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UNITED STATES
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 JUNE 30, 2003
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 77057
Houston, Texas (Zip Code)
(Address of principal executive offices)
(713) 361-3000
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
NUMBER OF SHARES OUTSTANDING OF COMMON STOCK AS OF AUGUST 14, 2003: 8,418,604
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DA CONSULTING GROUP, INC.
INDEX
PART I
FINANCIAL INFORMATION
PAGE NO.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2003
(unaudited) and December 31, 2002 . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the
Three Months ended June 30, 2003 and 2002 (unaudited) . . . . . 4
Condensed Consolidated Statements of Operations for the
Six Months ended June 30, 2003 and 2002 (unaudited) . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the
Six Months ended June 30, 2003 and 2002 (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. . . . 15
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . 15
PART II
OTHER INFORMATION
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . 16
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DA CONSULTING GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
JUNE 30, DECEMBER 31,
2003 2002
------------ --------------
ASSETS (Unaudited)
------
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 240 $ 576
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . . 2,219 3,615
Unbilled revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 50
Deferred tax asset. . . . . . . . . . . . . . . . . . . . . . . . . . . - 160
Prepaid expenses and other current assets 501 255
------------ --------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 3,052 4,656
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . 3,080 3,670
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 204
Deferred tax asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . - 840
Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 206
------------ --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,551 $ 9,576
============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Revolving line of credit . . . . . . . . . . . . . . . . . . . . . . . $ 1,396 $ 1,335
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,564 1,268
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,201 3,319
------------ --------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . 6,161 5,922
------------ --------------
Lease abandonment liabilities . . . . . . . . . . . . . . . . . . . . . . 210 396
------------ --------------
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . 130 130
------------ --------------
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 . . . . . . . . . . . . . . . . . . . . . . . . . . (31,276) (28,145)
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . . (1,276) (1,329)
Treasury stock, 153,173 shares at cost. . . . . . . . . . . . . . . . . (1,522) (1,522)
------------ --------------
Total shareholders' equity. . . . . . . . . . . . . . . . . . . . . . 50 3,128
------------ --------------
Total liabilities and shareholders' equity . . . . . . . . . . . . . $ 6,551 $ 9,576
============ ==============
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,
2003 2002 2003 2002
-------- ------- -------- --------
Revenue . . . . . . . . . . . . . . . . $ 4,806 $5,419 $ 9,666 $12,317
Cost of revenue . . . . . . . . . . . . 3,439 3,405 6,799 7,180
-------- ------- -------- --------
Gross profit. . . . . . . . . . . . . 1,367 2,014 2,867 5,137
Selling and marketing expense . . . . . 604 606 1,234 1,184
Development expense . . . . . . . . . . 33 36 62 81
General and administrative expense. . . 1,818 2,305 3,548 4,426
-------- ------- -------- --------
Operating loss. . . . . . . . . . . . (1,088) (933) (1,977) (554)
-------- ------- -------- --------
Interest expense, net . . . . . . . . . (26) (5) (34) (10)
Other expense, net. . . . . . . . . . . (24) (2) (57) (55)
-------- ------- -------- --------
Total other expense, net. . . . . . . (50) (7) (91) (65)
-------- ------- -------- --------
Loss before taxes . . . . . . . . . . (1,138) (940) (2,068) (619)
Provision (benefit) for income taxes. . - (192) 1,063 43
-------- ------- -------- --------
Net loss. . . . . . . . . . . . . . . $(1,138) $ (748) $(3,131) $ (662)
======== ======= ======== ========
Basic loss per share. . . . . . . . . . $ (0.14) $(0.09) $ (0.37) $ (0.08)
Weighted average shares outstanding . . 8,419 8,419 8,419 8,419
Diluted loss per share. . . . . . . . . $ (0.14) $(0.09) $ (0.37) $ (0.08)
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,
2003 2002
-------- --------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,131) $ (662)
-------- --------
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Loss on disposal of equipment. . . . . . . . . . . . . . . . . . . . . . . . 11 25
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . 625 1,114
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,063 43
Changes in operating assets and liabilities:
Accounts receivable, net and unbilled revenue . . . . . . . . . . . . . . 1,354 1,040
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . (246) (60)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10) (35)
Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . . . (116) (1,043)
-------- --------
Total adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,681 1,084
-------- --------
Net cash (used in) provided by operating activities. . . . . . . . . . (450) 422
-------- --------
Cash flows provided by investing activities:
Proceeds from sale of property and equipment . . . . . . . . . . . . . . . . . 16 20
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . (16) (4)
-------- --------
Net cash provided by investing activities. . . . . . . . . . . . . . . - 16
-------- --------
Cash flows provided by (used in) financing activities:
(Repayment) proceeds from revolving line of credit. . . . . . . . . . . . . . 61 (324)
-------- --------
Effect of changes in foreign currency exchange rate on cash and cash equivalents 53 190
-------- --------
(Decrease) increase in cash and cash equivalents . . . . . . . . . . . (336) 304
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . 576 373
-------- --------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . $ 240 $ 677
======== ========
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 " and, together with its subsidiaries, the
"Company") is an international provider of employee education and software
solutions to companies investing in business information technology. Through its
offices in six 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 DACG and all wholly 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, 2002 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 (the "SEC"). 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 six months ended June 30, 2003 are
not necessarily indicative of the results which will be realized for the year
ending December 31, 2003.
