequently encounter situations in which they require assistance. In order to limit workers' downtime and provide workers with easy access to assistance, on-line references containing relevant policies, processes, and procedures are utilized. In coordination with the design of educational programs, the Company works with each client to assess the ongoing documentation and performance support needs of the particular audience of end- users. Utilizing the DA Foundation, the Company then develops support content for the client, creating a clearly defined set of policies, processes, and procedures relating to the particular business software application. Based upon the client's information technology infrastructure, budget, and timing needs, the appropriate media for performance support are determined. Quick reference guides and printed documentation are used as hard copies to deliver performance support for the employee. Those clients who have limited time frames in which to develop an end-user support solution most often use this type of performance support solution. These clients can migrate to a more technologically advanced solution at a later date. More sophisticated performance support solutions can be delivered through the client's corporate intranet, where DACG will design and maintain a repository of the end-user support deliverables. DACG's most sophisticated performance support solution is an electronic performance support system ("EPSS") which provides comprehensive end-user support on demand at the desktop so that end-users can minimize interruptions in seeking help or information relating to a job task. End-users can access the EPSS from their own desktop and find the answers to the questions they have about a particular task. Building a comprehensive EPSS solution can be challenging and costly. To simplify its development, the Company has created a proprietary software technology, DA Passport. DA Passport is context sensitive, which means it can track the location of the client end-users in the client's ERP system, in order to provide support based on the particular application being run, thereby allowing the Company to create customized ERP end-user support accessible at a transactional or task level. The Company can link system tasks, business procedures, training, and computer-based training files to ERP transactions using the DA Passport technology to provide sophisticated support to end-users. A DA Passport solution is typically recommended to clients with corporate intranets, although the Company can consult with a client to construct a corporate intranet site if required. CLIENTS AND REPRESENTATIVE ENGAGEMENTS The Company provides custom support solutions around the world to large and mid-sized companies, many of which have information intensive, multinational operations. The Company has provided services to more than 450 clients, including many of the world's leading corporations in a broad range of industries such as oil and gas, technology, pharmaceutical and chemicals, utilities and telecommunications, consumer products, and manufacturing. The following is a selection of DACG's 1999 clients and representative engagements. Guinness Local (Guinness) Guinness is part of Diageo plc, a world-leading consumer goods company formed in 1997 through the merger of Grand Met & Guinness. Diageo has 85,000 employees and annual revenue of approximately GBP 14 billion. To meet increased demand and address Year 2000 issues, Guinness chose to integrate its systems and processes worldwide by implementing "Year 2000" compliant SAP ERP software. DACG was chosen to help Guinness train more than 1,200 employees in Ireland and more than 800 employees in the UK. After providing a detailed training needs analysis, DACG worked with Guinness to train 300 "Super Users"; internal employees devoted to learning specifics about the software. The "Super Users" then assisted colleagues with less experience during and after the implementation. Altogether, DACG produced over 80 courses and materials for future reference Page 7 of 42 and "job aids" such as help cards as reminders of key tasks. The materials were customized for each Guinness location and business area in accordance with local issues and culture. Rothmans of Pall Mall Berhad (Rothmans) Rothmans is the number one tobacco manufacturing and marketing company and ranks among the top five companies in Malaysia. Over the past 13 years, the company's growth has resulted in a market share increase from 10 to 60 percent. Rothmans found delivering timely information while managing sustained growth on a legacy system of disjointed computer systems difficult. To integrate its systems, Rothmans chose SAP R/3 ERP software using the ASAP methodology. After evaluating how sister companies implemented end-user training, Rothmans selected DACG to conduct its training. DACG documented 300 key SAP system tasks with respective business process flowcharts and process overviews and compiled them into HTML format for the Rothmans InfoCentre. More than 30 courseware programs were developed, each targeted to the needs of specific employee groups. Additionally, a classroom reference-based training methodology was used to train 230 end-users on the Rothmans InfoCentre. Compaq Computer Corporation (Compaq) Founded in 1982, Compaq has grown rapidly to become the second largest computer company in the world and the largest global supplier of personal computers. Compaq develops and markets hardware, software, solutions and services. Compaq's products are sold and supported in more than 100 countries through a network of authorized Compaq marketing partners. To meet its growing needs, Compaq acknowledged the need to standardize business systems and procedures at their headquarters in Houston, TX, and at their sales subsidiaries in Europe, Asia, Australia, Latin America, Canada and the United States. Compaq implemented SAP in a phased rollout, converting 47 sales subsidiaries and 6 manufacturing sites over a 30 month period. For its initial rollout, the Company utilized a team of 17 DACG consultants that developed 52 courses, managed end-user education programs and assisted in Compaq's intranet development. Following successful delivery of this solution, DACG was retained to deliver end-user education at Compaq sites in Mexico, Canada, China and South Africa. Baylor College of Medicine (Baylor) Houston-based Baylor, a renowned medical institution with total research support of $179.9 million and more than 50 research and patient-care centers, chose to replace its legacy computer systems with "Year 2000" compliant SAP ERP software. Recognizing the need for expert help, Baylor chose DACG as its preferred provider of documentation and training services. One of the greatest challenges Baylor faced in teaching 1,000 employees how to utilize ERP software was the vast variation in computing skills across the organization. DACG's customized approach to employee education addressed this challenge by providing job-specific training to small groups of people and adjusting teaching methods to accommodate different learning styles and experiences. In addition, Baylor benefited from DACG's proprietary on-line help tool, DA PassportTM, which allows employees to access information specific to their task. Working with Baylor, DACG facilitated business process definition workshops and created a performance support system made up of Baylor-specific business process documentation. DACG also delivered customized training reference materials targeted for the mass end user audience and for employees who use the system infrequently. DACG delivered both computer-based and instructor-led training at Baylor. Anglian Water Services (Anglian) Anglian is a privatized regional water and sewage service company with several hundred sites located in the United Kingdom. Its 162 treatment plants provide water to 4 million people, while more than 1,000 sewage treatment plants handle the needs of 2.4 million properties. Anglian implemented SAP R/3 to address "Year 2000" issues, replace legacy systems and to improve the efficiency of its business processes. SAP modules were implemented in Human Resources and Payroll; procurement; financial management and capital project management. After a thorough evaluation of training providers, Anglian selected DACG to train 1,700 geographically dispersed end-users in just 12 weeks. Working with a tight deadline, DACG developed 40 courses and workshops, delivering courses in a variety of methods including, computer-based training (CBT), instructor-led training, and a "playpit" environment where users can practice their skills in a realistic environment. The courses were developed in collaboration with Anglian business and allowed significant skills transfer to take place. Altogether, a total of 8,000 man-days of training were delivered, encompassing everyone from front-line operational staff to senior management team. All staff received a minimum of one day's training, with a high proportion receiving six or seven days of training. Public Service Enterprise Group (PSE&G) PSE&G is a $6.4 billion diversified energy and energy services company headquartered in New Jersey. Its two principal subsidiaries are PSE&G, New Jersey's oldest and largest regulated utility, and PSEG Energy Holdings, which manages unregulated and non-utility businesses. PSE&G serves more than 5.5 million customers and, like utilities across the nation, is preparing for a deregulated future. In response to heightened competition stemming from deregulation, PSE&G implemented SAP, allowing the company to respond to customers faster, manage work better, produce products more efficiently, and increase the timeliness of information. Moreover, PSE&G wanted its employees to be able to understand the costs of producing electricity, Page 8 of 42 make appropriate decisions as to how to keep costs down through preventive maintenance, and be able to report any malfunction to ensure quick and cost- efficient repair. PSE&G knew help was needed to ensure employees had the necessary training and information they needed to facilitate these changes. DACG was retained to train PSE&G employees and ensure user readiness. DACG produced hard-copy materials and used classroom instruction to train 1,200 end-users on the new system. PSE&G retained DACG to continue the training process after the completion of the implementation and plans to work with DACG on its next two implementations -nuclear and energy delivery. BASF (BASF) United-Kingdom-based BASF PLC is a division of BASF, a global chemicals company, employing more than 105,000 people and, with a worldwide turnover of DM55 billion, BASF PLC chose to implement SAP across its worldwide operations to replace legacy systems and to provide better customer service by developing common processes for key operational areas. BASF PLC employees 1001 staff and has annual revenues of over GBP 790 million. BASF PLC recognized that training was an important component of the project and chose DACG to achieve desired end results. Working with DACG, BASF PLC developed documentation for SAP system tasks and BASF business procedures and developed an on-line help system (DA Passport) for 750 end-users. DACG developed and administrated training courses for end-users through a combination of classroom-based courses, one-to-one sessions and workshops all incorporating DA Passport. The Company's ten largest clients, in the aggregate, accounted for approximately 34%, 31%, and 38% of its billed hour revenue in 1997, 1998, and 1999, respectively. No single client of the Company accounted for more than 6.0% of the Company's revenue in 1999. The following is a sample list of clients that the Company provided services for during 1999: Abbott Laboratories Ericsson Australia Nabisco Baylor College of Medicine Gleason Corporation Orleans Parish School Board BBC Worldwide Great Springs Waters of America Praxair Betz Dearborn Guinness Brewing Raytheon Compaq Hercules, Inc. Sabre, Inc. CompUSA Hewlett-Packard Company The American Bottling Company Corning Consumer Products McKesson Corporation Toyota of Australia Eastman Kodak Mitel Corporation W.R. Grace & Co.
COMPANY ORGANIZATION AND PROJECT MANAGEMENT METHODOLOGY Organization The Company divides its organization into three operating divisions: the Americas Division, which includes its operations in North, South, and Central America; the EMEA Division, which includes its operations in Europe, Middle East, and Africa; and the Asia Pacific Division, which includes its operations in Australia, Singapore and Asia. Each division is headed by a member of the Company's management and is further divided into regions that are generally headed by a Company vice president. Project Methodology Management The Company's DA Cornerstone(TM) project management methodology is a key component in its delivery of quality end-user support solutions to its clients. DA Cornerstone is DACG's comprehensive six phase, end-user support methodology that addresses key end-user support program deliverables, activities, and milestones throughout the lifecycle of a business information technology implementation. Each phase has associated tools that facilitate the completion of that phase's activities and deliverables. DA Cornerstone phases include: Analyze: DACG analyzes the client needs, resources, and requirements and submits to the client an end-user support strategy and proposed deliverables for approval. Prototype When the strategies are approved, DACG designs deliverables and and sets up appropriate Design: development strategies. The client must approve the strategic program design. Develop: DACG executes the strategies and submits all deliverables for frequent internal and client review. Page 9 of 42 Implement: DACG delivers the final work to the end-users. Evaluate: After implementation and as part of the services to the client, DACG evaluates the effectiveness of the services using appropriate tools. Support: DACG will arrange and set up the post implementation and long- term maintenance strategy for the educational program, end-user support, change communications or other program created by DACG for the client. The Company's project staff develops each end-user support component through an iterative draft and review process that directly involves client end-users in the development of content specific to their needs. This review process typically consists of three stages and has quality control steps embedded in each stage as formal checkpoints. These checkpoints are intended to ensure that the client is satisfied with the deliverables, that the content is accurate and adheres to the Company's own standards, and that the project is delivered in a cost-effective and timely manner. The success of a given project engagement from a cost, time, and client satisfaction standpoint is the responsibility of the assigned operations and project managers. SALES AND MARKETING The Company generates business through a field sales force that sells directly and pursues referrals and trade show leads. In addition, the Company co-markets, in the form of joint sales calls and marketing materials, with SAP and other ERP vendors, SmartForce, Centra Software, Insite Objects and others. The Company's direct sales efforts are performed worldwide by its 22 full- time sales personnel, each of whom has either a branch territory or regional focus. The sales personnel generate leads from several sources, including referrals from the Company's existing clients and from attendance at industry trade shows. Among its sales and marketing efforts, the Company's sales force has presented the Company's expertise at SAPPHIRE, the annual SAP America conference for SAP service providers and end-users. The Company also participates and has an opportunity to demonstrate its expertise at conferences around the world with all leading ERP vendors. The Company also uses Internet- based marketing, direct mail, advertising in trade magazines, corporate presentations, joint marketing events, and networking through regional business communities to generate potential sources for new business. Among its marketing efforts, the Company participates in and demonstrates its expertise at worldwide conferences with all leading enterprise software vendors and is a regular participant and speaker at SAPPHIRE, the annual SAP America conference for SAP service providers and end-users. In 2000, the Company plans to broaden marketing exposure into general employee education and training markets. The Company also uses Internet-based marketing, direct mail, advertising in trade magazines, corporate presentations, joint marketing events, and networking through regional business communities to generate potential sources for new business. The Company's strategic business alliances, including relationships the Company maintains with SAP, PeopleSoft, J.D. Edwards, and SmartForce, are a source of generating new business. DACG is recognized by SAP, PeopleSoft, and J.D. Edwards as a preferred or qualified provider of end-user support services. DACG is recognized as a Global Consulting Partner by SAP and a Global Education Services Alliance Partner by PeopleSoft. In addition, the Company develops and delivers to potential clients, joint proposals in collaboration with these business alliance partners, with the proposals covering software applications, software implementation services, and end-user support solutions. The Company has been successful in obtaining new business through these joint proposals. To this end, DACG has recently expanded its capability to develop and manage partnerships. This expanded capability has already shown signs of bringing a larger partner community onboard with an expanded focus, including not only referral selling, but true value-added reseller relationships. In this capacity, DACG will look to create bi-directional revenues derived from partners selling DACG products and services and by DACG reselling partner products and services. Through our business alliances with SmartForce and SAP, the Company has developed a series of computer-based training courses on SAP. The agreement does not require the Company to provide cash, but does require the Company to provide subject matter experts to assist SmartForce with the development of SAP-related computer-based training software. As of December 31, 1999, 20 of these titles had been released. The Company considers the development of computer-based training titles to be an important means of gaining market share in providing services for Fortune 1000 clients. These clients generally view computer-based courses as a cost-effective means of training. Page 10 of 42 Through business alliance with Centra Software Inc., the Company offers synchronous computer-aided distance learning. DACG offers both synchronous and asynchronous capabilities for computer-based distance learning. Using Symposium software from Centra Software, Inc., DACG provides synchronous distance learning, where many students can follow a single event. This is one method used for companies with remote user audiences and requires only basic information technology infrastructures because it involves distributing content by using wide area networks, corporate intranets, and audio conferencing technology. Typically a client implementing an ERP system or another new business technology will have the required infrastructure. Distance learning or "e-learning" is effective in situations where travel, time away from work and cost are important. The Company's services require a substantial financial commitment by clients and, therefore, typically involve a long sales cycle. Once a lead is generated, the Company endeavors to understand quickly the potential client's business needs and objectives in order to develop the appropriate solution and bid accordingly. The Company's operations and project managers are involved throughout the sales cycle to ensure mutual understanding of client goals, including time to completion and technological requirements. Sales cycles for end-user support solution projects typically range from one to six months from the time the Company initially meets with a prospective client until the client decides whether to authorize commencement of an engagement. The retention of the Company typically occurs at the beginning of the design/prototype stage of the software implementation. RECRUITING AND PROFESSIONAL DEVELOPMENT As of December 31, 1999, DACG's personnel consisted of 377 billable employees and 158 non-billable staff, which include sales, marketing, development, executive, and administrative personnel. The Company believes that its success depends mainly on its ability to attract, retain, and motivate talented, creative, and professional employees at all levels. For core business, the Company seeks to hire personnel with prior consulting experience in end-user education programs, education professionals with a background in information technology, and information technology professionals with education or communication program experience. Strong project management, analytical and communications skills and international experience are also considered. For the new programs such as e-learning and e-business, the company seeks individuals with systems design, web design, and system architecture capabilities. Recruiting is coordinated company-wide through the Company's human resources department. Training and mentoring are integral parts of the Company's staff development program. The Company's training programs ensure that its professional staff understands the impact of technology on people, is able to communicate effectively at all levels within a client organization, and has the ability to communicate with its clients' technical, business and management staff to provide value-added content to its clients. Ongoing training includes a blend of in-house and external training. In-house training includes basic training, more detailed software education, project management, consultancy skills, and leadership training. The use of DA Foundation materials and the application of performance support technologies such as DA Passport are also covered. In addition, all consultants are required to attend a DA Cornerstone methodology training program, and to be approved for its use before being assigned to any consulting project. External training programs focus on project and time management skills. The Company believes that its culture is central to its ability to attract and retain highly skilled and motivated professionals. Extensive technical, management, and sales training enable DACG professionals to expand their skills and attain increasing