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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 77057 (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 MAY 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 March 31, 2003 (unaudited)
and December 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the Three Months ended
March 31, 2003 and 2002 (unaudited) . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the Three Months ended
March 31, 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 . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . 13
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . 13
PART II
OTHER INFORMATION
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 14
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
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)
MARCH 31, DECEMBER 31,
2003 2002
------------ --------------
ASSETS (Unaudited)
------
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 343 $ 576
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . 2,582 3,615
Unbilled revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . 122 50
Deferred taxas set. . . . . . . . . . . . . . . . . . . . . . . . . . - 160
Prepaid expenses and other current assets . . . . . . . . . . . . . . 402 255
------------ --------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 3,449 4,656
------------ --------------
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . 3,366 3,670
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210 204
Deferred taxas set . . . . . . . . . . . . . . . . . . . . . . . . . . - 840
Goodwill, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 206
------------ --------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,231 $ 9,576
============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Revolving line of credit. . . . . . . . . . . . . . . . . . . . . . . $ 835 $ 1,335
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,489 1,268
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,366 3,319
------------ --------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . 5,690 5,922
------------ --------------
Lease abandonment liabilities. . . . . . . . . . . . . . . . . . . . . 202 396
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 . . . . . . . . . . . . . . . . . . . . . . . . . (30,136) (28,145)
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . (1,257) (1,329)
Treasury stock,153,173 shares at cost . . . . . . . . . . . . . . . . (1,522) (1,522)
------------ --------------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . 1,209 3,128
------------ --------------
Total liabilities and shareholders' equity . . . . . . . . . . . . $ 7,231 $ 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
MARCH 31,
2003 2002
------------ ----------
Revenue. . . . . . . . . . . . . . . $ 4,860 $ 6,898
Cost of revenue. . . . . . . . . . . 3,360 3,775
------------ ----------
Gross profit . . . . . . . . . . . 1,500 3,123
Selling and marketing expense. . . . 630 578
Development expense. . . . . . . . . 29 45
General and administrative expense . 1,730 2,121
------------ ----------
Operating income (loss). . . . . . (889) 379
------------ ----------
Interest expense, net. . . . . . . . (8) (6)
Other expense, net . . . . . . . . . (33) (52)
------------ ----------
Total other expense, net . . . . . (41) (58)
------------ ----------
Income (loss) before taxes . . . . (930) 321
Provision for income taxes . . . . . 1,061 235
------------ ----------
Net income (loss). . . . . . . . . $ (1,991) $ 86
============ ==========
Basic earnings (loss) per share. . . $ (.24) $ .01
Weighted average shares outstanding. 8,419 8,419
Diluted earnings (loss) per share. . $ (.24) $ .01
Weighted average shares outstanding. 8,419 8,872
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,
2003 2002
------------ ----------
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,991) $ 86
------------ ----------
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Loss on disposal of equipment - 26
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . 323 456
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,061 232
Changes in operating assets and liabilities:
Accounts receivable, netand unbilled revenue. . . . . . . . . . . . . . . . 961 (586)
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . (147) (73)
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6) (19)
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . 6 180
------------ ----------
Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,198 216
------------ ----------
Net cash provided by operating activities . . . . . . . . . . . . . . . . 207 302
------------ ----------
Cash flows used in investing activities:
Purchases of property and equipment. . . . . . . . . . . . . . . . . . . . . . (12) -
------------ ----------
Cash flows used in financing activities:
Repayment of revolving line of credit. . . . . . . . . . . . . . . . . . . . . (500) (407)
------------ ----------
Effect of changes in foreign currency exchange rate on cash and cash equivalents. 72 12
------------ ----------
Decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . . (233) (93)
Cash and cash equivalents at beginning of period. . . . . . . . . . . . . . . . . 576 373
------------ ----------
Cash and cash equivalents at end of period. . . . . . . . . . . . . . . . . . . . $ 343 $ 280
============ ==========
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 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 March 31, 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 in note 8 to the consolidated financial
statements for the year ended December 31, 2002 included in the Company's Annual
Report on Form 10-K.