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 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 adopted 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. Adoption of SFAS 146 in
the first quarter of 2003 did not have a material effect on the Company's
financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure (SFAS 148), which amended SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS 123). The new standard provides
alternative methods of transition for a voluntary change to the fair-value-based
method of accounting for stock-based employee compensation. Additionally, the
statement amends the disclosure requirements of SFAS 123 to require prominent
disclosures in the annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. This statement is effective for financial statements
for fiscal years ending after December 15, 2002. In compliance with SFAS 148,
DACG has elected to continue to follow the intrinsic value method in accounting
for its stock-based employee compensation arrangement as defined by Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employee,
and has made the applicable disclosures to the condensed consolidated financial
statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and
6
Hedging Activities, which amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. This statement is effective for contracts entered into or
modified after June 3, 2003, and for hedging relationships designated after June
30, 2003. We do not expect that the adoption of this Statement will have a
material impact on our financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (SFAS 150).
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of these instruments
were previously classified as temporary equity. SFAS 150 will be effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
shall be effective at the beginning of the first interim period beginning after
June 15, 2003. The adoption of this Statement will not have a material impact
on our financial position or results of operations.
3) LIQUIDITY, GOING CONCERN AND MANAGEMENTS PLANS
Significant losses were incurred for fiscal years 1999 through 2002. The
Company incurred significant losses in the first two quarters of 2003. Revenue
in the second quarter of 2003 was short of expectations due to a large project
cancellation following the sale of a customer's business and the continued
difficult technology market. The Company has reduced both facilities costs and
staff. The savings will take effect in the third and fourth quarters of 2003.
The Company is discussing possible merger opportunities and equity transactions.
Continued losses and the uncertainty of the Company's ability to obtain
additional capital raise substantial doubt about the Company's ability to
continue as a going concern.
To the extent a merger is not completed, the cash generated from the line
of credit, possible equity transactions, receivables-based financing and
continued operations are insufficient to meet the Company's current working
capital needs, the Company will have to raise additional capital. No assurance
can be given that additional funding will be available or, if available, will be
on terms acceptable to the Company. Uncertainty regarding the amount and timing
of any proceeds from the Company's plans to obtain additional capital raises
substantial doubt about the Company's ability to continue as a going concern.
The accompanying condensed consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
During the second quarter of 2003 the Company was not able to maintain
compliance with its Europe-based financing agreement on a consistent basis. At
June 30, 2003 the Company had borrowed $1,396,000 against the credit facility
and had $1,544,000 in collateralized receivables. The agreement required
collateralization of 200% of receivables or $2,792,000. On July 11, 2003 the
Company amended its European credit facility, increasing the line to $1.6
million (1 million pounds), secured by a mortgage deed against all assets of the
European Division, guaranteed by the Company and the personal guaranty of the
CEO. This cured non-compliance and brought the Company back into compliance with
the credit facility. The line expires on October 31, 2003 unless renewed. The
line may not exceed 133% of eligible European receivables. At August 12, 2003
the Company had borrowed $1,302,000 against the credit facility and had
$1,311,000 in collateralized receivables.
At July 31, 2003 the Company had sold $0.2 million U. S. accounts
receivables under a receivable based financing agreement representing all
eligible U. S. accounts receivable.