levels of responsibility within the organization. The technical career path provides opportunities for advancement outside the traditional management career ladder. The technical career path builds technical skills, provides compensation incentives, and at a macro level, supports the development of DACG's current and future core competencies. Through planned job assignment and rotations, special projects and structural development events, high potential management candidates are prepared to assume greater management roles. The Company attracts and motivates its professional and administrative staff by offering competitive packages of base and incentive compensation and benefits. All professional staff members are eligible for bonuses. The Company appreciates the importance of recognition and a promotion track for its administrative staff and fully integrates its staff into the conduct of its business. All of the Company's employees are eligible to receive stock options. See "Risk Factors". RESEARCH AND DEVELOPMENT DACG established a research and development department in 1995 to support and maintain its end-user support content and consulting methodologies. During 2000, the primary focus of this department will be the development of a virtual learning environment and complimentary consulting services, ongoing maintenance of DA Passport, DA Foundation, and the Company's proprietary toolset used for rapid deployment of end-user support solutions. The department is also responsible for developing computer-based training in collaboration with SmartForce and Centra Software. Page 11 of 42 The Company's research and development department continually applies technology developments to the Company's content and tools. As technology advances, DACG has kept pace expanding its deliverables from traditional hard copy materials and instructor led training to include on-line documentation, multimedia training, employee performance support systems, distance learning and web-based education and performance support solutions. In 1999, DACG released two new products and services - Change Communications and FastED(TM). Change Communications is a complete consultative service designed for communication of technological change. FastED is a pre-packaged product and service offering that allows complete but fast implementation of a training and support activity. FastED is available in English, French, German, Dutch, Spanish and Italian languages. Research & Development personnel work directly with the Company's human resources department to ensure that the Company's consultants are trained to support each new release of the consulting methodologies. The Company considers research and development crucial to the expansion of its service offerings into change and knowledge management, supply-chain and customer relationship management and plans to increase its expenditures in this area in 2000. COMPETITION The global markets for end-user performance support services for business information technology, e-learning and e-business consulting are large, highly fragmented, change rapidly, and are subject to low barriers to entry. DACG has three market areas for competition. These include: . Competition from the ERP software developers and other applications developers, which includes the software that DACG trains on, including SAP and other vendors. . Competition from large international systems integrators, such as the consulting practices of the large international accounting firms, which are focused principally on systems integration and implementation but also provide end-user support as a secondary service. . Competition from the professional services groups of many large technology and management consulting companies and a large number of smaller organizations that specialize in employee support services, generally serving a limited geographic area and having a smaller base of technical and managerial resources. . Competition as clients may elect to use internal resources to satisfy their needs for training services the Company provides. . In e-learning, the company faces a number of additional competitors in the public and private education systems for training. . In e-business, the Company has competition from a plethora of small and large companies entering the implementation and consulting space. In all markets, DACG faces competition for client assignments from a number of companies having significantly greater financial, technical, marketing resources and name recognition. The Company believes key competitive factors forming the basis upon which these companies compete are experience, reputation, industry focus, international presence, service and technology offerings, and price relative to the value of the services provided. The Company believes that it competes effectively and will continue to compete effectively worldwide. INTELLECTUAL PROPERTY AND OTHER PROPERTY RIGHTS The Company relies upon a combination of nondisclosure and other contractual arrangements and trade secret laws to protect its proprietary rights. The Company generally enters into confidentiality agreements with its key employees and clients, thereby seeking to limit distribution of proprietary information. There can be no assurance that the steps taken by the Company in this regard will be adequate to deter misappropriation of proprietary information or that the Company will be able to detect unauthorized use of and take appropriate steps to enforce its intellectual property rights. Software developed and other materials prepared by the Company in connection with client engagements are usually assigned to the Company's clients following the termination of the engagement. The Company retains the right to use the general know-how developed by the Company in the course of the engagement, and this accumulated knowledge is the basis for the DA Foundation. The Company also retains all rights to certain of its proprietary methodologies and software (such as DA PASSPORT and computer-based training software), the benefit of which the Company provides to the client by royalty-free license. DA Foundation(R), DA Team Teach(R) and DA Consulting Group(R) are registered trademarks and/or service marks of the Company. The Company also claims common law trademark rights in DACG and design (new), the globe and temple logo, Fast Implementation Toolkit(TM), Fast Implementation Toolset(TM), DA Cornerstone(TM), and DA Passport(TM), for each of which the Company has filed an application for to register in the United States Patent and Trademark Office. Furthermore, the Company claims common law trademark rights in DACG(TM), DA FIT/Fast Implementation Toolkit(TM), FastED(TM), DA ASK(TM), DA Quickweb(TM), and the slogan mark "Solutions for People and Technology"(TM), but as to these has decided at present not to file Page 12 of 42 applications for trademark registration. The Company holds no patents. The Company has registered the copyright in the computer programs titled "DA Basic Skills Training for SAP R/3" and "DA Basic Skills Training for SAP R/3 v2.0 US." The Company also claims the copyright in numerous other works and may elect to register such copyrights on a case-by-case basis. RISK FACTORS Our business operations are dependent on SAP and the ERP software market. A substantial portion of our revenue is derived from the provision of end- user support services in connection with ERP software implementations by our clients. These relationships and authorizations are generally subject to termination on short notice. In addition, these licensors could further modify their software in order to make the implementation cycles for its new releases shorter and less complicated, thereby possibly reducing the need for customized end-user support, or they could increase their provision of end-user support services for their software applications. They could also cease referring us to their customers as a provider of end-user support services. Any one or more of these circumstances could have a material adverse effect on our business and revenues. We may not be able to keep up with rapid technological changes Our future success will depend on our ability to gain expertise in technological advances, such as the latest releases from ERP software vendors, and to respond quickly to evolving industry trends and client needs. Our efforts to gain technological expertise and to develop new technologies require us to incur significant expense. There can be no assurance that we will be successful in adapting to these advances in technology or in addressing changing client needs on a timely basis. In addition, there can be no assurance that the services or technologies developed by others will not reduce significantly demand for our services or render our services obsolete. Any significant reduction in the demand for our services will have a material adverse effect on our results of operations. Our stock price has been volatile Stock prices may be subject to wide swings, particularly on a quarterly basis, in response to variations in operating and financial results, fluctuations in earnings, competitive pressures, market place conditions, failure to meet revenue expectations and other similar factors. It is difficult to forecast the timing of revenue because project cycles depend on factors such as the size and scope of assignments, circumstances specific to particular clients or industries, the number and nature of client projects commenced or completed during a period, and the utilization rates of our professional staff. Were we to fail to meet expectations of our anticipated revenue in a period, or if we were to experience a negative change in our perceived long-term growth prospects, either would likely have an adverse effect on our stock price. We may continue to experience increased competition from competitors with greater resources than ours, from potential clients performing services "in house" and from suppliers delivering a complete package to their customers The information technology services industry is highly competitive. It is served by many national, regional and local companies, including full service agencies and specialized temporary service agencies. It has limited barriers to entry, in part due to rapidly changing technologies. Our primary competitors come from a variety of market segments, including "Big Five" accounting firms, large systems consulting and implementation firms and large general management consulting firms. Many of these competitors have significantly greater financial, technical and marketing resources and greater name recognition. Such advantages may enable these competitors to attract more clients and provide faster service at less cost. In addition, our potential clients have increasingly decided to dedicate sufficient internal resources to performing the services that we provide "in house", particularly where these resources represent a fixed cost to the client. We are also increasingly finding that software licensors are implementing their own software packages, as well as educating their customers' employees in how to use them. Such competition may impose additional pricing pressures. We expect that the level of competition will remain high in the future. Increased competition could have a material adverse effect on our ability to profitably operate our business. We may not be able to attract and retain qualified information technology consultants Our continued success will depend in large part on our ability to attract, retain and motivate highly skilled employees, particularly project managers and other senior technical personnel. The qualified project managers that we require are in great demand and are likely to remain a limited resource for the foreseeable future. Many of the companies with which we compete for qualified professionals have substantially greater financial and other resources than we do. There can be no assurance that we will Page 13 of 42 be able to recruit, develop, and retain a sufficient number of highly skilled, motivated professionals to compete successfully. In addition, competition for qualified personnel may also lead to increased costs for such personnel which we may not be able to offset by increases in billing rates. The loss of a significant number of professional personnel is likely to have a material adverse effect on us, particularly our ability to complete existing projects or secure new projects. Failure to adequately estimate costs, or efficiently manage fixed-bid and not- to-exceed projects could have a material adverse effect on our profitability Certain of our projects are undertaken on a fixed bid basis, pursuant to which we charge our clients a flat rate for our services, or on a not-to-exceed basis, pursuant to which we limit the maximum fee that we will charge our client. For the year ended December 31, 1999, we realized approximately 11% of our revenues from fixed-bid or not-to-exceed projects. Were we to fail to adequately estimate the actual cost to us of completing a project under the guaranteed not-to-exceed or fixed fee price set forth in certain of our contracts, or were we to fail to efficiently manage these projects after entering into the not-to-exceed or fixed fee contract, we could become exposed to unrecoverable budget overruns, which could materially adversely affect our profitability. Additionally, client engagements are generally terminable with little or no notice or penalty, and our failure to meet a client's expectations could damage our relationship with that client and cause the client to terminate our engagement. A client's unanticipated decision to terminate or postpone a project may result in higher than expected numbers of unassigned professionals or severance costs, which could materially adversely affect our results of operations. We do not have any patents to protect our intellectual property rights from misappropriation Our success in the information technology services business depends upon our software deployment and methodology and other proprietary intellectual property rights. We do not hold any patents. We rely on a combination of trade secret, nondisclosure and other contractual arrangements and technical measures, and copyright and trademark laws to protect our proprietary rights. We generally enter into confidentiality agreements with our employees, consultants, clients and potential clients and limit access to and distribution of our proprietary information. There can be no assurance that the steps that we have taken will be adequate to prevent misappropriation of our intellectual property rights or that third parties will not independently develop functionally equivalent or superior methodologies or software. Moreover, there can be no assurance that third parties will not assert infringement claims against us in the future that would result in costly litigation or license arrangements regardless of the merits of such claims. Additionally, because our engagements are typically work- for-hire based, we assign ownership of, or grant a royalty-free license to use, the materials that we develop specifically for our clients to those clients upon project completion. Significant Exposure to International Markets We currently have international operations in Singapore, Australia, England, France, Germany, South Africa and Canada. As of December 31, 1999, 50% of our revenues resulted from our international operations. The successful operation of such geographically dispersed offices requires considerable management and financial resources and results in significant ongoing expense. International operations and the provision of services in foreign markets are subject to risks involving trade barriers, exchange controls, national and regional labor strikes, civil disturbances and war, and increases in duties, taxes, and governmental royalties, multiple and possibly overlapping tax structures, as well as changes in laws and policies governing operations of foreign-based companies. We may also experience difficulties relating to the global administration of our business. Any of such factors may have a material adverse effect on the Company. ITEM 2. PROPERTIES Currently, the Company maintains 16 offices on six continents. The Company's headquarters is at 5847 San Felipe Road, Suite 3700, Houston, Texas, where it leases approximately 57,000 square feet of space. This lease expires in June 2004. The Company also maintains domestic offices in the metropolitan areas of Boston, Chicago, Dallas, Philadelphia, and San Francisco, and foreign offices in Toronto, London, Paris, Melbourne, Sydney, Durban, Johannesburg, Cape Town, Singapore, and Canberra. Each of these offices is located near one or more significant clients of the Company, and, except for Durban, have terms that will expire between one and five years (exclusive of renewal options exercisable by the Company). All of the Company's offices are electronically linked together and have access to all of the Company's capabilities and core consulting tools. From time to time, the Company uses office space provided at client sites to facilitate performance of its services and maximize client contact. Where the Company operates in a country without an established office, operations are handled on a mobile basis with corporate support being delivered from one of its regional centers in Houston, London, Sydney, or Johannesburg. The Company believes that its facilities are adequate for its current needs and that additional facilities can be leased to meet future needs. In addition, the Company is in the process of subleasing several branch facilities that were vacated as a result of cost reduction measures. Page 14 of 42 ITEM 3. LEGAL PROCEEDINGS From time to time, the Company is a party to routine litigation in the ordinary course of business. The Company does not believe that the eventual outcome of such litigation will have a material effect on the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On December 7, 1999, at a Special Meeting of Shareholders, the holders of common stock approved the Company's 1997 Stock Option Plan (the "Plan") as amended, increasing the aggregate number of shares of common stock for which options may be granted under the Plan from 1,260,000 to 1,960,000. Votes For Votes Against Votes Abstained - --------- ------------- --------------- 3,394,064 768,592 1,630 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock has traded on the Nasdaq Stock Market since its initial public offering on April 24, 1998. Its trading symbol is DACG. The following table sets forth, for each quarterly period indicated, the high and low sale price for the common stock as reported by the Nasdaq National Market. 1998 High Low - ----------------------------------------------------- 2nd Quarter $18.50 $13.00 3rd Quarter 18.00 12.50 4th Quarter 21.88 10.25 1999 - ----------------------------------------------------- 1st Quarter $21.00 $ 7.63 2nd Quarter 12.63 5.13 3rd Quarter 6.38 4.38 4th Quarter 5.06 3.00 No dividends were declared on the Company's common stock during the years ended December 31, 1998 and 1999, and the Company does not anticipate declaring dividends in the foreseeable future. As of March 1, 2000 there were approximately 107 shareholders of record and greater than 1,200 beneficial shareholders. Page 15 of 42 ITEM 6. SELECTED COMBINED AND CONSOLIDATED FINANCIAL DATA The following selected consolidated financial statement data as of December 31, 1998 and 1999 and for the three years ended December 31, 1999 is derived from the audited consolidated financial statements of DA Consulting Group, Inc. and its subsidiaries (the "Company") included elsewhere herein. This information should be read in conjunction with such Consolidated Financial Statements and related notes thereto. The selected financial information as of December 31, 1995, 1996 and 1997 has been derived from the audited financial statements of the Company that have been previously included in the Company's reports under The Securities Exchange Act of 1934, that are not included herein. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
YEARS ENDED SIX MONTHS ENDED DECEMBER 31, --------------------------------------- --------------------------------------- JUNE 30, DECEMBER 31, 1995 1995 1995 1996 1997 1998 1999 ------------------------------------------------------------------------------------------- COMBINED(1) CONSOLIDATED(1) PRO FORMA(2) CONSOLIDATED(1) INCOME STATEMENT DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenue.............................. $6,299 $8,319 $14,618 $26,202 $44,204 $80,132 $ 70,295 Cost of revenue...................... 3,412 4,249 7,661 14,190 24,063 40,817 38,717 ------ ------ ------- ------- ------- ------- -------- Gross profit......................... 2,887 4,070 6,957 12,012 20,141 39,315 31,578 Selling and marketing expense........ 407 665 1,072 1,953 3,726 5,195 7,403 Development expense.................. 296 411 707 1,250 1,223 2,124 1,802 General and administrative expense... 1,657 2,357 4,014 6,597 12,436 24,877 33,461 Amortization expense(3).............. -- 230 459 274 54 29 354 Employee stock-related charge........ -- -- -- 1,858 263 -- 142 ------ ------ ------- ------- ------- ------- -------- Operating income (loss).............. 527 407 705 80 2,439 7,090 (11,584) Other (expense) income, net.......... (23) (61) (84) 95 (135) 22 287 ------ ------ ------- ------- ------- ------- -------- Income (loss) before taxes.......... 504 346 621 175 2,304 7,112 (11,297) Provision (benefit) for income taxes 189 228 250 141 896 2,813 (3,034) ------ ------ ------- ------- ------- ------- -------- Net income (loss).................... $ 315 $ 118 $ 371 $ 34 $ 1,408 $ 4,299 $ (8,263) ====== ====== ======= ======= ======= ======= ======== Basic earnings (loss) per share(4).. $0.09 $0.03 $0.10 $0.01 $0.29 $0.72 $(1.28) Weighted average shares outstanding.. 3,623 3,623 3,623 4,217 4,808 5,976 6,444 Diluted earnings (loss) per share(4). $0.08 $0.03 $0.10 $0.01 $0.28 $0.69 $(1.28) Weighted average shares outstanding.. 3,868 3,868 3,868 4,462 5,053 6,233 6,444 BALANCE SHEET DATA: Cash and cash equivalents............ $ 585 $ 592 $ 2,199 $ 3,664 $ 9,971 $ 5,795 Working capital...................... 315 761 1,629 4,101 25,585 11,007 Total assets......................... 3,211 5,440 8,549 20,135 48,903 32,918 Total debt........................... 445 562 731 3,970 -- -- Shareholders' equity................. 573 1,891 3,071 7,943 34,944 25,238
