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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 SEPTEMBER 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 November 12, 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 September 30, 2002 (unaudited) and
December 31, 2001 (audited) . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the Three Months ended
September 30, 2002 and 2001 (unaudited) . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Operations for the Nine Months ended
September 30, 2002 and 2001 (unaudited) . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the Nine Months ended
September 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. . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . 16
Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 17
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DA CONSULTING GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
SEPTEMBER 30, DECEMBER 31,
2002 2001
--------------- --------------
ASSETS (Unaudited) (Audited)
------
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . $ 459 $ 373
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . 3,766 4,053
Unbilled revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 38
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . 156 629
Prepaid expenses and other current assets. . . . . . . . . . . . . . . 395 352
--------------- --------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 4,985 5,445
--------------- --------------
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . 3,977 5,394
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208 177
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,291 5,990
Goodwill, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 206
--------------- --------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,667 $ 17,212
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Revolving line of credit . . . . . . . . . . . . . . . . . . . . . . . $ 1,015 $ 1,077
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,468 1,759
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,310 3,272
--------------- --------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 5,793 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 85
shares issued; 8,418,604 shares outstanding. . . . . . . . . . 85
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 34,039 34,039
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . (24,901) (20,782)
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . (1,399) (1,517)
Treasury stock, 153,173 shares at cost . . . . . . . . . . . . . . . . (1,522) (1,522)
--------------- --------------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . 6,302 10,303
--------------- --------------
Total liabilities and shareholders' equity . . . . . . . . . . $ 12,667 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
----------- ------------- ---------- -----------
Revenue. . . . . . . . . . . . . . . $ 5,893 $ 5,843 $ 18,210 $ 21,986
Cost of revenue. . . . . . . . . . . 3,414 3,332 10,594 12,897
----------- ------------- ---------- -----------
Gross profit . . . . . . . . . . . 2,479 2,511 7,616 9,089
Selling and marketing expense. . . . 614 606 1,798 2,651
Development expense. . . . . . . . . 40 28 121 660
General and administrative expense . 2,024 2,222 6,450 8,745
----------- ------------- ---------- -----------
Operating loss . . . . . . . . . . (199) (345) (753) (2,967)
----------- ------------- ---------- -----------
Interest income (expense), net . . . (10) (42) (21) (40)
Other expense, net . . . . . . . . . (22) (201) (76) (242)
----------- ------------- ---------- -----------
Total other expense, net . . . . . (32) (243) (97) (282)
----------- ------------- ---------- -----------
Loss before income taxes . . . . . (231) (588) (850) (3,249)
Provision (benefit) for income taxes 3,226 (30) 3,269 2,607
----------- ------------- ---------- -----------
Net loss . . . . . . . . . . . . . $ (3,457) $ (558) $ (4,119) $ (5,856)
=========== ============= ========== ===========
Basic loss per share . . . . . . . . $ (0.41) $ (0.07) $ (0.49) $ (0.70)
Weighted average shares outstanding. 8,419 8,419 8,419 8,419
Diluted loss per share . . . . . . . $ (0.41) $ (0.07) $ (0.49) $ (0.70)
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)
NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
---------- -----------
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,119) (5,856)
---------- -----------
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Loss on disposal of fixed assets. . . . . . . . . . . . . . . . . 25
Depreciation and amortization . . . . . . . . . . . . . . . . . . 1,447 1,869
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 3,269 2,807
Writedown of fixed assets and reserve for leasehold abandonment 157
Changes in operating assets and liabilities:
Accounts receivable and unbilled revenue. . . . . . . . . . . . 116 1,626
Prepaid expenses and other current assets . . . . . . . . . . . (43) 45
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . (31) 59
Accounts payable and accrued expenses . . . . . . . . . . . . . (627) (2,225)
---------- -----------
Total adjustments . . . . . . . . . . . . . . . . . . . . . 4,156 4,338
---------- -----------
Net cash provided by (used in) operating activities . . . . 37 (1,518)
---------- -----------
Cash flows from investing activities:
Proceeds from sale of property and equipment. . . . . . . . . . . . 24 274
Purchases of property and equipment . . . . . . . . . . . . . . . . (31) (30)
---------- -----------
Net cash provided by (used in) investing activities . . . . (7) 244
---------- -----------
Cash flows from financing activities:
---------- -----------
(Repayments) proceeds from revolving line of credit, net. . . . . . (62) 939
---------- -----------
Net cash provided by (used in) financing activities . . . . (62) 939
---------- -----------
Effect of changes in foreign currency exchange rate on
cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . 118 (284)
---------- -----------
Increase (decrease) in cash and cash equivalents. . . . . . 86 (619)
Cash and cash equivalents at beginning of period. . . . . . . . . . . 373 949
---------- -----------
Cash and cash equivalents at end of period. . . . . . . . . . . . . . $ 459 $ 330
========== ===========
Noncash activities:
Other liabilities 801
The accompanying notes are an integral part of the condensed consolidated financial statements.
