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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000.
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
incorporation or organization) Identification No.)
5847 SAN FELIPE ROAD, SUITE 3700
HOUSTON, TEXAS 77057
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 361-3000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
NUMBER OF SHARES OUTSTANDING OF COMMON STOCK AS OF November 10, 2000 - 8,418,604
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DA CONSULTING GROUP, INC.
INDEX
PART I
FINANCIAL INFORMATION
PAGE NO.
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1999
and September 30, 2000 (unaudited). . .. . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the Three Months ended
September 30, 1999 and 2000 (unaudited. . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Operations for the Nine Months ended
September 30, 1999 and 2000 (unaudited) . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the Nine Months ended
September 30, 1999 and 2000 (unaudited) . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements (unaudited) . . . . . 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. . . . . . . . 12
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . 13
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
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2
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PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DA CONSULTING GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ ------------
ASSETS (Unaudited)
-----
<S> <C> <C>
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . $ 3,406 $ 326
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . 2,389 --
Accounts receivable - net. . . . . . . . . . . . . . . . . . . . . . . 8,578 3,759
Unbilled revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 434 1,203
Income taxes receivable. . . . . . . . . . . . . . . . . . . . . . . . 2,979 1,080
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . 445 1,590
Prepaid expenses and other current assets. . . . . . . . . . . . . . . 456 413
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 18,687 8,371
------------ ------------
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . 12,368 8,779
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 133
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . 1,464 6,041
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . 399 385
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,918 $ 23,709
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,955 $ 1,961
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,613 5,368
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 3,016
Deferred income. . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 47
------------ ------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . 7,680 10,392
------------ ------------
Shareholder's Equity:
Preferred stock, $0.01 par value: 10,000,000 shares authorized . . . . -- --
Common stock, $0.01 par value: 40,000,000 shares authorized; 6,571,777
shares issued; 6,418,604 shares outstanding at December 31, 1999 and
September 30, 2000. . . . . . . . . . . . . . . . . . . . . . . . . . 65 65
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 29,355 29,355
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . (1,865) (13,291)
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . (795) (1,290)
Treasury stock, at cost: 153,173 shares at December 31, 1999 and
September 30, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . (1,522) (1,522)
------------ ------------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . 25,238 13,317
------------ ------------
Total liabilities and shareholders' equity . . . . . . . . . . . $ 32,918 $ 23,709
============ ============
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
3
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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,
1999 2000 1999 2000
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenue . . . . . . . . . . . . . . $15,804 $ 8,148 $61,980 $ 22,536
Cost of revenue . . . . . . . . . . 8,426 4,224 31,316 15,413
-------- -------- -------- ---------
Gross profit. . . . . . . . . . . 7,378 3,924 30,664 7,123
Selling and marketing expense . . . 1,621 1,154 5,748 3,877
Development expense . . . . . . . . 350 923 1,815 3,124
General and administrative expense. 9,012 3,739 24,238 14,262
Restructuring charge. . . . . . . . -- -- -- 3,354
-------- -------- -------- ---------
Operating loss. . . . . . . . . . (3,605) (1,892) (1,137) (17,494)
Interest income, net. . . . . . . . 92 15 309 50
Other income (expense), net . . . . (2) 43 (90) 4
-------- -------- -------- ---------
Total other income, net . . . . . 90 58 219 54
-------- -------- -------- ---------
Loss before taxes . . . . . . . . (3,515) (1,834) (918) (17,440)
Benefit for income taxes. . . . . . (1,318) (950) (326) (6,014)
-------- -------- -------- ---------
Net loss. . . . . . . . . . . $(2,197) $ (884) $ (592) $(11,426)
======== ======== ======== =========
Basic net loss per share. . . . . . $ (0.34) $ (0.14) $ (0.09) $ (1.78)
Weighted average shares outstanding 6,419 6,419 6,452 6,419
Diluted net loss per share. . . . . $ (0.34) $ (0.14) $ (0.09) $ (1.78)
Weighted average shares outstanding 6,419 6,419 6,452 6,419
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
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<TABLE>
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DA CONSULTING GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
1999 2000
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (592) $(11,426)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . 1,758 2,413
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 (5,722)