(1) Prior to July 1995, the Company's business was operated through four separate companies located in the United States (U.S.), the United Kingdom (U.K.), South Africa, and Australia (the "Predecessor Companies"). All of the Predecessor Companies were under common management. Prior to July 1995, three of the Predecessor Companies were controlled (based upon record ownership) by trusts, the sole beneficiaries of which were the controlling owners of the U.S. company and their children. As a result of a stock exchange transaction (the "Exchange Transaction") on July 1, 1995, the Predecessor Companies became wholly-owned subsidiaries of the Company. For accounting purposes, the acquisition of the U.S. company has been treated as a recapitalization of the U.S. company, and the U.S. company has been treated as the acquiror of the other three entities. As a result, the net assets of the U.S. company were carried forward at historical basis while the net assets of the acquired Predecessor Companies were recorded at fair market value using the purchase method of accounting. The financial data for the six months ended June 30, 1995 represents the combined results of the Predecessor Companies prior to the Exchange Transaction; the financial data for the six months ended December 31, 1995 and the years ended December 31, 1996, 1997, 1998 and 1999 represent the consolidated results of the Company following the Exchange Transaction. (2) The 1995 pro forma results of operations represent the combined results of the Predecessor Companies for the six months ended June 30, 1995 and the consolidated results of the Company for the six months ended December 31, 1995, which reflect the change in basis for the combined Predecessor Companies and amortization expense assuming the Exchange Transaction had occurred on January 1, 1995. The 1995 pro forma financial data have been presented since all of the entities were under common management and operated as one company for all of the years presented, and such data therefore represent a meaningful comparison with all of the years presented. As a result, the pro forma 1995 results include a full year of amortization expense in 1995 rather than the six months of amortization expense actually incurred by the Company in 1995. (3) In the Exchange Transaction, as described in note 1, the net assets of the three acquired Predecessor Companies were recorded at fair market value. As a result, the Company recorded $485,000 of goodwill which will be amortized over 25 years beginning July 1, 1995 and $510,000 of other intangible assets which were fully amortized between July 1, 1995 and June 30, 1997. (4) Basic and diluted earnings per share for 1997 on a pro forma basis would have been $0.31 and $0.29, respectively, to give effect to the sale of Common Stock (at an initial public offering price of $14.50 per share, less underwriting discounts and commissions and estimated offering expenses) to repay indebtedness and the associated reduction in interest expense as if such repayment had occurred on January 1, 1997. Page 16 of 42 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Annual Report on Form 10-K contains certain statements that are not historical facts which constitute forward-looking statements within the meaning of the Private Securities Legislation Reform Act of 1995 which provides a safe harbor for forward-looking statements. These forward-looking statements are based on management's belief as well as assumptions made by and information currently available to management, and are subject to substantial risks and uncertainties that could cause the Company's actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements. When used in this Report, the words "may," "will," "anticipate," "believe," "expect" and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements. Actual future results and trends may differ materially from historical results as a result of certain factors, including those set forth in the Risk Factors section of this Report, in the Liquidity and Capital Resources section of Management's Discussion and Analysis section in this Report and those risk factors set forth in our other filings with the Securities and Exchange Commission. BUSINESS The Company is a leading international provider of employee education and support solutions to companies investing in business information technology. Through its 535 employees in 16 offices worldwide, the Company provides employee support solutions through customized change communications, education, and performance support services to clients. Since 1988, the Company has provided services to over 450 clients, including more than 70 of the Fortune Global 500. The Company is currently organized into three divisions: the Americas Division which includes its operations in North, South, and Central America; the EMEA Division which includes its operations in Europe, Middle East, and Africa; and the Asia Pacific Division which includes its operations in Australia, New Zealand, and Asia. In 1999, the Americas, EMEA, and Asia Pacific Divisions represented 59.1%, 29.1%, and 11.8% of revenue, respectively. The number of clients served by the Company has increased substantially from 52 in 1994 to approximately 250 in 1999. The Company's client base is diversified, with no single client representing more than 6% of revenues in 1999. The Company derives substantially all of its revenue from fees for professional services related to supporting end-users in the implementation of ERP systems. Revenue from clients implementing SAP software represented 90% of billed consulting revenue for 1999. The majority of the Company's projects involve from three to ten consultants, are generally completed in three months to two years, and result in revenue from $200,000 to $1.5 million. The Company often performs multiple projects for a client in support of a phased implementation of the business information technology. The Company's services are generally provided pursuant to written contracts that can be terminated by the client with limited advance notice. In the event of such a termination by the client, the client remains obligated to pay for the services rendered to the client to the termination date. The Company generally bills its clients monthly for the services provided by its consultants at agreed upon rates, and where permitted, for expenses. The Company provides services to its clients primarily on a time and materials basis, although many of its contracts contain "not-to- exceed" provisions and Company performance obligations. The remainder of the Company's contracts are on a fixed-price basis, representing approximately 11% of the Company's total revenue for 1999. Revenue from time and materials engagements, as well as revenue from fixed price contracts, is recognized as services are performed and the realization of the revenue is assured. The Company also receives a small percentage of total revenue from license fees related to computer-based training products and other software products that are developed independently or are co-developed by the Company. Cost of revenue includes compensation and benefits paid to the Company's professional staff and all direct expenses of performing project work. The Company's financial performance is highly dependent upon staff billing rates, costs, and utilization rates. The Company manages these parameters by establishing and monitoring project budgets and timetables and tracking staffing requirements for projects in progress and anticipated projects. Project terminations, completions, and scheduling delays may result in periods when consultants are not fully utilized. An unanticipated termination of a significant project could cause the Company to experience lower staff utilization. In addition, the establishment of new services or new offices, employee vacations and training, and increases in the hiring of consultants may result in periods of lower staff utilization and downward pressure on gross margins. The Company's professional staff are generally employed on a full-time basis, and therefore the Company incurs substantially all of its staff-related costs even during periods of low utilization. In the past, the Company has experienced some seasonality in its business, with somewhat lower levels of revenue and profitability in the first and fourth quarters of the year due to the timing of project start-ups and completions, as well as holidays and vacations. During 1999, the Company experienced both Page 17 of 42 a seasonal downturn in business during the fourth quarter and a downturn in business demand during the third and fourth quarters due to the slowdown of ERP spending in anticipation of Year 2000 issues. Selling and marketing expense relates principally to compensation and benefits paid to the Company's dedicated sales staff and all direct costs associated with the sales process. Development expense consists principally of compensation costs for the Company's in-house research and development. These personnel focus on development of methodologies and applications of new technologies, including development of computer-based training courseware and performance support software and content. Development expense also includes personnel who provide technical support for the Company's professional staff in the field. General and administrative expense consists principally of salaries and benefits for executive management and for accounting, administrative, information technology, human resources, and recruiting and training staff, as well as compensation for the senior management in each of the Company's divisions. NEW ACCOUNTING PRONOUNCEMENTS In June, 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", which requires that companies recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The FASB has subsequently issues SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," that defers the requirements of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company did not hold any derivative or hedging instruments during the reported periods. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, income statement data expressed as a percentage of revenue and the percentage change in such items versus the previous comparable period.
PERCENTAGE OF REVENUE YEARS ENDED DECEMBER 31, ------------------------------------------------- 1997 1998 1999 ------------- ------------- ------------- Revenue...................................... 100.0% 100.0% 100.0% Cost of revenue.............................. 54.4 50.9 55.1 ---------- ---------- ---------- Gross profit................................. 45.6 49.1 44.9 Selling and marketing expense................ 8.4 6.5 10.5 Development expense.......................... 2.7 2.7 2.6 General and administrative expense........... 28.1 31.0 47.6 Amortization expense......................... 0.1 0.0 0.5 Employee stock-related charge................ 0.6 0.0 0.2 ---------- ---------- ---------- Operating income (loss)...................... 5.5 8.8 (16.5) Other (expense) income, net.................. (0.3) 0.0 0.4 ---------- ---------- ---------- Income (loss) before taxes................... 5.2 8.8 (16.1) Provision (benefit) for income taxes......... 2.0 3.5 (4.3) ---------- ---------- ---------- Net income (loss)............................ 3.2% 5.3% (11.8)% ========== ========== ==========
- ---------- YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 Revenue. Revenues decreased by $9.8 million, or 12.3%, from $80.1 million in 1998 to $70.3 million in 1999. The decrease was substantially attributable to a decrease in demand for services during the second half of 1999 as a result of the downturn in the market for complex computer software as companies focused on Year 2000 readiness and associated pricing pressures as competition for fewer assignments grew. Revenues from the Americas Division decreased by 19.0% from $51.2 million to $41.5 million; revenues from the EMEA Division decreased by 8.9% from $22.5 million to $20.5 million; and revenues from the Asia Pacific Division increased by 29.7% from $6.4 million to $8.3 million. The Company ended the 1999 period with 535 total employees, down from 863 employees at the beginning of the period. Page 18 of 42 Gross profit. Gross profit decreased by $7.7 million, or 19.7%, from $39.3 million in 1998 to $31.6 million in 1999, and decreased from 49.1% of revenue in 1998 to 44.9% of revenue in 1999. The decrease is primarily attributable to maintaining the consultant workforce at lower utilization rates in anticipation of future demand and pricing pressures due to increased competition as demand slowed in the second half of 1999. Selling and marketing expense. Selling and marketing expense increased by $2.2 million, or 42.5%, from $5.2 million in 1998 to $7.4 million in 1999 and increased as a percentage of revenue from 6.5% in 1998 to 10.5% in 1999. The increase was primarily attributable to the expansion of the sales leadership and global marketing efforts as the Company continued its efforts to maximize revenues. Development expense. Development expense decreased by $322,000, or 15.2%, from $2.1 million in 1998 to $1.8 million in 1999, and remained constant as a percentage of revenue at 2.7% in 1998 and 2.6% in 1999. Development expense was significant in 1998 due to the expenditures related to developing key products including DA FIT and tools to facilitate distance learning. In addition, development expense decreased during the second half of 1999 due to cost containment measures. General and administrative expense. General and administrative expense increased by $8.6 million, or 34.5%, from $24.9 million in 1998 to $33.5 million in 1999, and increased as a percentage of revenue from 31.0% in 1998 to 47.6% in 1999. During the first half of 1999, in response to the high growth of the Company in the prior year, the Company built administrative infrastructure including staff, systems and facilities. Salaries and benefits increased $3.4 million and facilities costs increased $2.8 million as a result of the increased infrastructure. During 1999, the Company incurred approximately $1.9 million in non-capitalized costs related to the implementation of SAP as its primary information system. The Company incurred severance and leasehold abandonment expenses related to cost reduction programs implemented during the second half of 1999. These costs were offset in part by reduced incentive compensation as a result of slow year over year revenue growth beginning late in the second quarter of 1999. Amortization expense. Amortization expense increased by $325,000, or 1,120%, from $29,000 in 1998 to $354,000 in 1999, and increased as a percentage of revenue from 0.0% in 1998 to 0.5% in 1999. The increase is due to the amortization of internal development costs associated with the SAP system placed in service in July 1999. These costs will be amortized over an 84 month period. Employee stock-related charge. While the Company incurred no employee stock- related charges in 1998, the Company did incur charges of $142,000 in 1999, related to the amendment of exercise dates of certain stock options awarded to an employee. Operating income (loss). Operating income decreased by $18.7 million or 263.4%, from $7.1 million in 1998 to a loss of $11.6 million in 1999. Operating loss, exclusive of employee stock-related charges and other intangible asset amortization, was (15.8%) of revenue in 1999. On the same basis, operating income was $7.1 million in 1998 and was 8.9% of revenue. Other income (expense), net. Other income (expense), net increased from income of $22,000 in 1998 to income of $287,000 in 1999. Interest income increased from $299,000 in 1998 to $366,000 in 1999, reflecting investment income from the investment of proceeds from the Company's initial public offering completed in April, 1998 (the "Offering".) Prior to completion of the Offering, the Company borrowed against a line of credit. Provision for income taxes. The decrease in the Company's effective tax rate from 39.6% in 1998 to a benefit rate of 26.9% in 1999, primarily relates to losses in lower income tax jurisdictions and non-deductible expenses. At December 31, 1999, the Company's deferred tax asset recorded on its balance sheet was approximately $2.9 million, consisting primarily of $2.3 million of future tax benefits resulting from net operating loss ("NOL") carryforwards. The Company's ability to recognize the entire benefit requires that the Company achieve certain future earnings levels prior to the expiration of the NOL carryforwards. The Company expects to generate the future earnings necessary to utilize the NOL carryforwards through implementation of the reasonable tax planning strategies and future income projections. The Company could be required to record a valuation allowance for a portion or entire deferred tax asset if the market conditions deteriorate and future earnings are below, or projected to be below, current estimates. At December 31, 1999, the Company has NOL carryforwards of $6.7 million. Of the $6.7 million, $5.4 million expires in 2014. The remaining $1.3 million have no expiration. Net income (loss). Net loss was $8.3 million in 1999 compared to income of $4.3 million in 1998. Net loss before other intangible asset amortization and compensation charges related to stock options awarded to an employee, would have been $7.8 million in 1999. Page 19 of 42 YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Revenue. Revenues increased by $35.9 million, or 81.3%, from $44.2 million in 1997 to $80.1 million in 1998. The increase was substantially attributable to an increase in volume of services and is to a lesser extent attributable to rate increases. The Company experienced growth in all of its divisions. Revenues from the Americas Division increased by 78.8% from $28.7 million to $51.2 million; revenues from the EMEA Division increased by 98.4% from $11.3 million to $22.5 million; and revenues from the Asia Pacific Division increased by 52.2% from $4.2 million to $6.4 million. The Company ended the 1998 period with 863 total employees, up from 568 employees at the beginning of the period. In addition, the Company opened four new offices during the period, and closed two smaller offices, increasing the total number of offices to 17. Gross profit. Gross profit increased by $19.2 million, or 95.2%, from $20.1 million in 1997 to $39.3 million in 1998, and increased from 45.6% of revenue in 1997 to 49.1% of revenue in 1998. The increase is primarily attributable to increased consultant productivity through use of the Company's tools developed to enhance software systems training. Selling and marketing expense. Selling and marketing expense increased by $1.5 million, or 39.4%, from $3.7 million in 1997 to $5.2 million in 1998, and decreased as a percentage of revenue from 8.4% in 1997 to 6.5% in 1998. The increase was primarily attributable to the growth of the Company's sales and marketing staff from 23 employees at December 31, 1997 to 27 at December 31, 1998 and the expenses associated with the expanded efforts of those employees. Development expense. Development expense increased by $900,000, or 73.7%, from $1.2 million in 1997 to $2.1 million in 1998, and remained constant as a percentage of revenue at 2.7%. Development expense increased significantly during 1998 due to the expenditures related to developing key products including DA FIT and tools to facilitate distance learning. Development expense was also incurred for continued work on products co-developed with CBT Systems and continued work on the Company's DA Passport product. Development expense also includes expenses to develop a conversion plan for the Company's SAP system and support staff to introduce new products to the sales and field staff. General and administrative expense. General and administrative expense increased by $12.4 million, or 100.0%, from $12.4 million in 1997 to $24.9 million in 1998, and increased as a percentage of revenue from 28.1% in 1997 to 31.0% in 1998. Expenses were incurred to continue to build the organization to support the growth during 1998 and future years. Increases included additional support staff, the addition of four new offices and the expansion of corporate headquarters. Amortization expense. Amortization expense decreased by $35,000, or 64.8%, from $54,000 in 1997 to $29,000 in 1998, and decreased as a percentage of revenue from 0.1% in 1997 to 0.0% in 1998. The decrease reflected the completion by June 30, 1997 of the amortization of other intangible assets created as a result of the Exchange Transaction on July 1, 1995. Employee stock-related charge. While the Company incurred no employee stock- related charges in 1998, the Company did incur charges of $263,000 in 1997, related to stock awarded to employees and payments in lieu thereof. These charges had the effect of reducing net income by $163,000 in 1997. Operating income. Operating income increased by $4.7 million or 190.7%, from $2.4 million in 1997 to $7.1 million in 1998. Operating income, exclusive of employee stock-related charges and other intangible asset amortization, was 8.8% of revenue in 1998. On the same basis, operating income was $2.7 million in 1997 and was 6.2% percent of revenue. Other income (expense), net. Other income (expense), net increased from an expense of $135,000 in 1997 to an income of $22,000 in 1998. This change reflects increased borrowings to support the Company's growth in 1997. Interest income increased from $30,000 in 1997 to $299,000 in 1998, reflecting investment income from the investment of proceeds from the Company's initial public offering on April 24,1998 (the "Offering"). Provision for income taxes. The increase in the Company's effective tax rate from 38.9% in 1997 to 39.6% in 1998, primarily relates to increased foreign income. Net income. Net income was $4.3 million in 1998 compared to $1.4 million in 1997. Exclusive of the charges for other intangible asset amortization and for compensation charges related to stock awarded to employees and payments in lieu thereof, net income would have been $1.7 million in 1997. Page 20 of 42 Quarterly Operating Results The following tables set forth unaudited income statement data for each of the eight quarters in the period beginning January 1, 1998 and ending December 31, 1999, as well as the percentage of the Company's total revenue represented by each item. In management's opinion, this unaudited information has been prepared on a basis consistent with the Company's audited annual financial statements and includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the quarters presented, when read in conjunction with the Financial Statements and related Notes thereto included elsewhere in this Yearly Report Form 10K. The operating results for any quarter are not necessarily indicative of results for any future period.
