<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2000
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 000-30897
Convergent Group Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 81-1264004
------------------------------- ----------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6399 South Fiddler's Green Circle, Suite 600, Englewood, CO 80111
-----------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(303) 741-8000
----------------------------------------------------
(Registrant's telephone number, including area code)
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 report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
--- ---
As of August 31, 2000, there were 43,417,779 shares outstanding of the
registrant's Common Stock, $.001 par value per share.
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<PAGE> 2
CONVERGENT GROUP CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I--Consolidated Financial Information
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets at December 31, 1999
and June 30, 2000 3
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1999 and June 30, 2000 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and June 30, 2000 7
Notes to Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Part II--Other Information 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Forms 8-K 22
Exhibits
27 Financial Data Schedule (for SEC information only)
</TABLE>
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<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS.
CONVERGENT GROUP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
------------ ------------
1999 2000
------------ ------------
(unaudited)
------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,596 $ 8,870
Accounts receivable (net of allowance for doubtful
accounts of $43 and $19, respectively) 9,181 5,414
Unbilled revenues 6,351 16,638
Deferred tax asset 3,400 2,620
Prepaid expenses and other 995 1,134
Deferred offering cost -- 1,600
------------ ------------
Total current assets 21,523 36,276
PROPERTY AND EQUIPMENT, AT COST (net of
accumulated depreciation and amortization of
$4,845 and $5,816, respectively) 3,102 4,851
LOAN RECEIVABLE FROM RELATED PARTY 2,046 2,105
OTHER ASSETS 36 --
------------ ------------
Total assets $ 26,707 $ 43,232
============ ============
</TABLE>
See accompanying notes.
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<PAGE> 4
CONVERGENT GROUP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
December 31, June 30,
------------ ------------
1999 2000
------------ ------------
(unaudited)
------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 2,346 $ 4,781
Note payable 40 --
Deferred revenue 2,182 2,708
Accrued liability for anticipated contract costs 1,949 2,554
Accrued compensation and related expense 2,128 3,281
Accrued project related costs 5,619 5,370
Other accrued expenses 1,327 2,737
------------ ------------
Total current liabilities 15,591 21,431
NON-CURRENT LIABILITIES:
Accrued liability for anticipated contract costs 171 134
Accrued compensation and related expenses 227 227
Long-term loan (net of deferred acquisition costs) 21,753 22,934
------------ ------------
Total non-current liabilities 22,151 23,295
------------ ------------
Total liabilities 37,742 44,726
COMMITMENTS -- --
STOCKHOLDERS' EQUITY (DEFICIT):
Series A convertible preferred stock ($.001 par value;
75,000,000 shares authorized; 41,978,689 and
42,487,701 shares issued and outstanding) 42 42
Common stock ($0.001 par value; 125,000,000 shares
authorized; 13,749,322 and
16,239,306 shares issued and outstanding 14 16
Additional paid-in capital 62,666 76,103
Deferred compensation (9,037) (11,434)
Accumulated deficit (65,030) (66,544)
Accumulated other comprehensive income 310 323
------------ ------------
Total stockholders' equity (deficit) (11,035) (1,494)
------------ ------------
Total liabilities and stockholders' equity
(deficit) $ 26,707 $ 43,232
============ ============
</TABLE>
See accompanying notes.
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<PAGE> 5
CONVERGENT GROUP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- --------------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Integration, consulting and other services $ 10,366 $ 14,052 $ 19,649 $ 27,883
Subcontractor and other revenue 5,936 7,921 11,462 12,724
---------- ---------- ---------- ----------
Total revenues 16,302 21,973 31,111 40,607
COST OF REVENUES:
Cost of integration, consulting and other services
(exclusive of $10 and $30 in 2000 reported
below as employee stock compensation
expense) 5,865 6,940 11,018 13,633
Cost of subcontractor and other revenue 4,719 6,246 9,064 10,117
---------- ---------- ---------- ----------
Total cost of revenue 10,584 13,186 20,082 23,750
---------- ---------- ---------- ----------
Gross profit 5,718 8,787 11,029 16,857
EXPENSES:
Selling, general and administrative expenses
(exclusive of $309 and $889 in 2000 reported
below as employee stock
compensation expense) 4,035 8,203 7,902 15,676
Employee stock compensation expense -- 319 -- 919
---------- ---------- ---------- ----------
4,035 8,522 7,902 16,595
---------- ---------- ---------- ----------
Operating income 1,683 265 3,127 262
OTHER INCOME (EXPENSE):
Interest income 11 46 34 100
Interest expense (18) (525) (28) (1,024)
---------- ---------- ---------- ----------
Total other income (expense) (7) (479) 6 (924)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME
TAXES 1,676 (214) 3,133 (662)
INCOME TAX BENEFIT (EXPENSE) 129 (420) 258 (852)
---------- ---------- ---------- ----------
NET INCOME (LOSS) 1,805 (634) 3,391 (1,514)
PREFERRED STOCK ADJUSTMENTS (207) -- (414) --
---------- ---------- ---------- ----------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $ 1,598 $ (634) $ 2,977 $ (1,514)
========== ========== ========== ==========
</TABLE>
See accompanying notes.
