SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 July 31, 2000 - - 6,418,604
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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 June 30, 2000 (unaudited) 3
Condensed Consolidated Statements of Operations for the Three Months ended
June 30, 1999 and 2000 (unaudited) 4
Condensed Consolidated Statements of Operations for the Six Months ended
June 30, 1999 and 2000 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Six Months ended
June 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 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART I
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 13
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2
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PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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<CAPTION>
DA CONSULTING GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
DECEMBER 31, JUNE 30,
1999 2000
ASSETS (Unaudited)
-------------- ----------
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Current Assets:
Cash and cash equivalents $ 3,406 $ 1,087
Short-term investments 2,389 --
Accounts receivable - trade, net 8,578 3,818
Unbilled revenue 434 285
Income taxes receivable 2,979 720
Deferred tax asset 445 514
Prepaid expenses and other current assets 456 540
-------------- ----------
Total current assets 18,687 6,964
-------------- ----------
Property and equipment, net 12,368 9,606
Other assets -- 153
Deferred tax asset 1,464 6,648
Intangible assets, net 399 389
-------------- ----------
Total assets $ 32,918 $ 23,760
============== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 1,955 $ 2,209
Accrued expenses 5,613 6,724
Revolving line of credit -- 340
Deferred income 112 45
-------------- ----------
Total current liabilities 7,680 9,318
-------------- ----------
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; 6,571,777
shares issued; 6,418,604 shares outstanding at December 31, 1999 and
June 30, 2000
65 65
Additional paid-in capital 29,355 29,355
Accumulated deficit (1,865) (12,407)
Accumulated other comprehensive losses (795) (1,049)
Treasury stock, at cost: 153,173 shares at December 31, 1999 and
June 30, 2000 (1,522) (1,522)
-------------- ----------
Total shareholders' equity 25,238 14,442
-------------- ----------
Total liabilities and shareholders' equity $ 32,918 $ 23,760
============== ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
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DA CONSULTING GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
========= ========
1999 2000 1999 2000
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenue $22,047 $ 8,020 $46,176 $ 14,389
Cost of revenue 11,305 5,262 22,890 11,190
-------- -------- -------- ---------
Gross profit 10,742 2,758 23,286 3,199
Selling and marketing expense 2,263 1,305 4,127 2,723
Development expense 614 1,732 1,254 2,201
General and administrative expense 7,615 4,405 15,437 10,523
Restructuring charge -- -- -- 3,354
-------- -------- -------- ---------
Operating income (loss) 250 (4,684) 2,468 (15,602)
Interest income, net 77 9 217 35
Other expense, net (52) (39) (88) (39)
-------- -------- -------- ---------
Total other income (expense), net 25 (30) 129 (4)
-------- -------- -------- ---------
Income (loss) before taxes 275 (4,714) 2,597 (15,606)
Provision (benefit) for income taxes 138 (1,641) 992 (5,064)
-------- -------- -------- ---------
Net income (loss) $ 137 $(3,073) $ 1,605 $(10,542)
======== ======== ======== =========
Basic earnings (loss) per share $ 0.02 $ (0.48) $ 0.25 $ (1.64)
Weighted average shares outstanding 6,388 6,419 6,466 6,419
Diluted earnings (loss) per share $ 0.02 $ (0.48) $ 0.24 $ (1.64)
Weighted average shares outstanding 6,489 6,419 6,628 6,419
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
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<CAPTION>
DA CONSULTING GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
1999 2000
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Cash flows from operating activities:
Net income (loss) $ 1,605 $(10,542)
Adjustments to reconcile net income(loss) to net cash used in
operating activities:
Depreciation and amortization 901 1,610
Deferred income taxes 207 (5,253)
Loss on sale of fixed assets 35 --
Writedown of fixed assets and reserve for leasehold abandonment -- 1,935
Changes in operating assets and liabilities:
Accounts receivable and unbilled revenue (3,118) 4,909
Income taxes receivable 1,310 2,259
Prepaid expenses and other current assets (979) (84)
Other assets. 120 (153)
Accounts payable and accrued liabilities (2,380) 430
Deferred income (580) (67)
Income taxes payable (198) --
-------- ---------
Total adjustments (4,682) 5,586
-------- ---------
Net cash used in operating activities (3,077) (4,956)
-------- ---------
Cash flows from investing activities:
Proceeds from sale of property and equipment 15 227
Sales of short-term investments 7,723 2,389
Purchases of property and equipment (5,388) (65)
-------- ---------
Net cash provided by investing activities 2,350 2,551
-------- ---------
Cash flows from financing activities:
Stock repurchases (1,943) --
Proceeds from exercise of stock options 532 --
Proceeds from revolving line of credit -- 340
-------- ---------
Net cash provided by (used in) financing activities (1,411) 340
-------- ---------
Effect of changes in foreign currency exchange rates on cash and cash equivalents (25) (254)
-------- ---------
Decrease in cash and cash equivalents (2,163) (2,319)
Cash and cash equivalents at beginning of period 9,971 3,406
-------- ---------
Cash and cash equivalents at end of period $ 7,808 $ 1,087
======== =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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 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.