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 September 30, 2002 and the nine
months ended September 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 asset 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 September 30, 2002. Goodwill amortization 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 143), which amends SFAS No.
19, Financial Accounting and Reporting by Oil and Gas Producing Companies, is
applicable to all companies. SFAS 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 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 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.
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections (SFAS 145). This statement
eliminates the current requirement that gains and losses on debt extinguishment
must be classified as extraordinary items in the income statement. Instead, such
gains and losses will be classified as extraordinary items only if they are
deemed to be unusual and infrequent, in accordance with the current GAAP
criteria for extraordinary classification. In addition, SFAS 145 eliminates an
inconsistency in lease accounting by requiring that modifications of capital
leases that result in reclassification as operating leases be accounted for
consistent with sale-leaseback accounting rules. The statement also contains
other nonsubstantive corrections to authoritative accounting literature. The
changes related to debt extinguishment will be effective for fiscal years
beginning after May 15, 2002, and the changes related to lease accounting will
be effective for transactions occurring after May 15, 2002. Adoption of this
standard will not have any immediate effect on the Company's consolidated
financial statements. The Company will apply this guidance prospectively.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS 146), which addresses accounting for
restructuring and similar costs. SFAS 146 supersedes previous accounting
guidance, principally Emerging Issues Task Force (EITF) Issue No. 94-3. The
Company will adopt the provisions of SFAS 146 for restructuring activities
initiated after December 31, 2002. SFAS 146 requires that the liability for
costs associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF No. 94-3, a liability for an exit cost was
recognized at the date of a company's commitment to an exit plan. SFAS 146 also
establishes that the liability should initially be measured and recorded at fair
value. Accordingly, SFAS 146 may affect the timing of recognizing future
restructuring costs as well as the amount recognized.
(3) MANAGEMENT'S RESTRUCTURING AND LIQUIDITY
During the second quarter of 2000, management began to restructure the
global operations of the Company. As part of the plan, management was required
to downsize the Company based upon current and future projected operating
results. Some of the restructuring initiatives taken by management were as
follows:
7
- 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 and third
quarters 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 September 30, 2002, the Company had $3.4 million of deferred tax assets
primarily consisting of net operating loss carryforwards ("NOL"). 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 assets requires that
the Company achieve certain future earnings levels prior to the expiration of
its NOL carryforwards. The Company has recorded a $7.6 million valuation
allowance against deferred tax assets. A increase in the valuation allowance is
a $3.3 million was recorded in the third quarter of 2002. 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 assets 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 September 30, 2002, the Company had used approximately $1.0
million of the credit facility. The interest rate on this line of credit was 6%
at September 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 $5.0 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 September 30, 2002, the Company had sold no accounts receivable
pursuant to this agreement.
(6) RESTRUCTURING CHARGE
During the three months 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
8
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 three months ended March 31, 2000. The
Company recognized approximately $1.5 million expense attributable to
involuntary employee termination benefits during the three months ended March
31,2000, 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 three months ended
June 30, 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 nine months ending September 30, 2002. At September 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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net loss. . . . . . . . . . . . . $ (3,457) $ (558) $ (4,119) $ (5,856)
---------- ---------- ---------- ----------
Other comprehensive income (loss) (72) (69) 118 (284)
Comprehensive loss. . . . . . . . $ (3,529) $ (627) $ (4,001) $ (6,140)
========== ========== ========== ==========
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 September 30, 2002 and 2001 (in thousands, except per
share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Basic loss per share. . . . . . . . . . . . . . . . . . . $ (0.41) $ (0.07) $ (0.49) $ (0.70)
========= ========= ========= =========
Net loss $ (3,457) $ (558) $ (4,119) $ (5,856)
========= ========= ========= =========
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 $ (0.41) $ (0.07) $ (0.49) $ (0.70)
========= ========= ========= =========
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
divisions (in thousands):
EUROPE,
MIDDLE EAST
AMERICAS & AFRICA ASIA PACIFIC TOTAL
---------- ------------ -------------- --------
THREE MONTHS ENDED SEPTEMBER 30, 2002
Revenue. . . . . . . . . . . . . . $ 1,433 $ 3,656 $ 804 $ 5,893
Operating income (loss). . . . . (70) 310 (439) (199)
THREE MONTHS ENDED SEPTEMBER 30, 2001
Revenue . . . . . . . . . . . . . . $ 810 $ 3,699 $ 1,334 $ 5,843
Operating income (loss). . . . . (434) 57 32 (345)
NINE MONTHS ENDED SEPTEMBER 30, 2002
Revenue . . . . . . . . . . . . . . $ 3,219 $ 11,091 $ 3,900 $18,210
Operating income (loss) . . . . . . (767) 286 (272) (753)
Total assets. . . . . . . . . . . . 3,713 6,438 2,516 12,667
NINE MONTHS ENDED SEPTEMBER 30, 2001
Revenue . . . . . . . . . . . . . . $ 4,462 $ 13,089 $ 4,435 $21,986
Operating income (loss) . . . . . . (3,721) 678 76 (2,967)
Total assets. . . . . . . . . . . . 6,709 7,685 3,120 17,514
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.