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<PAGE> 6
CONVERGENT GROUP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------------- ---------------------------------
1999 2000 1999 2000
-------------- -------------- -------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
EARNINGS (LOSS) PER
COMMON SHARE (BASIC) $ 0.11 $ (0.04) $ 0.20 $ (0.11)
============== ============== ============== ==============
EARNINGS (LOSS) PER
COMMON SHARE (DILUTED) $ 0.07 $ (0.04) $ 0.13 $ (0.11)
============== ============== ============== ==============
WEIGHTED AVERAGE SHARES
OUTSTANDING (BASIC) 14,698,534 15,276,585 15,089,633 13,944,065
============== ============== ============== ==============
WEIGHTED AVERAGE SHARES
OUTSTANDING
(DILUTED) 22,855,064 15,276,585 23,246,163 13,944,065
============== ============== ============== ==============
</TABLE>
See accompanying notes.
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<PAGE> 7
CONVERGENT GROUP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1999 2000
---------- ----------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 3,391 $ (1,514)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 692 852
Deferred income taxes (318) 780
Provision for bad debts (recovery) (100) (24)
Stock and options issued as compensation -- 919
Changes in operating assets and liabilities:
Receivables and unbilled revenues (5,675) (6,567)
Prepaid expenses and other assets 205 (33)
Deferred offering costs -- (1,600)
Accounts payable and accrued expenses (282) 4,708
Accrual for anticipated contract costs (49) 569
Unearned revenue and customer deposits (2,021) 527
---------- ----------
Net cash used in operating activities (4,157) (1,383)
INVESTING ACTIVITIES
Purchase of property and equipment (835) (2,601)
---------- ----------
Net cash used in investing activities (845) (2,601)
FINANCING ACTIVITIES
Issuance of common stock -- 10,000
Note receivable from a shareholder -- (60)
Borrowing line of credit 1,000 --
Borrowing on revolving credit loan agreements -- 1,181
Purchase of common stock (519) --
Exercise of stock options 45 124
---------- ----------
Net cash provided by financing activities 526 11,245
---------- ----------
Effect of exchange rate changes on cash and cash
equivalents 9 13
---------- ----------
Net increase (decrease) in cash and cash equivalents (4,457) 7,274
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 4,958 1,596
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 501 $ 8,870
========== ==========
</TABLE>
See accompanying notes.
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<PAGE> 8
CONVERGENT GROUP CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 2000
---------- ----------
(unaudited)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for interest $ 27 $ 1,121
========== ==========
NONCASH ACTIVITIES:
Issuance of note payable in exchange for stock repurchase $ 40 $ --
========== ==========
</TABLE>
See accompanying notes.
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<PAGE> 9
CONVERGENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note A. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Convergent Group Corporation and Subsidiaries (collectively, the "Company") have
been prepared in accordance with generally accepted accounting principals
("GAAP") and with the instructions to Form 10-Q. Accordingly, they do not
include all of the information and notes required for complete financial
statements. In the opinion of management, they contain all normal recurring
accruals and adjustments, which are necessary to present fairly the consolidated
financial position of the Company at June 30, 2000, the consolidated results of
its operations for the three and six months ended June 30, 1999 and 2000 and the
consolidated cash flows for the six months ended June 30, 1999 and June 30,
2000. The results for interim periods are not necessarily indicative of results
which may be expected for any other interim period or for the full year. These
statements should be read in conjunction with the consolidated financial
statements and notes thereof included in the Company's Registration Statement on
Form S-1 (SEC File No. 333-30586) relating to the Company's initial public
offering of common stock.
On August 13, 1999, the Company effected a Common Stock split on a 7.8 for one
basis. On July 24, 2000, the Company effected a reverse split of its common
stock on a one for two basis. All share amounts have been restated to
retroactively reflect the stock splits.
Note B. Basis of Consolidation
The consolidated financial statements include the accounts of the Company and
all subsidiaries. All significant intercompany accounts and transactions have
been eliminated.
Note C. Income Taxes
The Company provides for income tax expense in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes.
Under SFAS 109, the liability method is used in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
the differences between financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Note D. Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No. 130 (SFAS
130), Reporting Comprehensive Income. SFAS 130 establishes standards for
reporting and display of comprehensive income and its components. Comprehensive
income has no impact on the Company's net income, balance sheet or stockholders'
equity (deficit). The components of comprehensive income are as follows:
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<PAGE> 10
CONVERGENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Note D. Comprehensive Income (continued)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 1,598 $ (634) $ 2,977 $ (1,514)
Foreign currency
translation adjustments 5 2 6 13
-------- -------- -------- --------
Comprehensive income
(loss) $ 1,603 $ (632) $ 2,983 $ (1,501)
======== ======== ======== ========
</TABLE>
Note E. Recent Accounting Pronouncements
There have been no recent accounting pronouncements that have had or are
expected to have a material effect on the Company's financial position or
results of operations.
