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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 SEPTEMBER 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 NO X
--- ---
NUMBER OF SHARES OUTSTANDING OF COMMON STOCK AS OF November 14, 2003: 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, 2003 (unaudited) and December 31, 2002 (audited). . . . 3
Condensed Consolidated Statements of Operations for the Three
Months ended September 30, 2003 and 2002 (unaudited). . . . 4
Condensed Consolidated Statements of Operations for the
Nine Months ended September 30, 2003 and 2002 (unaudited). . 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months ended September 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
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)
SEPTEMBER 30, DECEMBER 31,
2003 2002
---------- ----------
(Unaudited) (Audited)
ASSETS
------
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . $ 42 576
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . 2,302 3,615
Unbilled revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 50
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . - 160
Prepaid expenses and other current assets. . . . . . . . . . . . . . . 440 255
------------ ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 2,985 4,656
------------ ----------
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . 2,827 3,670
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 204
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . - 840
Goodwill, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 206
------------ ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,151 $ 9,576
============ ==========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
-----------------------------------------------
Current Liabilities:
Revolving line of credit . . . . . . . . . . . . . . . . . . . . . . . $ 1,804 $ 1,335
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,235 1,268
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,986 3,319
------------ ----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 6,025 5,922
------------ ----------
Lease abandonment liabilities. . . . . . . . . . . . . . . . . . . . . . 233 526
------------ ----------
Deferred rent, long-term . . . . . . . . . . . . . . . . . . . . . . . . 90 -
------------ ----------
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. . . . . . . . . . . . . . . . . . . . . . . . . . (31,486) (28,145)
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . (1,313) (1,329)
Treasury stock, 153,173 shares at cost . . . . . . . . . . . . . . . . (1,522) (1,522)
------------ ----------
Total shareholders' (deficit) equity. . . . . . . . . . . . . . . . (197) 3,128
------------ ----------
Total liabilities and shareholders' (deficit) equity . . . . . $ 6,151 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenue . . . . . . . . . . . . . . $ 4,328 $ 5,893 $ 13,994 $ 18,210
Cost of revenue . . . . . . . . . . 2,807 3,414 9,606 10,594
----------- ----------- ----------- -----------
Gross profit. . . . . . . . . 1,521 2,479 4,388 7,616
Selling and marketing expense . . . 414 614 1,648 1,798
Development expense . . . . . . . . 33 40 95 121
General and administrative expense. 1,230 2,024 4,778 6,450
----------- ----------- ----------- -----------
Operating loss. . . . . . . (156) (199) (2,133) (753)
----------- ----------- ----------- -----------
Interest expense, net . . . . . . . (8) (10) (42) (21)
Other expense, net. . . . . . . . . (46) (22) (103) (76)
----------- ----------- ----------- -----------
Total other expense, net . . (54) (32) (145) (97)
----------- ----------- ----------- -----------
Loss before income taxes . . (210) (231) (2,278) (850)
Provision for income taxes. . . . . - 3,226 1,063 3,269
----------- ----------- ----------- -----------
Net loss. . . . . . . . . . $ (210) $ (3,457) $ (3,341) $ (4,119)
=========== =========== =========== ===========
Basic loss per share. . . . . . . . $ (0.02) $ (0.41) $ (0.40) $ (0.49)
Weighted average shares outstanding 8,419 8,419 8,419 8,419
Diluted loss per share. . . . . . . $ (0.02) $ (0.41) $ (0.40) $ (0.49)
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,
2003 2002
-------- --------
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,341) $(4,119)
-------- --------
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Loss on disposal of fixed assets . . . . . . . . . . . . . . . . . . 11 25
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . 900 1,447
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . 1,063 3,269
Changes in operating assets and liabilities:
Accounts receivable and unbilled revenue. . . . . . . . . . . 1,162 116
Prepaid expenses and other current assets . . . . . . . . . . (185) (43)
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . 71 (31)
Accounts payable and accrued expenses . . . . . . . . . . . . (773) (627)
Deferred rent, long-term. . . . . . . . . . . . . . . . . . . 90 -
-------- --------
Total adjustments . . . . . . . . . . . . . . . . . . 2,339 4,156
-------- --------
Net cash provided by (used in) operating activities (1,002) 37
-------- --------
Cash flows from investing activities:
Proceeds from sale of property and equipment . . . . . . . . . . . . . . . 26 24
Purchases of property and equipment. . . . . . . . . . . . . . . . . . . . (43) (31)
-------- --------
Net cash used in investing activities . . . . . . . . . (17) (7)
-------- --------
Cash flows from financing activities:
(Repayments) proceeds from revolving line of credit, net . . . . . . . . . 469 (62)
-------- --------
Net cash provided by (used in) financing activities . . 469 (62)
-------- --------
Effect of changes in foreign currency exchange rate on cash and cash equivalents. 16 118
-------- --------
Increase (decrease) in cash and cash equivalents . . . (534) 86
Cash and cash equivalents at beginning of period. . . . . . . . . . . . . . . . . 576 373
-------- --------
Cash and cash equivalents at end of period. . . . . . . . . . . . . . . . . . . . $ 42 $ 459
======== ========
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)" 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 three months ended September 30,
2003 and the nine months ended September 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.