CRITICAL ACCOUNTING POLICIES
Income Taxes
The Company recognizes deferred income taxes for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are determined based on
the difference between the financial statement carrying amount and tax basis of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. A valuation allowance is provided
against deferred tax assets which management considers more likely than not will
fail to be realized.
For the years ended December 31, 1999, 2000 and 2001, the Company incurred
losses before income taxes of $11.3, $20.6 and $3.2 million, respectively. The
Company incurred a loss before income taxes of $0.9 million for the nine months
ended Septemeber 30, 2002. During the above periods, the Company generated net
operating loss carryforwards for tax reporting purposes of approximately $32.1
million recording $11.0 million of deferred tax assets of which the Company has
recorded a valuation allowance of approximately $7.6 million resulting in $3.4
million of deferred tax assets net of the allowance based upon managements
estimate of future taxable income in the United States, against the deferred tax
asset generated from the net operating loss carryforwards.
There can be no assurance that management's restructuring plan in the United
States will yield sufficient future taxable income necessary to utilize the net
operating loss carryforwards recorded as a deferred tax asset by the Company.
The ultimate realization of the deferred tax asset is dependent upon
management's ability to grow the revenues of the Company in the United States,
adhere to the cost saving measures put in place during the restructuring and
generate sufficient future taxable income. Any future decline, if any, in the
demand for the Company's services or the Company's inability to return to
profitability in the United States will result in the Company being required to
increase the valuation allowance against the deferred tax asset which would
adversely affect the Company's financial position and operating results.
Long-lived Assets
Management reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount exceeds the fair value of the assets which considers the discounted
future net cash flows. Assets to be disposed of are reported at the lower of
the carrying amount or the fair value less costs of disposal.
11
Revenue Recognition
The majority of the Company's contracts with clients are based on time and
expenses incurred with the remainder of the revenue generated from fixed price
contracts. Accordingly, service revenue under both types of contracts is
recognized as services are performed and the realization of the revenue is
assured. Contract costs include direct labor costs and reimbursable expenses,
and those indirect costs related to contract performance such as indirect labor.
Selling, general and administrative costs are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in job performance, job conditions
and estimated profitability may result in revisions to costs and income and are
recognized in the period in which the revisions are determined. Unbilled revenue
represents the revenue earned in excess of amounts billed and deferred income
represents billings in excess of revenue earned. Revenue includes reimbursable
expenses directly incurred in providing services to clients. The Company
recognizes product revenue upon shipment to the client if no further services
are required.
Accounting for Stock Options
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS No. 123"), which sets forth accounting and disclosure
requirements for stock option and other stock-based compensation plans. The
statement encourages, but does not require, companies to record stock-based
compensation expense using a fair-value method, rather than the intrinsic-value
method prescribed by Accounting Principles Board ("APB") Opinion No. 25. The
Company has adopted only the disclosure requirements of SFAS No. 123 and has
elected to continue to record stock-based compensation expense using the
intrinsic-value approach prescribed by APB No. 25. Accordingly, the Company
computes compensation cost as the amount by which the intrinsic vale of the
Company's common stock exceeds the exercise price on the date of grant. The
amount of compensation cost, if any, is charged to income over the vesting
period.
Property and Equipment
Property and equipment are stated at cost. Expenditures for substantial
renewals and betterments are capitalized, while repairs and maintenance are
charged to expense as incurred. Assets are depreciated or amortized using the
straight-line method for financial reporting purposes and accelerated methods
for tax purposes over their estimated useful lives. Computer equipment is
depreciated over a useful life of three to five years. Furniture is depreciated
over a seven year useful life. Leasehold improvements are amortized over the
term of the lease. In 1999 the Company capitalized $3.3 million in
implementation costs related to the Company's primary information system.