Note F. Earnings Per Share
The Company computes earnings per share in accordance with SFAS No. 128,
Earnings per Share (SFAS 128). Basic net earnings (loss) per share is computed
by dividing the net income or loss available to common stockholders for the
period by the weighted average number of shares of Common Stock outstanding
during the period. The calculation of diluted net earnings (loss) per share was
calculated by dividing net income (loss) by the sum of the weighted average
number of common shares outstanding plus additional common shares that would
have been outstanding if potentially dilutive common shares had been issued.
Potential common shares are composed of Common Stock issuable upon the exercise
of stock options and upon conversion of Series A and Series B Mandatorily
Redeemable Preferred Stock which were reacquired in August, 1999 and Series A
Convertible Preferred Stock which were converted to Common Stock upon completion
of the Company's initial public offering in August, 2000.
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<PAGE> 11
CONVERGENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Note F. Earnings Per Share (continued)
The following table sets forth the computation of earnings per share:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1999 2000 1999 2000
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ 1,598 $ (634) $ 2,977 $ (1,514)
============ ============ ============ ============
Denominator:
Weighted average shares basic 14,698,534 15,276,585 15,089,633 13,944,065
Effect of dilutive securities -
employee stock options and
conversion of preferred stock 8,156,530 -- 8,156,530 --
------------ ------------ ------------ ------------
Denominator for diluted earnings
(loss) per share - adjusted
weighted average shares and
assumed conversions 22,855,064 15,276,585 23,246,163 13,944,065
------------ ------------ ------------ ------------
Basic earnings (loss
Per common shares $ 0.11 $ (0.04) $ 0.20 $ (0.11)
============ ============ ============ ============
Earnings (loss) per common
Share assuming dilution $ 0.07 $ (0.04) $ 0.13 $ (0.11)
============ ============ ============ ============
</TABLE>
Note G. Subsequent Events
On August 4, 2000, the Company consummated its initial public offering, issuing
5,000,000 shares of Common Stock at a price of $7.00 per share. Upon completion
of the Company's initial public offering, 42,487,701 outstanding shares of
Series A Convertible Preferred Stock were converted to 21,243,850 shares of the
Company's Common Stock.
On June 15, 2000, Cinergy Communications, Inc., a wholly owned subsidiary of
Cinergy Corp, one of our principal utility customers, purchased in a private
placement 1,237,000 shares of our Common Stock for $10,000,000. Concurrent with
the closing of our initial public offering, Cinergy Communications, Inc. in a
private placement purchased an additional 929,279 shares of our Common Stock for
$2,131,162. The purchase price for the additional shares purchased concurrently
with the closing of our initial public offering was determined based on a
formula so that the average purchase price for all shares purchased by Cinergy
Communications, Inc. was equal to 80% of the initial public offering price in
accordance with the stock purchase agreement, as amended.
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<PAGE> 12
ITEM 2.
CONVERGENT GROUP CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company provides consulting, software engineering, systems
integration, and project management services that enable its utility and local
government clients to implement Internet-based eBusiness solutions. The Company
combines the use of existing and emerging digital technologies with its business
expertise in the utility and local government sectors to deliver solutions that
address its clients' mission-critical business problems. These eBusiness
transformation solutions help clients integrate data from various isolated
sources to create a single, Web-based point of entry through which internal
decision-makers, business partners, suppliers, customers and constituents can
access business information on a real-time basis. The Company's solutions help
its clients increase revenues, reduce costs, improve customer services, ensure
service reliability, improve resource management and exploit their information
assets.
The Company derives the majority of its revenue from its professional
services which include consulting and software integration. The Company's
consulting services consist of evaluating existing information systems,
recommending solutions and components including hardware and software to
transition to real-time information digital environments, analyzing the cost and
benefit, developing the strategies to implement digital environments and
training personnel to transition the change. Integration services consist of
developing specific software code or employing our previously developed code,
which is the Company's intellectual property, to integrate new software into new
or existing systems. These professional services are included in integration,
consulting and other services revenue.
Subcontractor and other revenue include data conversion services and
computer hardware and software revenue, each of which can be a portion of the
solution the Company provides its client. Data conversion has historically been
performed principally through a single subcontractor whom the Company manages as
part of delivering its solutions for its clients. The Company has recently begun
using several other subcontractors for new client engagements. The Company acts
as a value added reseller for some computer hardware and software manufacturers.
The Company expects revenue from data conversion services to decline in
future years as a percent of our overall revenues. The Company expects that the
Company will derive an increasing percentage of its revenues from consulting and
integration services in future periods. The Company provides most of its
hardware and software procurement services during the earlier stages of a client
engagement, and once the Company has completed these services for a client, the
client's further requirements for these services are substantially lower. Thus,
when existing clients retain the Company for subsequent projects, it will
increasingly be to provide consulting and integration software and eBusiness
services.
-12-
<PAGE> 13
ITEM 2.