6
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and 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 MANAGEMENT'S PLANS
Significant losses were incurred for fiscal years 1999 through 2002. The
Company incurred significant losses in the first three quarters of 2003. The
Company has reduced both facilities costs and staff. 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 Company's independent auditors have advised Management that absent any
significant improvements in the Company's financial position, their opinion on
the financial statements for the year ended December 31, 2003 will include an
explanatory paragraph discussing this going concern uncertainty. 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.
At September 30, 2003 the Company had borrowed $1.7 million exceeding the
credit facility by $32,000. The facility is secured by a mortgage deed against
all assets of the European Division, guaranteed by the Company and its CEO. The
line may not exceed 133% of eligible European receivables. At November 11, 2003
the Company had borrowed $1,643,574 against the credit facility and had
$1,420,701 in collateralized receivables. The line expires on February 25, 2004
unless renewed.
At November 11, 2003 the Company had sold $0.1 million U. S. accounts
receivables under a receivable based financing agreement representing all
eligible U. S. accounts receivable.
(4) INCOME TAXES
At September 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.
7
(5) DEBT
Revolving Line of Credit
At September 30, 2003 the Company had borrowed $1.7 million exceeding the
credit facility by $32,000. The facility is secured by a mortgage deed against
all assets of the European Division, guaranteed by the Company and its CEO. The
line may not exceed 133% of eligible European receivables. At November 11, 2003
the Company had borrowed $1,643,574 against the credit facility and had
$1,420,701 in collateralized receivables. The line expires on February 25, 2004
unless renewed.
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 $0.5 million. The agreement
allows for the bank to request repurchase of an account receivable under certain
conditions. The bank has never requested repurchase of a U.S. account
receivable. At September 30, 2003, the Company has sold $0.1 million eligible
accounts receivable pursuant to this agreement.
Insurance Financing
The Company has a note payable for insurance financing with $0.1 million
outstanding at September 30, 2003. Payments required under the note total
$27,000 per month.
(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 three months ended September 30, 2003
payments charged to the reserve totaled $0.2 million. The reserve was reduced
by $0.1 million during the first quarter of 2003 and $0.2 million during the
third quarter of 2003 resulting in a reduction of general and administrative
expenses. The balance remaining at September 30, 2003 was $0.4 million of which
$0.2 million is recorded as long-term liability. During the nine months ended
September 30, 2003 payments against the reserve totaled $0.3 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 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
------------------ --------------------
2003 2002 2003 2002
------- --------- --------- ---------
Net loss. . . . . . . . . . . . . $ (210) $ (3,457) $ (3,341) $ (4,119)
Other comprehensive income (loss) (37) (72) 16 118
------- --------- --------- ---------
Comprehensive loss. . . . . . . . $ (247) $ (3,529) $ (3,325) $ (4,001)
======= ========= ========= =========
(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.