Purchased software and internal software development costs related to the
Company's primary information system are amortized over a seven year period.
Gains or losses from disposals of property and equipment are reflected in other
expense.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
Revenue. Revenue increased by $0.1 million, or 0.9%, from $5.8 million in
the third quarter of 2001 to $5.9 million in the third quarter of 2002,
reflecting an increase in America and decreases in Asia. Product sales
increased from $0.1 million in 2001 to $0.3 million in 2002. Revenue from the
Americas Division increased by 76.9% from $0.8 million to $1.4 million; revenue
from the EMEA Division remained at $3.7 million; and revenue from the Asia
Pacific Division decreased by 39.7% from $1.3 million to $0.8 million. The
Company ended the third quarter with 241 total employees, down from 268
employees at the end of the same period of the prior year. Billable employees
total 186 at September 30, 2002 compared to 209 at September 30, 2001. Revenue
for the third quarter of 2002 was 8.7% greater than revenue in the second
quarter of 2002 due to project delays in the second quarter of 2002. The
Company expects revenue to decline in the fourth quarter of 2002 but expects
improvement in the first quarter of 2003.
Gross profit. Gross profit decreased by $32,000, or 1.3%, totaling $2.5
million in the third quarter of 2001 and the third quarter of 2002 and decreased
as a percent of revenue from 43.0% in the third quarter of 2001 to 42.1% in the
third quarter of 2002. The decrease in the gross profit margin percentage is
primarily attributable to decreased project and product margins offset partially
by improved staff utilization.
12
Selling and marketing expense. Selling and marketing expense for the third
quarter of 2002 and 2001 was $0.6 million reflecting 22 sales and marketing
personnel in 2002 and 23 sales and marketing personnel in 2001.
Development expense. Development expense increased $12,000, or 42.9%,
from $28,000 in the third quarter of 2001 to $40,000 in the third quarter of
2002. Development expense includes two persons responsible for the creation of
tools and methodology used by consultants at client projects.
General and administrative expense. General and administrative expense
decreased by $0.2 million, or 8.9%, from $2.2 million in the third quarter of
2001 to $2.0 million in the third quarter of 2002 The reduction in general and
administrative expense was largely due to depreciation expense which decreased
from $0.6 million in the third quarter of 2001 to $0.3 million in the third
quarter of 2002.
Operating loss. Operating loss decreased by $0.1 million from a loss of
$0.3 million in the third quarter of 2001 to an operating loss of $0.2 million
in the third quarter of 2002. The decreased operating loss resulted from a
decline in depreciation. The operating loss decreased compared to a $0.9
million operating loss in the second quarter of 2002.
Provision (benefit) for income taxes. 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 and the decision to provide an
additional $3.3 million valuation allowance against previously recorded deferred
tax assets. The decision was based upon a continued slow market for the
Company's services in America and incremental expenses the Company believes will
be needed to reach continued profitability. Tax expense or benefit is recorded
on taxable income of Europe and Asia at approximately 30%.
At September 30, 2002, the Company had $3.4 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 assets requires that the Company
achieve certain future earnings levels prior to the expiration of its NOL
carryforwards. At September 30, 2002, the Company has recorded a $7.6 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 assets 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 increased by $2.9 million from a $0.6
million loss in the third quarter of 2001 to a net loss of $3.5 million in the
third quarter of 2002 largely due to the decision to record an additional
valuation allowance against deferred tax assets offset partially by reduced
expenses. Loss per share increased from a loss of $0.07 in the third quarter of
2001 to a loss per share of $0.41 in the third quarter of 2002.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2001
Revenue. Revenue decreased by $3.8 million, or 17.2%, from $22.0 million
for the nine months ended September 30, 2001 to $18.2 million for the nine
months ended September 30, 2002, reflecting decreases in all divisions. Product
sales increased from $0.8 million in 2001 to $1.1 million in 2002. Revenue from
the Americas Division decreased by 27.9% from $4.5 million to $3.2 million;
revenue from the EMEA Division decreased by 15.3% from $13.1 million to $11.1
million; and revenue from the Asia Pacific Division decreased by 12.1% from $4.4
million to $3.9 million. The Company ended the nine months with 241 total
employees, down from 268 employees at the end of the same period of the prior
year. Billable headcount has decreased to 186 at September 30, 2002 compared to
209 at September 30, 2001.
Gross profit. Gross profit decreased by $1.5 million, or 16.2%, from $9.1
million for the nine months ended September 30, 2001 to $7.6 million for the
nine months ended September 30, 2002 and increased as a percent of revenue from
41.3% in 2001 to 41.8% in 2002. The increase in the gross profit margin
percentage is primarily attributable to modest increases in staff utilization
offset partially by a modest decline in project margin and margin on product
sales.
