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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 00-24055
DA CONSULTING GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0418488
(STATE OR OTHER JURISDICTION OF I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
5847 SAN FELIPE, SUITE 1100
HOUSTON, TEXAS 77057
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 361-3000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
NUMBER OF SHARES OUTSTANDING OF COMMON STOCK AS OF April 30, 2002, 8,418,604
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1
DA CONSULTING GROUP, INC.
INDEX
PART I
FINANCIAL INFORMATION
PAGE NO.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2002
(unaudited) and December 31, 2001. . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the
Three Months ended March 31, 2002 and 2001 (unaudited) . . . 4
Condensed Consolidated Statement of Cash Flows for the
Three Months ended March 31, 2002 and 2001 (unaudited) . . . 5
Notes to Unaudited Condensed Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . 12
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . 12
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DA CONSULTING GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
MARCH 31, DECEMBER 31,
2002 2001
------------ --------------
ASSETS (Unaudited)
------
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . $ 280 $ 373
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . 4,303 4,053
Unbilled revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 374 38
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . 631 629
Prepaid expenses and other current assets. . . . . . . . . . . . . . . 425 352
------------ --------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 6,013 5,445
------------ --------------
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . 4,912 5,394
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 177
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . 5,756 5,990
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . 206 206
------------ --------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,083 $ 17,212
============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Revolving line of credit . . . . . . . . . . . . . . . . . . . . . . . $ 670 $ 1,077
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,222 1,759
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,156 3,272
------------ --------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . 6,048 6,108
------------ --------------
Lease abandonment liabilities. . . . . . . . . . . . . . . . . . . . . . 634 801
------------ --------------
Commitments and contingencies
Shareholders' Equity:
Preferred stock, $0.01 par value: 10,000,000 shares authorized . . . . - -
Common stock, $0.01 par value: 40,000,000 shares authorized; 8,571,777
shares issued; 8,418,604 shares outstanding . . . . . . . . . . . . 85 85
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 34,039 34,039
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . (20,696) (20,782)
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . (1,505) (1,517)
Treasury stock, 153,173 shares at cost . . . . . . . . . . . . . . . . (1,522) (1,522)
------------ --------------
Total shareholders' equity. . . . . . . . . . . . . . . . . . . . . 10,401 10,303
------------ --------------
Total liabilities and shareholders' equity . . . . . . . . . . $ 17,083 $ 17,212
============ ==============
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
DA CONSULTING GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
2002 2001
------- --------
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,898 $ 8,536
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . 3,775 4,993
------- --------
Gross profit . . . . . . . . . . . . . . . . . . . . . . 3,123 3,543
Selling and marketing expense . . . . . . . . . . . . . . . . 578 1,058
Development expense . . . . . . . . . . . . . . . . . . . . . 45 458
General and administrative expense. . . . . . . . . . . . . . 2,121 3,523
------- --------
Operating income (loss). . . . . . . . . . . . . . . . . 379 (1,496)
------- --------
Interest expense, net . . . . . . . . . . . . . . . . . . . . (6) (6)
Other income (expense), net . . . . . . . . . . . . . . . . . (52) 6
------- --------
Total other income (expense), net . . . . . . . . . . . . . (58) -
------- --------
Income (loss) before taxes . . . . . . . . . . . . . . . 321 (1,496)
Provision (benefit) for income taxes. . . . . . . . . . . . . 235 (548)
------- --------
Net income (loss). . . . . . . . . . . . . . . . . . . . $ 86 $ (948)
======= ========
Basic earnings (loss) per share . . . . . . . . . . . . . . . $ .01 $ (0.11)
Weighted average shares outstanding . . . . . . . . . . . . . 8,419 8,419
Diluted earnings (loss) per share . . . . . . . . . . . . . . $ .01 $ (0.11)
Weighted average shares outstanding . . . . . . . . . . . . . 8,872 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)
THREE MONTHS ENDED
MARCH 31,
2002 2001
------ -------
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 86 $ (948)
------ -------
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Loss on disposal of equipment. . . . . . . . . . . . . . . . . . . . 26 -
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . 456 623
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . 232 (341)
