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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002.
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: 00-24055
DA CONSULTING GROUP, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0418488
(State or other jurisdiction of I.R.S. Employer Identification No.)
Incorporation or organization)
5847 SAN FELIPE, SUITE 1100
HOUSTON, TEXAS 77057
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 361-3000
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 [ ]
NUMBER OF SHARES OUTSTANDING OF COMMON STOCK AS OF August 9, 2002, 8,418,604
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1
DA CONSULTING GROUP, INC.
INDEX
PART I
FINANCIAL INFORMATION
PAGE NO.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2002 (unaudited)
and December 31, 2001 (audited). . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the Three Months ended
June 30, 2002 and 2001 (unaudited) . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Operations for the Six Months ended
June 30, 2002 and 2001 (unaudited) . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the Six Months ended
June 30, 2002 and 2001 (unaudited) . . . . . . . . . . . . . . . . . . 5
Notes to Unaudited Condensed Consolidated Financial Statements. . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . 13
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . 14
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DA CONSULTING GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
JUNE 30, DECEMBER 31,
2002 2001
ASSETS (Unaudited) (Audited)
------ ------------ --------------
Current Assets:
Cash and cash equivalents $ 677 $ 373
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . . 2,776 4,053
Unbilled revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . 275 38
Deferred tax asset. . . . . . . . . . . . . . . . . . . . . . . . . . . 673 629
Prepaid expenses and other current assets . . . . . . . . . . . . . . . 412 352
------------ --------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 4,813 5,445
------------ --------------
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . 4,283 5,394
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212 177
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,027 5,990
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . 206 206
------------ --------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,541 $ 17,212
============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Revolving line of credit . . . . . . . . . . . . . . . . . . . . . . . $ 753 $ 1,077
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,490 1,759
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,895 3,272
------------ --------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 5,138 6,108
------------ --------------
Lease abandonment liabilities. . . . . . . . . . . . . . . . . . . . . . 572 801
------------ --------------
Commitments and contingencies
Shareholders' Equity:
Preferred stock, $0.01 par value: 10,000,000 shares authorized . . . . - -
Common stock, $0.01 par value: 40,000,000 shares authorized; 8,571,777
shares issued; 8,418,604 shares outstanding . . . . . . . . . . . . 85 85
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 34,039 34,039
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . (21,444) (20,782)
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . (1,327) (1,517)
Treasury stock, 153,173 shares at cost . . . . . . . . . . . . . . . . (1,522) (1,522)
------------ --------------
Total shareholders' equity. . . . . . . . . . . . . . . . . . . . . 9,831 10,303
------------ --------------
Total liabilities and shareholders' equity . . . . . . . . . . $ 15,541 $ 17,212
============ ==============
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
DA CONSULTING GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
------- -------- -------- --------
Revenue. . . . . . . . . . . . . . . $5,419 $ 7,607 $12,317 $16,143
Cost of revenue. . . . . . . . . . . 3,405 4,572 7,180 9,565
------- -------- -------- --------
Gross profit. . . . . . . . . . 2,014 3,035 5,137 6,578
Selling and marketing expense. . . . 606 987 1,184 2,045
Development expense. . . . . . . . . 36 174 81 632
General and administrative expense . 2,305 2,999 4,426 6,522
------- -------- -------- --------
Operating loss. . . . . . . . . (933) (1,125) (554) (2,621)
------- -------- -------- --------
Interest income (expense), net . . . (5) 8 (10) 2
Other expense, net . . . . . . . . . (2) (47) (55) (41)
------- -------- -------- --------
Total other expense, net. . . . (7) (39) (65) (39)
------- -------- -------- --------
Loss before taxes . . . . . . . (940) (1,164) (619) (2,660)
Provision (benefit) for income taxes (192) 3,185 43 2,637
------- -------- -------- --------
Net loss. . . . . . . . . . . . $ (748) $(4,349) $ (662) $(5,297)
======= ======== ======== ========
Basic loss per share . . . . . . . . $(0.09) $ (0.52) $ (0.08) $ (0.63)
Weighted average shares outstanding. 8,419 8,419 8,419 8,419
Diluted loss per share . . . . . . . $(0.09) $ (0.52) $ (0.08) $ (0.63)
Weighted average shares outstanding. 8,419 8,419 8,419 8,419
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