6
3) LIQUIDITY, GOING CONCERN AND MANAGEMENTS PLANS
Significant losses were incurred for fiscal years 1999 through 2002. The Company
incurred significant losses in the quarter ending March 31, 2003 and revenue
expectations in the second quarter of 2003 have been short of expectations due
to a large project cancellation following the sale of a customer' business and
the continued difficult technology market. The Company is in negotiations to
merge with another company. In the event the merger is not completed, another
source of financing will be required for the Company to continue its operations.
Current financing is not adequate to continue as a going concern. 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.
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
May 16, 2003 the Company had borrowed $785,000 against the credit facility and
had $1,150,000 in collateralized receivables. The agreement requires
collateralization of 200% of receivables or $1,570,000. The Company is
requesting a waiver until the merger can be completed. There can be no
assurance that the Company will be able to obtain a waiver or additional
financing on acceptable terms, if at all.
At May 16, 2003 the Company had sold $0.4 million U. S. accounts receivables
under a receivable based financing agreement representing all eligible U. S.
accounts receivable.
(4) INCOME TAXES
At March 31, 2003 the Company had $11.6 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 $11.6 million
valuation allowance against deferred tax assets resulting in a net carrying
value of zero.
(5) DEBT
Revolving Line of Credit
The Company has a credit facility from a foreign bank with an available
line of approximately $1.2 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, 2003, the Company had used $0.8 million of the credit
facility. The interest rate on this line of credit was 5.75% at March 31, 2003.
The line of credit is available through March 2004, however, the line of credit
is due upon demand.
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
May 16, 2003 the Company had borrowed $785,000 against the credit facility and
had $1,150,000 in collateralized receivables. The agreement requires
collateralized receivables in the amount of $1,570,000. The Company is not in
compliance with this credit facility at May 20, 2003. The Company is requesting
a waiver.
Accounts Receivable Financing
7
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 March 31, 2003, the Company had sold $0.4 million accounts receivable
pursuant to this agreement. At May 16, 2003 the Company had sold $0.4 million
U. S. accounts receivables under a receivable based financing agreement
representing all eligible U. S. accounts receivable.
(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 March 31, 2003
payments charged to the reserve totaled $0.1 million and the reserve was reduced
by $0.1 million resulting in a reduction of general and administrative expenses.
The balance remaining at March 31, 2003 was $0.9 million of which $0.2 million
is recorded as long-term debt. During the three months ended March 31, 2002
payments against the reserve totaled $0.2 million and no adjustments of the
reserve were recorded.
(7) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of two components: net income
(loss) and other comprehensive income. Other comprehensive income 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 income (loss). The components
of comprehensive income (loss) are listed below (in thousands):
THREE MONTHS ENDED
MARCH 31,
2003 2002
------------ ---------
Net income (loss) . . . . . . . . . . $ (1,991) $ 86
Other comprehensive income. . . . . . 72 12
------------ ---------
Comprehensive income (loss) . . . . . $ (1,919) $ 98
============ =========
(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, 2003 and 2002 (in thousands, except
per share amounts):
THREE MONTHS ENDED
MARCH 31,
------------------------
2003 2002
------------- ---------
Basic earnings (loss) per share . . . . . . . . . . . . . .$ (0.24) $ 0.01
============= =========
Net income (loss) . . . . . . . . . . . . . . . . . . . . .$ (1,991) $ 86
============= =========
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. . . . . . . 8,419 8,872
============= =========
Diluted earnings (loss) per share . . . . . . . . . . . . .$ (0.24) $ 0.01
============= =========
8
Approximately 1,883,000 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, 2003. 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.
(9) PRO FORMA NET LOSS AND EARNINGS (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
March 31, 2003 and 2002 approximate the pro forma amounts below (in thousands,
except per share amounts):
THREE MONTHS ENDED
------------------------
MARCH 31,
------------------------
2003 2002
------------ ----------
Net income (loss), as reported $ (1,991) $ 86
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (100) (239)
------------ ----------
Pro forma (2,091) (153)
Basic and diluted earnings (loss) per share:
As reported . . . . . . . . . . . . . . $ (0.24) $ 0.01
Pro forma (0.25) (0.02)
The fair value of each stock option granted is estimated on the date of
grant using the minimum value method of option pricing based on the following
weighted-average assumptions: dividend yield of 0%; risk-free interest rates
ranging from 3.13% to 6.77%; volatility ranging from 50% to 137%; and expected
life of 5 years. The effects of applying SFAS 123 in this pro forma disclosure
are not indicative of future amounts.