8
The following table summarizes the Company's computation of loss per share
for the periods ended September 30, 2003 and 2002 (in thousands, except per
share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------------
2003 2002 2003 2002
------------- ------------ ------------- -------------
Basic loss per share. . . . . . . . . . . . . . . . . . . . $ (0.02) $ (0.41) $ (0.40) $ (0.49)
============= ============ ============= =============
Net loss $ (210) $ (3,457) $ (3,341) $ (4,119)
============= ============ ============= =============
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. . . . . . . . . . . . . . . . . . . $ (0.02) $ (0.41) $ (0.40) $ (0.49)
============= ============ ============= =============
Approximately 1,728,000 antidilutive options and 3,000,000 antidilutive
warrants were excluded from the calculation of diluted earnings per share for
the periods ending in 2003. 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 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
September 30, 2003 and 2002 would approximate the pro forma amounts below (in
thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ ------------------
SEPTEMBER 30, SEPTEMBER 30,
----------------- ------------------
2003 2002 2003 2002
------- --------- -------- --------
Net loss, as reported $ (210) $ (3,457) $(3,341) $(4,119)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (101) (263) (302) (788)
------- --------- -------- --------
Pro forma $ (311) $ (3,720) $(3,643) $(4,907)
Basic and diluted loss per share:
As reported $(0.02) $ (0.41) $ (0.40) $ (0.49)
Pro forma (0.04) (0.44) (0.43) (0.58)
9
(10) 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, 2003
Revenue . . . . . . . . . . . . . . $ 742 $ 2,930 $ 656 $ 4,328
Operating income (loss) . . . . . . (94) 196 (258) (156)
THREE MONTHS ENDED SEPTEMBER 30, 2002
Revenue . . . . . . . . . . . . . . $ 1,433 $ 3,656 $ 804 $ 5,893
Operating income (loss) . . . . . . (70) 310 (439) (199)
NINE MONTHS ENDED SEPTEMBER 30, 2003
Revenue . . . . . . . . . . . . . . $ 3,263 $ 7,590 $ 3,141 $13,994
Operating loss. . . . . . . . . . . (250) (1,524) (359) (2,133)
Total assets. . . . . . . . . . . . 999 3,805 1,347 6,151
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
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 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 September 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 SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
Revenue. Revenue decreased by $1.6 million, or 26.6%, from $5.9 million
in the third quarter of 2002 to $4.3 million in the third quarter of 2003,
reflecting a decrease in all divisions. Product sales decreased from $0.3
million in 2002 to $0.2 million in 2003. Revenue from the Americas Division
decreased by 48.2% from $1.4 million to $0.7 million; revenue from the EMEA
Division decreased 19.9% from $3.7 million to $2.9 million; and revenue from the
Asia Pacific Division decreased by 18.4% from $0.8 million to $0.7 million. The
Company
11
ended the third quarter with 180 total employees, down from 241 employees at the
end of the same period of the prior year. Billable employees total 144 at
September 30, 2003 compared to 186 at September 30, 2002. Revenue for the third
quarter of 2003 was 10% less than revenue in the second quarter of 2003.
Gross profit. Gross profit decreased by $1.0 million, or 38.6%, from $2.5
million in the third quarter of 2002 to $1.5 million in the third quarter of
2003 and decreased as a percent of revenue from 42.1% in the third quarter of
2002 to 35.1% in the third quarter of 2003. The decrease in the gross profit
margin percentage is primarily attributable to decreased staff utilization.
Selling and marketing expense. Selling and marketing expense for the third
quarter of 2002 was $0.6 million and for 2003 was $0.4 million reflecting 12
sales and marketing personnel in 2003 and 22 sales and marketing personnel in
2002.
Development expense. Development expense decreased $7,000, or 17.5%, from
$40,000 in the third quarter of 2002 to $33,000 in the third quarter of 2003.
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 $0.8 million, or 39.2%, from $2.0 million in the third quarter of
2002 to $1.2 million in the third quarter of 2003 The reduction in general and
administrative expense was largely due to compensation, facilities, professional
fees and depreciation. Facilities costs were reduced approximately $0.3
million due to reduced reserves for terminated leases in the third quarter of
2003 compared to a charge of $0.3 million in the third quarter of 2002.