THREE MONTH PERIOD ENDED --------------------------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 1998 1998 1998 1998 1999 1999 1999 1999 --------- --------- ---------- ---------- ---------- -------- --------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Revenue............................. $14,587 $19,703 $21,882 $23,960 $24,129 $22,047 $15,804 $ 8,315 Cost of revenue..................... 7,740 10,278 11,233 11,565 11,586 11,305 8,426 7,400 --------- --------- ---------- ---------- ---------- -------- --------- ---------- Gross profit........................ 6,847 9,425 10,649 12,395 12,543 10,742 7,378 915 Selling and marketing expense....... 1,236 1,217 1,345 1,397 1,864 2,263 1,621 1,655 Development expense................. 355 390 779 601 640 434 350 379 General and administrative expense.. 4,259 5,948 6,427 8,244 7,818 7,600 8,864 9,179 Amortization expense................ 5 5 5 14 4 53 148 148 Employee stock-related charge....... -- -- -- -- -- 142 -- -- --------- --------- ---------- ---------- ---------- -------- --------- ---------- Operating income (loss)............. 992 1,865 2,093 2,139 2,217 250 (3,605) (10,446) Other income (expense), net......... (113) (159) 159 135 104 25 90 68 --------- --------- ---------- ---------- ---------- -------- --------- ---------- Income (loss) before taxes.......... 879 1,706 2,252 2,274 2,321 275 (3,515) (10,378) Provision (benefit) for income taxes 334 675 914 888 853 138 (1,318) (2,707) --------- --------- ---------- ---------- ---------- -------- --------- ---------- Net income (loss).................. $ 545 $ 1,031 $ 1,338 $ 1,386 $ 1,468 $ 137 $(2,197) $ (7,671) ========= ========= ========== ========== ========== ======== ========= ========== Basic earnings (loss) per share..... $ 0.11 $ 0.17 $ 0.20 $ 0.21 $ 0.22 $ 0.02 $ (0.34) $ (1.20) Weighted average shares outstanding. 4,808 5,978 6,555 6,547 6,546 6,388 6,418 6,418 Diluted earnings (loss) per share... $ 0.11 $ 0.16 $ 0.20 $ 0.20 $ 0.22 $ 0.02 $ (0.34) $ (1.20) Weighted average shares outstanding. 5,053 6,264 6,822 6,800 6,737 6,489 6,418 6,418 AS A PERCENTAGE OF REVENUE ---------------------------------------------------------------------------------------------- Revenue............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenue..................... 53.1 52.2 51.3 48.3 48.0 51.3 53.3 89.0 --------- --------- ---------- ---------- ---------- -------- --------- ---------- Gross profit........................ 46.9 47.8 48.7 51.7 52.0 48.7 46.7 11.0 Selling and marketing expense....... 8.5 6.2 6.1 5.8 7.7 10.3 10.3 19.9 Development expense................. 2.4 2.0 3.6 2.5 2.7 2.0 2.2 4.6 General and administrative expense.. 29.2 30.2 29.4 34.4 32.4 34.4 56.1 110.4 Amortization expense................ 0.0 0.0 0.0 0.1 0.0 0.2 0.9 1.8 Employee stock-related charge....... 0.0 0.0 0.0 0.0 0.0 0.7 0.0 0.0 --------- --------- ---------- ---------- ---------- -------- --------- ---------- Operating income (loss)............. 6.8 9.5 9.6 8.9 9.2 1.1 (22.8) (125.6) Other income (expense), net......... (0.7) (0.8) 0.7 0.6 0.5 0.1 0.6 0.8 --------- --------- ---------- ---------- ---------- -------- --------- ---------- Income (loss) before taxes.......... 6.0 8.7 10.3 9.5 9.6 1.2 (22.2) (124.8) Provision (benefit) for income taxes 2.3 3.4 4.2 3.7 3.5 0.6 (8.3) (32.6) --------- --------- ---------- ---------- ---------- -------- --------- ---------- Net income (loss)................... 3.7% 5.2% 6.1% 5.8% 6.1% 0.6% (13.9)% (92.3)% ============================================================================================== - ------------
Liquidity and Capital Resources Since its inception, the Company has historically financed its operations and growth with cash flow from operations, supplemented by the issuance of Common Stock and by short-term borrowings under its revolving bank line of credit and from shareholders. The Company's cash and cash equivalents were $3.7 million as of December 31, 1997, $10.0 million as of December 31, 1998 and $3.4 million as of December 31, 1999. The Company's working capital was $4.1 million as of December 31, 1997, $25.6 million as of December 31, 1998 and $11.0 million as of December 31, 1999. The Company's operating activities used cash of $6.4 million in 1999, compared with providing cash of $5.9 million in 1998. The decrease is primarily attributable to operating losses for 1999 offset in part by a decrease in accounts receivable. The Company's operating activities used cash of $2.4 million in 1997 compared to providing cash of $5.9 million in 1998. The increase in cash provided during 1998 was primarily the result of increased net income. Page 21 of 42 The Company's investing activities provided cash of $ 1.4 million in 1999 compared to investment of cash of $17.4 million in 1998 and $2.0 million in 1997. The $1.4 million cash provided in 1999 was the result of the Company selling $7.7 million in short-term investments offset by investing $6.2 million in fixed assets, primarily attributable to the implementation of SAP as the Company's primary information system. Of the $17.4 million invested in 1998, the Company invested $10.0 million from the proceeds from the Offering in short- term investments and $7.4 million in capitalized fixed assets, including the costs of implementing the Company's primary information system. The Company's financing activities used cash of $1.5 million for 1999 and provided cash of $18.6 million for 1998 and $5.9 million in 1997. Cash used in financing activities during 1999 were principally attributable to the buyback of common stock during the first half of the year. The increase in cash from financing activities in 1998 resulted from private placements of shares and an initial public offering of common stock. Cash was used to repay notes payable and the revolving line of credit. During 1996, the Company entered into a credit facility with a financial institution with a maximum credit limit of $1,000,000, which expired in March 1997. In March 1997 and September 1997, the Company amended and renewed the credit facility, increasing the available line from $1,000,000 to $3,500,000 and $5,000,000, respectively. Interest was payable monthly at prime plus 0.5% per year (9.0% and 8.25% at December 31, 1997 and 1998, respectively). No amounts were drawn on this line of credit during 1999 and the debt on this line of credit was fully repaid during the year ended December 31, 1998. The balance outstanding on the line of credit to expire at December 31, 1997 was $3,208,000. The company allowed this line of credit to expire at December 31, 1999. During 2000, the Company expects to make approximately $1 million in capital expenditures, primarily for computer and office equipment, and leasehold improvements. Capital expenditures will be financed by a combination of available cash resources and lease financing. In March 2000, the Company signed an agreement with a bank, which provides for financing of eligible U.S. accounts receivable under a purchase and sale agreement. The maximum funds available under this agreement is $5 million. Also in March 2000, the Company obtained a credit facility from a bank with a maximum line of credit of approximately $800,000, secured by eligible foreign accounts receivable. The Company believes its current cash balances, receivable-based financings and cash provided by future operations will be sufficient to meet the Company's working capital and cash needs through 2001. However, there can be no assurance that such sources of funds will be sufficient to meet these future expenses. The Company may seek additional financing through a public or private placement of equity. The Company's need for additional financing will be principally dependent on the degree of market demand for the Company's services. There can be no assurance that the Company will be able to obtain any such additional financing on acceptable terms, if at all. The Company capitalizes software development costs beginning when product technological feasibility is established and concluding when the product is ready for general release. At such time, software development costs are amortized on the straight-line basis over a maximum of three years or the expected life of the product, whichever is less. During 1999, the Company capitalized $184,000 of software development costs relating to computer-based training software development. The development was completed in 1999 and will start amortizing in 2000. Research costs related to software development are expensed as incurred. In 1999 and 1998, respectively, the Company capitalized $3.3 million and $728,000 of implementation costs related to the Company's primary information system. Such development costs are amortized over a seven year period. Because the Company has been and is currently able to match the local currency component of client engagements to the amount of operating costs transacted in local currency, the Company has not needed to and does not currently hedge against currency fluctuations. During the three-month period ending March 31, 2000, the Company implemented a plan to address the recent dramatic decline in training and documentation activity for enterprise resource planning implementations. The plan consists of regional base consolidations and down-sizing of billable and non-billable personnel. Charges include the costs of involuntary employee termination benefits, write-down of certain fixed assets and reserves for leasehold abandonment. The Company paid approximately $700,000 attributable primarily to involuntary employee termination benefits during the three months ended March 31, 2000. In addition the Company has reserved $1.7 million related to facilities and fixed asset reserves. The Company believes the provision is adequate to cover the future costs attributable to implementation of the current plan. Page 22 of 42 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company holds short-term investments which consist of variable rate municipal debt instruments. The Company uses a sensitivity analysis technique to evaluate the hypothetical effect that changes in market interest rates may have on the fair value of the Company's investments. At December 31, 1999, the potential decrease in the fair value of investments assuming a 10 percent adverse change in the market rates is not significant. YEAR 2000 COMPLIANCE ISSUES. Internal Project: During 1998, the Company began to implement plans to ensure that its systems continue to meet its internal and external requirements. During the first quarter of 1999, the Company completed the Year 2000 remediation of its corporate headquarters and Americas division systems. The Company completed this remediation process for its EMEA and Asia Pacific divisions in the second quarter of 1999. Implementation of SAP as the Company's primary information system was completed in the third quarter of 1999. Internal Systems: In addition to computer and software systems, the Company recognizes that the use of internal systems such as telephone systems and other business-related items may be affected by the Year 2000 issue. The Company addressed during 1999, the potential effects and the cost to mitigate these effects, and believes that the necessary steps were taken to upgrade or replace these items without a material effect on the Company's financial position. Third Parties: The Company has communicated with third parties with which the Company does business in order to identify, to the extent possible, the status of such parties' Year 2000 readiness. Although these companies have confirmed that they were compliant by the Year 2000, the Company has limited or no control over the actions taken by these third parties. The Company to date has not experienced any significant events, nor received any significant reports indicating any material Year 2000 issues from third parties. Contingency Plan: As of this date, the Company has not experienced any disturbances or interruption in its ability to transact business with its customers or its suppliers. Uncertainties exist as to the Company's ability to detect all Year 2000 problems. The Company continues to monitor its systems, suppliers and clients for any unanticipated issues that have yet to surface. The total cost of the Company's current systems conversion was approximately $8 million, of which substantially all has been incurred. This conversion was not necessary in order for the Company to become Year 2000 compliant. The cost of converting only the non-compliant system would have been nominal. ITEM 8. FINANCIAL STATEMENTS The consolidated financial statements of the Company are included in pages 27 through 42. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in accountants, disagreements, or other events requiring reporting under this item. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF DA CONSULTING GROUP, INC. MANAGEMENT Information relating to the Company's directors and executive officers is included in the Company's definitive Proxy Statement in connection with its 1999 Annual Meeting of Stockholders (the "1999 Proxy Statement), which will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year ended December 31,1999, under the captions "ELECTION OF DIRECTORS - Nominees" and "OTHER INFORMATION - Directors and Executive Officers" and is incorporated herein by reference in response to this Item 10. Page 23 of 42 ITEM 11. EXECUTIVE COMPENSATION Information relating to executive compensation is set forth in the 1999 Proxy Statement under the captions "ELECTION OF DIRECTORS - Compensation of Directors" and "EXECUTIVE COMPENSATION" and is incorporated herein by reference in response to this Item 11. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information relating to ownership of Registrant's Common Stock by management and certain other beneficial owners is set forth in the 1999 Proxy Statement under the caption "OTHER INFORMATION - Certain Stockholders" and is incorporated herein by reference in response to this Item 12. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information relating to certain relationships and related transactions is set forth in the 1999 Proxy Statement under the caption "OTHER INFORMATION - Related Transactions" and is incorporated herein by reference in response to this Item 13. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as a part of this Report. 1. The following financial statements of the Company and the related report of independent accountants are filed herewith:
PAGE NUMBER -------- Report of Independent Accountants .............................................................. 27 Consolidated Financial Statements: Balance Sheets as of December 31, 1998 and 1999 .............................................. 28 Statements of Operations for the years ended December 31, 1997, 1998, and 1999 ............... 29 Statements of Stockholders' Equity for the years ended December 31, 1997, 1998 and 1999 ...... 30 Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999 ................ 31 Notes to Consolidated Financial Statements..................................................... 32
2. Schedules for which provisions were made in accordance with applicable accounting regulations of the Securities and Exchange Commission are inapplicable and therefore have been omitted. 3. Exhibits (A) EXHIBITS EXHIBIT NO. DESCRIPTION - ----------- ------------- 1.1 --Form of Underwriting Agreement by and among the Company, the Underwriters and the Selling Shareholders* 3.1 --Amended and Restated Articles of Incorporation of the Company* 3.2 --Restated By-Laws of the Company* 4.1 --Specimen Stock Certificate* 5.1 --Opinion of Pepper Hamilton LLP dated March 20, 1998* 5.2 --Opinion of Pepper Hamilton LLP dated April 16, 1998* 10.1 --Amended and Restated 1997 Stock Option Plan 10.2 --Employment Agreement between the Company and Nick Marriner* 10.5 --Employment Agreement between the Company and Lisa L. Costello* 10.6 --Employment Agreement between the Company and Eric J. Fernette* Page 24 of 42 EXHIBIT NO. DESCRIPTION - ----------- ------------- 10.17 --Amended and Restated Employment Agreement between the Company and Lisa Costello* 10.18 --DA Consulting Group, Inc. Deferred Compensation Plan* 11.1 --Computation of Net Income Per Share dated January 9, 1998* 11.2 --Computation of Pro Forma Earnings per Share dated March 2, 1998* 11.3 --Computation of Pro Forma Earnings per Share dated March 31, 1998* 11.4 --Computation of Pro Forma Earnings per Share dated April 22, 1998* 16.1 --Letter re change in certifying accountants dated January 9, 1998* 16.2 --Letter re change in certifying accountants dated March 30, 1998* 21.1 --Subsidiaries* 23.1 --Consent of PricewaterhouseCoopers LLP 23.2 --Consent of Pepper Hamilton LLP (included in Exhibit 5.2)* 24 --Power of Attorney (included on Signature Pages)* 27 --Financial Data Schedule _________ * Previously filed. (B) REPORTS ON FORM 8-K. None were filed during the fourth quarter of 1999. Page 25 of 42 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 28, 2000. DA Consulting Group, Inc. (Registrant) By: /s/ Nicholas H. Marriner --------------------------- Nicholas H. Marriner Chairman and Chief Executive Officer By: /s/ Dennis C. Fairchild --------------------------- Dennis C. Fairchild Chief Financial Officer, Executive Vice President, Secretary and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on March 28, 2000. SIGNATURE TITLE --------- ----- /s/ NICHOLAS H. MARRINER Chief Executive Officer and - -------------------------------- Chairman of the Board (Principal Nicholas H. Marriner Executive Officer) /s/ DENNIS C. FAIRCHILD Chief Financial Officer, Executive - -------------------------------- Vice President, Secretary Dennis C. Fairchild and Treasurer (Principal Financial and Accounting Officer) /s/ NIGEL W.E. CURLET Director - -------------------------------- Nigel W.E. Curlet /s/ GUNTHER E. A. FRITZE Director - -------------------------------- Gunther E. A. Fritze /s/ VIRGINIA L. PIERPONT Director - -------------------------------- Virginia L. Pierpont /s/ RICHARD W. THATCHER, JR. Director - -------------------------------- Richard W. Thatcher, Jr. Page 26 of 42 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of: DA Consulting Group, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders' equity, and cash flows present fairly, in all material respects, the financial position of DA Consulting Group, Inc. and its subsidiaries (the "Company") at December 31, 1998 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Houston, Texas March 24, 2000 Page 27 of 42 DA CONSULTING GROUP, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, ------------------------ 1998 1999 ------ ------ C> ASSETS ------ Current Assets: Cash and cash equivalents...................................... $ 9,971 $ 3,406 Short-term investments......................................... 10,033 2,389 Accounts receivable, trade, net................................ 16,015 8,578 Unbilled revenue............................................... 1,589 434 Income taxes receivable........................................ 1,310 2,979 Deferred tax asset............................................. -- 445 Prepaid expenses and other current assets...................... 626 456 ------- ------- Total current assets........................................ 39,544 18,687 Property and equipment, net.................................... 8,759 12,368 Other assets................................................... 182 -- Deferred tax asset............................................. -- 1,464 Intangible assets, net......................................... 418 399 ------- ------- Total assets......................................... $48,903 $32,918 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current Liabilities: Accounts payable............................................... $ 2,954 $ 1,955 Accrued expenses............................................... 8,903 5,613 Deferred income................................................ 1,345 112 Income taxes payable........................................... 592 -- Deferred income taxes.......................................... 165 -- ------- ------- Total current liabilities................................... 13,959 7,680 ------- ------- Commitments and contingencies (Note 8) Shareholders' equity: Preferred stock, $0.01 par value: 10,000,000 shares authorized. -- -- Common stock, $0.01 par value: 40,000,000 shares authorized; 6,571,777 shares issued and 6,550,074 and 6,418,604 shares outstanding, respectively...................................... 65 65 Additional paid-in capital...................................... 29,359 29,355 Retained earnings (accumulated deficit)......................... 6,398 (1,865) Accumulated other comprehensive loss............................ (762) (795) Treasury stock, at cost: 21,703 and 153,173 shares, respectively (116) (1,522) ------- ------- Total shareholders' equity................................... 34,944 25,238 ------- ------- Total liabilities and shareholders' equity............... $48,903 $32,918 ======= =======