(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 accounting principles, generally accepted in the United States,
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
investor loan received on August 3, 2000, the future proceeds from the sale of
common stock to investors, 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. There can be no assurance that the Company will be able to
obtain shareholder approval for the proposed equity placement or any other
additional financing.
(4) INCOME TAXES
At June 30, 2000, the Company had $7.2 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) RESTRUCTURING CHARGE
During the first quarter of 2000, the Company implemented a plan to address
the recent 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 fixed assets 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 $1.1 million was paid during the six
months ended June 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 leases,
approximately $0.4 has been paid against the reserve as of June 30, 2000. The
Company believes that the remaining provision is adequate to cover the future
costs attributable to this plan.
(6) COMPREHENSIVE INCOME
Comprehensive income is comprised of two components: net income (loss) and
other comprehensive income (loss). Other comprehensive income refers to
revenues, expenses, gains and losses that are recorded as an element of
stockholders' equity and are excluded from net income. Other comprehensive
income is comprised of foreign currency translation adjustments from
international subsidiaries. The components of comprehensive income are listed
below:
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<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 2000
--------------- ------------------
(in thousands) 1999 2000 1999 2000
----- -------- ------- ---------
<S> <C> <C> <C> <C>
Net income (loss) . . . . . . . . $ 137 $(3,073) $1,605 $(10,542)
Other comprehensive income (loss) 74 (90) (25) (254)
----- -------- ------- ---------
Comprehensive income (loss) . . . $ 211 $(3,163) $1,580 $(10,796)
===== ======== ======= =========
</TABLE>
(7) EARNINGS PER SHARE
Basic 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.
The following table summarizes the Company's computation of earnings per
share for the three months and six months ended June 30, 1999 and 2000 (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- ------------------
1999 2000 1999 2000
------- -------- ------- ---------
<S> <C> <C> <C> <C>
Basic earnings (loss) per share $ 0.02 $ (0.48) $ 0.25 $ (1.64)
======= ======== ======= =========
Net income (loss) $ 137 $(3,073) $1,605 $(10,542)
======= ======== ======= =========
Weighted average shares outstanding 6,388 6,419 6,466 6,419
Computation of diluted earnings per share:
Common shares issuable under outstanding stock options. 856 - 856 -
Less shares assumed repurchased with proceeds from
exercise of stock options ions (755) - (694) -
------- -------- ------- ---------
Adjusted weighted average shares outstanding 6,489 6,419 6,628 6,419
======= ======== ======= =========
Diluted earnings (loss) per share $ 0.02 $ (0.48) $ 0.24 $ (1.64)
======= ======== ======= =========
</TABLE>
7
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Approximately 1.3 million stock options were excluded from the calculation
of diluted earnings per share for the three months and six months ended June 30,
2000 as their effect is antidilutive.
.