Changes in operating assets and liabilities:
Accounts receivable, net and unbilled revenue. . . . . . . . . (586) 1,267
Prepaid expenses and other current assets . . . . . . . . . . . (73) (175)
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . (19) (6)
Accounts payable and accrued expenses . . . . . . . . . . . . . 180 (824)
------ -------
Total adjustments . . . . . . . . . . . . . . . . . . . . 216 544
------ -------
Net cash provided by (used in) operating activities . . . 302 (404)
------ -------
Cash flows from investing activities:
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . - (35)
------ -------
Net cash used in investing activities . . . . . . . . . . - (35)
------ -------
Cash flows from financing activities:
(Repayment) proceeds from revolving line of credit. . . . . . . . . . . . . . (407) 309
------ -------
Net cash provided by (used in ) financing activities. . . (407) 309
------ -------
Effect of changes in foreign currency exchange rate on cash and cash equivalents. 12 (331)
------ -------
Decrease in cash and cash equivalents . . . . . . . . . . (93) (461)
Cash and cash equivalents at beginning of period. . . . . . . . . . . . . . . . . 373 949
------ -------
Cash and cash equivalents at end of period. . . . . . . . . . . . . . . . . . . . $ 280 $ 488
====== =======
5
DA CONSULTING GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS
DA Consulting Group, Inc. ("DACG(TM)" together with its subsidiaries or the
"Company") is a leading international provider of employee education and
software solutions to companies investing in business information technology.
Through its offices in seven countries, DACG delivers customized services for
documentation and training necessary for implementation of extended enterprise
software applications; technical and non-technical employee education and
continuous learning programs; e-Learning applications such as
computer-based-training, learning management systems; and consulting on human
resource management, change management and change communications. The
consolidated financial statements include the accounts of DA Consulting Group,
Inc. and all majority-owned subsidiaries. Intercompany balances and
transactions have been eliminated in consolidation.
(2) BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements for the year
ended December 31, 2001, included in the Company's Annual Report on Form 10-K.
The unaudited condensed consolidated financial statements included herein have
been prepared by the Company without an audit pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted, pursuant to such rules and regulations.
Operating results for the three months ended March 31, 2002 are not necessarily
indicative of the results which will be realized for the year ending December
31, 2002.
The unaudited condensed consolidated financial information included herein
reflects all adjustments, consisting only of normal recurring adjustments, which
are necessary, in the opinion of management, for a fair presentation of the
Company's financial position, results of operations and cash flows for the
interim periods presented.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standard Board finalized FASB
Statement No. 141, Business Combinations (SFAS 141), and No. 142 Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires us to recognize acquired intangible assets apart from goodwill if
the acquired intangible asset meets certain criteria. SFAS 141 applies to all
business combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires, upon
adoption of SFAS 142, that we reclassify the carrying amounts of intangible
assets and goodwill based upon the criteria of SFAS 141.
SFAS 142 requires, among other things, that we no longer amortize goodwill,
but instead test goodwill for impairment at least annually. In addition, SFAS
142 requires us to identify reporting units for the purposes of assessing
potential future impairments of goodwill, reassess the useful lives of other
existing recognized intangible assets and cease amortization of intangible
assets with an indefinite useful life. An intangible with an indefinite useful
life should be tested for impairment in accordance with the guidance in SFAS
142. SFAS 142 is required to be applied in fiscal years beginning after
December 15, 2001 to all goodwill and other intangible assets recognized at that
date, regardless of when those assets were initially recognized. SFAS 142
requires us to complete a transitional goodwill impairment test six months from
the date of adoption, which we intend to do before June 30, 2002. We were also
required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142; which we have done. The
adoption of SFAS 141 and SFAS 142 have not had a material impact on our
financial position and results of operations.
6
The Company has approximately $0.2 million of goodwill included in its
balance sheet at March 31, 2002. Goodwill amortization for the for the year
ended December 31, 2001, was $19,000. Implementation of SFAS 142 by the Company
resulted in the elimination of amortization of goodwill for the current and
future fiscal years.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, SFAS No. 143, which amends SFAS No. 19, Financial Accounting and
Reporting by Oil and Gas Producing Companies, is applicable to all companies.