(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 MARCH 31, 2003
Revenue $ 1,303 $ 2,087 $ 1,470 $4,860
Operating income (loss) . . . . (58) (1,019) 188 (889)
THREE MONTHS ENDED MARCH 31, 2002
Revenue $ 706 $ 4,459 $ 1,733 $6,898
Operating income (loss) . . . . (443) 617 205 379
DA CONSULTING GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
9
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 incurred additional significant losses for the first quarter of 2003.
At March 31, 2003, the Company had generated net operating loss carryforwards
for tax reporting purposes of approximately $33.6 million recording $12.2
million of deferred tax assets of which the Company has recorded a valuation
allowance of approximately $12.2 million resulting no deferred tax assets from
net operating loss carryover net of the allowance based upon management's
estimate of future taxable income, against the deferred tax asset generated from
the net operating loss carryforwards.
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
10
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 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 MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Revenue. Revenue decreased by $2 million, or 29.5%, from $6.9 million in
the first quarter of 2002 to $4.9 million in the first quarter of 2003,
reflecting decreases in Europe and Asia and an increase in America. Product
sales decreased from $0.5 million in 2002 to $0.1 million in 2003. Revenue from
the Americas Division increased by 84.6% from $0.7 million to $1.3 million;
revenue from the EMEA Division decreased by 53.2% from $4.5 million to $2.1
million; and revenue from the Asia Pacific Division decreased by 15.2% from $1.7
million to $1.5 million. The Company ended the first quarter with 220 total
employees, down from 258 employees at the end of the same period of the prior
year. Billable headcount has decreased 18% compared to the first quarter of
2002. Revenue for the first quarter of 2003 was 11.0% less than revenue in the
fourth quarter of 2002.
Gross profit. Gross profit decreased by $1.6 million, or 52.0%, from $3.1
million in the first quarter of 2002 to $1.5 million in the first quarter of
2003 and decreased as a percent of revenue from 45.3% in the first quarter of
2002 to 30.9% in the first quarter of 2003. The decrease in the gross profit
margin percentage is primarily attributable to decreased staff utilization, bill
rates and reduced recovery of travel costs offset partially by a increase in
margin on product sales.
Selling and marketing expense. Selling and marketing expense increased
$52,000 or 9.0%, from $578,000 in the first quarter of 2002 to $630,000 in the
first quarter of 2003. The increase is the result of purchased services. The
Company had 22 sales and marketing personnel in the first quarter of 2002 and
the first quarter of 2003.
Development expense. Development expense decreased $16,000, or 35.6%,
from $45,000 in the first quarter of 2002 to $29,000 in the first quarter of
2003 reflecting reduced spending on new tools.
General and administrative expense. General and administrative expense
decreased by $0.4 million, or 18.4%, from $2.1 million in the first quarter of
2002 to $1.7 million in the first quarter of 2003. The decrease in expense is
due primarily to a reduction in incentive pay, facilities and depreciation.
Depreciation expense included in general and administrative costs decreased from
$0.4 million in the first quarter of 2002 to $0.3 million in the first quarter
of 2003. Facilities expense was reduced by $0.2 million due to a reduction in
reserve requirements on abandoned facilities. General and administrative
personnel total 28 at the end of the first quarter of 2003 compared to 31 at the
end of the first quarter of 2002.
Operating income (loss). Operating income decreased by $1.3 million from
an operating income of $0.4 million in the first quarter of 2002 to an operating
loss of $0.9 million in the first quarter of 2003. The increase in operating
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loss resulted from a decline in revenue partially offset by reduced operating
expenses. The operating loss also increased by $0.2 million compared to $0.7
million loss in the fourth quarter of 2002.