(8) GEOGRAPHIC FINANCIAL DATA
Revenue, operating income (loss) from the Company's operations and total
assets are presented below by operating division. Operating losses during the
three and six months ended June 30, 2000 included restructuring charges.
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<CAPTION>
EUROPE,
MIDDLE EAST
(In thousands) AMERICAS & AFRICA ASIA PACIFIC TOTAL
<S> <C> <C> <C> <C>
---------- ------------- -------------- ---------
THREE MONTHS ENDED JUNE 30, 1999
Revenue $ 14,238 $ 5,750 $ 2,059 $ 22,047
Operating income (loss) 648 126 (524) 250
THREE MONTHS ENDED JUNE 30, 2000
Revenue $ 2,599 $ 2,934 $ 2,487 $ 8,020
Operating income (loss) (4,012) (852) 180 (4,684)
SIX MONTHS ENDED JUNE 30, 1999
Revenue $ 29,441 $ 12,907 $ 3,828 $ 46,176
Operating income (loss) 2,329 910 (771) 2,468
Total assets 36,305 7,517 2,299 46,121
SIX MONTHS ENDED JUNE 30, 2000
Revenue $ 4,593 $ 6,163 $ 3,633 $ 14,389
Operating income (loss) (12,186) (2,452) (964) (15,602)
Total assets 10,137 4,848 8,775 23,760
</TABLE>
(9) SUBSEQUENT EVENT
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. The closing of
the transaction is subject to shareholder approval. In connection with the
agreement, the investor has loaned the Company $2.0 million. This loan is
unsecured and will be credited towards the purchase price of shares of common
stock to be purchased by the investor at closing. If the Company does not
receive shareholder approval within 90 days, the loan is to be repaid in full
not later than 90 days following the date of the shareholder meeting at which
the approval is not obtained.
DA CONSULTING GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSI ON 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.
8
<PAGE>
RESULTS OF OPERATIONS.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
Revenue. Revenue decreased by $14.0 million, or 63.6%, from $22.0 million
in the second quarter of 1999 to $8.0 million in the second quarter of 2000,
reflecting decreases in volume of services and a decrease in bill rates.
Revenue from the Americas Division decreased by 81.7% from $14.2 million to $2.6
million; revenue from the EMEA Division decreased by 49.0% from $5.8 million to
$2.9 million; and revenue from the Asia Pacific Division increased by 20.8% from
$2.1 million to $2.5 million. The Company ended the second quarter with 337
total employees, down from 804 employees at the end of the same period of the
prior year. Revenue for the second quarter of 2000 increased by 25.9% compared
to revenue of $6.4 million in the first quarter of 2000 due to strong growth in
the AsiaPacific division and moderate gains in the Americas division.
Gross profit. Gross profit decreased by $8.0 million, or 74.3%, from $10.7
million in the second quarter of 1999 to $2.8 million in the second quarter of
2000 and decreased as a percent of revenue from 48.7% in the second quarter of
1999 to 34.4% in the second quarter of 2000. The decrease in the gross profit
margin percentage is primarily attributable to decreased staff utilization and
lower hourly bill rates. Gross profit for the second quarter of 2000 increased
by $2.3 million or 525% compared to the first quarter of 2000 due to increased
staff utilization and a higher average bill rate.
Selling and marketing expense. Selling and marketing expense decreased
$1.0 million or 42.3%, from $2.3 million in the second quarter of 1999 to $1.3
million in the second quarter of 2000. The decrease is the result of cost
reduction measures taken during the first quarter of 2000 and reduced
commissions expense related to the reduced level of sales in the second quarter
of 2000 as compared to the same period of 1999.
Development expense. Development expense increased $1.1 million or 182.1%,
from $0.6 million in the second quarter of 1999 to $1.7 million in the second
quarter of 2000. The increase in costs during the second quarter of 2000 is due
to fees incurred for the development of the Company's web-enabled learning
management product. The Company expects development costs related to the
web-enabled learning management system to be lower during the remainder of the
year.