SFAS No. 143, which is effective for fiscal years beginning after June 15, 2002,
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or the normal operation of a long-lived asset, except for certain
obligations of lessees. As used in SFAS No. 143, a legal obligation is an
obligation that a party is required to settle as a result of an existing or
enacted law, statute, ordinance, or written or oral contract or by legal
construction of a contract under the doctrine of promissory estoppel. While we
are not yet required to adopt SFAS No. 143, we do not believe the adoption will
have a material effect on our financial condition or results of operations.
(3) MANAGEMENT'S RESTRUCTURING AND LIQUIDITY
During the second quarter of 2000, management began to restructure the
global operations of the Company. As part of the plan, management was required
to downsize the Company based upon current and future projected operating
results. Some of the restructuring initiatives taken by management were as
follows:
- Reduction in the number of consultants
- Reduction of administrative personnel
- Reduction in office space
- Various other cost cutting measures
Management completed the restructuring of the Company during the third
quarter of 2001 and achieved overall profitability in the fourth quarter of
2001. There can be no assurance that profitability will continue.
The Company believes its current cash balances, revolving line of credit,
receivable-based financing and cash provided by future operations will be
sufficient to meet the Company's working capital and cash need for the next 12
months. However, there can be no assurance that such sources will be sufficient
to meet these future expenses and the Company's future needs. The Company may
seek additional financing through a private or public placement of equity. The
Company's need for additional financing will be principally dependent on the
degree of market demand for the Company's services. There can be no assurance
that the Company will be able to obtain any such additional financing on
acceptable terms, if at all.
(4) INCOME TAXES
At March 31, 2002, the Company had $6.4 million of deferred tax assets
primarily consisting of net operating loss carryforwards. The benefit from
utilization of net operating loss carryforwards could be subject to limitations
if significant ownership changes occur in the Company. The Company's ability to
realize the entire benefit of its deferred tax asset requires that the Company
achieve certain future earnings levels prior to the expiration of its NOL
carryforwards. The Company has recorded a $4.2 million valuation allowance
against deferred tax assets. The Company believes it will generate sufficient
taxable income to realize the remaining deferred tax assets. The Company could
be required to record a valuation allowance for a portion or all of its
remaining deferred tax asset if market conditions deteriorate and future
earnings are below, or projected to be below, its current estimates and
management believes it is more likely than not the deferred tax assets will fail
to be realized.
(5) DEBT
Revolving Line of Credit
7
The Company has a credit facility from a foreign bank with an available
line of approximately $1.1 million (750,000 Great Britain Pounds),
collateralized by and based on eligible foreign accounts receivable, secured by
a mortgage deed against all the assets of the Europe Division and guaranteed by
the Company. At March 31, 2002, the Company had used $0.7 million of the credit
facility. The interest rate on this line of credit was 6.0% at March 31, 2002.
The line of credit is available through March 2003, however, the line of credit
is due upon demand.
Accounts Receivable Financing
The Company has an agreement with a bank, which provides for financing of
eligible U.S. accounts receivable under a purchase and sale agreement. The
maximum funds available under the agreement is $5 million. The agreement allows
for the bank to request repurchase of an account receivable under certain
conditions. The bank has never requested repurchase of an account receivable.
At March 31, 2002, the Company had sold no accounts receivable pursuant to this
agreement.
(6) RESTRUCTURING CHARGE
During the three month period ended March 31, 2000, the Company implemented
a plan to address the dramatic decline in training and documentation activity
for enterprise resource planning implementations. The plan consisted of
regional base consolidations and downsizing of billable and non-billable
personnel. Charges included the costs of involuntary employee termination
benefits, write-down of certain property and equipment and reserves for
leasehold abandonment.
The reduction in workforce consisted of 60 billable consultants and 44
non-billable administrative personnel. Substantially all of the employee
terminations were completed during the first quarter. The Company recognized
approximately $1.5 million expense attributable to involuntary employee
termination benefits during the first quarter, of which approximately $1.2
million had been paid at December 31, 2000. The remaining $0.3 million in
termination pay was paid during 2001.