The accompanying notes are an integral part of the consolidated financial statements. Page 28 of 42 DA CONSULTING GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, -------------------------------------------------- 1997 1998 1999 ----------- ----------- ----------- Revenue......................................... $44,204 $80,132 $ 70,295 Cost of revenue................................. 24,063 40,817 38,717 ------- ------- -------- Gross profit................................. 20,141 39,315 31,578 Selling and marketing expense................... 3,726 5,195 7,403 Development expense............................. 1,223 2,124 1,802 General and administrative expense.............. 12,436 24,877 33,461 Amortization expense............................ 54 29 354 Employee stock-related charge................... 263 -- 142 ------- ------- -------- Operating income (loss)...................... 2,439 7,090 (11,584) Interest income, net............................ 30 299 366 Other expense, net.............................. (165) (277) (79) ------- ------- -------- Total other income (expense), net (135) 22 287 ------- ------- -------- Income (loss) before taxes................... 2,304 7,112 (11,297) ------- ------- -------- Provision for income taxes: Current provision (benefit).................. 888 2,867 (960) Deferred provision (benefit)................. 8 (54) (2,074) ------- ------- -------- Provision (benefit) for income taxes...... 896 2,813 (3,034) ------- ------- -------- Net income (loss)......................... $ 1,408 $ 4,299 $ (8,263) ======= ======= ======== Basic earnings (loss) per share................. $ 0.29 $ 0.72 $ (1.28) Weighted average shares outstanding............. 4,808 5,976 6,444 Diluted earnings (loss) per share............... $ 0.28 $ 0.69 $ (1.28) Weighted average shares outstanding............. 5,053 6,233 6,444
The accompanying notes are an integral part of the consolidated financial statements. Page 29 of 42 DA CONSULTING GROUP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
RETAINED ACCUMULATED COMMON STOCK ADDITIONAL EARNINGS OTHER ------------------- PAID-IN (ACCUMULATED COMPREHENSIVE NUMBER PAR CAPITAL DEFICIT) INCOME (LOSS) ------ ----- ---------- ------------ ------------- Balance as of December 31, 1996........... 4,435 $44 $ 2,787 $ 691 $ (33) Issuance of common stock................. 394 4 3,662 -- -- Employee stock repurchases............... -- -- -- -- -- Net income............................... -- -- -- 1,408 -- Foreign currency translation adjustment, net of taxes of $17......... -- -- -- -- (26) ----- --- ------- ------- ----- BALANCE AS OF DECEMBER 31, 1997........... 4,829 48 6,449 2,099 (59) Issuance of common stock................. 1,743 17 21,129 -- -- Income tax expense related to -- -- 1,781 -- -- restricted stock plan................... Employee stock repurchases............... -- -- -- -- -- Repayment of stockholder notes receivable -- -- -- -- -- Net income............................... -- -- -- 4,299 -- Foreign currency translation adjustment, net of taxes of $459........ -- -- -- -- (703) ----- --- ------- ------- ----- BALANCE AS OF DECEMBER 31, 1998........... 6,572 65 29,359 6,398 (762) Stock repurchases........................ -- -- -- -- -- Exercise of employee stock options -- -- (146) -- -- Employee stock compensation -- -- 142 -- -- Net loss................................. -- -- -- (8,263) -- Foreign currency translation adjustment, net of taxes of $22......... -- -- -- -- (33) ----- --- ------- ------- ----- Balance as of December 31, 1999........... 6,572 $65 $29,355 $ 1,865 $(795) ===== === ======= ======= ===== NOTES TREASURY STOCK RECEIVABLE TOTAL ------------------- FROM SHAREHOLDERS' NUMBER COST SHAREHOLDERS EQUITY ------ ------ ------------ ------------- Balance as of December 31, 1996........... 221 $ (5) $(413) $ 3,071 Issuance of common stock................. (218) 5 (90) 3,581 Employee stock repurchases............... 18 (91) -- (91) Net income............................... -- -- -- 1,408 Foreign currency translation adjustment, net of taxes of $17......... -- -- -- (26) --- ------- ----- ------- BALANCE AS OF DECEMBER 31, 1997........... 21 (91) (503) 7,943 Issuance of common stock................. -- -- -- 21,146 Income tax expense related to -- -- -- 1,781 restricted stock plan................... Employee stock repurchases............... 1 (25) -- (25) Repayment of stockholder notes receivable -- -- 503 503 Net income............................... -- -- -- 4,299 Foreign currency translation adjustment, net of taxes of $459........ -- -- -- (703) --- ------- ----- ------- BALANCE AS OF DECEMBER 31, 1998........... 22 (116) -- 34,944 Stock repurchases........................ 200 (1,943) -- (1,943) Exercise of employee stock options (69) 537 -- 391 Employee stock compensation -- -- -- 142 Net loss................................. -- -- -- (8,263) Foreign currency translation adjustment, net of taxes of $22......... -- -- -- (33) --- ------- ----- ------- Balance as of December 31, 1999........... 153 $(1,522) $ -- $25,238 === ======= ===== =======
The accompanying notes are an integral part of the consolidated financial statements. Page 30 of 42 DA CONSULTING GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ---------------------------------------------- 1997 1998 1999 --------- ---------- ---------- Cash flows from operating activities: Net income (loss)................................................. $ 1,408 $ 4,299 $(8,263) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization................................... 453 1,138 2,560 Provision for doubtful accounts................................. 353 773 435 Stock option compensation expense............................... -- -- 142 Deferred income taxes........................................... 8 (54) (2,074) (Gain) loss on sale on property and equipment................... -- (1) 80 Changes in operating assets and liabilities: Accounts receivable and unbilled revenue..................... (8,225) (5,998) 8,157 Prepaid expenses and other current assets.................... 151 (376) 170 Other assets................................................. (45) (193) 182 Accounts payable and accrued liabilities..................... 3,083 4,499 (4,289) Deferred income.............................................. 312 1,033 (1,233) Income taxes payable......................................... 72 730 (2,261) ------- -------- ------- Total Adjustments...................................... (3,838) 1,551 1,869 ------- -------- ------- Net cash (used in) provided by operating activities... (2,430) 5,850 (6,394) ------- -------- ------- Cash flows from investing activities: Proceeds from sale of property and equipment...................... -- 39 19 Sale of short-term investments.................................... -- -- 7,721 Purchases of short-term investments............................... -- (10,033) (77) Purchases of property and equipment............................... (1,955) (7,398) (6,249) ------- -------- ------- Net cash (used in) provided by investing activities.... (1,955) (17,392) 1,414 ------- -------- ------- Cash flows from financing activities: Net proceeds from (repayments of) revolving line of credit........ 2,833 (3,208) -- Proceeds from (repayments of) note payable........................ 762 (762) -- Proceeds from (repayments of) notes payable to shareholders....... (356) -- -- Repayments of notes receivable from shareholders.................. -- 503 -- Issuance of stock................................................. 3,581 25,268 -- Stock repurchases................................................. (91) (25) (1,943) Proceeds from stock option exercises.............................. -- -- 391 Offering costs.................................................... (853) (3,224) -- ------- -------- ------- Net cash provided by (used in) financing activities.... 5,876 18,552 (1,552) ------- -------- ------- Effect of changes in foreign currency exchange rate on cash and cash equivalents.......................................... (26) (703) (33) ------- -------- ------- Increase (decrease) in cash and cash equivalents...... 1,465 6,307 (6,565) Cash and cash equivalents at beginning of year...................... 2,199 3,664 9,971 ------- -------- ------- Cash and cash equivalents at end of year............................ $ 3,664 $ 9,971 $ 3,406 ======= ======== =======
The accompanying notes are an integral part of the consolidated financial statements. Page 31 of 42 DA CONSULTING GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations & Basis of Presentation DA Consulting Group, Inc. and its subsidiaries (the "Company") is a leading international provider of employee education and end-user support solutions to companies which are implementing enterprise resource planning software systems and other business information technology. The consolidated financial statements include the accounts of DA Consulting Group, Inc. and all majority- owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. Management Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the USA requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Short-Term Investments Short-term investments are those, that when purchased, have maturities greater that three months. The short-term investments consist of variable rate municipal debt instruments, which result in no unrealized holding gains or losses. As the Company does not intend to hold the investments until their stated maturity dates, the Company has classified all investments as available-for-sale. The Company records its short-term investments at cost, which approximates market value determined using the specific identification method. Property and Equipment Property and equipment are stated at cost. Expenditures for substantial renewals and betterments are capitalized, while repairs and maintenance are charged to expense as incurred. Assets are depreciated or amortized using the straight-line method for financial reporting purposes and accelerated methods for tax purposes over their estimated useful lives. Computer equipment is depreciated over a useful life of three to five years. Furniture is depreciated over a seven year useful life. Purchased software and internal software development costs related to the Company's primary information system are amortized over a seven year period. Gains or losses from disposals of property and equipment are reflected in operations. Software Development Costs The Company capitalizes software development costs beginning when product technological feasibility is established and concluding when the product is ready for general release. At such time, software development costs are amortized on a straight-line basis over the lessor of three years or the expected life of the product. Research costs related to software development are expensed as incurred. During 1999, the Company capitalized $184,000 of software development costs relating to computer-based training software development. In 1998 and 1999, the Company capitalized $728,000 and $3.3 million, respectively, of implementation costs related to the Company's primary information system. Such costs are being amortized straight-line over seven years. Income Taxes The Company recognizes deferred income taxes for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are determined based on the difference between Page 32 of 42 the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance, if necessary, is provided against deferred tax assets based upon managment's assessment as to their realization. Foreign Currency Translation For the Company's foreign subsidiaries, the local currency is the functional currency. Assets and liabilities are translated at year-end exchange rates, and related revenue and expenses are translated at the average exchange rates in effect during the period. Resulting translation adjustments are recorded as a separate component in shareholders' equity. For countries with highly inflationary currencies, the Company uses the U.S. dollar as the functional currency. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and trade accounts receivable. The Company maintains cash deposits and short-term investments, which exceed Federally insured limits, with several major financial institutions. Management periodically assesses the financial condition of the financial institutions and investees and believes that any possible credit risk is minimal. The Company performs ongoing credit evaluations of its clients and generally does not require collateral for services. Bad debts have not been significant in relation to the volume of revenue. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable and accounts payable approximate fair values due to the short-term nature of these instruments. The estimated fair values of these instruments have been determined by the Company using available market information. Allowance for Doubtful Accounts The Company provides an allowance for accounts receivable that it believes may not be fully collectible. The balance of the allowance at December 31, 1998 and 1999, was $650,000 and $964,000, respectively. Intangible Assets Prior to July 1995, the Company's business was operated through four separate companies located in the United States, the United Kingdom, South Africa and Australia (the "Predecessor Companies"). All of the Companies were under common management. As a result of a stock exchange transaction on July 1, 1995, the Predecessor Companies became wholly-owned subsidiaries of the Company. In the exchange transaction, the net assets of the three acquired Predecessor Companies were recorded at fair market value. As a result, the Company recorded $485,000 of goodwill, which is being amortized over 25 years beginning July 1, 1995. Accumulated amortization of goodwill was $67,000 and $86,000 as of December 31, 1998 and 1999, respectively. Revenue Recognition The majority of the Company's contracts with clients are based on time and expenses incurred with the remainder of the revenue generated from fixed price contracts. Accordingly, service revenue under both types of contracts is recognized as services are performed and the realization of the revenue is assured. Contract costs include direct labor costs and reimbursable expenses, and those indirect costs related to contract performance such as indirect labor. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Unbilled revenue represents the revenue earned in excess of amounts billed and deferred income represents billings in excess of revenue earned. Revenue includes reimbursable expenses directly incurred in providing services to clients. Revenue attributable to reimbursable expenses amounted to $3.7 million, $7.7 million and $4.9 million for the years ended December 31, 1997, 1998 and 1999, respectively. The Company recognizes product revenue upon shipment of the product to the client. Significant Clients No individual client accounted for more than 10% of consolidated revenue for any period presented. Page 33 of 42 Earnings Per Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128"). SFAS No. 128 specifies the computation, presentation and disclosure requirements of earnings per share and supercedes Accounting Principles Board Opinion No. 15, Earnings Per Share. SFAS No. 128 requires a dual presentation of the basic and diluted earnings per share. Basic earnings per share, which is based on the weighted average number of common shares outstanding, replaces primary earnings per share. Diluted earnings per share, which is based on the weighted average number of common and dilutive potential common shares outstanding, replaces fully diluted earnings per share and utilizes the average market price per share as opposed to the greater of the average market price per share or ending market price per share when applying the treasury stock method in determining dilutive potential shares. During 1998, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share," and all prior periods have been retroactively adjusted to conform to this statement. Accounting for Stock Options In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), which sets forth accounting and disclosure requirements for stock option and other stock-based compensation plans. The statement encourages, but does not require, companies to record stock-based compensation expense using a fair-value method, rather than the intrinsic-value method prescribed by Accounting Principles Board ("APB") Opinion No. 25. The Company has adopted only the disclosure requirements of SFAS No. 123 and has elected to continue to record stock-based compensation expense using the intrinsic-value approach prescribed by APB No. 25. Accordingly, the Company computes compensation cost as the amount by which the fair market price of the Company's common stock exceeds the exercise price on the date of grant. The amount of compensation cost, if any, is charged to income over the vesting period. Comprehensive Income In 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income ("SFAS" No. 130"). SFAS No. 130 establishes rules for the reporting of comprehensive income and its components. Comprehensive income consists of net income and foreign currency translation adjustments and is presented in the Company's statements of shareholders' equity. The adoption of SFAS 130 had no impact on total shareholders' equity. Prior year financial statements have been reclassified to conform to the requirements of SFAS 130. New Accounting Pronouncements In June, 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", which requires that companies recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The FASB has subsequently issues SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," that defers the requirements of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company did not hold any derivative or hedging instruments during the reported periods. Reclassifications Certain amounts previously reported have been reclassified to conform to current period presentation. These reclassifications have no effect on consolidated assets, liabilities, stockholders' equity or net income. Page 34 of 42 2. PROPERTY AND EQUIPMENT, NET The components of property and equipment were as follows (in thousands): YEARS ENDED DECEMBER 31, ------------------------ 1998 1999 ------ ------ Computer equipment and software................ $ 4,290 $ 5,246 Automobiles.................................... 67 65 Furniture and fixtures......................... 2,045 2,624 Leasehold improvements......................... 567 1,176 Software development and implementation costs.. 728 4,199 Purchased software............................. 2,926 3,129 ------- ------- Property and equipment...................... $10,623 $16,439 Less accumulated depreciation and amortization. (1,864) (4,071) ------- ------- Property and equipment, net................. $ 8,759 $12,368 ======= ======= 3. DEBT Revolving Line of Credit In September 1997, the Company amended and renewed the credit facility increasing the available line to $5,000,000. Interest is payable monthly at prime plus 0.5% per year. The credit facility matures in November 2000 and is collateralized by the accounts receivable of the Company's North American operations. The debt on this line of credit was fully repaid during the year ended December 31, 1998. The Company allowed such line of credit to expire at December 31, 1999. In March 2000, the Company signed a credit facility agreement with an available line of approximately $800,000. Such facility is secured by eligible foreign accounts receivable. Notes Payable In 1997, the Company borrowed approximately $762,000 for the purchase of furniture and equipment. The borrowing bore an annual interest rate of 9.1%, with interest and principal of approximately $24,000, payable monthly. The note payable was repaid in full during the year ended December 31, 1998. The borrowing was collateralized by the furniture and fixtures purchased. Total interest expense related to this note for the year ended December 31, 1998 amounted to $68,000. Accounts Receivable Financing In March 2000, the Company signed an agreement with a bank, which provides for financing of eligible U.S. accounts receivable under a purchase and sale agreement. The maximum funds available under the agreement is $5 million. Page 35 of 42 4. ACCRUED EXPENSES The components of accrued expenses were as follows (in thousands): YEARS ENDED DECEMBER 31, ------------------------ 1998 1999 ------ ------ Compensation and related expenses..... $2,006 $1,272 Bonuses............................... 3,406 731 Professional fees..................... 979 659 Vacations............................. 770 689 Other taxes........................... 940 1,556 Leasehold abandonment reserve......... -- 283 Other................................. 802 423 ------ ------ Accrued expenses................... $8,903 $5,613 ====== ====== 5. INCOME TAXES The following is a summary of the significant components of the Company's deferred income taxes (in thousands): YEARS ENDED DECEMBER 31, ------------------------ 1998 1999 -------- -------- Deferred tax assets: Net operating loss carryforward........... $ -- $2,348 Accrued expenses.......................... 234 444 Other..................................... 128 122 ----- ------ Deferred tax assets................... 362 2,914 ----- ------ Deferred tax liabilities: Cash to accrual temporary differences..... 362 221 Property, plant and equipment............. 165 784 ----- ------ Deferred tax liabilities.............. 