CONVERGENT GROUP CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
General (continued)
The Company's most significant operating expenses for integration,
consulting and other services consist of project personnel costs, including
compensation, benefits and project-related travel expenses. The Company expects
to increase the number of professional staff significantly during 2000 and in
future years to support its expected revenue growth in this area. As a result of
this growth, the Company expects its direct cost of integration, consulting and
other services revenue to increase significantly. In addition, the Company
expects the personnel cost of each professional staff member to increase as the
solutions the Company delivers become more complex and require the Company's
staff members to obtain additional training. Members of the Company's
professional staff are highly trained and the Company expects that salary and
benefit costs will increase as the Company strives to maintain its competitive
position. Although these direct costs are expected to increase, the Company
expects its gross profit margins on its integration, consulting and other
services revenue to increase due to improved delivery efficiencies achieved
through the use of our internally developed software solutions and our Rapid
Performance Modeling methodology. Rapid Performance Modeling is the methodology
the Company employs to speed the delivery of integration software solutions to
its clients and to reduce its professional service costs. At the outset of each
engagement, the Company identifies the components used in previously developed
software that can be used to satisfy the new client's requirements. The Company
delivers the core code of these previously developed software components to its
client, customizes the code to meet the client's solution requirements and
eliminates the professional labor cost associated with redeveloping the core
software code.
Expenses related to subcontractor and other revenue include software,
hardware and subcontractor costs. The Company expects costs of software and
hardware to decrease as a percentage of revenue. Data conversion services are
labor intensive and generate low gross profit margins. The Company plans to
improve its profit margins on these services by better managing its
subcontractors and by engaging additional subcontractors. Data migration
services, which will be included in integration consulting and other services
revenues, are less labor intensive than data conversion services but require a
higher degree of technical skill. As a result of the Company's personnel growth
and accompanying enhanced internal capabilities, the Company believes that it
can realize higher profit margins on data migration services than on data
conversion services by performing these services internally.
Selling, general and administrative expenses are expected to increase
during 2000 due to the opening of new sales and marketing offices in the United
Kingdom and Australia, each of which were opened during the first quarter of
2000. Selling expenses are also expected to increase due to the Company's
efforts to develop brand name recognition through the aggressive marketing of
the Company's Digital Utility and Government Gateway solutions. In addition,
administrative costs are expected to increase as a percentage of revenue as the
Company hires additional management personnel to manage its growth.
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<PAGE> 14
ITEM 2.
CONVERGENT GROUP CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
General (continued)
The Company plans to continue to expand its operations by hiring
additional professional staff members and other employees, and adding new
offices, systems and other infrastructure. The resulting increase in operating
expenses would harm our operating results if the Company's revenues do not
increase to support such expenses. Based on all of the foregoing, the Company
believes that its quarterly revenue and operating results are likely to vary
significantly in the future and that period-to-period comparisons of its
operating results are not necessarily meaningful and should not be relied on as
indications of future performance.
Forward-Looking Statements
The information in this discussion contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are based on the Company's current expectations
and are subject to a number of risks, uncertainties and assumptions. Any
statements contained herein that are not statements of historical fact my be
deemed to be forward-looking statements. For example, words such as "may,"
"will," "should," "estimates," "predicts," "strategy," "believes,"
"anticipates," "plans," "intends," and similar expressions are intended to
identify forward-looking statements. Our actual results and the timing of
certain events may differ significantly from those discussed in the
forward-looking statements. Among the important factors that could cause actual
results to differ significantly from these expressed or implied by such
forward-looking statements are our dependence on a limited number of significant
clients and the loss of any major client or the loss or reduction in scope of
any significant project; unexpected project delays, project cancellations or the
failure to obtain new projects; increased costs from any associated employee
underutilization; the failure to maintain costs under our fixed-price contracts
at or below the estimated levels; our reliance on a single subcontractor for our
data conversion services and the failure of that subcontractor to perform
services on a timely basis; the failure of our eBusiness transformation products
and services to be accepted in the marketplace; the intense competition in our
industry; technological change; damage to our reputation which could result from
unexpected network interruptions, undetected errors or defects in our services,
breaches of our network security or computer viruses or government audits; the
risk that our utility and government clients will postpone or cancel projects if
there is an economic downturn or if they are unable to comply with their
regulatory requirements; demand for our services could decrease if the rate of
deregulation in the utility industry slows; the imposition of new burdensome
government regulations and legal uncertainties regarding the Internet which
could increase our costs or limit our operations; the risk that our intellectual
property and proprietary rights may not be fully protected; our inability to
negotiate contracts which permit us to reuse our software codes and
methodologies; the risk that we fail to manage and maintain our growth,
including our international growth; our need to successfully develop awareness
of our brand names; the risk that we may be subject to employment-related claims
relating to the hiring of new employees; the potential need for additional
financing; as well as the other risk factors affecting the Company detailed from
time to time in the documents filed by the Company with the Securities and
Exchange Commission, including but not limited to those discussed under the
caption "Risk Factors" in the Company's registration statement on Form S-1 (file
no. 333-30586) declared effective by the SEC on July 31, 2000.
-14-
<PAGE> 15
ITEM 2.