During the three months ended March 31, 2000 the Company reserved
approximately $0.9 million related to the abandonment of leases and
approximately $1.0 million related to the writedown of leasehold improvements,
furniture and equipment held by its Americas division. During the fourth
quarter of 2000 due to weakening in the real estate market, the Company recorded
an additional $1.3 million reserve for lease abandonment resulting in a total
annual charge of $2.2 million.
During the three months ended June 30, 2001 the Company recorded a $0.8
million charge for the abandonment of additional leases. The charge was
included in general and administrative costs. Payments for unutilized leased
office space totaling $2.1 million were charged against the reserve during 2000,
2001 and the first quarter ending March 31, 2002. At March 31, 2002, the
Company has a remaining accrual of $0.9 million of which $0.5 million is
included in long term liabilities.
(7) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (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 income (loss) are listed below (in thousands):
8
THREE MONTHS ENDED
MARCH 31,
2002 2001
-------- --------
Net income (loss) . . . . . . . . $ 86 $ (948)
Other comprehensive income (loss) 12 (331)
-------- --------
Comprehensive income (loss) . . . $ 98 $(1,279)
======== ========
(8) EARNINGS (LOSS) PER SHARE
Basic earnings (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.
The following table summarizes the Company's computation of earnings (loss)
per share for the quarter ended March 31, 2002 and 2001 (in thousands, except
per share amounts):
THREE MONTHS ENDED
MARCH 31,
------- -------
2002 2001
------- -------
Basic earnings (loss) per share . . . . . . . . . . . . . . $ 0.01 $(0.11)
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $ 86 $ (948)
======= =======
Weighted average shares outstanding . . . . . . . . . . . . 8,419 8,419
======= =======
Computation of diluted earnings per share:
Common shares issuable under outstanding stock options. 1,029 -
Less shares assumed repurchased with proceeds from
exercise of stock options ions . . . . . . . . . . . . (576) -
------- -------
Adjusted weighted average shares outstanding. . . . . . 8,872 8,419
======= =======
Diluted earnings (loss) per share . . . . . . . . . . . . . $ 0.01 $(0.11)
======= =======
Approximately 463,000 antidilutive options and 3,000,000 antidilutive
warrants were excluded from the calculation of diluted earnings per share for
the three months ended March 31, 2002. Approximately 1,329,000 antidilutive
options and 3,000,000 antidilutive warrants were excluded from the calculation
of diluted earnings per share for the three months ended March 31, 2001.
(9) GEOGRAPHIC FINANCIAL DATA
Revenue from the Company's operations are presented below by operating
division (in thousands):
EUROPE,
MIDDLE EAST
AMERICAS & AFRICA ASIA PACIFIC TOTAL
---------- ------------ -------------- --------
THREE MONTHS ENDED MARCH 31, 2002
Revenue . . . . . . . . . . . $ 706 $ 4,459 $ 1,733 $ 6,898
Operating income (loss) . . . (443) 617 205 379
THREE MONTHS ENDED MARCH 31, 2001
Revenue . . . . . . . . . . . 2,410 4,673 1,453 8,536
Operating income (loss) . . . (1,384) 38 (150) (1,496)
9
DA CONSULTING GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is an international provider of education for employees of
companies which are implementing business information technology. The Company
provides customized change communications, education and performance support
services designed to maximize its clients' returns on their substantial
investments in business information technology.
Recognizing the global nature of its existing and prospective client base,
the Company has built a substantial international presence. The Company is
currently organized into three divisions: the Americas Division; the EMEA
Division, which includes Europe; and the Asia Pacific Division, which includes
its Australia and Asia operations.
RESULTS OF OPERATIONS.
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
Revenue. Revenue decreased by $1.6 million, or 19.2%, from $8.5 million
in the first quarter of 2001 to $6.9 million in the first quarter of 2002,
reflecting decreases in Europe and America and an increase in Asia. Product
sales increased from $.3 million in 2001 to $.5 million in 2002. Revenue from
the Americas Division decreased by 70.7% from $2.4 million to $0.7 million;
revenue from the EMEA Division decreased by 4.6% from $4.7 million to $4.5
million; and revenue from the Asia Pacific Division increased by 19.3% from $1.5
million to $1.7 million. The Company ended the first quarter with 258 total
employees, down from 337 employees at the end of the same period of the prior
year. Billable headcount has decreased 6.0% from the fourth quarter 2001 and
decreased 22.2% compared to the first quarter of 2001. Revenue for the first
quarter of 2002 was 3.4% more than revenue in the fourth quarter of 2001 due to
the continued improvement in the market for complex computer software. The
Company expects continued modest improvement in the upcoming quarters.