DA CONSULTING GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
2002 2001
-------- --------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (662) $(5,297)
-------- --------
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Loss on disposal of fixed assets. . . . . . . . . . . . . . . . . . . . 25 6
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 1,114 1,232
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 43 2,807
Changes in operating assets and liabilities:
Accounts receivable and unbilled revenue . . . . . . . . . . . . . 1,040 1,597
Prepaid expenses and other current assets. . . . . . . . . . . . . (60) (45)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . (35) 57
Accounts payable and accrued expenses. . . . . . . . . . . . . . . (1,043) (1,436)
-------- --------
Total adjustments . . . . . . . . . . . . . . . . . . . . . . 1,084 4,218
-------- --------
Net cash provided by (used in) operating activities . . . . . 422 (1,079)
-------- --------
Cash flows from investing activities:
Proceeds from sale of property and equipment . . . . . . . . . . . . . . . . 20 56
Purchases of property and equipment. . . . . . . . . . . . . . . . . . . . . (4) (35)
-------- --------
Net cash provided by investing activities . . . . . . . . . . 16 21
-------- --------
Cash flows from financing activities:
(Repayment) proceeds from revolving line of credit . . . . . . . . . . . . . (324) 862
-------- --------
Net cash provided by (used in) financing activities . . . . . (324) 862
-------- --------
Effect of changes in foreign currency exchange rate on cash and cash equivalents. 190 (215)
-------- --------
Increase (decrease) in cash and cash equivalents . . . . . . . 304 (411)
Cash and cash equivalents at beginning of period. . . . . . . . . . . . . . . . . 373 949
-------- --------
Cash and cash equivalents at end of period. . . . . . . . . . . . . . . . . . . . $ 677 $ 538
======== ========
5
DA CONSULTING GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS
DA Consulting Group, Inc. ("DACG(TM)" together with its subsidiaries or the
"Company") is a leading international provider of employee education and
software solutions to companies investing in business information technology.
Through its offices in seven countries, DACG delivers customized services for
documentation and training necessary for implementation of extended enterprise
software applications; technical and non-technical employee education and
continuous learning programs; e-Learning applications such as
computer-based-training, learning management systems; and consulting on human
resource management, change management and change communications. The condensed
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.
(2) BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements for the year
ended December 31, 2001, included in the Company's Annual Report on Form 10-K.
The unaudited condensed consolidated financial statements included herein have
been prepared by the Company without an audit pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted, pursuant to such rules and regulations.
Operating results for the three months ended June 30, 2002 and the six months
ended June 30, 2002 are not necessarily indicative of the results which will be
realized for the year ending December 31, 2002.
The unaudited condensed consolidated financial information included herein
reflects all adjustments, consisting only of normal recurring adjustments, which
are necessary, in the opinion of management, for a fair presentation of the
Company's financial position, results of operations and cash flows for the
interim periods presented.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standard Board finalized FASB
Statement No. 141, Business Combinations (SFAS 141), and No. 142 Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires us to recognize acquired intangible assets apart from goodwill if
the acquired intangible asset meets certain criteria. SFAS 141 applies to all
business combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires, upon
adoption of SFAS 142, that we reclassify the carrying amounts of intangible
assets and goodwill based upon the criteria of SFAS 141.
SFAS 142 requires, among other things, that we no longer amortize goodwill,
but instead test goodwill for impairment at least annually. In addition, SFAS
142 requires us to identify reporting units for the purposes of assessing
potential future impairments of goodwill, reassess the useful lives of other
existing recognized intangible assets and cease amortization of intangible
assets with an indefinite useful life. An intangible with an indefinite useful
life should be tested for impairment in accordance with the guidance in SFAS
142. SFAS 142 is required to be applied in fiscal years beginning after
December 15, 2001 to all goodwill and other intangible assets recognized at that
date, regardless of when those assets were initially recognized. SFAS 142
requires us to complete a transitional goodwill impairment test six months from
the date of adoption and to reassess the useful lives of other intangible assets
within the first interim quarter after adoption of SFAS 142 which we have done.