CONVERGENT GROUP CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations
Revenues. For the first six months of 2000, revenues increased 31% to
$40.6 million, as compared to $31.1 million for the same period last year. This
increase was primarily due to an increase in integration, consulting and other
service revenues of $8.3 million, or 42%, from $19.6 million for the six months
ended June 30, 1999 to $27.9 million for the six months ended June 30, 2000, as
a result of the addition of professional personnel to service engagements and
the increase in the number and scope of the engagements. Revenue from
subcontractor and other revenue increased by $1.2 million, or 11%, from $11.5
million for the six months ended June 30, 1999 to $12.7 million for the six
months ended June 30, 2000. The increase in subcontractor and other revenue was
primarily due to an increase in revenues from third-party software deliveries of
$1.7 million from $1.4 million for the six months ended June 30, 1999 to $3.1
million for the six months ended June 30, 2000 offset by a decrease in
subcontractor data conversion services of $1.0 million from $8.0 million for the
six months ended June 30, 1999 to $7.0 million for the six months ended June 30,
2000. We expect that data conversion revenue will decline as a percentage of
revenue during future quarters as we focus on increasing our integration,
consulting, and other service revenues.
For the second quarter of 2000, revenues increased 35% to $22.0
million, as compared to $16.3 million for the same period last year. Revenue
from integration, consulting and other services increased 36% from $10.4 million
for the three months ended June 30, 1999 to $14.1 million for the three months
ended June 30, 2000. The increase in integration, consulting, and other services
was due to an increase in the number of consulting engagements and increase in
the scope of engagements. Revenue from subcontractor and other revenue increased
33% from $5.9 million for the three months ended June 30, 1999 to $7.9 million
for the three months ended June 30, 2000. The increase in subcontractor and
other revenue is primarily due to third-party software deliveries. Our revenue
from third party software is dependent upon our customers' and projects'
scheduled delivery requirements. We expect third party software revenue to
fluctuate from quarter to quarter.
Gross Profit. Gross profit for the second quarter rose to $8.8 million,
an increase of 54% over the $5.7 million reported in the second quarter last
year. Gross profit margin for the second quarter increased from 35.0% for the
three months ended June 30, 1999 to 40.0% for the three months ended June 30,
2000. Gross profit for the first half of 2000 rose to $16.9 million, an increase
of 53% over the $11.0 million reported for the first half of last year. Gross
profit margin for the first half of 2000 increased from 35.5% for the six months
ended June 30, 1999 to 41.5% for the six months ended June 30, 2000.
Gross profit from integration, consulting, and other services increased
by $2.6 million from $4.5 million for the three months ended June 30, 1999 to
$7.1 million for the three months ended June 30, 2000. Gross profit margin from
integration, consulting, and other services for the second quarter increased
from 43.4% for the three months ended June 30, 1999 to 50.6% for the three
months ended June 30, 2000.
Gross profit from integration, consulting, and other services also
increased for the six months ended June 30, 2000 by $5.7 million to $14.3
million from $8.6 million for the six months ended June 30, 1999. Gross profit
margin from integration, consulting, and other services for the first half of
2000 increased from 43.9% for the six months ended June 30, 1999 to 51.1% for
the six months ended June 30, 2000. The increases in gross profit and gross
profit margin in both the second quarter and the first six months of 2000
-15-
<PAGE> 16
ITEM 2.
CONVERGENT GROUP CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations (continued)
were primarily due to the use of the Company's Rapid Performance Modeling for
integration, consulting and other services, which permits the elimination of
redundant costs in the development of core software code for similar business
applications. The cost of developing this reusable software was substantially
expensed during 1999. Gross profit and gross profit margin for the three and six
months ended June 30, 2000 does not include approximately $10 thousand and $30
thousand, respectively, reported as employee stock compensation expense.
Gross profit from subcontractor and other revenue increased from $1.2
million and $2.4 million for the three and six months ended June 30, 1999 to
$1.7 million and $2.6 million for the three and six months ended June 30, 2000.
Gross profit margin from subcontractor and other revenue increased slightly from
20.5% for the three months ended June 30, 1999 to 21.1% for the three months
ended June 30, 2000. The primary reason for this increase is the shift in
revenue mix from lower margin conversion revenue to higher margin third-party
software revenue. Gross profit margin from subcontractor and other revenue
decreased slightly from 20.9% for the six months ended June 30, 1999 to 20.5%
for the six months ended June 30, 2000. This decrease was primarily due to the
cessation by us of maintenance services for our GDS software product, which was
discontinued in 1996.
Operating Expenses. Excluding $319 thousand and $919 thousand of
employee stock compensation expense for the three and six months ended June 30,
2000, total operating expenses increased 103% and 98% from $4.0 million and $7.9
million during the three and six months ended June 30, 1999 to $8.2 million and
$15.7 million for the three and six months ended June 30, 2000. These increases
reflect an increase in selling, general, and administrative personnel and
related expense. Selling, general, and administrative headcount increased by
108% from 62 for the six months ended June 30, 1999 to 129 for the six months
ended June 30, 2000. This increase was primarily attributable to corporate
expansion in the U.S. and in London, England, and Brisbane, Australia. In
addition, we added headcount to recruit professional and technical personnel and
manage our hiring process for personnel additions necessary to perform and
manage our growth in number of customers and engagements.