Loss on sale of property and equipment . . . . . . . . . . . . . . . . . . . 41 --
Writedown of property and equipment and reserve for leasehold
abandonment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 1,935
Changes in operating assets and liabilities:
Accounts receivable and unbilled revenue . . . . . . . . . . . . . . . . . (502) 4,050
Income taxes receivable. . . . . . . . . . . . . . . . . . . . . . . . . . 270 1,899
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . (1,028) 43
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 (133)
Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . . . (2,632) (1,174)
Deferred income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (639) (65)
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . (592) --
-------- ---------
Total adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,998) 3,246
-------- ---------
Net cash used in operating activities. . . . . . . . . . . . . . . . . . (3,590) (8,180)
-------- ---------
Cash flows from investing activities:
Proceeds from sale of property and equipment . . . . . . . . . . . . . . . . . 15 260
Sales of short-term investments. . . . . . . . . . . . . . . . . . . . . . . . 7,723 2,389
Purchases of short-term investments. . . . . . . . . . . . . . . . . . . . . . (5) --
Purchases of property and equipment. . . . . . . . . . . . . . . . . . . . . . (5,649) (70)
-------- ---------
Net cash provided by investing activities. . . . . . . . . . . . . . . . 2,084 2,579
-------- ---------
Cash flows from financing activities:
Stock repurchases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,943) --
Proceeds from stock option exercises . . . . . . . . . . . . . . . . . . . . . 537 --
Proceeds from bridge loan. . . . . . . . . . . . . . . . . . . . . . . . . . . -- 2,000
Net proceeds from revolving line of credit . . . . . . . . . . . . . . . . . . -- 1,016
-------- ---------
Net cash provided by (used in) financing activities . . . . . . . . . . (1,406) 3,016
-------- ---------
Effect of changes in foreign currency exchange rate on cash and cash equivalents 72 (495)
-------- ---------
Decrease in cash and cash equivalents. . . . . . . . . . . . . . . . . . (2,840) (3,080)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . 9,971 3,406
-------- ---------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . $ 7,131 $ 326
======== =========
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
5
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DA CONSULTING GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) ORGANIZATION AND BUSINESS
DA Consulting Group, Inc. and its subsidiaries (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, which includes
its North America operations; the EMEA Division, which includes its Europe
operations; and the Asia Pacific Division, which includes its Australia and Asia
operations.
(2) BASIS OF PRESENTATION
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 generally accepted accounting principles have been condensed or
omitted, pursuant to such rules and regulations. The unaudited condensed
consolidated financial statements should be read in conjunction with the
Company's consolidated financial statements and the notes thereto as of and for
the year ended December 31, 1999, included in the Company's Annual Report on
Form 10-K.
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. Certain reclassifications have been made to prior
year amounts to conform to the current year presentation. The results of
operations for the interim periods presented herein are not necessarily
indicative of the results to be expected for the full year.
(3) LIQUIDITY
The Company believes its current cash balances, the proceeds of the equity
financing received on October 16, 2000, receivable-based financings and cash
provided by future operations will be sufficient to meet the Company's working
capital and cash needs through the foreseeable future. However, there can be no
assurance that such sources of funds will be sufficient to meet these future
expenses and our future needs. The Company's need for additional financing
will be principally dependent on shareholder approval of the proposed equity
placement announced August 3, 2000 and the degree of future market demand for
the Company's services.
(4) INCOME TAXES
At September 30, 2000, the Company had $7.6 million of deferred tax assets
primarily consisting of unused net operating losses. The Company continues to
believe it will generate sufficient taxable income to ensure realization of the
benefit, accordingly, no valuation allowance has been provided.
The benefit from the utilization of net operating loss carryforwards could
be subject to limitations if significant ownership changes occur in the Company.
6
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(5) NOTES PAYABLE
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 million. As of September 30,
2000, the Company had sold $0.7 million of receivables pursuant to this
agreement. During March 2000, the Company obtained a credit facility from a
bank with a maximum line of credit of approximately $1.0 million, based on
eligible foreign accounts receivable. At September 30, 2000, the Company had
drawn down $1.0 million of this line.
On August 3, 2000, the Company signed an agreement with a private investor
for the purchase of two million shares of the Company's common stock for $4.8
million and warrants to purchase up to three million shares of the Company's
common stock in future periods as specified in the agreement. In connection
with the agreement, the investor loaned the Company $2.0 million. This loan was
unsecured and was credited towards the purchase price of shares of common stock
purchased by the investor at the closing of the transaction, which was October
16, 2000.
