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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 Identification No.)
incorporation or organization)
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 May 12, 2000 - - 6,418,604
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DA CONSULTING GROUP, INC.
INDEX
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
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<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of December 31, 1999
and March 31, 2000 (unaudited)........................................... 3
Condensed Consolidated Statements of Operations for the Three Months ended
March 31, 1999 and 2000 (unaudited)...................................... 4
Condensed Consolidated Statement of Cash Flows for the Three Months ended
March 31, 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................ 10
</TABLE>
PART II
OTHER INFORMATION
<TABLE>
<S> <C>
Item 6. Exhibits and Reports on Form 8-K......................................... 11
Signatures......................................................................... 11
</TABLE>
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)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ ----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................... $ 3,406 $ 3,012
Short-term investments...................................................... 2,389 --
Accounts receivable: Trade, net............................................. 8,578 4,946
Unbilled revenue............................................................ 434 635
Income taxes receivable..................................................... 2,979 2,142
Deferred tax asset.......................................................... 445 445
Prepaid expenses and other current assets................................... 456 594
------- -------
Total current assets...................................................... 18,687 11,774
------- -------
Property and equipment, net................................................. 12,368 10,581
Other assets................................................................ -- 151
Deferred tax asset.......................................................... 1,464 4,836
Intangible assets, net...................................................... 399 395
------- -------
Total assets..................................................... $32,918 $27,737
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................................ $ 1,955 $ 2,463
Accrued expenses............................................................ 5,613 7,113
Revolving line of credit.................................................... -- 489
Deferred income............................................................. 112 67
------- -------
Total current liabilities.................................................. 7,680 10,132
------- -------
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 65 65
shares issued; 6,418,604 shares outstanding at December 31, 1999 and.......
March 31, 2000.............................................................
Additional paid-in capital.................................................. 29,355 29,355
Accumulated deficit......................................................... (1,865) (9,334)
Accumulated other comprehensive loss....................................... (795) (959)
Treasury stock, at cost: 153,173 shares at December 31, 1999 and
March 31, 2000............................................................. (1,522) (1,522)
------- -------
Total shareholders' equity................................................. 25,238 17,605
------- -------
Total liabilities and shareholders' equity.......................... $32,918 $27,737
======= =======
</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
March 31,
1999 2000
-------- --------
Revenue................................................. $24,129 $ 6,369
Cost of revenue......................................... 11,586 5,928
------- --------
Gross profit.......................................... 12,543 441
Selling and marketing expense........................... 1,864 1,418
Development expense..................................... 640 469
General and administrative expense...................... 7,822 6,118
Restructuring charge.................................... -- 3,354
------- --------
Operating income(loss)................................ 2,217 (10,918)
Interest income, net.................................... 140 26
Other expense, net...................................... (36) -
------- --------
Total other (expense) income, net...................... 104 26
------- --------
Income (loss) before taxes............................ 2,321 (10,892)
Provision (benefit) for income taxes.................... 853 (3,423)
------- --------
Net income (loss).................................... $ 1,468 $ (7,469)
======= ========
Basic earnings(loss) per share.......................... $ 0.22 $ (1.16)
Weighted average shares outstanding..................... 6,546 6,418
Diluted earnings (loss) per share....................... $ 0.22 $ (1.16)
Weighted average shares outstanding..................... 6,737 6,418
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
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DA CONSULTING GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1999 2000
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................................. $ 1,468 $(7,469)
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization............................................... 439 852
Deferred income taxes....................................................... 36 (3,371)
Write-down of fixed assets and reserve for leasehold abandonment............. -- 1,935
Changes in operating assets and liabilities:
Accounts receivable and unbilled revenue................................. (7,032) 3,431
Income tax receivable.................................................... 1,232 837
Prepaid expenses and other current assets................................ (675) (138)
Other assets............................................................. 52 (151)
Accounts payable and accrued expenses.................................... (110) 1,072
Deferred income.......................................................... (157) (45)
Income taxes payable..................................................... (298) --
------- -------
Total adjustments.................................................. (6,513) 4,421
------- -------
Net cash used in operating activities................ (5,045) (3,047)
------- -------
Cash flows from investing activities:
Sales of short-term investments............................................... 6,218 2,389
Purchases of short-term investments........................................... (2,260) --
Purchases of property and equipment........................................... (2,887) (61)
------- -------
Net cash (used in) provided by investing activities................ 1,071 2,328
------- -------
Cash flows from financing activities: -- --
------- -------
Proceeds from revolving line of credit........................................ -- 489
------- -------
Net cash provided by financing activities.......................... -- 489
------- -------
Effect of changes in foreign currency exchange rates on cash and cash
equivalents................................................................... (99) (164)
------- -------
Net decrease in cash and cash equivalents.......................... (4,073) (394)
Cash and cash equivalents at beginning of period................................ 9,971 3,406
------- -------
Cash and cash equivalents at end of period...................................... $ 5,898 $ 3,012
======= =======
Supplemental disclosure of non-cash activities:
Issuance of accounts payable to acquire common stock........................ $ 866 $ --
======= =======
</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 implementing
business information technology.