Operating loss. Operating loss was unchanged at $0.2 million in the third
quarter of 2002 and 2003. The operating loss decreased $0.9 million compared
to the operating loss in the second quarter of 2003 due to an increase in gross
profit and a decline in expenses.
Provision for income taxes. The Company did not record an income tax
benefit in the third 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. At September 30, 2002 the
Company recorded a valuation allowance against previously recorded tax losses
resulting in a tax charge for the quarter of $3.2 million.
At September 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 decreased by $3.3 million from a $3.5
million loss in the third quarter of 2002 to a net loss of $0.2 million in the
third quarter of 2003 largely due to the decision to record an additional
valuation allowance against deferred tax assets in 2002. Loss per share
decreased from a loss of $0.41 in the third quarter of 2002 to a loss per share
of $0.02 in the third quarter of 2003.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
Revenue. Revenue decreased by $4.2 million, or 23.2%, from $18.2 million
for the nine months ended September 30, 2002 to $14.0 million for the nine
months ended September 30, 2003, reflecting decreases in EMEA and Asia divisions
and a small increase in America. Product sales decreased from $1.1 million in
2002 to $0.7 million in 2003. Revenue from the Americas Division increased by
1.4% from $3.2 million to $3.3 million; revenue from the EMEA Division decreased
by 31.6% from $11.1 million to $7.6 million; and revenue from the Asia Pacific
Division decreased by 19.5% from $3.9 million to $3.1 million. The Company ended
the nine months with 180 total employees, down from 241 employees at the end of
the same period of the prior year. Billable headcount has decreased to 144 at
September 30, 2003 compared to 186 at September 30, 2002.
12
Gross profit. Gross profit decreased by $3.2 million, or 42.4%, from $7.6
million for the nine months ended September 30, 2002 to $4.4 million for the
nine months ended September 30, 2003 and decreased as a percent of revenue from
41.8% in 2002 to 31.4% in 2003. The decrease in the gross profit margin
percentage is primarily attributable to decreases in staff utilization.
Selling and marketing expense. Selling and marketing expense decreased
$0.2 million or 8.3%, from $1.8 million for the nine months ended September 30,
2002 to $1.6 million for the same period of 2003. Sales and marketing personnel
total 12 at September 30, 2003 compared to 22 at September 2002.
Development expense. Development expense decreased $26,000, or 21.5%,
from $121,000 for the nine months ended September 30, 2002 to $95,000 for the
same period of 2003. Two people are involved in development in both 2002 and
2003.
General and administrative expense. General and administrative expense
decreased by $1.7 million, or 25.9%, from $6.5 million for the nine months ended
September 30, 2002 to $4.8 million for the same period in 2003. The decrease in
expense is due primarily to a reduction in personnel, facilities and
depreciation. General and administrative personnel total 22 at the end of nine
months ended September 30, 2003 compared to 30 at the end of the same period of
2002. Depreciation expense included in general and administrative costs
decreased from $1.4 million in the nine months ended September 30, 2002 to $0.9
million for the same period of 2003. The third quarter of 2002 included a $0.2
million increase for a change in estimated life. Expenses for the first three
quarters of 2003 include an $0.4 million credit for reduction of lease reserves
compared to a charge of $0.5 million for lease terminations in first three
quarters of 2002.
Operating loss. Operating loss increased by $1.3 million from a loss of
$0.8 million for the nine months ended September 30, 2002 to an operating loss
of $2.1 million for the same period of 2003. The increased operating loss
resulted from increased operating loss in the first two quarters of the year
when revenue and margin declines exceeded expense reductions and explanations
above.
Provision for income taxes. The Company recorded a valuation allowance
against previously recorded tax losses resulting in a tax charge year to date of
$1.1 million for 2003 and $3.3 million for 2002.