(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 has been paid at September 30, 2000. In addition the Company has
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. Of the $0.9 million
reserved for lease abandonment, approximately $0.6 has been paid against the
reserve. At September 30, 2000, the Company believes the remaining provision is
adequate to cover the future costs attributable to this plan. At September 30,
2000 an accrual of approximately $305,000 for severance pay remained related to
severance contracts being paid over a 12-month period. In addition,
approximately $273,000 remained accrued for future lease payments related to
abandoned leases.
(7) COMPREHENSIVE INCOME
Comprehensive income is comprised of two components: net income and other
comprehensive income. Other comprehensive income refers to revenues, expenses,
gains and losses that under generally accepted accounting principles are
recorded as an element of stockholder's equity and are excluded from net income.
Other comprehensive income (loss) comprises foreign currency translation
adjustments from international subsidiaries. The components of comprehensive
income (loss) are listed below:
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 1999 2000 1999 2000
-------- -------- ------ ---------
Net loss. . . . . . . . . . . . . $(2,197) $ (884) $(592) $(11,426)
Other comprehensive income (loss) 92 (241) 72 (495)
-------- -------- ------ ---------
Comprehensive loss. . . . . . . . (2,105) $(1,125) $(520) $(11,921)
======== ======== ====== =========
7
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(8) EARNINGS PER SHARE
Basic net earnings 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. As a result of net
losses for the applicable periods, common stock equivalents were antidilutive
and, accordingly, dilutive net earnings per share is the same as basic net
earnings per share for such periods.
Antidilutive stock options excluded from the diluted earnings per share
calculation were 1,015,920 for the three months and nine months ended September
30, 1999 and 1,353,970 for the three months and nine months ended September 30,
2000.
(9) GEOGRAPHIC FINANCIAL DATA
Revenue and operating income (loss) from the Company's operations are
presented below by operating division:
<TABLE>
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EUROPE,
MIDDLE EAST
AMERICAS & AFRICA ASIA PACIFIC TOTAL
(In thousands) ------------- ---------- -------------- ---------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 1999
Revenue . . . . . . . . . . . . . $ 8,827 $ 4,076 $ 2,901 $ 15,804
Operating income (loss) . . . . . . (2,811) (872) 78 (3,605)
THREE MONTHS ENDED SEPTEMBER 30, 2000
Revenue . . . . . . . . . . . . . $ 3,915 $ 2,549 $ 1,684 $ 8,148
Operating income (loss) . . . . . . (1,770) 31 (153) (1,892)
NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenue . . . . . . . . . . . . . $ 38,267 $ 16,984 $ 6,729 $ 61,980
Operating income (loss) . . . . . . (482) 38 (693) (1,137)
Total assets. . . . . . . . . . . . 32,105 7,714 3,498 43,317
NINE MONTHS ENDED SEPTEMBER 30, 2000
Revenue . . . . . . . . . . . . . $ 8,508 $ 8,711 $ 5,317 $ 22,536
Operating income (loss) . . . . . . (13,956) (2,421) (1,117) (17,494)
Total assets. . . . . . . . . . . . 17,054 4,360 2,295 23,709
</TABLE>
(10) SUBSEQUENT EVENT
On October 16, 2000, the Company consummated the sale to Purse Holding
Limited ("Purse"), a British Virgin Islands limited company, of two million
shares of the Company's common stock for $4.8 million and warrants to
purchase up to three million shares of the Company's common stock. The sale
was effected pursuant to a Securities Purchase Agreement ("the Agreement")
dated August 2, 2000, between the Company and Purse. The Agreement was
approved by the Company's shareholders at a special meeting held on October
12, 2000. The Company credited its $2 million loan, received from Purse on
August 3, 2000, toward the $4.8 million purchase price of the two million
shares of its common stock.
In accordance with the terms of the Agreement, the Company issued two
million shares of common stock at a price of $2.40 per share and warrants
to purchase (a) two million shares of common stock, exercisable until
October 16, 2003, at the greater of $3.00 per share or 85% of the market
price per share of common stock at the time of exercise, and (b) one
million shares of common stock, exercisable for the period of time after
January 1, 2002, and until October 16, 2003, at $3.00 per share.
8
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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, which includes
its United States and Canada operations; the EMEA Division, which includes its
Europe operations; and the Asia Pacific Division, which includes its Australia
and Asia operations.