527 1,005 ----- ------ Net, deferred tax assets (liabilities) $(165) $1,909 ===== ====== At December 31, 1999, for U.S. federal income tax reporting purposes, the Company had $5.4 million of unused net operating losses available for carryforward to future years. The benefit from carryforward of such net operating losses will expire in 2014. The Company believes it will generate sufficient taxable income to ensure realization of the benefit, accordingly, no valuation allowance has been provided. At December 31, 1999, the Company also had foreign net operating loss carryforwards totaling $1.3 million with no expiration date. The company believes it will generate sufficient income to utilize all of the foreign net operating loss carryforwards. Accordingly, no valuation allowance has been provided. The benefit from utilization of net operating losses carryforwards could be subject to limitations if significant ownership changes occur in the Company. Page 36 of 42 The components of the Company's provision for income taxes were as follows (in thousands): YEARS ENDED DECEMBER 31, ---------------------------------- 1997 1998 1999 -------- ------ ------- United States federal and state: Current provision (benefit).............. $ 652 $2,073 $ (562) Deferred provision (benefit)............. 110 (182) (1,774) ----- ------ ------- 762 1,891 (2,336) ----- ------ ------- Foreign: Current provision (benefit)............. 236 794 (398) Deferred provision (benefit)............ (102) 128 (300) ----- ------ ------- 134 922 (698) ----- ------ ------- Provision (benefit) for income taxes. $ 896 $2,813 $(3,034) ===== ====== ======= The difference between the effective federal income tax rate reflected in the provision (benefit) for income taxes and the statutory federal income tax rate are summarized as follows: YEARS ENDED DECEMBER 31, -------------------------- 1997 1998 1999 ------ ------ ------ U.S. statutory rate............................... 34.0% 34.0% (34.0)% Write-off of investment in foreign subsidiaries - - (2.3) State and local................................... 3.0 2.1 (3.1) Foreign........................................... (1.8) 2.9 8.5 Other 3.7 0.6 4.0 ---- ---- ----- Effective tax rate............................. 38.9% 39.6% (26.9)% ==== ==== ===== The U.S. components of income (loss) before taxes were $1.8, $5.0 and $3.9 million in 1997, 1998 and 1999, respectively, and the foreign components were $0.5, $2.1 and $7.4 million in 1997, 1998 and 1999, respectively. Applicable U.S. income taxes have not been provided on $1.4 million of undistributed earnings of the Company's foreign subsidiaries as of December 31, 1999. The Company considers such earnings to be permanently invested outside the U.S. The earnings could be subject to U.S. income tax if distributed to the Company as dividends or otherwise. The Company anticipates that foreign tax credits would substantially reduce the amount of U.S. income tax payable if these earnings were repatriated. 6. STOCK-BASED COMPENSATION PLANS Stock Options The Company's 1997 Stock Option Plan, as amended in December 1999 (the "Option Plan"), is a stock-based incentive compensation plan. Under the Option Plan, the Company is authorized to issue 1,960,000 shares of common stock pursuant to "awards" granted in the form of incentive stock options (intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended) and non-qualified stock options not intended to qualify under Section 422. Awards may be granted to selected employees, directors, independent contractors, and consultants of the Company or any subsidiary. Stock options granted have contractual terms of 10 years. Unless otherwise specified in the terms of an award, all options vest on a schedule: 33% per year for 3 years, beginning on the second anniversary of the date of grant. Options granted under the Option Plan are at prices equal to the fair market value of the stock on the date of the grant, as determined by the Company's Board of Directors. To date, no stock options have been granted to independent contractors and consultants of the Company. To the extent that stock options were granted to these parties, the Company would recognize compensation expense equal to the difference between the fair market value of the stock options granted and the consideration given, if any, for such options. Page 37 of 42 During the year ended December 31, 1998, the Company recognized $1.8 million in compensation expense for excess book versus tax stock option basis as a result of certain changes to restrictions related to these stock options. The charge was recognized as a charge to additional paid-in capital. The following table sets forth pertinent information regarding stock option transactions and stock option prices during the year ended December 31, 1997, 1998 and 1999: NUMBER OF WEIGHTED SHARES OF AVERAGE UNDERLYING EXERCISE OPTIONS PRICES --------- -------- Outstanding as of December 31, 1996 -- $ -- Granted........................................ 478,766 5.92 Forfeited...................................... (40,677) 5.82 --------- ------ Outstanding as of December 31, 1997............ 438,089 $ 5.93 Granted........................................ 450,620 14.39 Forfeited...................................... (97,279) 9.71 --------- ------ Outstanding as of December 31, 1998............ 791,430 $10.28 Granted........................................ 541,140 9.20 Exercised (68,530) 5.71 Forfeited...................................... (222,980) 12.12 --------- Outstanding as of December 31, 1999............ 1,041,060 9.63 ========= ====== Exercisable as of December 31, 1997............ -- -- ========= ====== Exercisable as of December 31, 1998............ -- -- ========= ====== Exercisable as of December 31, 1999............ 94,593 $ 6.14 ========= ====== Weighted average fair value of options granted during the year ended December 31, 1999....... $ 6.28 ====== The fair value of each stock option granted is estimated on the date of grant using the minimum value method of option pricing based on the following weighted-average assumptions: dividend yield of 0%; risk-free interest rates ranging from 4.81% to 6.13%; expected life of 5 years. The following table sets forth pertinent information regarding the outstanding stock options as of December 31, 1999:
Options Outstanding Options Exercisable --------------------------------------------------------------- ----------------------------------- Actual Range of Number Weighted Average Weighted-Average Number Weighted-Average Exercise Prices Outstanding Remaining Exercise Price Exercisable Exercise Price Contractual Life $ 3.69- 5.37 256,800 9.8 $ 4.44 -- -- $ 5.71- 6.55 263,780 7.0 5.95 90,493 $5.98 $ 9.75-14.50 330,980 8.3 13.49 4,100 $9.75 $15.00-15.25 189,500 9.1 15.01 -- -- - ------------------------------------------------------------------------------ ---------------------------------- $ 3.69-15.25 1,041,060 8.5 $ 9.63 94,593 $6.14
Page 38 of 42 Pro Forma Net Income and Earnings Per Share Had the compensation cost for the Company's stock-based compensation plan been determined consistent with SFAS No. 123, the Company's net income (loss) and net income (loss) per share as of December 31, 1997, 1998 and 1999 would approximate the pro forma amounts below: 1997 1998 1999 ------ ------ ------ Net Income (loss): As reported $1,408 $4,299 $(8,263) Pro forma 1,287 3,891 (9,082) Diluted Earnings per Share: As reported $ 0.28 $ 0.69 $ (1.28) Pro forma 0.25 0.62 (1.41) The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. 7. SHAREHOLDERS' EQUITY Initial Public Offering In connection with the consummation of the Company's Offering on April 24, 1998, the Company sold 1.7 million shares of its common stock, par value $0.01 per share. Additionally, on May 28, 1998, the Company sold additional 42,586 shares of its common stock pursuant to and in connection with the underwriters' over-allotment option. The Company received net proceeds of $21.1 million from the sale of such shares, after deducting the underwriting discount and other offering expenses. Additionally, in connection with the Offering, the Company effected a 4.2 for one stock split. All share data included in the accompanying consolidated financial statements and notes thereto are as if the stock split had occurred prior to the periods presented. Employee Stock Purchases In February 1996, the Company established a plan which allowed certain employees to purchase shares of common stock at fair market value on such date. An aggregate of 121,065 shares were purchased pursuant to this plan, at $1.27 per share. No additional shares will be sold under this plan as it has been terminated. During the year ended December 31, 1997, the Company repurchased 18,375 shares of common stock at fair value from former employees. Stock Awards to Employees In December 1997, the Company recognized compensation expense of $263,000 relating to cash payments to a former employee in lieu of an award of shares of common stock. The tax effect of income tax deductions in excess of compensation expense under this plan is credited to additional paid-in capital. Private Placement of Shares In January 1997, the Company sold 234,990 shares of common stock at $5.71 per share, representing the fair value at the date of sale. Proceeds to the Company, net of offering costs, amounted to $1.2 million. In December 1997, the Company sold 362,208 shares of common stock at $6.55 per share, representing the fair value at the date of sale, including 43,680 shares (for an aggregate of approximately $286,000) to directors of the Company, and 52,920 shares (for an aggregate of approximately $347,000) to officers and employees of the Company. Total proceeds to the Company amounted to approximately $2.4 million. Stock Repurchase Plan In March 1999, the Company established a plan to repurchase up to 250,000 shares of its outstanding common stock. During the second quarter of 1999, the Company repurchased 200,000 shares at an average of $9.70 per share totaling $1.9 million. The Company suspended the plan at the end of the second quarter of 1999. Page 39 of 42 Earnings Per Share The following table summarizes the Company's computation of earnings per share for the years ended December 31, 1997, 1998 and 1999 (in thousands, except per share amounts):
YEARS ENDED DECEMBER 31, 1997 1998 1999 ------ ------- ------ Basic earnings(loss) per share....................................... $ 0.29 $ 0.72 $ (1.28) ====== ====== ======= Net income(loss) (numerator)......................................... $1,408 $4,299 $(8,263) ====== ====== ======= Weighted average shares outstanding (denominator).................... 4,808 5,976 6,444 Computation of diluted earnings per share: 449 767 -- Common shares issuable under outstanding stock options............ Less shares assumed repurchased with proceeds from exercise stock (204) (510) -- ------ ------ ------- Options....................................................... Adjusted weighted average shares outstanding (denominator)........ 5,053 6,233 6,444 ====== ====== ======= Diluted earnings (loss) per share................................. $ 0.28 $ 0.69 $ (1.28) ====== ====== =======
8. COMMITMENTS AND CONTINGENCIES The Company leases various office facilities under non-cancelable operating lease agreements. Rent expense amounted to $575,000,$1,129,000 and $3,100,000 for the years ended December 31, 1997, 1998 and 1999, respectively. The Company leases apartments and housing facilities for certain employees, and also leases office facilities in foreign cities. The terms of these leases are less than one year. As of December 31, 1999, future lease payments under non-cancelable leases with terms of more than one year are as follows: 2000.................... $ 3,272 2001.................... 2,531 2002.................... 2,115 2003.................... 1,734 2004.................... 749 Thereafter.............. -- ------- $10,401 ======= The Company has employment agreements with certain officers and key members of management of the company, which automatically renew for one-year terms. The agreements provide for minimum salary levels, incentive bonuses at the discretion of the Company's Board of Directors, customary benefits including insurance coverage. In addition, the employment agreements further provide for severance pay ranging from six months to two year's base salary, bonus, and benefits, depending on the cause of termination and in the event of a change in corporate control. From time to time, the Company is a party to routine litigation in the ordinary course of business. The Company does not believe that such litigation will have a material impact on the financial statements. 9. EMPLOYEE BENEFIT PLANS 401(k) Plan The Company sponsors a 401(k) profit sharing plan (the "401(k) Plan") which covers substantially all of its U.S. employees. Employees are eligible to participate after completing three months of service. The 401(k) Plan provides for elective contributions by employees up to the maximum limit allowed by the Internal Revenue Code. The Company currently matches 50% of the amount deferred by participants, on deferral amounts up to 7.5% of compensation. Although the Company has not made any profit sharing contributions, the 401(k) Plan permits the Company to make a discretionary profit sharing contribution which, if made, is allocated to the accounts of participants who have been credited with 1,000 hours of service during a plan year and who are Page 40 of 42 employed on the last day of a plan year. The Company made matching contributions equal to $0.50 for the years ended December 31, 1997, 1998 and 1999 for each dollar contributed to the 401(k) Plan, subject to the limits noted above, by employees. These amounts have been included in general and administrative expenses on the statements of operations. An employee is fully vested in the matching contributions after six years of employment, or earlier upon attainment of appropriate retirement age, upon retirement due to disability, or upon death. The Company made contributions to the 401(k) Plan aggregating approximately $224,000, $385,000 and $504,000 during the years ended December 31, 1997, 1998 and 1999, respectively. Payment of benefits is generally made in the form of a single lump sum or in installments. The Company sponsors similar plans in Canada, Mexico, South Africa, Venezuela, and the United Kingdom, pursuant to which employees may defer specified percentages of compensation which the Company matches at a rate of 50-100% on the first 3-5% of compensation deferred. Incentive Compensation and Profit Sharing Policies The Company has implemented incentive compensation and profit sharing policies that cover substantially all salaried employees. Employees in positions at project manager or below, as well as administrative staff, are eligible for discretionary profit sharing payments. Each employee's profit sharing payment is based on a formula and is contingent upon his or her level of salary and length of service. Employees in positions at project manager or above are eligible for incentive compensation payments based on satisfaction of applicable performance criteria. The Company approved and made incentive compensation and profit sharing payments aggregating approximately $1,994,000, $2,036,000 and $2,882,000 for the years ended December 31, 1997, 1998 and 1999 in the Americas division, respectively, which are included in general and administrative expense. The Company sponsored a profit sharing plan in the United Kingdom, pursuant to which 9% of net revenues are paid to employees on a partially tax-deferred basis. This plan was terminated in December 1998. The Company made payments pursuant to this plan aggregating approximately $420,000 in 1998. The Company continued a discretionary profit sharing plan in the United Kingdom for 1999 for which no payments were made due to Company performance. 10. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Years ended December, 31 1997 1998 1999 -------------- ------------ ------------ Cash paid for interest and income taxes (in thousands): Interest $ 80 $ 271 $ -- Income taxes 816 2,137 1,198 Years ended December, 31 1997 1998 1999 -------------- ------------ ------------ Non-cash activities were (in thousands): Common stock issued for notes receivable $ 90 $ -- $ -- Exercise of stock options using company stock -- -- 146 Deferred offering costs -- (898) -- Income tax expense related to restricted stock plan -- 1,781 --
11. SEGMENT REPORTING In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for reporting information about operating segments and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Company's chief decision making group. This group is comprised of senior management who are responsible for the allocation of resources and assessment of operating performance. Because the Company's operations are geographically based, the organization is divided into three operating divisions: the Americas Division, which includes its operations in North, South, and Central America; the EMEA Division, which includes its operations in Europe, Middle East, and Africa; and the Asia Pacific Division, which includes its operations in Australia, Singapore and Asia. The Company provides employee education and support services to companies investing in business technology in all geographic regions. Page 41 of 42 The Company's reportable segment information was as follows:
(in thousands) EUROPE, MIDDLE AMERICAS EAST & AFRICA ASIA PACIFIC TOTAL --------------- ----------------- --------------- --------------- YEAR ENDED DECEMBER 31, 1999 Revenues $41,500 $20,505 $ 8,290 $ 70,295 Operating income (loss)........................ (7,703) (2,306) (1,575) (11,584) Total assets 24,409 6,432 2,077 32,918 Capital expenditures........................... 4,739 1,310 200 6,249 Depreciation and amortization.................. 2,190 298 72 2,560 YEAR ENDED DECEMBER 31, 1998 Revenues $51,240 $22,498 $ 6,394 $ 80,132 Operating income (loss)........................ 4,043 2,843 204 7,090 Total assets 39,083 7,641 2,179 48,903 Capital expenditures........................... 7,005 339 54 7,398 Depreciation and amortization.................. 904 178 56 1,138 YEAR ENDED DECEMBER 31, 1997 Revenues $28,663 $11,341 $ 4,200 $ 44,204 Operating income (loss)........................ 2,007 209 223 2,439 Total assets 15,484 3,230 1,421 20,135 Capital expenditures........................... 1,564 261 130 1,955 Depreciation and amortization.................. 311 121 21 453
12. SUBSEQUENT EVENT During the three-month period ending March 31, 2000, the Company implemented a plan to address the recent dramatic decline in training and documentation activity for enterprise resource planning implementations. The plan consists of regional base consolidations and down-sizing of billable and non-billable personnel. Charges include the costs of involuntary employee termination benefits, write-down of certain fixed assets and reserves for leasehold abandonment. The Company paid approximately $700,000 attributable primarily to involuntary employee termination benefits during the three months ended March 31, 2000. In addition the Company has reserved $1.7 million related to facilities and fixed asset reserves. The Company believes the provision is adequate to cover the future costs attributable to implementation of the current plan. Page 42 of 42 EX-10.1 2 AMENDED 1997 STOCK OPTION PLAN EXHIBIT 10.1 DA CONSULTING GROUP, INC. 1997 STOCK OPTION PLAN (EFFECTIVE AS OF FEBRUARY 1, 1997, AMENDED AND RESTATED EFFECTIVE MARCH 1998 AND, AMENDED AND RESTATED EFFECTIVE DECEMBER 7, 1999) DA CONSULTING GROUP, INC. 1997 STOCK OPTION PLAN Section I. Purposes. The DA Consulting Group, Inc. 1997 Stock Option Plan (the "Plan") was originally effective February 1, 1997, and is amended and restated as set forth in this document, effective December 7, 1999, subject to approval by the Company's stockholders. The purposes of the Plan are to: (a) assist DA Consulting Group, Inc. ("the Company") in recruiting and retaining highly qualified managers, consultants and staff; (b) provide Employees with an incentive for productivity; and (c) provide Employees an opportunity to share in the growth and value of the Company. The Options granted pursuant to the Plan are intended to constitute either Incentive Stock Options within the meaning of section 422 of the Code, or non-qualified stock options, as determined by the Committee, or the Board if no Committee has been appointed, at the time of Award. The type of Options awarded will be specified in the Option Agreement between the Company and the Optionee. The terms of this Plan shall be incorporated in the Option Agreement to be executed by the Optionee. Section II. Definitions. 1. "Affiliate" shall mean, with respect to a Person, a Person that directly or indirectly controls, or is controlled by, or is under common control with such Person. 2. "Award" shall mean a grant of an Option or Options to an Employee pursuant to the provisions of this Plan. Each separate grant of an Option or Options to an Employee and each group of Options which matures on a separate date, is treated as a separate Award. 