(4) INCOME TAXES
At June 30, 2003 the Company had $12.0 million of net 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 net
7
operating loss carryforwards. The Company has recorded a $12.0 million
valuation allowance against deferred tax assets resulting in a net carrying
value of zero.
(5) DEBT
Revolving Line of Credit
During the second quarter of 2003 the Company was not able to maintain
compliance with its Europe-based financing agreement on a consistent basis. At
June 30, 2003 the Company had borrowed $1,396,000 against the credit facility
and had $1,544,000 in collateralized receivables. The agreement required
collateralization of 200% of receivables or $2,792,000. On July 11, 2003 the
Company amended its European credit facility, increasing the line to $1.6
million (1 million pounds), secured by a mortgage deed against all assets of the
European Division, guaranteed by the Company and the personal guaranty of the
CEO. This cured non-compliance and brought the Company back into compliance with
the credit facility. The line expires on October 31, 2003 unless renewed. The
line may not exceed 133% of eligible European receivables. At August 12, 2003
the Company had borrowed $1,302,000 against the credit facility and had
$1,311,000 in collateralized receivables.
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 $2.5 million. The agreement
allows for the bank to request repurchase of an account receivable under certain
conditions. The bank has never requested repurchase of an account receivable.
At June 30 and July 31, 2003, the Company had sold $0.2 million eligible U.S.
accounts receivable pursuant to this agreement.
(6) LEASE LIABILITIES
The Company has recorded liabilities related to losses on leases abandoned
and termination liabilities on leases requiring the leased property be returned
to its original condition. During the six months ended June 30, 2003 payments
charged to the reserve totaled $0.1 million, and the reserve was reduced by $0.1
million during the first quarter of 2003 resulting in a reduction of general and
administrative expenses. The balance remaining at June 30, 2003 was $0.8 million
of which $0.2 million is recorded as long-term liability. During the six months
ended June 30, 2002 payments against the reserve totaled $0.3 million and the
reserve was increased $0.2 million.
(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 generally accepted accounting principles 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
------------------------------------
2003 2002 2003 2002
-------- ------ -------- ------
Net loss. . . . . . . . . . . . . . . . $(1,138) $(748) $(3,131) $(662)
Other comprehensive income (loss) . . . (21) 178 53 190
-------- ------ -------- ------
Comprehensive loss. . . . . . . . . . . $(1,159) $(570) $(3,078) $(472)
======== ====== ======== ======
(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 earnings 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.
8
The following table summarizes the Company's computation of loss per share
for the periods ended June 30, 2003 and 2002 (in thousands, except per share
amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------
2003 2002 2003 2002
-------- ------- -------- -------
Basic loss per share . . . . . . . . . . . . . . . . . . $ (0.14) $(0.09) $ (0.37) $(0.08)
======== ======= ======== =======
Net loss $(1,138) $ (748) $(3,131) $ (662)
======== ======= ======== =======
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 $ (0.14) $(0.09) $ (0.37) $(0.08)
======== ======= ======== =======
Approximately 1,870,000 antidilutive options and 3,000,000 antidilutive
warrants were excluded from the calculation of diluted earnings per share for
the periods ended June 30, 2003. 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 ended June 30, 2002.
(9) PRO FORMA NET LOSS AND LOSS PER SHARE
Had the compensation cost for the Company's stock-based compensation plan
been determined consistent with SFAS 123, the Company's net loss per share at
June 30, 2003 and 2002 would approximate the pro forma amounts below (in
thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ------------------
JUNE 30, JUNE 30,
------------------ ------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net loss, as reported $(1,138) $ (748) $(3,131) $ (662)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (101) (263) (201) (525)
-------- -------- -------- --------
Pro forma $(1,239) $(1,011) $(3,332) $(1,187)
Basic and diluted loss per share:
As reported $ (0.14) $ (0.09) $ (0.37) $ (0.08)
Pro forma (0.15) (0.12) (0.40) (0.14)
9
(10) 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, 2003
Revenue $ 1,218 $ 2,573 $ 1,015 $ 4,806
Operating loss . . . . . . . . . $ (98) $ (701) $ (289) (1,088)
THREE MONTHS ENDED JUNE 30, 2002
Revenue $ 1,080 $ 2,976 $ 1,363 $ 5,419
Operating loss . . . . . . . . . (254) (641) (38) (933)
SIX MONTHS ENDED JUNE 30, 2003
Revenue. . . . . . . . . . . . . $ 2,521 $ 4,660 $ 2,485 $ 9,666
Operating loss . . . . . . . . . (156) (1,720) (101) (1,977)
Total assets . . . . . . . . . . 809 4,076 1,666 6,551
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
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 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 fiscal years 1999 through 2002 the Company incurred significant
losses before income taxes. The Company has incurred additional significant
losses to date in 2003. At June 30, 2003, the Company had generated net
operating loss carryforwards for tax reporting purposes of approximately $35
million recording $12 million of deferred tax assets of which the Company has
recorded a valuation allowance against the deferred tax asset generated from the
net operating loss carryforwards of approximately $12 million. This resulted in
no deferred tax assets from net operating loss carryforwards based upon
management's estimate of future taxable income.