Net Interest Income (Expense). Net interest income (expense) for the
three and six months ended June 30, 1999 of ($7) thousand and $6 thousand
compared to net interest (expense) of ($479) thousand and ($924) thousand for
the three and six months ended June 30, 2000. This increase in interest expense
was due to interest payable on $22.0 million borrowed under our revolving credit
loan facility in connection with our 1999 recapitalization. We repaid $16.0
million of this borrowing with part of the proceeds from our initial public
offering completed in August 2000.
Income (Loss) Before Taxes. Our income (loss) before provision
(benefit) for income taxes decreased from $1.7 million and $3.1 million for the
six and three months ended June 30, 1999 to ($0.2) million and $(0.7) million
for the three and six months ended June 30, 2000. This decrease is primarily due
to an increase in selling, general and administrative expenses including
approximately $0.3 million and $0.9 million of employee stock compensation
amortization expense recorded for the three and six months ended June 30, 2000.
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<PAGE> 17
ITEM 2.
CONVERGENT GROUP CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations (continued)
Income Tax Benefit (Provision). The income tax benefit for the three
months ended June 30, 1999 was $0.1 million compared to an income tax provision
of ($0.4) for the three months ended June 30, 2000. For the six months ended
June 30, 1999, income tax benefit was $0.3 million compared to an income tax
provision of ($0.9) for the six months ended June 30, 2000. Income tax benefit
was recorded to the extent we expected to realize a tax benefit from the use of
our net operating losses in future periods. We believe that, based upon our
history of operations, recording a tax benefit for more than the amount we
expect to realize in our next fiscal year would be inappropriate. Based upon our
expectations for the remaining portion of this fiscal year and our fiscal year
2001 and limitations placed on the use of our net operating losses by the
Internal Revenue Code and Regulations, we have reduced our deferred tax asset to
reflect the asset we believe will be allowable under these limitations to offset
income taxes for the current and our next fiscal year.
Net Income (Loss). As a result of the foregoing factors, we incurred
net income of $1.6 million and $3.0 million for the three and six months ended
June 30, 1999 as compared to a net loss of ($0.6) and ($1.5) for the three and
six months ended June 30, 2000.
Liquidity and Capital Resources
Cash used in operating activities decreased from $4.2 million for the
six months June 30, 1999 to $1.4 million for the six months ended June 30, 2000.
This decrease reflected our net loss of $1.5 million for the six months ended
June 30, 2000 and an increase in receivables and unbilled revenues of $6.6
million which was partially offset by an increase in accounts payable and
accrued expenses of $4.7 million, compared to our net income of $3.4 million in
1999 which was reduced by cash used due to a $5.7 million increase in
receivables and unbilled revenue and a $2.0 million decrease in unearned revenue
and customer deposits.
The days outstanding for accounts receivable and unbilled revenues have
increased from 71 days at June 30, 1999 to 81 days at June 30, 2000. The primary
reason for this increase in days outstanding is due to payment delays on
subcontract conversion revenues which has increased our unbilled revenue days
outstanding by 13 days.
The balance in the allowance for doubtful accounts has decreased
between the six months ended June 30, 1999 and June 30, 2000 by $38 thousand
from $57 thousand at June 30, 1999 to $19 thousand at June 30, 2000 as a result
of bad debts charged against the allowance relating to GDS software maintenance.
We maintain a deminimus allowance for doubtful accounts for our system
integration projects. Accounts receivable from our system integration clients,
primarily large stable utilities and government enterprises, represent nominal
credit risk. The Company realized no bad debt expense on any system integration
or consulting engagement during the periods ended June 30, 1999 and 2000.
-17-
<PAGE> 18
ITEM 2.
CONVERGENT GROUP CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (continued)
Net cash provided by financing activities increased from $0.5 for the
six months ended June 30, 1999 to $11.2 million for the six months ended June
30, 2000. Cash provided by financing activities for the six months ended June
30, 2000 resulted from net borrowings on our revolving credit line of $1.2
million and the issuance of common stock of $10.0 million. During the six months
ended June 30, 1999, cash provided by financing activities was primarily due to
borrowing of $1.0 million on our line of credit offset by $0.5 million used to
repurchase outstanding common stock for our employee stock option plan.
Our capital expenditures were $2.6 million for the six months ended
June 30, 2000 and $0.8 million for the six months ended June 30, 1999. Capital
expenditures during 2000 were used primarily to purchase new personal computer
hardware and software as a result of the increase in our headcount. Capital
expenditures for 2000 are expected to be approximately $5 million. The majority
of capital expenditures for 2000 are projected to cover the purchase of
additional software and hardware for employees we expect to hire during the
year.
Cash and cash equivalents increased from $0.5 million for the six
months ended June 30, 1999 to $8.9 million for the six months ended June 30,
2000.