Gross profit. Gross profit decreased by $0.4 million, or 11.9%, from $3.5
million in the first quarter of 2001 to $3.1 million in the first quarter of
2002 and increased as a percent of revenue from 41.5% in the first quarter of
2001 to 45.3% in the first quarter of 2002. The increase in the gross profit
margin percentage is primarily attributable to increased staff utilization, bill
rates and improved recovery of travel costs offset partially by a decline in
margin on product sales.
Selling and marketing expense. Selling and marketing expense decreased
$0.5 million or 45.4%, from $1.1 million in the first quarter of 2001 to $0.6
million in the first quarter of 2002. The decrease is the result of reduced
personnel from 29 in the first quarter of 2001 to 22 in the first quarter of
2002 and a reduced expenditure for outside marketing professional fees.
Development expense. Development expense decreased $0.4 million, or
90.3%, from $458,000 in the first quarter of 2001 to $45,000 in the first
quarter of 2002. Reductions resulted primarily from the reduction of personnel
from 7 in 2001 to 2 in 2002.
General and administrative expense. General and administrative expense
decreased by $1.4 million, or 39.8%, from $3.5 million in the first quarter of
2001 to $2.1 million in the first quarter of 2002. The decrease in expense is
due primarily to a reduction in headcount in the areas of finance,
administration and human resources as a result of the cost containment plans.
General and administrative personnel total 31 at the end of the first quarter of
2002 compared to 40 at the end of the first quarter of 2001. Expenditures for
facilities, professional fees and travel also decreased. Depreciation expense
included in general and administrative costs decreased from $0.6 million in the
first quarter of 2001 to $0.4 million in the first quarter of 2002.
Operating income(loss). Operating income increased by $1.9 million from a
loss of $1.5 million in the first quarter of 2001 to an operating income of
$0.4 million in the first quarter of 2002. The operating income resulted from
improved profitability of projects despite a decline in revenue and reduced
10
operating expenses. Operating income also increased compared to $0.1 million in
the fourth quarter of 2001.
Provision (benefit) for income taxes. The Company's effective tax rate was
73.2% in the first quarter of 2002 compared to 36.6% in the first quarter of
2001. The tax rate was increased due to the Company's decision not to record
further tax benefits from losses in America beginning in the second quarter of
2001. Tax expense is recorded on taxable income of Europe and Asia at
approximately 30%. In the first quarter of 2001 tax benefits on losses in
America were recorded. The effect of not recording tax benefits in America
increased the provision for income tax by approximately $0.2 million
At March 31, 2002, the Company had $6.4 million of deferred tax assets
primarily consisting of net operating loss carryforwards. The benefit from
utilization of net operating loss carryforwards could be subject to limitations
if significant ownership changes occur in the Company. The Company's ability to
realize the entire benefit of its deferred tax asset requires that the Company
achieve certain future earnings levels prior to the expiration of its NOL
carryforwards. The Company has recorded a $4.2 million valuation allowance
against deferred tax assets. The Company believes it will generate sufficient
taxable income to realize the remaining deferred tax assets. The Company could
be required to record a valuation allowance for a portion or all of its
remaining deferred tax asset if market conditions deteriorate and future
earnings are below, or are projected to be below, its current estimates and
management believes it is more likely than not the deferred tax assets will fail
to be realized.
Net income (loss). The Company's net income increased by 1.0 million from
a $0.9 million loss in the first quarter of 2001 to a net income of $0.1 million
in the first quarter of 2002 for reasons discussed above. Income per share
increased from a loss of $0.11 in the first quarter of 2001 to income per share
of $.01 in the first quarter of 2002.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has historically financed its operations
and growth with cash flows from the sale of common stock, operations, short-term
borrowings under revolving line of credit arrangements and receivables-based
financing.