RESULTS OF OPERATIONS.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
Revenue. Revenue decreased by $7.7 million, or 48.4%, from $15.8 million
in the third quarter of 1999 to $8.1 million in the third quarter of 2000,
reflecting decreases in volume of services and a decrease in average bill rates.
Revenue from the Americas Division decreased by 55.5% from $8.8 million to $3.9
million; revenue from the EMEA Division decreased by 37.4% from $4.1 million to
$2.5 million; and revenues from the Asia Pacific Division decreased by 42.0%
from $2.9 million to $1.7 million. The Company ended the third quarter with 306
total employees, down from 727 employees at the end of the same period of the
prior year. Revenue for the third quarter of 2000 increased by 1.6% compared to
revenue of $8.0 million in the second quarter of 2000 due to strong growth in
the Americas division offset by loss of revenue in the EMEA and Asia Pacific
divisions.
Gross profit. Gross profit decreased by $3.5 million, or 46.8%, from $7.4
million in the third quarter of 1999 to $3.9 million in the third quarter of
2000 and increased as a percent of revenue from 46.7% in the third quarter of
1999 to 48.2% in the third quarter of 2000. The increase in the gross profit
margin percentage is primarily attributable to increased staff utilization.
Gross profit for the third quarter of 2000 increased by $1.1 million or 42.2%
compared to the second quarter of 2000 due to increased staff utilization and a
higher average bill rate.
Selling and marketing expense. Selling and marketing expense decreased
$0.5 million or 28.8%, from $1.6 million in the third quarter of 1999 to $1.2
million in the third quarter of 2000. The decrease is the result of cost
reduction measures implemented during the first quarter of 2000 and reduced
commissions expense related to the reduced level of sales in the third quarter
of 2000 as compared to the same period of 1999.
Development expense. Development expense increased $0.6 million or
163.7%, from $0.4 million in the third quarter of 1999 to $0.9 million in the
third quarter of 2000. The increase in costs during the third quarter of 2000 is
due to professional fees incurred for the development of the Company's
web-enabled learning management system, which will be officially launched in
November.
General and administrative expense. General and administrative expense
decreased by $5.3 million, or 58.5%, from $9.0 million in the third quarter of
1999 to $3.7 million in the third quarter of 2000. 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
implemented during the latter half of 1999 and the first quarter of 2000.
Operating loss. Operating loss decreased from a loss of $3.6 million in
the third quarter of 1999 to an operating loss of $1.9 million in the third
quarter of 2000. This decrease in loss is related to cost reduction measures
taken during the first half of 2000, primarily in general and administrative
expense, which offset the decrease in revenue for the third quarter of 2000 as
compared to the same period of 1999.
9
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Other income (expense), net. Other income (expense), net changed from
income of $90,000 in the third quarter of 1999 to income of $58,000 in the third
quarter of 2000. Interest income, net decreased from $92,000 in the third
quarter of 1999 to $15,000 in the third quarter of 2000. The decrease in
interest income is due to lower cash balances available for investment.
Benefit for income taxes. The Company's effective tax rate was 37.5% in
the third quarter of 1999 compared to 51.8% in the third quarter of 2000. The
increase in the effective tax rate is due to a year-to-date adjustment to the
deferred tax asset in the Asia Pacific Division.
Net loss. The Company's net loss decreased by $1.3 million from $2.2
million in the third quarter of 1999 to $0.9 million in the third quarter of
2000 for the reasons discussed above. Basic and diluted net loss per share
decreased from $0.34 in the third quarter of 1999 to $0.14 in the third quarter
of 2000.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
Revenue. Revenue decreased by $39.4 million, or 63.6%, from $62.0 million
for the nine months ended September 30, 1999 to $22.5 million for the nine
months ended September 30, 2000, reflecting decreases in volume of services and
a decrease in average bill rates. Revenue from the Americas Division decreased
by 77.8% from $38.3 million to $8.5 million; revenue from the EMEA Division
decreased by 48.7% from $17.0 million to $8.7 million; and revenue from the Asia
Pacific Division decreased by 21.0% from $6.7 million to $5.3 million. While the
market for enterprise resource planning software began recovering in the fourth
quarter of 1999, the Company began seeing recovery in the second quarter of
2000, as the Company's revenue generally lag the software sale from three to
nine months.