The adoption of SFAS 141 and SFAS 142 have not had a material impact on our
financial position and results of operations.
6
The Company has approximately $0.2 million of goodwill included in its
balance sheet at June 30, 2002. Goodwill amortization for the for the year ended
December 31, 2001, was $19,000. Implementation of SFAS 142 by the Company
resulted in the elimination of amortization of goodwill for the current and
future fiscal years.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
Accounting for Asset Retirement Obligations, SFAS No. 143, which amends SFAS No.
19, Financial Accounting and Reporting by Oil and Gas Producing Companies, is
applicable to all companies. SFAS No. 143, which is effective for fiscal years
beginning after June 15, 2002, addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and/or the normal operation of a long-lived asset,
except for certain obligations of lessees. As used in SFAS No. 143, a legal
obligation is an obligation that a party is required to settle as a result of an
existing or enacted law, statute, ordinance, or written or oral contract or by
legal construction of a contract under the doctrine of promissory estoppel.
While we are not yet required to adopt SFAS No. 143, we do not believe the
adoption will have a material effect on our financial condition or results of
operations.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a business segment. SFAS 144 also eliminates the exception to
consolidation for a subsidiary for which control is likely to be temporary. The
provisions of SFAS 144 are effective for financial statements issued for fiscal
years beginning after December 15, 2001, and interim periods within those fiscal
years. The provisions of SFAS 144 generally are to be applied prospectively. It
is anticipated that the financial impact of SFAS 144 will not have a material
effect on the Company.
April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections. This statement eliminates the current requirement
that gains and losses on debt extinguishment must be classified as extraordinary
items in the income statement. Instead, such gains and losses will be classified
as extraordinary items only if they are deemed to be unusual and infrequent, in
accordance with the current GAAP criteria for extraordinary classification. In
addition, SFAS 145 eliminates an inconsistency in lease accounting by requiring
that modifications of capital leases that result in reclassification as
operating leases be accounted for consistent with sale-leaseback accounting
rules. The statement also contains other nonsubstantive corrections to
authoritative accounting literature. The changes related to debt extinguishment
will be effective for fiscal years beginning after May 15, 2002, and the changes
related to lease accounting will be effective for transactions occurring after
May 15, 2002. Adoption of this standard will not have any immediate effect on
the Company consolidated financial statements. The Company will apply this
guidance prospectively.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which addresses accounting for
restructuring and similar costs. SFAS No. 146 supersedes previous accounting
guidance, principally Emerging Issues Task Force (EITF) Issue No. 94-3. The
Company will adopt the provisions of SFAS No. 146 for restructuring activities
initiated after December 31, 2002. SFAS No. 146 requires that the liability for
costs associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF No. 94-3, a liability for an exit cost was
recognized at the date of a companys commitment to an exit plan. SFAS No. 146
also establishes that the liability should initially be measured and recorded at
fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing
future restructuring costs as well as the amount recognized.
(3) MANAGEMENT'S RESTRUCTURING AND LIQUIDITY
7
During the second quarter of 2000, management began to restructure the
global operations of the Company. As part of the plan, management was required
to downsize the Company based upon current and future projected operating
results. Some of the restructuring initiatives taken by management were as
follows:
- Reduction in the number of consultants
- Reduction of administrative personnel
- Reduction in office space
- Various other cost cutting measures
Management completed the restructuring of the Company during the third
quarter of 2001 and achieved overall profitability in the fourth quarter of 2001
and first quarter of 2002. The Company recorded a loss in the second quarter of
2002 due to a decline in revenue and losses related to leases. There can be no
assurance that profitability will be achieved in the future.
The Company believes its current cash balances, revolving line of credit,
receivable-based financing and cash provided by future operations will be
sufficient to meet the Company's working capital and cash need for the next 12
months. However, there can be no assurance that such sources will be sufficient
to meet these future expenses and the Company's future needs. The Company may
seek additional financing through a private or public placement of equity. The
Company's need for additional financing will be principally dependent on the
degree of market demand for the Company's services. There can be no assurance
that the Company will be able to obtain any such additional financing on
acceptable terms, if at all.