The Company's cash and cash equivalents were $0.3 million at March 31,
2002, compared to $0.4 million at December 31, 2001. The Company's working
capital deficit was $35,000 at March 31, 2002 and $663,000 at December 31, 2001.
The Company's operating activities provided cash of $0.3 million for the
three months ended March 31, 2002, compared to a $0.5 million use of cash for
the same period in 2001. The increase in cash provided by operations resulted
primarily from operating profits, the related tax effects and an increase in
accounts payable offset partially by an increase in accounts receivable.
Investing activities required no cash in the three months ended March 31,
2002, compared to cash used of $35,000 for the first quarter in 2001 for
equipment purchases. The Company anticipates the need to lease or acquire
small amounts of computer equipment throughout 2002.
Financing activities used cash of $0.4 million for the three months ended
March 31, 2002 to pay down its line of credit compared to $0.3 million cash
provided by using the line of credit during the three months ended March 31,
2001.
The Company has a revolving line of credit from a foreign bank with a
maximum line of credit of approximately $1.1 million based on eligible
foreign accounts receivable. At March 31, 2002, the Company had borrowed
$0.7 million against this line.
The Company has an agreement with a bank, which provides for financing of
eligible U.S. accounts receivable under a purchase and sale agreement. The
maximum funds available under this agreement is $5.0 million. At March 31,
2002, the Company had sold no receivables pursuant to this agreement.
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The Company believes its current cash balances, receivable-based financing,
revolving line of credit and cash provided by future operations will be
sufficient to meet the Company's working capital and cash needs for at least the
next 12-month period. However, there can be no assurance that such sources of
funds will be sufficient to meet these needs. The Company may seek additional
financing through public or private placement of equity. The Company's need for
additional financing will be principally dependent on the degree of market
demand for the Company's services. There can be no assurance that the Company
would be able to obtain additional financing on acceptable terms, if at all.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain statements that are not
historical facts which constitute forward-looking statements within the meaning
of the Private Securities Legislation Reform Act of 1995 which provides a safe
harbor for forward-looking statements. These forward-looking statements are
subject to substantial risks and uncertainties that could cause the Company's
actual results, performance or achievements to differ materially from those
expressed or implied by these forward-looking statements. When used in this
Report, the words "anticipate," "believe," "expect" and similar expressions as
they relate to the Company or its management are intended to identify such
forward-looking statements. Actual future results and trends may differ
materially from historical results as a result of certain factors, including but
not limited to: dependence on SAP AG and the ERP software market, risks
associated with management of a geographically dispersed organization,
fluctuating quarterly results, the need to attract and retain professional
employees, substantial competition, dependence on key personnel, risks
associated with management of growth, rapid technological change, limited
protection of proprietary expertise, methodologies and software, as well as
those set forth in the Risk Factors section and Management's Discussion and
Analysis section in the Company's Annual Report on Form 10-K and other filings
with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company from time to time holds short-term investments which consist of
variable rate municipal debt instruments. The Company uses a sensitivity
analysis technique to evaluate the hypothetical effect that changes in market
interest rates may have on the fair value of the Company's investments. At
March 31, 2002, the Company did not hold any short-term investments.
Currency exchange rate fluctuations between the U.S. dollar and the Euro,
British pound, Canadian dollar, Singapore dollar, and the Australian dollar have
an impact on revenue and expenses of the Company's international operations.
Dramatic fluctuations could have a negative affect upon the Company's financial
condition.
DA CONSULTING GROUP, INC.
PART II-OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
The Company has had no disagreements with its accountants on
accounting or financial disclosure issues. The disclosures called for related
to changes in accountants have been previously reported by the Company in Form
8-K's filed by the Company with the Securities and Exchange Commission on
February 4, 2002 and February 12, 2002.
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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: April 30, 2002 By: /s/ Virginia L. Pierpont
------------------------------------------------
Virginia L. Pierpont
President and Chief Executive Officer
By: /s/ Dennis C. Fairchild
------------------------------------------------
Dennis C. Fairchild
Chief Financial Officer, Secretary and Treasurer
(Principal Financial and Accounting Officer)
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