General and administrative expense. General and administrative expense
decreased by $3.2 million, or 42.2%, from $7.6 million in the second quarter of
1999 to $4.4 million in the second 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 income (loss). Operating income decreased from $0.2 million in
the second quarter of 1999 to an operating loss of $4.7 million in the second
quarter of 2000. This decrease resulted from rapid decreases in revenues
beginning in the third quarter of 1999, resulting in lower expense coverage
during the second quarter of 2000 as compared to the revenues in the second
quarter of 1999.
Other income (expense) net. Other income (expense), net changed from
income of $25,000 in the second quarter of 1999 to expense of $30,000 in the
second quarter of 2000. Interest income, net decreased from income of $77,000
in the second quarter of 1999 to income of $9,000 in the second quarter of 2000.
The decrease in interest income is due to lower cash balances available for
investment during the second quarter of 2000.
Provision (benefit) for income taxes. The Company's effective tax rate was
50.2% in the second quarter of 1999 compared to a tax benefit rate of 34.8% in
the second quarter of 2000. The effective rate for both periods is affected by
nondeductible operating losses in various countries.
Net income (loss). The Company's net income (loss) decreased by $3.2
million from $0.1 million in the second quarter of 1999 to a net loss of $3.1
million in the second quarter of 2000 for reasons discussed above. Diluted
earnings per share decreased from $0.02 in the second quarter of 1999 to a loss
per share of $0.48 in the second quarter of 2000.
9
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SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Revenue. Revenue decreased by $31.8 million, or 68.8%, from $46.2 million
for the six months ended June 30, 1999 to $14.4 million for the six months ended
June 30, 2000, reflecting decreases in volume of services and a decrease in bill
rates. Revenue from the Americas Division decreased by 84.4% from $29.4
million to $4.6 million; revenue from the EMEA Division decreased by 52.2% from
$12.9 million to $6.2 million; and revenue from the Asia Pacific Division
decreased by 5.1% from $3.8 million to $3.6 million. While the market for
enterprise resource planning software began recovering in the fourth quarter of
1999, the Company did not begin to see evidence of recovery until the end of the
second quarter of 2000, as the Company's revenue generally lag the software sale
from three to six months.
Gross profit. Gross profit decreased by $20.1 million, or 86.3%, from
$23.3 million for the six months ended June 30,1999 to $3.2 million for the six
months ended June 30, 2000 and decreased as a percent of revenue from 50.4% in
1999 to 22.2% 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
$1.4 million or 34.0%, from $4.1 million for the six months ended June 30, 1999
to $2.7 million for the same period of 2000. The decrease is the result of cost
reduction measures taken during the first quarter of 2000 and reduced
commissions expense related to the reduced level of sales for the six months
ended June 30, 2000 as compared to the same period of 1999.
Development expense. Development expense increased $0.9 million or 75.5%,
from $1.2 million for the six months ended June 30, 1999 to $2.2 million for the
six months ended June 30, 2000. The increase in costs during the six months
ended June 30, 2000 is due to fees incurred for the development of the Company's
web-enabled learning management product. 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 $4.9 million, or 31.8%, from $15.4 million for the six months ended
June 30, 1999 to $10.5 million for the six months ended June 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 $0.6 million by
consolidating locations during the six months ended June 30, 2000.
Restructuring Charge. During the first quarter of 2000, the Company
implemented a plan to address the recent 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 fixed assets 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
$1.1 million was paid during the six months ended June 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 leases, approximately $0.4 has been paid against the
reserve as of June 30, 2000. The Company believes that the remaining provision
is adequate to cover the future costs attributable to this plan.
Operating income(loss). Operating income decreased from $2.6 million six
months ended June 30, 1999 to an operating loss of $15.6 million for the same
period of 2000. The decrease resulted from rapid decreases in revenues
beginning in the third quarter of 1999, resulting in lower expense coverage
during six months ended June 30, 2000 as compared to the revenues in the same
period of 1999.
Other income (expense) net. Other income (expense), net changed from
income of $129,000 for the six months ended June 30, 1999 to expense of $4,000
for the same period of 2000. Interest income, net decreased from income of
$217,000 for the six months ended June 30, 1999 to income of $35,000 for the
same period of 2000. The decrease in interest income is due to lower cash
balances available for investment during 2000.