3. "Board" shall mean the Board of Directors of the Company, as constituted from time to time. 4. "Change of Control" shall mean a change in the control of the Company which shall be deemed to have occurred upon the earliest to occur of the following: (i) the date the stockholders of the Company (or the Board, if stockholder action is not required) approve a plan or other arrangement pursuant to which the Company will be dissolved or liquidated; (ii) the date the stockholders of the Company approve a definitive agreement to sell or otherwise dispose of all or substantially all of the assets of the Company; (iii) the date or dates the stockholders of the Company and the stockholders of the other constituent corporations (or their respective boards of directors, if and to the extent that stockholder action is not required) have approved a definitive agreement to merge or consolidate the Company with or into another corporation, other than, in either case, a merger or consolidation of the Company in which the Company is the surviving entity, and in which shares of the Company's voting capital stock outstanding immediately before such merger or consolidation are exchanged or converted into shares which represent more than 50% of the Company's voting capital stock after such merger or consolidation, as such holders' ownership of voting capital stock of the Company immediately before the merger or consolidation; or (iv) the date any Person, other than (A) the Company, or (B) any of its Subsidiaries, or (C) any of the holders of the capital stock of the Company, as determined on the date that this Plan is adopted by the Board, or (D) any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its Subsidiaries or (E) any Affiliate of any of the foregoing, shall have acquired beneficial ownership of, or shall have acquired voting control over more than 50% of the outstanding shares of the Company's voting capital stock, unless the transaction pursuant to which such Person acquired such beneficial ownership or control resulted from the original issuance by the Company of shares of its voting capital stock and was approved by at least a majority of the Directors then in office. 5. "Code" shall mean the Internal Revenue Code of 1986, as amended. 6. "Committee" shall mean the Committee appointed by the Board in accordance with Section 4(a) of the Plan, if one is appointed, in which event in connection with this Plan, the Committee shall possess all of the power and authority of, and shall be authorized to take any and all actions required to be taken hereunder by, and make any and all determinations required taken hereunder by, the Board. 7. "Common Stock" shall mean Class A common stock of the Company, $.01 par value per Share. 8. "Company" shall mean DA Consulting Group, Inc. 9. "Director" shall mean an individual who is a member of the Board of Directors of the Company. 10. "Disability" shall mean a disability of an employee, officer or a director which renders such employee, officer or director unable to perform the full extent of his duties and responsibilities by reason of his illness or incapacity which would entitle that employee, officer or director to receive Social Security Disability Income under the Social Security Act, as amended, and the regulations promulgated thereunder. "Disabled" shall mean having a Disability. The determination of whether an Optionee is Disabled shall be made by the Board, whose determination shall be conclusive; provided that, (i) if an Optionee is bound by the terms of an employment agreement between the Optionee and the Company, whether the Optionee is "Disabled" for purposes of the Plan shall be determined in accordance with the procedures set forth in said employment agreement, if such procedures are therein provided; and (ii) an Optionee bound by such an employment agreement shall not be determined to be Disabled under the Plan any earlier than he would be determined to be disabled under his employment agreement. 11. "Employee" shall mean any person employed by the Company or any of its Subsidiaries. Additionally, solely for purposes of determining those persons eligible under the Plan to be recipients of Awards of Options, which Options shall be limited to non-qualified stock options, and not for the purpose of affecting the status of the relationship between such person and the Company, the term "Employee" shall include independent contractors of and consultants to the Company, as well as Directors and members of the board of directors of a Subsidiary. 12. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 13. "Fair Market Value Per Share" shall mean the fair market value of a share of Common Stock, as determined pursuant to Section 8 hereof. 14. "Incentive Stock Option" shall mean an Option which is an incentive stock option as described in Section 422 of the Code. 15. "Non-Employee Director" shall have the meaning set forth in Rule 16b-3(b)(3)(i) promulgated by the Securities and Exchange Commission under the Exchange Act, or any successor definition adopted by the Securities and Exchange Commission; provided, however, that the Board or the Committee may, in its sole discretion, substitute the definition of "outside director" provided in the regulations under Section 162(m) of the Code in place of the definition of Non- Employee Director contained in the Exchange Act. 16. "Option(s)" shall mean an Incentive Stock Option or a non- qualified stock option to purchase Shares that is awarded pursuant to the Plan. 17. "Option Agreement" shall mean a written agreement substantially in the form of Exhibit A-1, A-2 or A-3, or such other form or forms as the Board or Committee (subject to the terms and conditions of this Plan) may from time to time approve evidencing and reflecting the terms of an Option. 18. "Optionee" shall mean an Employee to whom an Option is awarded. 19. "Participant" shall mean each Employee of the Company or a Subsidiary to whom an Award is granted pursuant to the Plan. 20. "Person" shall mean an individual, partnership, corporation, limited liability company, trust, joint venture, unincorporated association, or other entity or association. 21. "Plan" shall mean the DA Consulting Group, Inc. 1997 Stock Option Plan, as amended from time to time. 22. "Pool" shall mean the pool of Shares of Common Stock subject to the Plan, as described in Section 6 hereof. 23. "Securities Act" shall mean the Securities Act of 1933, as amended. 24. "Shares" shall mean shares of Common Stock contained in the Pool, as adjusted in accordance with Section 9 of the Plan. 25. "Stock Purchase and Restriction Agreement" shall mean an agreement substantially in the form attached hereto as Exhibit B, or such other form as the Board or Committee (subject to the terms and conditions of this Plan) may from time to time approve, which an Optionee shall be required to execute as a condition of purchasing Shares upon the exercise of an Option. 26. "Subsidiary" shall mean a subsidiary corporation, whether now or hereafter existing, as defined in sections 424(f) and (g) of the Code. Section III. Participation. Participants in the Plan shall be selected by the Board from the Employees. The Board may make Awards at any time and from time to time to Employees. Any Award may include or exclude any Employee, as the Board shall determine in its sole discretion. Section IV. Administration. 1. Procedure. (i) In General. The Plan shall be administered by the Board. The Board may at any time by a unanimous vote, with each Member voting, appoint a Committee consisting of not less than two persons to administer the Plan on behalf of the Board, subject to such terms and conditions as the Board may prescribe. Members of the Committee shall serve for such period of time as the Board may determine. Members of the Board or the Committee who are eligible for Options or have been awarded Options may vote on any matters affecting the administration of the Plan or the Award of any Options pursuant to the Plan, except that no such member shall act upon the Award of an Option to himself or herself, but any such member may be counted in determining the existence of a quorum at any meeting of the Board or Committee during which action is taken with respect to the Award of Options to himself or herself. From time to time the Board may increase the size of the Committee and appoint additional members thereto, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan. (ii) Company Registers Securities Under Exchange Act. In the event the Company has a class of equity securities registered under Section 12 of the Exchange Act, the Plan shall be administered either by the Board, or by a Committee, appointed in the same manner and subject to the same terms as provided in the preceding subsection, provided that said Committee shall consist of not less than two persons, each of whom is a Non-Employee Director. 2. Powers of the Board and the Committee. Subject to the provisions of the Plan, the Board or its Committee shall have the authority, in its discretion: (i) to make Awards; (ii) to determine the Fair Market Value Per Share; (iii) to determine the exercise price of the Options to be awarded in accordance with Sections 7 and 8 of the Plan; (iv) to determine the Employees to whom, and the time or times at which, Awards shall be made, and the number of Shares to be subject to each Award; (v) to prescribe, amend and rescind rules and regulations relating to the Plan; (vi) to determine the terms and provisions of each Award under the Plan, each Option Agreement and each Stock Purchase and Restriction Agreement (which need not be identical with the terms of other Awards, Option Agreements and Stock Purchase and Restriction Agreements) and, with the consent of the Optionee, to modify or amend an outstanding Option, Option Agreement or Stock Purchase and Restriction Agreement; (vii) to accelerate the vesting or exercise date of any Award; (viii) to interpret the Plan or any agreement entered into with respect to an Award or exercise of Options; (ix) to authorize any person to execute on behalf of the Company any instrument required to effectuate an Award or to take such other actions as may be necessary or appropriate with respect to the Company's rights pursuant to Awards or agreements relating to the Award or exercise thereof; and (x) to make such other determinations and establish such other procedures as it deems necessary or advisable for the administration of the Plan. 3. Effect of the Board's or Committee's Decision. All decisions, determinations and interpretations of the Board or the Committee shall be final and binding with respect to all Awards under the Plan. 4. Limitation of Liability. Notwithstanding anything herein to the contrary (with the exception of Section 31 hereof), no member of the Board or of the Committee shall be liable for any good faith determination, act or failure to act in connection with the Plan or any Award hereunder. Section V. Eligibility. Awards may be made only to Employees. An Employee who has received an Award, if he or she is otherwise eligible, may receive additional Awards. Section VI. Stock Subject to the Plan. Subject to the provisions of this Section 6 and the provisions of Section 9 of the Plan, the maximum aggregate number of Shares which may be awarded and sold under the Plan is 1,960,000 Shares of Common Stock (collectively, the "Pool"). The maximum aggregate number of Shares which may be awarded and sold under the Plan to any individual Optionee is 1,260,000 Shares of Common Stock. Options awarded from the Pool may be either Incentive Stock Options or non-qualified stock options, as determined by the Board. If an Option should expire or become unexercisable for any reason without having been exercised in full, or if Shares are subsequently repurchased by the Company, the unpurchased or repurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, be returned to the Plan and become available for future Award under the Plan. Section VII. Terms and Conditions of Options. Each Option awarded pursuant to the Plan shall be authorized by the Board and shall be evidenced by an Option Agreement in such form as the Board may from time to time determine. Each Option Agreement shall incorporate by reference all other terms and conditions of the Plan, including the following terms and conditions: 1. Number of Shares. The number of Shares subject to the Option, which may include fractional Shares. 2. Option Price. The price per Share payable on the exercise of any Option which is an Incentive Stock Option shall be stated in the Option Agreement and shall be no less than the Fair Market Value Per Share of the Common Stock on the date such Option is awarded, without regard to any restriction other than a restriction which will never lapse. Notwithstanding the foregoing, if an Option which is an Incentive Stock Option shall be awarded under this Plan to any person who, at the time of the Award of such Option, owns stock possessing more than 10% of the total combined voting power of all classes of the Company's stock, the price per Share payable upon exercise of such Incentive Stock Option shall be no less than 110 percent (110%) of the Fair Market Value Per Share of the Common Stock on the date such Option is awarded. The price per Share payable on the exercise of an Option which is a non- qualified stock option shall be at least $.01 per Share and shall be stated in the Option Agreement. 3. Consideration. The consideration to be paid for the Shares to be issued upon the exercise of an Option, including the method of payment, shall be determined by the Board and may consist entirely of cash, check, promissory notes or Shares of Common Stock having an aggregate Fair Market Value Per Share on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, or any combination of such methods of payment, or such other consideration and method of payment permitted under any laws to which the Company is subject and which is approved by the Board. In making its determination as to the type of consideration to accept, the Board shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. (i) If the consideration for the exercise of an Option is a promissory note, it may, in the discretion of the Board, be either full recourse or nonrecourse and shall bear interest at a per annum rate which is not less than the applicable federal rate determined in accordance with section 1274(d) of the Code as of the date of exercise. In such an instance the Company may, in its sole discretion, retain the Shares purchased upon exercise of the Option in escrow as security for payment of the promissory note. (ii) If the consideration for the exercise of an Option is the surrender of previously acquired and owned shares of Common Stock, the Optionee will be required to make representations and warranties satisfactory to the Company regarding his title to the shares of Common Stock used to effect the purchase (the "Payment Shares"), including without limitation, representations and warranties that the Optionee has good and marketable title to such Payment Shares free and clear of any and all liens, encumbrances, charges, equities, claims, security interests, options or restrictions, and has full power to deliver such Payment Shares without obtaining the consent or approval of any person or governmental authority other than those which have already given consent or approval in a manner satisfactory to the Company. The per Share value of the Payment Shares shall be the Fair Market Value Per Share of such Payment Shares on the date of exercise as determined by the Board in its sole discretion, exercised in good faith. If such Payment Shares were acquired upon previous exercise of Incentive Stock Options granted within two years prior to the exercise of the Option or acquired by the Optionee within one year prior to the exercise of the Option, such Optionee shall be required, as a condition to using the Payment Shares in payment of the exercise price of the Option, to acknowledge the tax consequences of doing so, in that such previously exercised Incentive Stock Options may have, by such action, lost their status as Incentive Stock Options, and the Optionee may have to recognize ordinary income for tax purposes as a result. 4. Form of Option. The Option Agreement will state whether the Option awarded is an Incentive Stock Option or a non-qualified stock option, and will constitute a binding determination as to the form of Option awarded. 5. Exercise of Options. Any Option awarded hereunder shall be exercisable at such times and under such conditions as shall be set forth in the Option Agreement (as may be determined by the Board and as shall be permissible under the terms of the Plan), which may include performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of the Plan. An Option may be exercised in accordance with the provisions of this Plan as to all or any portion of the Shares then exercisable under an Option from time to time during the term of the Option. An Option may not be exercised for a fraction of a Share. Except as may otherwise be provided in an Option Agreement, if an Option would first become exercisable while the Optionee is absent from service on an approved leave of absence, the Optionee shall not be permitted to exercise such Option until the Optionee's return to active employment with the Company. Except as may otherwise be provided in an Option Agreement, if an Option had become exercisable before or as of the commencement of an approved leave of absence, the Optionee may exercise such previously vested Option while on such leave. Whether an Optionee is absent on a leave or has terminated employment shall be determined in accordance with the Company's regular personnel policies. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company at its principal executive office in accordance with the terms of the Option Agreement by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company, accompanied by any agreements required by the terms of the Plan and/or Option Agreement, including an executed Stock Purchase and Restriction Agreement. Full payment may consist of such consideration and method of payment allowable under this Section 7 of the Plan. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the Option is exercised, except as provided in Section 9 of the Plan. As soon as practicable after any proper exercise of an Option in accordance with the provisions of the Plan, the Company shall, without transfer or issue tax to the Optionee, deliver to the Optionee at the principal executive office of the Company or such other place as shall be mutually agreed upon between the Company and the Optionee, a certificate or certificates representing the Shares for which the Option shall have been exercised. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. 6. Term and Vesting of Options. (i) Except as otherwise provided by the Committee in an Option Agreement, one-third of the Options granted pursuant to each Award shall vest on the second anniversary of the date of grant, an additional one-third of the Options granted pursuant to the Award shall vest on the third anniversary of the date of grant, and the balance of the Award shall vest on the fourth anniversary of the date of grant. Notwithstanding the preceding sentence, Options awarded to Directors shall be fully vested at grant. Options may be exercised in any order elected by the Optionee whether or not the Optionee holds any unexercised Options under this Plan or any other plan of the Company. (ii) Notwithstanding any other provision of this Plan, no Option shall be (A) awarded under this Plan after February 6, 2007, or (B) exercisable more than ten (10) years from the date of Award; provided, however, that if an Option that is intended to be an Incentive Stock Option shall be awarded under this Plan to any person who, at the time of the Award of such Option, owns stock possessing more than 10% of the total combined voting power for all classes of the Company's stock, the foregoing clause (B) shall be deemed modified by substituting "five (5) years" for the term "ten (10) years" that appears therein. (iii) No Option awarded to any Optionee shall be treated as an Incentive Stock Option, to the extent such Option would cause the aggregate Fair Market Value Per Share (determined as of the date of Award of each such Option) of the Shares with respect to which Incentive Stock Options are exercisable by such Optionee for the first time during any calendar year to exceed $100,000. For purposes of determining whether an Incentive Stock Option would cause such aggregate Fair Market Value Per Share to exceed the $100,000 limitation, such Incentive Stock Options shall be taken into account in the order awarded. For purposes of this subsection, Incentive Stock Options include all Incentive Stock Options under all plans of the Company that are Incentive Stock Option plans within the meaning of section 422 of the Code. 7. Termination of Options. (i) Unless sooner terminated as provided in this Plan, each Option shall be exercisable for such period of time as shall be determined by the Board and set forth in the Option Agreement, and shall be void and unexercisable thereafter. (ii) Except as otherwise provided herein or by the terms of any Award, upon the termination of the Optionee's employment or other relationship with the Company or a Subsidiary for any reason, Options exercisable on the date of termination of employment or such other relationship shall be exercisable by the Optionee (or in the case of the Optionee's death subsequent to termination of employment or such other relationship, by the Optionee's executor(s) or administrator(s)) for a period of three (3) months from the date of the Optionee's termination of employment or such other relationship. (iii) Except as otherwise provided herein or by the terms of any Award, upon the Disability or death of an Optionee while in the employ of the Company or a Subsidiary, Options held by such Optionee which are exercisable on the date of Disability or death shall be exercisable for a period of twelve (12) months commencing on the date of the Optionee's Disability or death, by the Optionee or his legal guardian or representative or, in the case of death, by his executor(s) or administrator(s). (iv) Options may be terminated at any time by agreement between the Company and the Optionee. 