(4) INCOME TAXES
At June 30, 2002, the Company had $6.7 million of deferred tax assets
primarily consisting of net operating loss carryforwards. The benefit from
utilization of net operating loss carryforwards could be subject to limitations
if significant ownership changes occur in the Company. The Company's ability to
realize the entire benefit of its deferred tax asset requires that the Company
achieve certain future earnings levels prior to the expiration of its NOL
carryforwards. The Company has recorded a $4.3 million valuation allowance
against deferred tax assets. The Company believes it will generate sufficient
taxable income to realize the remaining deferred tax assets. The Company could
be required to record a valuation allowance for a portion or all of its
remaining deferred tax asset if market conditions deteriorate and future
earnings are below, or projected to be below, its current estimates and
management believes it is more likely than not the deferred tax assets will fail
to be realized.
(5) DEBT
Revolving Line of Credit
The Company has a credit facility from a foreign bank with an available
line of approximately $1.1 million (750,000 Great Britain Pounds),
collateralized by and based on eligible foreign accounts receivable, secured by
a mortgage deed against all the assets of the Europe Division and guaranteed by
the Company. At June 30, 2002, the
8
Company had used $0.8 million of the credit facility. The interest rate on this
line of credit was 6.0% at June 30, 2002. The line of credit is available
through March 2003, however, the line of credit is due upon demand.
Accounts Receivable Financing
The Company has an agreement with a bank, which provides for financing of
eligible U.S. accounts receivable under a purchase and sale agreement. The
maximum funds available under the agreement is $5 million. The agreement allows
for the bank to request repurchase of an account receivable under certain
conditions. The bank has never requested repurchase of a U.S. account
receivable. At June 30, 2002, the Company had sold no accounts receivable
pursuant to this agreement.
(6) RESTRUCTURING CHARGE
During the three month period ended March 31, 2000, the Company implemented
a plan to address the dramatic decline in training and documentation activity
for enterprise resource planning implementations. The plan consisted of
regional base consolidations and downsizing of billable and non-billable
personnel. Charges included the costs of involuntary employee termination
benefits, write-down of certain property and equipment and reserves for
leasehold abandonment.
The reduction in workforce consisted of 60 billable consultants and 44
non-billable administrative personnel. Substantially all of the employee
terminations were completed during the first quarter. The Company recognized
approximately $1.5 million expense attributable to involuntary employee
termination benefits during the first quarter, of which approximately $1.2
million had been paid at December 31, 2000. The remaining $0.3 million in
termination pay was paid during 2001.
During the three months ended March 31, 2000 the Company reserved
approximately $0.9 million related to the abandonment of leases and
approximately $1.0 million related to the writedown of leasehold improvements,
furniture and equipment held by its Americas division. During the fourth
quarter of 2000 due to weakening in the real estate market, the Company recorded
an additional $1.3 million reserve for lease abandonment resulting in a total
annual charge of $2.2 million.
During the three months ended June 30, 2001 the Company recorded a $0.8
million charge for the abandonment of additional leases. The charge was
included in general and administrative costs. During the first six months of
2002 the Company recorded losses on subleases of $0.2 million which is included
in general and administrative expense. Payments for unutilized leased office
space totaling $2.2 million were charged against the reserve during 2000, 2001
and the first six months ending June 30, 2002. At June 30, 2002, the Company
has a remaining accrual of $1.0 million of which $0.6 million is included in
long-term liabilities.
(7) COMPREHENSIVE LOSS
Comprehensive loss is comprised of two components: net loss and other
comprehensive income (loss). Other comprehensive income (loss) is comprised of
foreign currency translation adjustments from international subsidiaries that
under accounting principles generally accepted in the United States of America
are recorded as an element of shareholders' equity and are excluded from net
loss. The components of comprehensive loss are listed below (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------- ----------------
2002 2001 2002 2001
------ -------- ------ --------
Net loss. . . . . . . . . . . . . $(748) $(4,349) $(662) $(5,297)
Other comprehensive income (loss) 178 116 190 (215)
------ -------- ------ --------
Comprehensive loss. . . . . . . . $(570) $(4,233) $(472) $(5,512)
====== ======== ====== ========
9
(8) LOSS PER SHARE
Basic loss per share has been computed based on the weighted average number
of common shares outstanding during the applicable period. Diluted loss per
share includes the number of shares issuable upon exercise of stock options,
less the number of shares that could have been repurchased with the exercise
proceeds, using the treasury stock method. Dilutive shares are excluded from
the calculation below because the inclusion would be antidilutive.