At September 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 decreased by $0.8 million from a $4.1
million loss for the nine months ended September 30, 2002 to a net loss of $3.3
million for the same period in 2003 reflecting an increased operating loss
offset by a decrease in income tax expense. Loss per share decreased from a loss
of $0.49 for the nine months ended September 30, 2002 to a loss per share of
$0.40 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.
The Company's cash and cash equivalents were $42,000 at September 30, 2003,
compared to $576,000 at December 31, 2002. The Company's working capital
deficit was $3.0 million at September 30, 2003 and $1.3 million at December 31,
2002.
The Company's operating activities used cash of $1.0 million for the nine
months ended September 30, 2003, compared to cash provided of $37,000 for the
same period in 2002. The increase in cash used by operations
13
resulted primarily from increased operating losses and reduced accrued expenses
offset partially by a decrease in accounts receivable.
Investing activities used $17,000 in cash for the nine months ended
September 30, 2003, compared to $7,000 cash used for the first nine months in
2002 as the Company purchased office improvements and liquidated unneeded and
older equipment. The Company anticipates the need to lease or acquire small
amounts of computer equipment throughout 2003 and 2004.
Financing activities provided cash of $0.5 million for the nine months
ended September 30, 2003 using its line of credit compared to using $0.1
million cash to repay the line of credit during the nine months ended September
30, 2002.
At September 30, 2003 the Company had borrowed $1.7 million, exceeding the
credit facility by $32,000. The facility is secured by a mortgage deed against
all assets of the European Division, guaranteed by the Company and its CEO. The
line may not exceed 133% of eligible European receivables. At November 11, 2003
the Company had borrowed $1,643,574 against the credit facility and had
$1,420,701 in collateralized receivables. The line expires on February 25, 2004
unless renewed.
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 $0.5 million. The agreement
allows for the bank to request repurchase of an account receivable under certain
conditions. The bank has never requested repurchase of a U.S. account
receivable. At September 30, 2003, the Company has sold $0.1 million eligible
accounts receivable pursuant to this agreement.
The Company has a note payable for insurance financing with $0.1 million
outstanding at September 30, 2003. Payments required under the note total
$27,000 per month.
Significant losses were incurred for fiscal years 1999 through 2002. The
Company incurred significant losses in the first three quarters of 2003. The
Company has reduced both facilities costs and staff. 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 Company's independent auditors have advised Management that absent any
significant improvements in the Company's financial position, their opinion on
the financial statements for the year ended December 31, 2003 will include an
explanatory paragraph discussing this going concern uncertainty. 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.
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
14
historical results as a result of certain factors, including but not limited to:
dependence on SAP AG and the ERP software market, risks associated with
management of a geographically dispersed organization, fluctuating quarterly
results, the need to attract and retain professional employees, substantial
competition, dependence on key personnel, risks associated with management of
growth, rapid technological change, limited protection of proprietary expertise,
methodologies and software, as well as those set forth in the Risk Factors
section and Management's Discussion and Analysis section in the Company's Annual
Report on Form 10-K and other filings with the Securities and Exchange
Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company from time to time holds short-term investments which consist of
variable rate municipal debt instruments. The Company uses a sensitivity
analysis technique to evaluate the hypothetical effect that changes in market
interest rates may have on the fair value of the Company's investments. At
September 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) At September 30, 2003 the Company had borrowed $32,000 in excess
of its European credit facility. At November 11, 2003 the Company had borrowed
$1,643,574 against the credit facility and had $1,420,701 in collateralized
receivables. The maximum that could be borrowed at November 11, 2003 was
$1,889,533. The credit facility expires on February 25, 2004 unless renewed.
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included in this form 10-Q:
31.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of Virginia
L. Pierpont, President and Chief Executive Officer
31.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of Virginia
L. Pierpont, President and Chief Executive Officer
32.1 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
32.2 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
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: November 14, 2003 By: /s/ Virginia L. Pierpont
---------------------------------------------
Virginia L. Pierpont
President and Chief Executive Officer
Dated: November 14, 2003 By: /s/ Dennis C. Fairchild
---------------------------------------------
Dennis C. Fairchild
Chief Financial Officer, Secretary and
Treasurer (Principal Financial and
Accounting Officer)
16