10
<PAGE>
Provision (benefit) for income taxes. The Company's effective tax rate was
38.2% for the six months ended June 30, 1999 compared to a tax benefit rate of
32.4% for the six months ended June 30, 2000. The effective rate for the six
months ended June 30, 2000 is affected by nondeductible operating losses in
various countries.
Net income (loss). The Company's net income (loss) decreased by $12.1
million from $1.6 million for the six months ended June 30, 1999 to a net loss
of $10.5 million for the six months ended June 30, 2000 for reasons discussed
above. Diluted earnings per share decreased from $0.24 for the six months ended
June 30, 1999 to a loss per share of $1.64 for the same period of 2000.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has historically financed its operations
and growth with cash flow from operations, supplemented by the issuance of
Common Stock in connection with the Company's initial public offering and by
short-term borrowings under revolving line of credit arrangements.
The Company's cash and cash equivalents were $1.1 million at June 30, 2000,
compared to $3.4 million at December 31, 1999. The Company's working capital
was $(2.4) million at June 30, 2000 and $11.0 million at December 31, 1999.
The Company's operating activities required cash of $4.7 million for the
six months ended June 30, 2000, compared to $3.1 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 six months ended June 30, 2000
offset by a reduction in trade accounts receivable and collection of income
taxes receivables.
Investing activities provided cash of $2.3 million in the six months ended
June 30, 2000, compared to cash provided of $2.4 million for the same period in
1999. During the six months ended June 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, which was offset in
part by $5.4 million of purchases of property and equipment.
Financing activities provided cash of $340,000 for the six months ended
June 30, 2000 as a result of a drawdown 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 in part by $0.5 million 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 June 30,
2000, the Company had sold $349,000 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 $750,000, secured by eligible foreign
accounts receivable. At June 30, 2000, the Company had drawndown $340,000 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. The closing of
the transaction is subject to shareholder approval. In connection with the
agreement, the investor has loaned the Company $2.0 million. This loan is
unsecured and will be credited towards the purchase price of shares of common
stock to be purchased by the investor at closing. If the Company does not
receive shareholder approval within 90 days, the loan is to be repaid in full
not later than 90 days following the date of the shareholder meeting at which
the approval is not obtained.
Capital expenditures for the 2000 have been scaled back significantly due
to a temporary decline in the market for the Company's services.
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The Company believes its current cash balances, the proceeds of the
investor loan received on August 3, 2000, as previously discussed, the future
proceeds from the sale of common stock to investors, as previously discussed,
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 or 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. There can be no
assurance that the Company will be able to obtain shareholder approval for the
proposed equity placement or any other additional financing.
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, the ability of
the Company to obtain shareholder approval for its proposed equity financing, 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 June
30, 2000, the Company did not hold any short term investments.
DA CONSULTING GROUP, INC.
PART II-OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on June 6, 2000, the
shareholders of the Company elected three directors - two Class II directors and
one Class III director - and the shareholders ratified the appointment of their
independent accountants for the year ending December 31, 2000.
The matters voted upon at the Annual Meeting and the results of the voting
are set forth below:
<TABLE>
<CAPTION>
ELECTION OF DIRECTORS: VOTES VOTES BROKER
CLASS II DIRECTORS: VOTES FOR AGAINST ABSTAINED NON-VOTES
--------- ------- --------- ---------
<S> <C> <C> <C> <C>
Virginia L. Pierpont 4,338,128 18,325 - -
Richard W. Thatcher 4,338,128 18,325 - -
CLASS III DIRECTOR:
John E. Mitchell 4,338,128 18,325 - -
RATIFICATION OF INDEPENDENT ACCOUNTANTS 4,349,478 4,175 2,800 -
</TABLE>
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1 Employment agreement by and between DA Consulting
Group, Inc. and John E. Mitchell dated April 4, 2000
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the reporting period ended
June 30, 2000.
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: August 14, 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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