The following table summarizes the Company's computation of loss per share
for the periods ended June 30, 2002 and 2001 (in thousands, except per share
amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -----------------
2002 2001 2002 2001
------- -------- ------- --------
Basic loss per share. . . . . . . . . . . . . . . . . . . . $(0.09) $ (0.52) $(0.08) $ (0.63)
------- -------- ------- --------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . $ (748) $(4,349) $ (662) $(5,297)
======= ======== ======= ========
Weighted average shares outstanding . . . . . . . . . . . . 8,419 8,419 8,419 8,419
Computation of diluted earnings per share:
Common shares issuable under outstanding stock options - - - -
Less shares assumed repurchased with proceeds from
exercise of stock options. . . . . . . . . . . . . . . - - - -
------- -------- ------- --------
Adjusted weighted average shares outstanding . . . . . 8,419 8,419 8,419 8,419
======= ======== ======= ========
Diluted loss per share. . . . . . . . . . . . . . . . . . . $(0.09) $ (0.52) $(0.08) $ (0.63)
======= ======== ======= ========
Approximately 1,480,000 antidilutive options and 3,000,000 antidilutive
warrants were excluded from the calculation of diluted earnings per share for
the periods ending in 2002. Approximately 1,329,000 antidilutive options and
3,000,000 antidilutive warrants were excluded from the calculation of diluted
earnings per share for the periods ending in 2001.
(9) GEOGRAPHIC FINANCIAL DATA
Revenue from the Company's operations are presented below by operating
division (in thousands):
EUROPE,
MIDDLE EAST
AMERICAS & AFRICA ASIA PACIFIC TOTAL
-------- ------------- -------------- --------
THREE MONTHS ENDED JUNE 30, 2002
Revenue. . . . . . . . . . . $ 1,080 $ 2,976 $ 1,363 $ 5,419
Operating loss . . . . . . . (254) (641) (38) (933)
THREE MONTHS ENDED JUNE 30, 2001
Revenue. . . . . . . . . . . $ 1,242 $ 4,717 $ 1,648 $ 7,607
Operating income (loss). . . (1,903) 584 194 (1,125)
SIX MONTHS ENDED JUNE 30, 2002
Revenue. . . . . . . . . . . $ 1,786 $ 7,435 $ 3,096 $12,317
Operating income (loss). . . (697) (24) 167 (554)
Total assets. . . . . . . . 6,675 5,774 3,092 15,541
SIX MONTHS ENDED JUNE 30, 2001
Revenue. . . . . . . . . . . $ 3,652 $ 9,390 $ 3,101 $16,143
Operating income (loss). . . (3,287) 621 45 (2,621)
Total assets. . . . . . . . 7,220 8,286 3,278 18,784
10
DA CONSULTING GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is an international provider of education for employees of
companies which are implementing business information technology. The Company
provides customized change communications, education and performance support
services designed to maximize its clients' returns on their substantial
investments in business information technology.
Recognizing the global nature of its existing and prospective client base,
the Company has built a substantial international presence. The Company is
currently organized into three divisions: the Americas Division; the EMEA
Division, which includes Europe; and the Asia Pacific Division, which includes
its Australia and Asia operations.
RESULTS OF OPERATIONS.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Revenue. Revenue decreased by $2.2 million, or 28.8%, from $7.6 million
in the second quarter of 2001 to $5.4 million in the second quarter of 2002,
reflecting decreases in Europe, America and Asia. Product sales decreased from
$0.3 million in 2001 to $0.2 million in 2002. Revenue from the Americas Division
decreased by 13.0% from $1.2 million to $1.1 million; revenue from the EMEA
Division decreased by 36.9% from $4.7 million to $3.0 million; and revenue from
the Asia Pacific Division decreased by 17.3% from $1.6 million to $1.4 million.