Gross profit. Gross profit decreased by $23.5 million, or 76.8%, from
$30.7 million for the nine months ended September 30, 1999 to $7.1 million for
the nine months ended September 30, 2000 and decreased as a percent of revenue
from 49.5% in 1999 to 31.6% in 2000. The decrease in the gross profit margin
percentage is primarily attributable to decreased staff utilization and lower
hourly bill rates.
Selling and marketing expense. Selling and marketing expense decreased
$1.9 million or 32.6%, from $5.7 million for the nine months ended September
30,1999 to $3.9 million for the same period of 2000. The decrease is the result
of cost reduction measures implemented during the first quarter of 2000 and
reduced commissions expense related to the reduced level of sales for the nine
months ended September 30, 2000 as compared to the same period of 1999.
Development expense. Development expense increased $1.3 million or 72.1%,
from $1.8 million for the nine months ended September 30, 1999 to $3.1 million
for the nine months ended September 30, 2000. The increase in costs during the
nine months ended September 30, 2000 is due to professional fees incurred for
the development of the Company's web-enabled learning management system, which
will be officially launched in November. The Company expects development costs
related to the web-enabled learning management system to be lower during the
remainder of the year. These costs were offset in part by reduced headcount as
a result of cost containment plans implemented during the latter half of 1999
and the first quarter of 2000.
General and administrative expense. General and administrative expense
decreased by $10.0 million, or 41.1%, from $24.2 million for the nine months
ended September 30, 1999 to $14.3 million for the nine months ended September
30, 2000. 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 implemented during the latter half of 1999 and the first
quarter of 2000. In addition facilities costs were reduced by approximately
$1.7 million by consolidating locations during the nine months ended September
30, 2000.
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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 has been paid at September 30, 2000. In addition the Company has
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. Of the $0.9 million
reserved for lease abandonment, approximately $0.6 has been paid against the
reserve. At September 30, 2000, the Company believes that the remaining
provision is adequate to cover the future costs attributable to this plan. At
September 30, 2000 an accrual of approximately $305,000 for severance pay
remained related to severance contracts being paid over a 12-month period. In
addition, approximately $273,000 remained accrued for future lease payments
related to abandoned leases.
Operating loss. Operating loss increased from $1.1 million for the nine
months ended September 30, 1999 to $17.5 million for the same period of 2000.
The increase resulted from rapid decreases in revenue beginning in the third
quarter of 1999, resulting in lower expense coverage during nine months ended
September 30, 2000 as compared to the revenues in the same period of 1999.
Other income (expense) net. Other income (expense), net changed from
$219,000 for the nine months ended September 30, 1999 to $54,000 for the same
period of 2000. Interest income, net decreased from $309,000 for the nine
months ended September 30, 1999 to $50,000 for the same period of 2000. The
decrease in interest income is due to lower cash balances available for
investment.
Benefit for income taxes. The Company's effective tax rate was 35.5% for
the nine months ended September 30, 1999 compared to 34.5% for the nine months
ended September 30, 2000. The decrease in the effective rate is the result of
certain nondeductible foreign operating losses.
Net loss. The Company's net loss increased by $10.8 million from $0.6
million for the nine months ended September 30, 1999 to $11.4 million for the
nine months ended September 30, 2000 for reasons discussed above. Basic and
diluted net loss per share increased from $0.09 for the nine months ended
September 30, 1999 to $1.78 for the same period of 2000.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has historically financed its operations
with cash flow from operations, supplemented by the issuance of common stock and
short-term borrowings under revolving line of credit arrangements.
The Company's cash and cash equivalents were $0.3 million at September 30,
2000, compared to $3.4 million at December 31, 1999. The Company's working
capital deficit was $2.0 million at September 30, 2000 compared to working
capital surplus of $11.0 million at December 31, 1999.
The Company's operating activities required cash of $8.2 million for the
nine months ended September 30, 2000, compared to $3.6 million used in
operations for the same period in 1999. The increase in cash used in operations
resulted primarily from operating losses incurred in the nine months ended
September 30, 2000 and increase in deferred income taxes offset by a reduction
in accounts receivable and income taxes receivable.
Investing activities provided cash of $2.6 million in the nine months ended
September 30, 2000, compared to cash provided of $2.1 million for the same
period in 1999. During the nine months ended September 30, 2000, $2.4 million
was provided by the sale of short-term investments. During the same period of
1999 the Company had net sales of short-term investments of $7.7 million, offset
by $5.6 million of purchases of property and equipment.