In connection with our August 1999 recapitalization, we entered into a
Revolving Credit Loan Agreement with Fleet Bank, which provides a line of credit
of up to $25 million. We borrowed $22 million under the Agreement during 1999 to
partially fund the purchase of our previously outstanding Series A and Series B
Preferred Stock and Class A Common Stock. In addition, we borrowed an additional
$1.0 million during the three months ended June 30, 2000 for temporary working
capital. At our election, interest on borrowings under this credit facility are
based on either LIBOR plus 2.5% or the prime rate plus 0.75%. As of June 30,
2000, $20 million of our outstanding balance bears interest based on LIBOR, and
the remaining $3 million bears interest under the prime rate option. The
effective blended interest rate on borrowings at June 30, 2000 was 9.23%. The
Agreement includes covenants relating to the maintenance of specific financial
ratios, including minimum interest coverage, debt service, current assets ratios
and limitations on additional debt.
We were in compliance with all covenants at December 31, 1999. At June
30, 2000, we were in violation of certain covenants for which we have obtained
waivers. We paid approximately $16.0 million against the credit facility during
August 2000.
On August 4, 2000, the Company consummated its initial public offering,
issuing 5,000,000 shares of Common Stock at a price of $7.00 per share.
Estimated net proceeds of the initial public offering, which excludes
underwriting discounts and commissions and estimated expenses incurred in
connection with the initial public offering are $30.1 million. Pursuant to a
stock purchase agreement, as amended, Cinergy Communications, Inc. purchased
929,279 shares of our Common Stock for $2,131,162 concurrently with the closing
of our initial public offering.
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<PAGE> 19
ITEM 2.
CONVERGENT GROUP CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (continued)
We believe that cash provided from operations, borrowings available
under our revolving credit loan facility or a new credit facility and the net
proceeds of our initial public offering will be sufficient to meet working
capital and capital expenditure requirements for at least the next twelve
months. Thereafter, we may need to raise additional funds through public or
private financing, or make other arrangements to fund our operations and
potential acquisitions, if any. We cannot assure you that any financing or other
arrangements will be available in amounts or on terms acceptable to us or at
all, and any financing or other arrangements could place operating or other
restrictions on us. Our inability to raise capital when needed could seriously
harm the growth of our business and results of operations. If additional funds
are raised through the issuance of equity securities, the percentage ownership
of our stockholders would be reduced. Furthermore, these equity securities could
have rights, preferences or privileges senior to those of our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company currently provides services to clients located in North
America, and to a lesser extent, Europe, South America and the Asia-Pacific
region. As a result, the Company's financial results could be affected by
factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. As all of the Company's contracts with clients
currently provide that payments to the Company be made in U.S. dollars, a
strengthening of the dollar could make the Company's services less competitive
in foreign markets. The Company does not expect any material adverse effect on
the Company's consolidated financial position, results of operations or cash
flows due to movements in any specific foreign currency. The Company currently
does not use financial instruments to hedge foreign denominated operating
expenses, but the Company intends to assess the need to utilize financial
instruments to hedge currency exposures on an ongoing basis. The Company does
not enter into derivative or other financial instruments for trading or
speculative purposes. The Company's interest income is sensitive to changes in
the general level of U.S. interest rates, particularly since the majority of the
Company's investments are in short-term instruments. Due to the short-term
nature of the Company's investments, the Company believes that there is no
material risk exposure. The Company's revolving credit facility, which
constitutes long term debt, bears interest at variable rates based on LIBOR or
the prime rate. As a result, interest rate changes generally do not affect the
fair market value of our variable rate debt but do impact future earnings and
cash flows, assuming other factors are held constant. The Company used part of
the proceeds from its initial public offering to repay amounts outstanding under
the revolving credit facility.
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<PAGE> 20
CONVERGENT GROUP CORPORATION AND SUBSIDIARIES
Part II - OTHER INFORMATION
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS.
Use of Proceeds
Pursuant to a Form S-1 Registration Statement (SEC File No. 333-30586) declared
effective by the SEC on July 31, 2000, the Company on August 4, 2000 completed
the sale of 5,000,000 shares of its Common Stock in connection with an initial
public offering ("IPO") at a price of $7 per share. The managing underwriters in
the offering were FleetBoston Robertson Stephens Inc., Donaldson, Lufkin &
Jenrette Securities Corporation and WitSoundview Corporation.
The following table details the underwriting discounts and commissions and
estimated expenses incurred by the Company in connection with the completion of
the IPO:
<TABLE>
<CAPTION>
(in thousands)
--------------
<S> <C>
Gross Proceeds $ 35,000
Underwriting discounts and commissions (2,450)
Estimated Expenses:
Nasdaq listing fee (90)
Blue Sky Fees (10)
SEC Filing Fees (40)
NASD Fee (16)
Transfer agent fees (3)
Accounting fees (115)
Legal fees (1,155)
Printing fees (440)
Miscellaneous (306)
------------
Total underwriting discounts and commissions
and estimated expenses (4,625)
------------
Net Proceeds $ 30,375
============
</TABLE>
----------
None of such expenses involved direct or indirect payments to directors or
officers of the Company or their associates, 10% stockholders of the Company, or
affiliates of the Company.
Since the effective date of the Registration Statement through August
31, 2000, we have used the net proceeds of the offering plus the net proceeds of
$2.1 million of a concurrent private placement as follows:
o Approximately $16.0 million to pay indebtedness under a revolving
credit facility plus accrued interest; and
o $3.0 million in payment of fees owed to InSight Capital Partners,
which with affiliated entities owns approximately 21.5% of the
Company's outstanding common stock.