The Company ended the second quarter with 233 total employees, down from 265
employees at the end of the same period of the prior year. Billable employees
total 180 at June 30, 2002 compared to 199 at June 30, 2001. Revenue for the
second quarter of 2002 was 21.4% less than revenue in the first quarter of 2002
due to project delays and a weak market for complex computer software. The
Company expects modest improvement in the upcoming quarters.
Gross profit. Gross profit decreased by $1.0 million, or 33.6%, from $3.0
million in the second quarter of 2001 to $2.0 million in the second quarter of
2002 and decreased as a percent of revenue from 39.9% in the second quarter of
2001 to 37.2% in the first quarter of 2002. The decrease in the gross profit
margin percentage is primarily attributable to decreased staff utilization and
bill rates partially offset by improved recovery of travel costs and margin on
product sales.
Selling and marketing expense. Selling and marketing expense decreased
$0.4 million or 38.6%, from $1.0 million in the second quarter of 2001 to $0.6
million in the second quarter of 2002. The decrease is the result of reduced
personnel from 29 in the first quarter of 2001 to 22 in the first quarter of
2002 and reduced commissions.
Development expense. Development expense decreased $138,000, or 79.3%,
from $174,000 in the second quarter of 2001 to $36,000 in the second quarter of
2002. Reductions resulted primarily from the reduction of personnel from 7 in
2001 to 2 in 2002.
General and administrative expense. General and administrative expense
decreased by $0.7 million, or 23.1%, from $3.0 million in the second quarter of
2001 to $2.3 million in the second quarter of 2002. The decrease in expense is
due primarily to a reduction in headcount in the areas of finance,
administration and human resources as a result of the cost containment plans.
General and administrative personnel total 30 at the end of the second quarter
of 2002 compared to 39 at the end of the second quarter of 2001. Expenditures
for facilities, professional fees and travel also decreased. Depreciation
expense included in general and administrative costs increased from $0.6 million
in the second quarter of 2001 to $0.7 million in the second quarter of 2002.
The second quarter of 2002 included a $0.2 million increase for a change in
estimated life. Expenses for the second quarter of 2002 included $0.2 million
for reserves against leases. Expenses for the second quarter of 2001 were
reduced by $0.5 million related to incentive compensation and other employees
related accruals and increased by charges establishing additional liabilities
for idle leased facilities of $0.6 million.
11
Operating loss. Operating loss decreased by $0.2 million from a loss of
$1.1 million in the second quarter of 2001 to an operating loss of $0.9 million
in the second quarter of 2002. The decreased operating loss resulted from a
decline in operating expenses in excess of the decline in revenue. The
operating loss increased compared to a $0.4 million operating profit in the
first quarter of 2002.
Provision (benefit) for income taxes. The Company's effective tax rate was
20.4% in the second quarter of 2002 compared to 273.6% in the second quarter of
2001. The tax rate related to the pre tax loss in the second quarter of 2002
was decreased due to the Company's decision not to record further tax benefits
from losses in America beginning in the second quarter of 2001. The effect of
not recording tax benefits in America decreased the benefit for income tax by
approximately $0.1 million. Tax expense is recorded on taxable income of Europe
and Asia at approximately 30%. The tax rate in the second quarter of 2001 was
due to the Company's decision to stop recording tax benefits related to tax
losses in America and to provide a valuation allowance against the tax loss.
At June 30, 2002, the Company had $6.7 million of deferred tax assets
primarily consisting of net operating loss carryforwards. The benefit from
utilization of net operating loss carryforwards could be subject to limitations
if significant ownership changes occur in the Company. The Company's ability to
realize the entire benefit of its deferred tax asset requires that the Company
achieve certain future earnings levels prior to the expiration of its NOL
carryforwards. The Company has recorded a $4.3 million valuation allowance
against deferred tax assets. The Company believes it will generate sufficient
taxable income to realize the remaining deferred tax assets. The Company could
be required to record a valuation allowance for a portion or all of its
remaining deferred tax asset if market conditions deteriorate and future
earnings are below, or are projected to be below, its current estimates and
management believes it is more likely than not the deferred tax assets will fail
to be realized.