(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 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) RESTRUCTURING CHARGE
During the three-month period ended March 31, 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 attributable to involuntary employee
termination benefits during the quarter, of which $0.7 million was paid during
the three months ended March 31, 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. The Company believes the
plan will be fully implemented by the end of the second quarter and that the
provision is adequate to cover the future costs attributable to this plan.
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(4) 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 is comprised of foreign currency translation
adjustments from international subsidiaries. The components of comprehensive
income are listed below:
Three Months Ended
March 31,
---------------------
(in thousands) 1999 2000
------ --------
Net income (loss).............................. $1,468 $(7,469)
Other comprehensive loss....................... (99) (164)
------ -------
Comprehensive income (loss).................... $1,369 $(7,633)
====== =======
(5) 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 (loss)
per share for the three month period ended March 31, 1999 and 2000 (in
thousands, except per share amounts):
Three Months Ended
March 31,
-------------------
1999 2000
------ --------
Basic earnings (loss) per share.................. $ 0.22 $ (1.16)
====== =======
Net income (loss)................................ $1,468 $(7,469)
====== =======
Weighted average shares outstanding.............. 6,546 6,418
Computation of diluted earnings per share:
Common shares issuable under outstanding stock
options....................................... 910 -
Less shares assumed repurchased with proceeds
from exercise of stock options................ (719) -
------ -------
Adjusted weighted average shares outstanding... 6,737 6,418
====== =======
Diluted earnings (loss) per share................ $ 0.22 $ (1.16)
====== =======
Approximately 963,000 antidilutive options were excluded from the calculation
of diluted loss per share for the three months ended March 31, 2000.
7
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(6) GEOGRAPHIC FINANCIAL DATA
Revenues and operating income (loss) from the Company's operations are
presented below by operating division.
<TABLE>
<CAPTION>
Europe,
Middle East
(In thousands) Americas & Africa Asia Pacific Total
--------- ----------- ------------ ------
<S> <C> <C> <C> <C>
Three Months Ended March 31, 1999
Revenues............................. $15,203 $ 7,157 $ 1,769 $ 24,129
Operating income (loss).............. 1,437 980 (200) 2,217
Three Months Ended March 31, 2000
Revenues............................. 1,993 3,229 1,147 6,369
Operating loss....................... (8,174) (1,600) (1,144) (10,918)
</TABLE>
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 North, South, and Central America operations; the EMEA Division, which
includes its Europe, Middle East, and Africa operations; and the Asia Pacific
Division, which includes its Australia and Asia operations.
RESULTS OF OPERATIONS.
Three Months ended March 31, 1999 Compared to Three Months ended March 31, 2000
Revenue. Revenue decreased by $17.8 million, or 73.6%, from $24.1 million in
the first quarter of 1999 to $6.4 million in the first quarter of 2000,
reflecting decreases in volume of services and a decrease in bill rates.
Revenues from the Americas Division decreased by 86.9% from $15.2 million to
$2.0 million; revenues from the EMEA Division decreased by 54.9% from $7.2
million to $3.2 million; and revenues from the Asia Pacific Division decreased
by 35.2% from $1.8 million to $1.1 million. The Company ended the first quarter
with 402 total employees, down from 913 employees at the end of the same period
of the prior year. Revenue for the first quarter of 2000 was 22.9% less than
revenue in the fourth quarter of 1999 due to the continued slowdown in the
market for complex computer software and to the postponement of several
projects as clients focused on Year 2000 readiness. While the market for
enterprise resource planning software began recovering in the fourth quarter of
1999, the Company expects its revenues to begin recovery in the second quarter
of 2000, as historically, the Company's revenues lag the software sale by six
months.
Gross profit. Gross profit decreased by $12.1 million, or 96.5%, from $12.5
million in the first quarter of 1999 to $441,000 in the first quarter of 2000
and decreased as a percent of revenue from 52.0% in the first quarter of 1999 to
6.9% in the first quarter of 2000. The decrease in the gross profit margin
percentage is primarily attributable to decreased staff utilization and lower
hourly bill rates.
8
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Selling and marketing expense. Selling and marketing expense decreased
$446,000 or 23.9%, from $1.9 million in the first quarter of 1999 to $1.4
million in the first 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 first quarter
of 2000 as compared to the same period of 1999.
Development expense. Development expense decreased $171,000, or 26.7%, from
$640,000 in the first quarter of 1999 to $469,000 in the first quarter of 2000.
Primary expenditures for development in the first quarter of 2000 were for
preparation of tools for the 4.6 SAP upgrade and development of the Company's
proprietary web based learning system. The decrease in costs during the first
quarter of 2000 is due to 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 $1.7 million, or 21.8%, from $7.8 million in the first quarter of
1999 to $6.1 million in the first 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.
Restructuring charge. During the three-month period ended March 31, 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 attributable to involuntary
employee termination benefits during the quarter, of which $0.7 million was paid
during the three months ended March 31, 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 certain fixed assets. The
Company believes the provision is adequate to cover the future costs
attributable to implementation of the current plan.