10
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.
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 FASB issued Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 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 APB Opinion No. 25. The
Company has adopted only the disclosure requirements of SFAS 123, as amended by
SFAS 148, 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 value 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
Revenue. Revenue decreased by $0.6 million, or 11.3%, from $5.4 million
in the second quarter of 2002 to $4.8 million in the second quarter of 2003,
reflecting decreases in Europe and Asia and a slight increase in America.
Product sales increased from $0.2 million in 2002 to $0.3 million in 2003.
Revenue from the Americas Division increased by 12.8% from $1.1 million to $1.2
million; revenue from the EMEA Division decreased by 13.5% from
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$3.0 million to $2.6 million; and revenue from the Asia Pacific Division
decreased by 25.5% from $1.4 million to $1.0 million. The Company ended the
second quarter with 198 total employees, down from 233 employees at the end of
the same period of the prior year. Billable employees total 153 at June 30, 2003
compared to 180 at June 30, 2002.
Gross profit. Gross profit decreased by $0.6 million, or 32.1%, from $2.0
million in the second quarter of 2002 to $1.4 million in the second quarter of
2003 and decreased as a percent of revenue from 37.2% in the second quarter of
2002 to 28.4% in the second quarter of 2003. The decrease in the gross profit
margin percentage is primarily attributable to decreased staff utilization and
pricing.
Selling and marketing expense. Selling and marketing expense remained
consistent at $0.6 million for both periods. Dedicated sales and marketing
personnel have been reduced at the end of the second quarter 2003 to 16 people
as compared to 22 at the end of the second quarter of 2002. The Company will
use more consulting staff in the sales and marketing effort in the future.
Development expense. Development expense decreased $3,000 or 8.3%, from
$36,000 in the second quarter of 2002 to $33,000 in the second quarter of 2003.
General and administrative expense. General and administrative expense
decreased by $0.5 million, or 21.1%, from $2.3 million in the second quarter of
2002 to $1.8 million in the second quarter of 2003. The decrease in general and
administrative cost was primarily due to a decrease in depreciation and
facilities costs. Depreciation expense included in general and administrative
costs decreased from $0.7 million in the second quarter of 2002 to $0.3 million
in the second quarter of 2003. 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. General and
administrative personnel total 27 at the end of the second quarter of 2003
compared to 30 at the end of the second quarter of 2002.
Operating loss. Operating loss increased by $0.2 million from a loss of
$0.9 million in the second quarter of 2002 to an operating loss of $1.1 million
in the second quarter of 2003. The increased operating loss resulted from
decreased sales and gross margins partially offset by a decrease in general and
administrative costs.
Provision (benefit) for income taxes. The Company did not record an income
tax benefit in the second quarter of 2003 related to operating losses based upon
management's estimate of future taxable income, against the deferred tax asset
generated from the net operating loss carryforwards. Tax benefits were recorded
in the second quarter of 2002 related to Europe and Asia using a 30% tax rate.
At June 30, 2003 the Company had $12.0 million of net 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 net
operating loss carryforwards. The Company has recorded a $12.0 million
valuation allowance against deferred tax assets resulting in a net carrying
value of zero.