Net loss. The Company's net loss decreased by $3.6 million from a $4.3
million loss in the second quarter of 2001 to a net loss of $0.7 million in the
second quarter of 2002 for reasons discussed above. Loss per share decreased
from a loss of $0.52 in the second quarter of 2001 to a loss per share of $0.09
in the second quarter of 2002.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Revenue. Revenue decreased by $3.8 million, or 23.7%, from $16.1 million
for the six months ended June 30, 2001 to $12.3 million for the six months
ended June 30, 2002, reflecting decreases primarily in Europe and America.
Product sales increased from $0.7 million in 2001 to $0.8 million in 2002.
Revenue from the Americas Division decreased by 51.1% from $3.7 million to $1.8
million; revenue from the EMEA Division decreased by 20.8% from $9.4 million to
$7.4 million; and revenue from the Asia Pacific Division remained consistent at
$3.1 million for both six-month periods. The Company ended the six months with
233 total employees, down from 265 employees at the end of the same period of
the prior year. Billable headcount has decreased to 180 at June 30, 2002
compared to 199 at June 30, 2001.
Gross profit. Gross profit decreased by $1.5 million, or 21.9%, from $6.6
million for the six months ended June 30, 2001 to $5.1 million for the six
months ended June 30, 2002 and increased as a percent of revenue from 40.7% in
2001 to 41.7% in 2002. The increase in the gross profit margin percentage is
primarily attributable to modest increases in staff utilization, bill rates and
improved recovery of travel costs offset partially by a decline in margin on
product sales.
Selling and marketing expense. Selling and marketing expense decreased
$0.8 million or 42.1%, from $2.0 million for the six months ended June 30, 2001
to $1.2 million for the same period of 2002. The decrease is the result of
reduced personnel from 22 at June 30, 2001 to 20 at June 30, 2002 and a reduced
expenditure for outside marketing professional fees and reduced commissions.
Development expense. Development expense decreased $551,000, or 87.2%,
from $632,000 for the six months ended June 30, 2001 to $81,000 for the same
period of 2002. Reductions resulted primarily from the reduction of personnel
from 7 in 2001 to 2 in 2002 and reduced spending on development of a learning
management system was completed in 2001.
12
General and administrative expense. General and administrative expense
decreased by $2.1 million, or 32.1%, from $6.5 million for the six months ended
June 30, 2001 to $4.4 million for the same period in 2002. The decrease in
expense is due primarily to a reduction in headcount in the areas of finance,
administration and human resources as a result of the cost containment plans.
General and administrative personnel total 30 at the end of six months ended
June 30, 2002 compared to 39 at the end of the same period of 2001. Expenditures
for facilities, professional fees and travel also decreased. Depreciation
expense included in general and administrative costs decreased from $1.2 million
in the six months ended June 30, 2001 to $1.1 million for the same period of
2002. The second quarter of 2002 included a $0.2 million increase for a change
in estimated life. Expenses for the first six months of 2002 included $0.2
million for reserves against leases. Expenses for the first six months of 2001
were reduced by $0.5 million related to incentive compensation and other
employees related accruals and increased by charges establishing additional
liabilities for idle leased facilities of $0.6 million.
Operating loss. Operating loss decreased by $2.0 million from a loss of
$2.6 million for the six months ended June 30, 2001 to an operating loss of $0.6
million for the same period of 2002. The decreased operating loss resulted
from a decline in operating expenses in excess of the decline in revenue.
Provision (benefit) for income taxes. The Company's effective tax rate was
6.9% for the six months ended June 30, 2002 compared to 99.1% for the same
period of 2001. The tax rate was increased due to the Company's decision not to
record further tax benefits from losses in America beginning in the second
quarter of 2001. Tax expense is recorded on taxable income of Europe and Asia
at approximately 30%. The effect of not recording tax benefits in America
decreased the benefit for income tax by approximately $0.3 million for the six
months ended June 30, 2002.
At June 30, 2002, the Company had $6.7 million of deferred tax assets
primarily consisting of net operating loss carryforwards. The benefit from
utilization of net operating loss carryforwards could be subject to limitations
if significant ownership changes occur in the Company. The Company's ability to
realize the entire benefit of its deferred tax asset requires that the Company
achieve certain future earnings levels prior to the expiration of its NOL
carryforwards. The Company has recorded a $4.3 million valuation allowance
against deferred tax assets. The Company believes it will generate sufficient
taxable income to realize the remaining deferred tax assets. The Company could
be required to record a valuation allowance for a portion or all of its
remaining deferred tax asset if market conditions deteriorate and future
earnings are below, or are projected to be below, its current estimates and
management believes it is more likely than not the deferred tax assets will fail
to be realized.