8. Forfeiture. Notwithstanding any other provision of this Plan, if the Optionee's employment or engagement is terminated for "cause" (as such term is defined in the Optionee's employment agreement or non-disclosure agreement with the Company, if any, and if the Optionee is not a party to any such agreement, then, as such term is defined in the Stock Purchase and Restriction Agreement) or if the Board makes a determination that the Optionee: (i) has engaged in any type of disloyalty to the Company, including without limitation, fraud, embezzlement, theft, or dishonesty in the course of his employment or engagement, or has otherwise breached any fiduciary duty owed to the Company; (ii) has been convicted of a felony; (iii) has disclosed trade secrets or confidential information of the Company; or (iv) has breached any agreement with or duty to the Company in respect of confidentiality, non-disclosure, non-competition or otherwise, all unexercised Options shall terminate upon the date of such a finding, or, if earlier, the date of termination of employment or engagement for "cause" then, in the event of such a finding, in addition to immediate termination of all unexercised Options, the Optionee shall forfeit all Shares for which the Company has not yet delivered share certificates to the Optionee and the Company shall refund to the Optionee the Option purchase price paid to it, if any, in the same form as it was paid (or in cash at the Company's discretion). Notwithstanding anything herein to the contrary, the Company may withhold delivery of share certificates pending the resolution of any inquiry that could lead to a finding resulting in forfeiture. Section VIII. Determination of Fair Market Value Per Share of Common Stock. (a) Except to the extent otherwise provided in this Section 8, the Fair Market Value Per Share of Common Stock shall be determined by the Board in its sole discretion. (b) Notwithstanding the provisions of Section 8(a), in the event that shares of Common Stock are traded in the over-the-counter market, the Fair Market Value Per Share of Common Stock shall be the mean of the closing bid and asked prices for a share of Common Stock on the relevant valuation date as reported in The Wall Street Journal (or, if not so reported, as otherwise reported by the Nasdaq Stock Market) as applicable or, if there is no trading on such date, on the next preceding date on which there were reported share prices. In the event shares of Common Stock are listed on a national or regional securities exchange or traded through the Nasdaq National Market, the Fair Market Value of a share of Common Stock shall be the closing price for a share of Common Stock on the exchange or on the Nasdaq National Market, as reported in The Wall Street Journal on the relevant valuation date, or if there is no trading on that date, on the next preceding date on which there were reported share prices. Section IX. Adjustments. 1. Subject to required action by the stockholders, if any, the number of Shares as to which Awards may be made under this Plan and the number of Shares subject to outstanding Options and the Option prices thereof shall be adjusted proportionately for any increase or decrease in the number of outstanding Shares of Common Stock of the Company resulting from stock splits, reverse stock splits, stock dividends, reclassifications and recapitalizations, merger, consolidation, exchange of shares, or rights offered to purchase shares of Common Stock at a price substantially below Fair Market Value Per Share or any similar change affecting Common Stock. 2. No fractional Shares shall be issuable on account of any action mentioned in Section 9(a), and the aggregate number of Shares into which Shares then covered by the Award, when changed as the result of such action, shall be reduced to the number of whole Shares resulting from such action, unless the Board, in its sole discretion, shall determine to issue scrip certificates with respect to any fractional Shares, which scrip certificates, in such event, shall be in a form and have such terms and conditions as the Board in its discretion shall prescribe. Section X. Rights as a Stockholder. A recipient of an Option Award shall have no rights as a stockholder of the Company and shall neither have the right to vote nor receive dividends with respect to any Shares subject to an Option until such Option has been exercised and a certificate with respect to the Shares purchased upon such exercise has been issued to him. Section XI. Time of Awarding Options. The date of an Award shall, for all purposes, be the date which the Board specifies when the Board makes its determination that an Award is made or if none is specified, then the date of the Board's determination. Notice of the determination shall be given to each Employee to whom an Award is made within a reasonable time after the date of such Award. Section XII. Modification, Extension and Renewal of Option. Subject to the terms and conditions of the Plan, the Board may modify, extend or renew an Award, or accept the surrender of an Award (to the extent not theretofore exercised). Notwithstanding the foregoing, (a) no modification of an Award which adversely affects the Optionee shall be made without the consent of the Optionee, and (b) no Incentive Stock Option may be modified, extended or renewed if such action would cause it to cease to be an "Incentive Stock Option" within the meaning of section 422 of the Code, unless the Optionee specifically acknowledges and consents to the tax consequences of such action. Section XIII. Purchase for Investment and Other Restrictions. 1. The obligation of the Company to issue Shares to an Optionee upon the exercise of an Option granted under the Plan is conditioned upon: (i) the Company obtaining any required permit or order from appropriate United States, state and foreign governmental agencies or stock exchange or similar body, authorizing the Company to issue such Shares; and (ii) such issuance complying with all relevant provisions of applicable law, including, without limitation, the Securities Act, the Exchange Act, the rules and regulations promulgated thereunder and any applicable foreign laws. 2. At the option of the Board, the obligation of the Company to issue Shares to an Optionee upon the exercise of an Option granted under the Plan may be conditioned upon obtaining appropriate representations, warranties, restrictions and agreements of the Optionee as set forth in the applicable Stock Purchase and Restriction Agreement. Among other representations, warranties, restrictions and agreements, the Optionee may be required to represent and agree that the purchase of Shares shall be for investment, and not with a view to the public resale or distribution thereof, unless the Shares are registered under the Securities Act and the issuance and sale of the Shares complies with all other laws, rules and regulations applicable thereto. Unless the issuance of such Shares is registered under the Securities Act (and any similar law of a foreign jurisdiction applicable to the Optionee), the Optionee shall acknowledge that the Shares purchased are not registered under the Securities Act (or any such other law) and may not be sold or otherwise transferred unless the Shares have been registered under the Securities Act (or any such other law) in connection with the sale or other transfer thereof, or that counsel satisfactory to the Company has issued an opinion satisfactory to the Company that the sale or other transfer of such Shares is exempt from registration under the Securities Act (or any such other law), and unless said sale or transfer is in compliance with all other applicable laws, rules and regulations, including all applicable federal, state and foreign securities laws, rules and regulations. Additionally, the Shares, when issued, shall be subject to other transfer restrictions, rights of first refusal and rights of repurchase as set forth in Stock Purchase and Restriction Agreement. Unless the Shares subject to an Award are registered under the Securities Act, the certificates representing such Shares issued shall contain the following legend in substantially the following form: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR ANY APPLICABLE STATE SECURITIES LAWS. THESE SHARES HAVE NOT BEEN ACQUIRED WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, ASSIGNED, EXCHANGED, MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED OR DISPOSED OF, BY GIFT OR OTHERWISE, OR IN ANY WAY ENCUMBERED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SHARES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE STATE SECURITIES LAWS, OR A SATISFACTORY OPINION OF COUNSEL SATISFACTORY TO DA CONSULTING GROUP, INC. THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT AND UNDER APPLICABLE STATE SECURITIES LAWS. If required under the laws of any jurisdiction in which the Optionee resides, the certificate or certificates may bear any such legend. Section XIV. Transferability. Except as specifically approved by the Board or the Committee with respect to a particular Option which is not intended to be an Incentive Stock Option, no Option shall be assignable or transferable otherwise than by will or by the laws of descent and distribution, and during the lifetime of the Optionee, his Options shall be exercisable only by such Optionee, or, in the event of his or her legal incapacity or Disability, then by the Optionee's legal guardian or representative. Section XV. Other Provisions. The Option Agreement and Stock Purchase and Restriction Agreement may contain such other provisions as the Board in its discretion deems advisable and which are not inconsistent with the provisions of this Plan, including, without limitation, restrictions upon or conditions precedent to the exercise of the Option. Section XVI. Power of Board in Case of Change of Control. Notwithstanding anything to the contrary set forth in this Plan (with the exception of Section 31 hereof), in the event of a Change of Control, the Board shall have the authority, in its discretion, to accelerate the vesting of all unmatured Options and to accelerate the expiration date of all Options, whether or not matured. In addition, in the event of a Change of Control of the Company by reason of a merger, consolidation or tax free reorganization or sale of all or substantially all of the assets of the Company, the Board shall have the authority, in its discretion, to terminate this Plan and to (a) exchange all Options for options to purchase common stock in the successor corporation or (b) distribute to each Optionee cash and/or other property in an amount equal to and in the same form as the Optionee would have received from the successor corporation if the Optionee had owned the Shares subject to the Option rather than the Option at the time of the Change of Control, provided that any such amount paid to an Optionee shall reflect the deduction of the exercise price the Optionee would have paid to purchase such Shares. The form of payment or distribution to the Optionee pursuant to this Section shall be determined by the Board. Section XVII. Amendment of the Plan. Insofar as permitted by law and the Plan, the Board may from time to time suspend, terminate or discontinue the Plan or revise or amend it in any respect whatsoever with respect to any Shares at the time not subject to an Option; provided, however, that without approval of the stockholders by a majority of the votes cast at a duly held stockholder meeting at which a quorum representing a majority of the Company's outstanding voting shares is present (either in person or by proxy), within one year (365 days) of the adoption of an amendment or revision by the Board, no such amendment or revision may change the aggregate number of Shares for which Options may be awarded hereunder, change the designation of the class of Employees eligible to receive Options or decrease the price at which Options may be awarded. The Board may make Awards hereunder prior to approval of any amendment; provided, however, that any and all Options so awarded automatically shall be converted into non-qualified stock options if the amendment is not approved by such stockholders within 365 days of its adoption. Any other provision of this Section 17 notwithstanding, the Board specifically is authorized to adopt any amendment to this Plan deemed by the Board to be necessary or advisable to assure that the Incentive Stock Options or the non-qualified stock options available under the Plan continue to be treated as such, respectively, under all applicable laws. Section XVIII. Application of Funds. The proceeds received by the Company from the sale of Shares pursuant to the exercise of Options shall be used for general corporate purposes or such other purpose as may be determined by the Board. Section XIX. No Obligation to Exercise Option. The Awarding of an Option shall impose no obligation upon the Optionee to exercise such Option. Section XX. Approval of Stockholders. This Plan originally became effective on February 1, 1997, the date as of which it was adopted by the Board. This amendment and restatement of the Plan shall become effective on December 7, 1999, provided it is approved by the Company's stockholders. Section XXI. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. Section XXII. Reservation of Shares. The Company, during the term of this Plan, shall at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. The Company, during the term of this Plan, shall use its best efforts to seek to obtain from appropriate regulatory agencies any requisite authorization in order to issue and sell such number of Shares as shall be sufficient to satisfy the requirements of the Plan. The inability of the Company to obtain from any such regulatory agency having jurisdiction the requisite authorization(s) deemed by the Company's counsel to be necessary for the lawful issuance and sale of any Shares hereunder, or the inability of the Company to confirm to its satisfaction that any issuance and sale of any Shares hereunder will meet applicable legal requirements, shall relieve the Company of any liability in respect to the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. Section XXIII. Stock Option and Stock Purchase and Restriction Agreements. Options shall be evidenced by an Option Agreement in such form or forms as the Board shall approve from time to time. Upon the exercise of an Option, the Optionee shall sign and deliver to the Company a Stock Purchase and Restriction Agreement in such form or forms as the Board shall approve from time to time. Section XXIV. Taxes, Fees, Expenses and Withholding of Taxes. 1. The Company shall pay all original issue and transfer taxes (but not income taxes, if any) with respect to the Award of Options and/or the issue and transfer of Shares pursuant to the exercise thereof, and all other fees and expenses necessarily incurred by the Company in connection therewith, and will from time to time use its best efforts to comply with all laws and regulations which, in the opinion of counsel for the Company, shall be applicable thereto. 2. The Award of Options hereunder and the issuance of Shares pursuant to the exercise of Options is conditioned upon the Company's reservation of the right to withhold in accordance with any applicable law, from any compensation or other amounts payable to the Optionee, any taxes required to be withheld under federal, state or local law as a result of the Award or exercise of such Option or the sale of the Shares issued upon exercise thereof. To the extent that compensation or other amounts, if any, payable to the Optionee is insufficient to pay any taxes required to be so withheld, the Company may, in its sole discretion, require the Optionee (or such other person entitled herein to exercise the Option), as a condition of the exercise of an Option, to pay in cash to the Company an amount sufficient to cover such tax liability or otherwise to make adequate provision for the Company's satisfaction of its withholding obligations under federal, state and local law, provided that such satisfaction of tax liability is made within 60 days of the date on which written notice of exercise has been given to the Company. Section XXV. Notices. Any notice to be given to the Company pursuant to the provisions of this Plan shall be addressed to the Company in care of its Secretary (or such other person as the Company may designate from time to time) at its principal executive office, and any notice to be given to an Optionee shall be delivered personally or addressed to him or her at the address given beneath his or her signature on his or her Option Agreement, or at such other address as such Optionee or his or her permitted transferee (upon the transfer of the Shares) may hereafter designate in writing to the Company. Any such notice shall be deemed duly given on the date and at the time delivered via personal, courier or recognized overnight delivery service or, if sent via telecopier, on the date and at the time telecopied with confirmation of delivery or, if mailed, on the date five (5) days after the date of the mailing (which shall be by regular, registered or certified mail). Delivery of a notice by telecopy (with confirmation) shall be permitted and shall be considered delivery of a notice notwithstanding that it is not an original that is received. It shall be the obligation of each Optionee and each permitted transferee holding Shares purchased upon exercise of an Option to provide the Secretary of the Company, by letter mailed as provided herein, with written notice of his or her direct mailing address. Section XXVI. No Enlargement of Optionee Rights. This Plan is purely voluntary on the part of the Company, and the continuance of the Plan shall not be deemed to constitute a contract between the Company and any Optionee, or to be consideration for or a condition of the employment or service of any Optionee. Nothing contained in this Plan shall be deemed to give any Optionee the right to be retained in the employ or service of the Company or any Subsidiary, or to interfere with the right of the Company or any such corporation to discharge or retire any Optionee thereof at any time subject to applicable law. No Optionee shall have any right to or interest in Awards authorized hereunder prior to the Award thereof to such Optionee, and upon such Award he shall have only such rights and interests as are expressly provided herein, subject, however, to all applicable provisions of the Company's Certificate of Incorporation, as the same may be amended from time to time. Section XXVII. Information to Optionees. The Company, upon request, shall provide without charge to each Optionee copies of such annual and periodic reports as are provided by the Company to its stockholders generally. Section XXVIII. Availability of Plan. A copy of this Plan shall be delivered to the Secretary of the Company and shall be shown by him to any eligible person making reasonable inquiry concerning it. Section XXIX. Invalid Provisions. In the event that any provision of this Plan is found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability shall not be construed as rendering any other provisions contained herein as invalid or unenforceable, and all such other provisions shall be given full force and effect to the same extent as though the invalid or unenforceable provision was not contained herein. Section XXX. Applicable Law. This Plan shall be governed by and construed in accordance with the laws of the State of Texas. Section XXXI. Board Action. Notwithstanding anything to the contrary set forth in this Plan, any and all actions of the Board or Committee, as the case may be, taken under or in connection with this Plan and any agreements, instruments, documents, certificates or other writings entered into, executed, granted, issued and/or delivered pursuant to the terms hereof, shall be subject to and limited by any and all votes, consents, approvals, waivers or other actions of all or certain stockholders of the Company or other persons required pursuant to: (i) the Company's Certificate of Incorporation (as the same may be amended and/or restated from time to time); (ii) the Company's Bylaws (as the same may be amended and/or restated from time to time); and (iii) any other agreement, instrument, document or writing now or hereafter existing, between or among the Company and its stockholders or other persons (as the same may be amended from time to time). EX-23.1 3 CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.1 DA CONSULTING GROUP, INC. CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the registration statements of DA Consulting Group, Inc. on Form S-1 (File No. 333-43989), on Forms S-8 (File No. 333-71987 and 333-93091), of our report dated March 24, 2000, on our audits of the consolidated financial statements of DA Consulting Group, Inc. as of December 31, 1999 and 1998 and for the years ended December 31, 1999, 1998 and 1997, which report is included in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP Houston, Texas March 30, 2000 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 3,406 2,389 9,542 (964) 0 18,687 16,439 (4,071) 32,918 7,680 0 0 0 65 (1,522) 25,238 70,295 70,295 38,717 43,162 79 0 0 (11,297) (3,034) (8,263) 0 0 0 (8,263) (1.28) (1.28)
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