Operating income (loss). Operating income decreased from $2.2 million in the
first quarter of 1999 to an operating loss of $10.9 million in the first quarter
of 2000. This decrease resulted from rapid decreases in revenues resulting in
lower expense coverage as compared to the revenues in the first quarter of 1999.
Other income (expense) net. Other income (expense), net changed from income
of $104,000 in the first quarter of 1999 to income of $26,000 in the first
quarter of 2000. Interest income, net changed from income of $140,000 in the
first quarter of 1999 to income of $26,000 in the first quarter of 2000. The
decrease in interest income is due to lower cash balances available for
investment during the first quarter of 2000.
Provision (benefit) for income taxes. The Company's effective tax rate was
36.8% in the first quarter of 1999 compared to 31.4% in the first quarter of
2000. The effective rate for the first quarter of 2000 is the result of
nondeductible permanent items and different tax rates in different tax
jurisdictions.
Net income (loss). The Company's net income decreased by $9.0 million
from $1.5 million in the first quarter of 1999 to a net loss of $7.5 million in
the first quarter of 2000 for reasons discussed above. Diluted earnings per
share decreased from $0.22 in the first quarter of 1999 to a loss per share of
$1.16 in the first quarter 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 and by short-term borrowings under revolving line of credit arrangements.
9
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The Company's cash and cash equivalents were $3.0 million at March 31, 2000,
compared to $3.4 million at December 31, 1999. The Company's working capital
was $1.6 million at March 31, 2000 and $11.0 million at December 31, 1999.
The Company's operating activities required cash of $3.0 million for the three
months ended March 31, 2000, compared to $5.0 million used in operations for the
same period in 1999. The decrease in cash used in operations resulted primarily
from operating losses incurred in the first quarter of 2000 offset by a
reduction in accounts receivable and an increase in accrued expenses.
Investing activities provided cash of $2.3 million in the three months ended
March 31, 2000, compared to cash provided of $1.1 million for the same period in
1999. During the first quarter of 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 $4.0 million, which was offset in part by $2.9
million of purchases of property and equipment.
Financing activities provided cash of $489,000 for the three months ended
March 31, 2000 as a result of a drawdown on a short term line of credit during
the quarter.
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 March 31,
2000, the Company had sold $255,000 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 $800,000, secured by eligible foreign
accounts receivable.
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, receivable-based financings
and cash provided by future operations will be sufficient to meet the Company's
current working capital and cash needs. However, there can be no assurance
that such sources of funds will be sufficient to meet these future expenses.
The Company may seek additional financing through a private placement of equity.
The Company's need for additional financing will be principally dependent on the
degree of market demand for the Company's services. There can be no assurance
that the Company will be able to obtain any such additional financing on
acceptable terms, if at all.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain statements that are not
historical facts which constitute forward-looking statements within the meaning
of the Private Securities Legislation Reform Act of 1995 which provides a safe
harbor for forward-looking statements. These forward-looking statements are
subject to substantial risks and uncertainties that could cause the Company's
actual results, performance or achievements to differ materially from those
expressed or implied by these forward-looking statements. When used in this
Report, the words "anticipate," "believe," "expect" and similar expressions as
they relate to the Company or its management are intended to identify such
forward-looking statements. Actual future results and trends may differ
materially from historical results as a result of certain factors, including but
not limited to: dependence on SAP AG and the ERP software market, risks
associated with management of a geographically dispersed organization,
fluctuating quarterly results, the need to attract and retain professional
employees, substantial competition, dependence on key personnel, risks
associated with management of growth, rapid technological change, limited
protection of proprietary expertise, methodologies and software, as well as
those set forth in the Risk Factors section and Management's Discussion and
Analysis section in the Company's Annual Report on Form 10-K and other filings
with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company from time to time, holds short-term investments, which consist of
variable rate municipal debt instruments. The Company uses a sensitivity
analysis technique to evaluate the hypothetical effect that changes in
10
<PAGE>
market interest rates may have on the fair value of the Company's investments.
At March 31, 2000, the Company did not hold any short term investments.
DA CONSULTING GROUP, INC.
PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the reporting period ended March
31, 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: May 12, 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)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,012
<SECURITIES> 0
<RECEIVABLES> 6,608
<ALLOWANCES> (1,662)
<INVENTORY> 0
<CURRENT-ASSETS> 11,774
<PP&E> 15,381
<DEPRECIATION> (4,800)
<TOTAL-ASSETS> 27,737
<CURRENT-LIABILITIES> 10,132
<BONDS> 0
0
0
<COMMON> 65
<OTHER-SE> (1,522)
<TOTAL-LIABILITY-AND-EQUITY> 27,737
<SALES> 6,369
<TOTAL-REVENUES> 6,369
<CGS> 5,928
<TOTAL-COSTS> 5,928
<OTHER-EXPENSES> 11,359
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,892)
<INCOME-TAX> (3,424)
<INCOME-CONTINUING> (7,469)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,469)
<EPS-BASIC> (1.16)
<EPS-DILUTED> (1.16)
</TABLE>