Net loss. The Company's net loss decreased by $4.6 million from a $5.3
million loss for the six months ended June 30, 2001 to a net loss of $0.7
million for the same period in 2002 for reasons discussed above. Loss per share
decreased from a loss of $0.63 for the six months ended June 30, 2001 to a loss
per share of $0.08 for the same period of 2002.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has historically financed its operations
and growth with cash flows from the sale of common stock, operations, short-term
borrowings under revolving line of credit arrangements and receivables-based
financing.
The Company's cash and cash equivalents were $0.7 million at June 30, 2002,
compared to $0.4 million at December 31, 2001. The Company's working capital
deficit was $325,000 at June 30, 2002 and $663,000 at December 31, 2001.
The Company's operating activities provided cash of $0.4 million for the
six months ended June 30, 2002, compared to a $1.1 million use of cash for the
same period in 2001. The increase in cash provided by operations resulted
primarily from operating profits, the related deferred tax effects and a
decrease in accounts receivable offset partially by a decrease in accounts
payable.
13
Investing activities provided $16,000 in cash in the six months ended June
30, 2002, compared to cash provided of $21,000 for the six months in 2001 as the
company liquidated unneeded and older equipment. The Company anticipates the
need to lease or acquire small amounts of computer equipment throughout 2002.
Financing activities used cash of $0.3 million for the six months ended
June 30, 2002 to pay down its line of credit compared to $0.9 million cash
provided by using the line of credit during the six months ended June 30, 2001.
The Company has a revolving line of credit from a foreign bank with a
maximum line of credit of approximately $1.1 million based on eligible foreign
accounts receivable. At June 30, 2002, the Company had borrowed $0.8 million
against this line.
The Company has an agreement with a bank, which provides for financing of
eligible U.S. accounts receivable under a purchase and sale agreement. The
maximum funds available under this agreement is $5.0 million. At June 30,
2002, the Company had sold no receivables pursuant to this agreement.
The Company believes its current cash balances, receivable-based financing,
revolving line of credit and cash provided by future operations will be
sufficient to meet the Company's working capital and cash needs for at least the
next 12-month period. However, there can be no assurance that such sources of
funds will be sufficient to meet these needs. The Company may seek additional
financing through 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
would be able to obtain additional financing on acceptable terms, if at all.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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
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 "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 but
not limited to: dependence on SAP AG and the ERP software market, risks
associated with management of a geographically dispersed organization,
fluctuating quarterly results, the need to attract and retain professional
employees, substantial competition, dependence on key personnel, risks
associated with management of growth, rapid technological change, limited
protection of proprietary expertise, methodologies and software, as well as
those set forth in the Risk Factors section and Management's Discussion and
Analysis section in the Company's Annual Report on Form 10-K and other filings
with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company from time to time holds short-term investments which consist of
variable rate municipal debt instruments. The Company uses a sensitivity
analysis technique to evaluate the hypothetical effect that changes in market
interest rates may have on the fair value of the Company's investments. At June
30, 2002, the Company did not hold any short-term investments.
Currency exchange rate fluctuations between the U.S. dollar and the Euro,
British pound, Canadian dollar, Singapore dollar, and the Australian dollar have
an impact on revenue and expenses of the Company's international operations.
Dramatic fluctuations could have a negative affect upon the Company's financial
condition.
14
DA CONSULTING GROUP, INC.
PART II-OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included in this form 10Q:
99.1 Certification Pursuant to 18 U.S.C Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
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 thereunto duly authorized.
DA CONSULTING GROUP, INC.
(Registrant)
Dated: August 9, 2002 By: /s/ Virginia L. Pierpont
-------------------------------------------------
Virginia L. Pierpont
President and Chief Executive Officer
By: /s/ Dennis C. Fairchild
-------------------------------------------------
Dennis C. Fairchild
Chief Financial Officer, Secretary and Treasurer
(Principal Financial and Accounting Officer)
15