Net loss. The Company's net loss increased by $0.4 million from a $0.7
million loss in the second quarter of 2002 to a net loss of $1.1 million in the
second quarter of 2003 for reasons discussed above. Loss per share increased
from a loss of $0.09 in the second quarter of 2002 to a loss per share of $0.14
in the second quarter of 2003.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Revenue. Revenue decreased by $2.6 million, or 21.5%, from $12.3 million
for the six months ended June 30, 2002 to $9.7 million for the six months ended
June 30, 2003, reflecting decreases primarily in Europe and Asia and an increase
in Americas. Product sales decreased from $0.8 million in 2002 to $0.5 million
in 2003. Revenue from the Americas Division increased by 41.1% from $1.8
million to $2.5 million; revenue from the EMEA Division decreased by 37.3% from
$7.4 million to $4.7 million; and revenue from the Asia Pacific Division
decreased 19.7% from $3.1 million in 2002 to $2.5 million in 2003. The Company
ended the six months with 198 total employees,
12
down from 233 employees at the end of the same period of the prior year.
Billable headcount has decreased to 153 at June 30, 2003 compared to 180 at June
30, 2002.
Gross profit. Gross profit decreased by $2.2 million, or 44.2%, from $5.1
million for the six months ended June 30, 2002 to $2.9 million for the six
months ended June 30, 2003 and decreased as a percent of revenue from 41.7% in
2002 to 29.7% in 2003. The decrease in the gross profit margin percentage is
primarily attributable to decreased staff utilization and pricing.
Selling and marketing expense. Selling and marketing expense was $1.2
million for both six months ended June 30, 2002 and 2003. Dedicated sales and
marketing personnel have been reduced at the end of the second quarter 2003 to
16 people as compared to 22 at the end of the second quarter of 2002. The
Company will use more consulting staff in the sales and marketing effort in the
future.
Development expense. Development expense decreased $19,000, or 23.5%,
from $81,000 for the six months ended June 30, 2002 to $62,000 for the same
period of 2003. Reductions resulted primarily from the reduction of
compensation costs. Development costs include 2 people.
General and administrative expense. General and administrative expense
decreased by $0.9 million, or 19.8%, from $4.4 million for the six months ended
June 30, 2002 to $3.5 million for the same period in 2003. The decrease in
expense is due primarily to a reduction in headcount in compensation,
depreciation and facilities. General and administrative personnel total 27 at
the six months ended June 30, 2003 compared to 30 at the end of the same period
of 2002. Depreciation expense included in general and administrative costs
decreased from $1.1 million in the six months ended June 30, 2002 to $0.6
million for the same period of 2003. 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 charge for reserves against leases.
Expenses for the first six months of 2003 were reduced by $0.1 million credit
related to lease reserves.
Operating loss. Operating loss increased by $1.4 million from a loss of
$0.6 million for the six months ended June 30, 2002 to an operating loss of $2.0
million for the same period of 2003. The increased operating loss resulted
from a decrease in revenue and gross margin only partially offset by a decline
in general and administrative expenses.
Provision (benefit) for income taxes. The Company did not record an income
tax benefit in the second quarter of 2003 related to operating losses based upon
management's estimate of future taxable income, against the deferred tax asset
generated from the net operating loss carryforwards. Income tax expense in the
first quarter of 2003 resulted from reserving previously recorded tax benefits.
Tax benefits were recorded in the second quarter of 2002 related to Europe and
Asia using a 30% tax rate.
At June 30, 2003 the Company had $12.0 million of net 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 net
operating loss carryforwards. The Company has recorded a $12.0 million
valuation allowance against deferred tax assets resulting in a net carrying
value of zero.
Net loss. The Company's net loss increased by $2.4 million from a $0.7
million loss for the six months ended June 30, 2002 to a net loss of $3.1
million for the same period in 2003 for reasons discussed above. Loss per share
increased from a loss of $0.08 for the six months ended June 30, 2002 to a loss
per share of $0.37 for the same period of 2003.
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.
13
The Company's cash and cash equivalents were $0.2 million at June 30, 2003,
compared to $0.6 million at December 31, 2002. The Company's working capital
deficit was $3.1 million at June 30, 2003 and $1.3 million at December 31, 2002.
The Company's operating activities used cash of $0.5 million for the six
months ended June 30, 2003, compared to $0.4 million cash provided for the same
period in 2002. The decrease resulted from increased losses from operations
offset partially by reduced use of funds for the payment of accounts payable
and additional funds from receivables.
Investing activities used no cash in the six months ended June 30, 2003,
compared to cash provided of $16,000 for the six months in 2002 as the Company
liquidated older equipment in 2003 which offset $16,000 in capital expenditures.