Provision (benefit) for income taxes. The Company's effective tax rate was
114% in the first quarter of 2003 compared to 73.2% in the first quarter of
2002. The tax rate in the first quarter of 2003 was due to the Company's
reserve of all deferred tax assets related to net operating loss carryforwards.
12
At March 31, 2003, the Company had $11.6 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 has recorded
a $11.6 million valuation allowance against deferred tax assets.
Net income (loss). The Company's net income decreased by $2.1 million from
a net income of $0.1 million in the first quarter of 2002 to a net loss of $2.0
million in the first quarter of 2003 for reasons discussed above. Income per
share decreased from income per share of $0.01 in the first quarter of 2002 to
loss per share of $0.24 in the first quarter 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 $0.3 million at March 31,
2003, compared to $0.6 million at December 31, 2002. The Company's working
capital deficit was $2.2 million at March 31, 2003 and $1.3 million at December
31, 2002.
The Company's operating activities provided cash of $0.2 million for the
three months ended March 31, 2003, compared to cash provided of $0.3 million for
the same period in 2002. The decrease in cash provided by operations resulted
primarily from operating losses offset partially by an increase in accounts
receivable.
Investing activities required $12,000 in the three months ended March 31,
2003 for equipment purchases, compared to no cash requirement for the first
quarter in 2002. The Company anticipates the need to lease or acquire small
amounts of computer equipment throughout 2003.
Financing activities used cash of $0.5 million for the three months ended
March 31, 2003 to pay down its line of credit compared to cash used of $0.4
million to pay down its line of credit for the three months ended March 31,
2002.
The Company has a revolving line of credit from a foreign bank with a
maximum line of credit of approximately $1.2 million based on eligible
foreign accounts receivable. At March 31, 2003, the Company had borrowed
$0.8 million against this line.
The Company has an agreement with a bank, which provides for financing of
eligible U.S. accounts receivable under a purchase and sale agreement. The
maximum funds available under this agreement is $2.5 million. At March 31,
2003, the Company had sold $0.4 million receivables pursuant to this agreement.
Significant losses were incurred for fiscal years 1999 through 2002. The
Company incurred significant losses in the quarter ending March 31, 2003 and
revenue expectations in the second quarter of 2003 have been short of
expectations due to a large project cancellation following the sale of a
customer' business and the continued difficult technology market. The Company
is in negotiations to merge with another company. In the event the merger is
not completed, another source of financing will be required for the Company to
continue its operations. Current financing is not adequate to continue as a
going concern. 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
13
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 has not been able to maintain
compliance with its Europe based financing agreement on a consistent basis. At
May 16, 2003 the Company had borrowed $785,000 against the credit facility and
had $1,150,000 in collateralized receivables. The agreement requires
collateralization of 200% of receivables or $1,570,000. The Company is
requesting a waiver until the merger can be completed. There can be no
assurance that the Company will be able to obtain a waiver or additional
financing on acceptable terms, if at all.
At May 16, 2003 the Company had sold $0.4 million U. S. accounts
receivables under a receivable based financing agreement representing all
eligible U. S. accounts receivable.
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, 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
March 31, 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.
14
(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 May 16, 2003 the Company had borrowed $785,000
against the credit facility and had $1,150,000 in collateralized
receivables. The agreement requires collateralized receivables in the
amount of $1,570,000. The Company is requesting a waiver.
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.
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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)
Date: May 20, 2003 By: /s/ Virginia L. Pierpont
---------------------------------------
Virginia L. Pierpont
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 20, 2003 By: /s/ Dennis C. Fairchild
---------------------------------------
Dennis C. Fairchild
Chief Financial Officer, Executive Vice
President, Secretary and Treasurer
(Principal Financial and Accounting
Officer)
16
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: May 20, 2003 /s/ Virginia L. Pierpont
---------------------------
Virginia L. Pierpont
Chief Executive Officer
17
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: May 20, 2003 /s/ Dennis C. Fairchild
-----------------------------
Dennis C. Fairchild
Chief Financial Officer
18