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<PAGE> 21
o The Company maintains the balance of net proceeds in an interest
bearing account.
These uses of proceeds from the Company's offering do not represent a
material change from the anticipated uses described in the Prospectus for the
IPO.
Except for the payment to InSight Capital Partners as described above,
none of the proceeds from the IPO were used to make direct or indirect payments
to directors or officers of the Company of their associates, 10% stockholders of
the Company, or affiliates of the Company.
Changes in Securities
On June 15, 2000, the Company sold 1,237,000 shares (after giving effect to the
reverse stock split referred to below) of Common Stock to Cinergy Communications
Inc. ("CCI") in a private placement for $10,000,000. Concurrent with the closing
of the IPO, the Company sold an additional 929,279 shares of common stock to CCI
in a private placement for $2.1 million. The purchase price of the additional
shares sold to CCI was in an amount such that the purchase price per share of
all the shares sold to CCI would be at a price equal to 80% of the IPO price per
share. Concurrently with the closing of the IPO, the Company's Series A
Convertible Preferred Stock automatically converted into 21,243,850 shares of
common stock.
During the quarter ended June 30, 2000 and prior to the closing of the Company's
initial public offering on August 4, 2000, the Company granted options to
purchase 11,000 shares of its common stock to employees, officers and directors
of the Company with an exercise price of $6.76. These options were granted
pursuant to the Company's 1999 Stock Option Plan. During the quarter ended June
30, 2000 and prior to the closing of the Company's initial public offering on
August 4, 2000, the Company issued 118,426 shares of its common stock upon the
exercise of options at an exercise price of $0.09 to $6.76, resulting in a total
purchase price of $18,897.
The issuance of options and the sale of the common stock upon exercise of
employee stock options was deemed to be exempt from registration under the
Securities Act of 1933 in reliance upon Section 4(2) of the Securities Act of
1933 ("the Act") or Rule 701 promulgated under Section 3 (b) of the Act. The
issuance of common stock upon automatic conversion of the Company's previously
outstanding Series A Preferred stock upon consummation of the IPO was exempt
from registration under the Act by virtue of Section 3 (a)(9) of the Act. The
issuances of common stock to CCI was exempt from registration under the Act in
reliance upon Section 4(2) or Regulation D promulgated thereunder.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the second quarter of 2000, the stockholders of the Company have
taken the following actions by written consent, effective on the dates listed
below.
1. As of June 26, 2000, the stockholders approved an amendment to
the Company's 1999 Stock Option Plan to increase the number of
shares available under the Plan and remove the requirement
that the exercise price of nonqualified options be at least
25% of the fair market value of the underlying shares. The
stockholders also approved an
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<PAGE> 22
amendment to the Certificate of Incorporation changing the
definition in one provision relating to the Series A Preferred
Stock in order to reflect the increase in the number of shares
available under the 1999 Stock Option Plan and certain stock
grants.
2. As of June 30, 2000, the stockholders approved an amendment to
the Company's Certificate of Incorporation to effect a
one-for-two reverse stock split of the common stock in
preparation of the Company's initial public offering.
Stockholders also approved the Amended and Restated
Certificate of Incorporation and Amended Bylaws. The Amended
and Restated Certificate of Incorporation included provisions
that, among other things, provide for a classified Board of
Directors, eliminate stockholder action by written consent,
provide that the directors may be removed only for cause with
the affirmative vote of the holders of 66-2/3% of the
outstanding voting power, delete provisions applicable to the
Company's Series A Convertible Preferred Stock which were
converted into Common Stock upon consummation of the IPO,
authorized 75,000,000 shares of Preferred Stock with terms to
be fixed by the Board of Directors, and required the vote of
66-2/3% of the outstanding voting power for an amendment or
repeal of the Bylaws of the Company and a vote of 66-2/3% of
the outstanding voting power for an amendment to that
provision and certain other provisions of the Amended and
Restated Certificate of Incorporation.
3. As of June 30, 2000, holders of Series A Preferred Stock of
the Company approved the Company's IPO, the allocation of
certain shares within the designated shares program in the
IPO, an amendment to an agreement under which a shareholder
sold certain shares of the Company stock, the issuance of
restricted stock to two directors, the issuance of a certain
shares to four executives of the Company or entities related
to them, the issuance of up to 10,000 shares to a consultant
and the issuance of shares pursuant to the Company's 1999
Stock Option Plan. The approval was done in accordance with
terms of a shareholders' agreement.
More than 97% of the voting power of the Series A Preferred Stock
executed the consents described above, and over 80% of the voting power of all
stock entitled to vote on these matters executed the consents described in
Paragraphs 1 and 2 above.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
27 Financial Data Schedule
b. Reports on Form 8-K
None.
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<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CONVERGENT GROUP CORPORATION
(Registrant)
Dated: September 13, 2000 By: /s/ Bryan R. Mileger
---------------------------------
Bryan R. Mileger, Chief Financial
Officer (Principal Financial Officer
and Principal Accounting Officer)
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