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Financing activities provided cash of $3.0 million for the nine months
ended September 30, 2000 as a result of a bridge loan of $2 million provided by
Purse Holdings, Limited. In addition, the Company borrowed $1.0 million on a
short-term line of credit during the period. During the same period of 1999,
financing activities used cash of $1.4 million as a result of the Company
repurchasing 200,000 shares of common stock for $1.9 million offset by $0.5
million in proceeds from stock option exercises.
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 million. As of September 30,
2000, the Company had sold $0.7 million of receivables pursuant to this
agreement. During March 2000, the Company obtained a credit facility from a
bank with a maximum line of credit of approximately $1.0 million, based on
eligible foreign accounts receivable. At September 30, 2000, the Company had
drawn down $1.0 million of this line.
On October 16, 2000, the Company consummated the sale to Purse Holding
Limited ("Purse"), a British Virgin Islands limited company, of two million
shares of the Company's common stock for $4.8 million and warrants to purchase
up to three million shares of the Company's common stock. The sale was effected
pursuant to a Securities Purchase Agreement ("the Agreement") dated August 2,
2000, between the Company and Purse. The Agreement was approved by the
Company's shareholders at a special meeting held on October 12, 2000. The
Company credited its $2 million loan, received from Purse on August 3, 2000,
toward the $4.8 million purchase price of the two million shares of its common
stock.
Capital expenditures for the 2000 have been scaled back significantly due
to a temporary decline in the market for the Company's services.
The Company believes its current cash balances, the proceeds of the equity
financing received on October 16, 2000, receivable-based financings and cash
provided by future operations will be sufficient to meet the Company's working
capital and cash needs through 2001. However, there can be no assurance that
such sources of funds will be sufficient to meet these future expenses. The
Company's need for additional financing will be principally dependent on the
degree of future market demand for the Company's services.
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
September 30, 2000, the Company did not hold any short-term investments.
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DA CONSULTING GROUP, INC.
PART II-OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On October 16, 2000, the Company consummated the sale to Purse Holding
Limited ("Purse"), a British Virgin Islands limited company, of two million
shares of the Company's common stock for $4.8 million and warrants to purchase
up to three million shares of the Company's common stock. The sale was effected
pursuant to a Securities Purchase Agreement ("the Agreement") dated August 2,
2000, between the Company and Purse. The Agreement was approved by the
Company's shareholders at a special meeting held on October 12, 2000. The
Company credited its $2 million loan, received from Purse on August 3, 2000,
toward the $4.8 million purchase price of the two million shares of its common
stock.
In accordance with the terms of the Agreement, the Company issued two
million shares of common stock at a price of $2.40 per share and warrants to
purchase (a) two million shares of common stock, exercisable until October 16,
2003, at the greater of $3.00 per share or 85% of the market price per share of
common stock at the time of exercise, and (b) one million shares of common
stock, exercisable for the period of time after January 1, 2002, and until
October 16, 2003, at $3.00 per share.
These issues did not involve an underwriter. The Company considers these
securities to have been offered and sold in transactions not involving a public
offering and, therefore, to be exempted from the registration under Section 4(2)
of the Securities Act of 1933, as amended.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Special Meeting of Shareholders held on October 12, 2000,
the shareholders of the Company voted on the following matter:
Approval of the Securities Purchase Agreement ("the Agreement") between the
Company and Purse Holding Limited ("Purse"), a British Virgin Islands limited
company, dated August 2, 2000 and in connection with to approve, (i) the
issuance to Purse of two million shares of common stock, (ii) the issuance to
Purse of warrants to purchase up to three million shares of common stock and the
exercisability thereof, and (iii) approve the Board of Directors representation
rights granted to Purse, all as set forth in the Agreement.
The voting results were as follows:
VOTES VOTES
VOTES FOR AGAINST ABSTAINED
--------- ------- ---------
3,517,036 486,245 74,900
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
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(b) Reports on Form 8-K
On August 4, 2000, the Company reported that it had signed a
definitive agreement relating to the purchase by a private investor of two
million shares of the Company's common stock for $4.8 million and warrants to
purchase up to three million shares of the Company's common stock.
On October 27, 2000, the Company reported that it had consummated the
sale to Purse Holding Limited, two million shares of the Company's common stock
for $4.8 million and warrants to purchase up to three million shares of the
Company's common stock.
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 13, 2000 By: /s/ John E. Mitchell
-------------------------------------
John E. Mitchell
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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