In 2002, $20,000 of capital expenditures were partially offset by $4,000 in
equipment sales. The Company anticipates the need to lease or acquire small
amounts of computer equipment throughout 2003.
Financing activities provided cash of $0.1 million for the six months
ended June 30, 2003 by using a line of credit compared to $0.3 million cash used
during the six months ended June 30, 2002 used to pay down the line of credit.
During the second quarter of 2003 the Company was not able to maintain
compliance with its Europe-based financing agreement on a consistent basis. At
June 30, 2003 the Company had borrowed $1,396,000 against the credit facility
and had $1,544,000 in collateralized receivables. The agreement required
collateralization of 200% of receivables or $2,792,000. On July 11, 2003 the
Company amended its European credit facility, increasing the line to $1.6
million (1 million pounds), secured by a mortgage deed against all assets of the
European Division, guaranteed by the Company and the personal guaranty of the
CEO. This cured non-compliance and brought the Company back into compliance with
the credit facility. The line expires on October 31, 2003 unless renewed. The
line may not exceed 133% of eligible European receivables. At August 12, 2003
the Company had borrowed $1,302,000 against the credit facility and had
$1,311,000 in collateralized receivables.
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 $2.5 million. At June 30 and
July 31, 2003, the Company had sold $0.2 million eligible U.S. accounts
receivable pursuant to this agreement.
Significant losses were incurred for fiscal years 1999 through 2002. The
Company incurred significant losses in the first two quarters of 2003. Revenue
in the second quarter of 2003 was short of expectations due to a large project
cancellation following the sale of a customer' business and the continued
difficult technology market. The Company has reduced both facilities costs and
staff. Additional cost reductions will take effect in the third quarter of
2003. The Company is discussing possible merger opportunities. Continued
losses and the uncertainty of the Company's ability to raise additional capital
raise substantial doubt about the Company's ability to continue as a going
concern.
To the extent the merger is not completed, the cash generated from the line
of credit, receivables based financing, and continued operations are
insufficient to meet the Company's current working capital needs, the Company
will have to raise additional capital. No assurance can be given that
additional funding will be available or, if available, will be on terms
acceptable to the Company. Uncertainty regarding the amount and timing of any
proceeds from the Company's plans to raise additional capital raises substantial
doubt about the Company's ability to continue as a going concern. The
accompanying consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
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
14
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, and other risks
and uncertainties detailed from time to time in the Company's filings with the
SEC. The Company is under no duty to update any of the forward-looking
statements after the date of this filing to conform such statements to actual
results.
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, 2003, 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.
DA CONSULTING GROUP, INC.
PART II-OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) During the second quarter of 2003 the Company has not been able to
maintain compliance with its Europe-based financing agreement on a
consistent basis. At June 30, 2003 the Company had borrowed $1,396,000
against the credit facility and had $1,544,000 in collateralized
receivables. The agreement required collateralized receivables in the
amount of $2,792,000. The Company cured the non-compliance subsequent
to June 30, 2003.
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included in this form 10-Q:
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Virginia
L. Pierpont, President and Chief Executive Officer
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Dennis
C. Fairchild, Chief Financial Officer
(b) Reports on Form 8-K
On May 16, 2003 DA Consulting Group, Inc. (DACG) announced that it is
involved in negotiations with another company regarding the possible
sale of DACG. DACG's working capital position has been adversely
affected by the current business environment.
16
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)
Date: August 14, 2003 By: /s/ Virginia L. Pierpont
------------------------------------------
Virginia L. Pierpont
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2003 By: /s/ Dennis C. Fairchild
------------------------------------------
Dennis C. Fairchild
Chief Financial Officer, Executive Vice
President, Secretary and Treasurer (Principal
Financial and Accounting Officer)
17
CERTIFICATION PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Virginia L. Pierpont, Chief Executive Officer of DA Consulting Group, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of DA Consulting
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: August 14, 2003 /s/ Virginia L. Pierpont
------------------------
Virginia L. Pierpont
Chief Executive Officer
18
CERTIFICATION PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Dennis C. Fairchild, Chief Financial Officer of DA Consulting Group, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of DA Consulting
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: August 14, 2003 /s/ Dennis C. Fairchild
-----------------------
Dennis C. Fairchild
Chief Financial Officer
19