13
Selling and marketing expense. Selling and marketing expense decreased
$0.9 million or 32.2%, from $2.7 million for the nine months ended September 30,
2001 to $1.8 million for the same period of 2002. The decrease is the result of
reduced personnel costs, recruiting fees and a reduced expenditure for outside
marketing professional fees and reduced commissions. Sales and marketing
personnel total 22 at September 30, 2002 compared to 23 at September 2001.
Development expense. Development expense decreased $0.6 million, or
81.7%, from $0.7 million for the nine months ended September 30, 2001 to $0.1
million for the same period of 2002. The decrease resulted primarily from
reduction of personnel from 7 in 2001 to 2 in 2002 and reduced spending on
development of a learning management system which was completed in 2001.
General and administrative expense. General and administrative expense
decreased by $2.2 million, or 26.3%, from $8.7 million for the nine months ended
September 30, 2001 to $6.5 million for the same period in 2002. The decrease in
expense is due primarily to a reduction in personnel, facilities, professional
fees and depreciation. General and administrative personnel total 30 at the
end of nine months ended September 30, 2002 compared to 35 at the end of the
same period of 2001. Depreciation expense included in general and
administrative costs decreased from $1.8 million in the nine months ended
September 30, 2001 to $1.4 million for the same period of 2002. The third
quarter of 2002 included a $0.2 million increase for a change in estimated life.
Expenses for the first 9 months of 2001 included $0.6 million in charges for the
termination of leases offset by the reversal of employee related reserves
totaling $0.5 million.
Operating loss. Operating loss decreased by $2.2 million from a loss of
$3.0 million for the nine months ended September 30, 2001 to an operating loss
of $0.8 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 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 and the decision to provide an
additional $3.3 million valuation allowance against previously recorded deferred
tax assets. The decision was based upon a continued slow market for the
Company's services in America and incremental expenses the company believes will
be needed to reach continued profitability. Tax expense or benefit is recorded
on taxable income of Europe and Asia at approximately 30%.
At September 30, 2002, the Company had $3.4 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 assets requires that the Company
achieve certain future earnings levels prior to the expiration of its NOL
carryforwards. At September 30, 2002, the Company has recorded a $7.6 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 assets 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 $1.8 million from a $5.9
million loss for the nine months ended September 30, 2001 to a net loss of $4.1
million for the same period in 2002 largely due to expense reductions offset
partially by a decline in revenue. Loss per share decreased from a loss of $0.70
for the nine months ended September 30, 2001 to a loss per share of $0.49 for
the same period of 2002.
14
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 $0.5 million at September 30,
2002, compared to $0.4 million at December 31, 2001. The Company's working
capital deficit was $0.8 million at September 30, 2002 and $0.7 million at
December 31, 2001.
The Company's operating activities provided cash of $ 37,000 for the nine
months ended September 30, 2002, compared to a $1.5 million use of cash for the
same period in 2001. The increase in cash provided by operations resulted
primarily from decreased operating losses and a decrease in accounts receivable,
offset partially by a decrease in accounts payable and an increase in valuation
allowances for deferred taxes.
Investing activities used $7,000 in cash in the nine months ended September
30, 2002, compared to cash provided of $0.2 million for the nine 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
and 2003.
Financing activities used cash of $0.1 million for the nine months ended
September 30, 2002 to pay down its line of credit compared to $0.9 million cash
provided by using the line of credit during the nine months ended September 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 September 30, 2002, the Company had borrowed $1.0
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 September 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.
15
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
September 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.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures - The Corporation's
Principal Executive Officer and Principal Financial Officer have reviewed and
evaluated the effectiveness of the Corporation's disclosure controls and
procedures [as defined in Rules 240.13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act)] as of a date within ninety days before
the filing date of this quarterly report. Based on that evaluation, the
Principal Executive Officer and the Principal Financial Officer have concluded
that the Corporation's disclosure controls and procedures are effective,
providing them with material information relating to the Corporation as required
to be disclosed in the reports the Corporation files or submits under the
Exchange Act on a timely basis.
(b) Changes in internal controls - There were no significant changes in the
Corporation's internal controls or in other factors that could significantly
affect the Corporation's disclosure controls and procedures subsequent to the
date of their evaluation, nor were there any significant deficiencies or
material weaknesses in the Corporation's internal controls.
16
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 10-Q:
99.1 Chief Executive Officer Certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
99.2 Chief Financial Officer Certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
99.3 Chief Executive Officer Certification pursuant to Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.4 Chief Financial Officer Certification pursuant to 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: October 30, 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)
17