-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VqiVF5hrl25FBmxkTyM/SdLYdeMdK/YYyoOLKs1a01NoTlhJcG8wV2hi4AHSUI0Q mYpdYS+pB2hWeY4mwXurjA== 0001015402-01-502383.txt : 20010815 0001015402-01-502383.hdr.sgml : 20010815 ACCESSION NUMBER: 0001015402-01-502383 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DA CONSULTING GROUP INC CENTRAL INDEX KEY: 0001051209 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 760418488 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24055 FILM NUMBER: 1713401 BUSINESS ADDRESS: STREET 1: ONE EXETER PLAZA, FOURTH FLOOR CITY: BOSTON STATE: MA ZIP: 02116 BUSINESS PHONE: 6173752800 MAIL ADDRESS: STREET 1: ONE EXETER PLAZA STREET 2: FOURTH FLOOR CITY: BOSTON STATE: MA ZIP: 02116 10-Q 1 doc1.txt ================================================================================ 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, 2001. 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, SUITE 1100 HOUSTON, TEXAS 77057 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 361-3000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO NUMBER OF SHARES OUTSTANDING OF COMMON STOCK AS OF August 14, 2001 - - 8,418,604 ================================================================================ 1
DA CONSULTING GROUP, INC. INDEX PART I FINANCIAL INFORMATION PAGE NO. -------- Item 1. Financial Statements Condensed Consolidated Balance Sheets at June 30, 2001 and December 31, 2000 (unaudited) . . . . . . . . . . . . . . . . . . . . 3 Condensed Consolidated Statements of Operations for the Three Months ended June 30, 2001 and 2000 (unaudited). . . . . . . . . . . . . . . . . . . . 4 Condensed Consolidated Statements of Operations for the Six Months ended June 30, 2001 and 2000 (unaudited). . . . . . . . . . . . . . . . . . . . 4 Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2001 and 2000 (unaudited). . . . . . . . . . . . . . . . . . . . 5 Notes to Unaudited Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . 15 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 15 Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2 PART I-FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
DA CONSULTING GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) JUNE 30, DECEMBER 31, 2001 2000 ------------ -------------- ASSETS (Unaudited) ------ Current Assets: Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . $ 538 $ 949 Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . 3,653 5,226 Unbilled revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 206 Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . 663 708 Prepaid expenses and other current assets. . . . . . . . . . . . . . . 485 440 ------------ -------------- Total current assets . . . . . . . . . . . . . . . . . . . . . . . 5,521 7,529 ------------ -------------- Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . 6,811 8,130 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 254 Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . 5,885 8,647 Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . 370 380 ------------ -------------- Total assets. . . . . . . . . . . . . . . . . . . . . . . . . $ 18,784 $ 24,940 ============ ============== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current Liabilities: Revolving line of credit . . . . . . . . . . . . . . . . . . . . . . . $ 1,016 $ 154 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,678 1,840 Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,311 6,655 ------------ -------------- Total current liabilities. . . . . . . . . . . . . . . . . . . . . 8,005 8,649 ------------ -------------- Commitments and contingencies Shareholders' Equity: Preferred stock, $0.01 par value: 10,000,000 shares authorized . . . . - - Common stock, $0.01 par value: 40,000,000 shares authorized; 8,571,777 shares issued; 8,418,604 shares outstanding. . . . . . . . . . . . . 85 85 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 34,039 34,039 Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . (20,379) (15,082) Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . (1,444) (1,229) Treasury stock, at cost: 153,173 shares. . . . . . . . . . . . . . . . (1,522) (1,522) ------------ -------------- Total shareholders' equity . . . . . . . . . . . . . . . . . . . . 10,779 16,291 ------------ -------------- Total liabilities and shareholders' equity. . . . . . . . . . $ 18,784 $ 24,940 ============ ==============
The accompanying notes are an integral part of the condensed consolidated financial statements. 3
DA CONSULTING GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 -------- -------- -------- --------- Revenue. . . . . . . . . . . . . . . $ 7,607 $ 8,020 $16,143 $ 14,389 Cost of revenue. . . . . . . . . . . 4,572 5,262 9,565 11,190 -------- -------- -------- --------- Gross profit . . . . . . . . . . . 3,035 2,758 6,578 3,199 Selling and marketing expense. . . . 987 1,305 2,045 2,723 Development expense. . . . . . . . . 174 1,732 632 2,201 General and administrative expense . 2,999 4,405 6,522 10,523 Restructuring charge . . . . . . . . - - - 3,354 -------- -------- -------- --------- Operating loss . . . . . . . . . . (1,125) (4,684) (2,621) (15,602) -------- -------- -------- --------- Interest income, net . . . . . . . . 8 9 2 35 Other expense, net . . . . . . . . . (47) (39) (41) (39) -------- -------- -------- --------- Total other expense, net . . . . . (39) (30) (39) (4) -------- -------- -------- --------- Loss before income taxes . . . . . (1,164) (4,714) (2,660) (15,606) Provision (benefit) for income taxes 3,185 (1,641) 2,637 (5,064) -------- -------- -------- --------- Net loss . . . . . . . . . . . . . $(4,349) $(3,073) $(5,297) $(10,542) ======== ======== ======== ========= Basic loss per share . . . . . . . . $ (0.52) $ (0.48) $ (0.63) $ (1.64) Weighted average shares outstanding. 8,419 6,419 8,419 6,419 Diluted loss per share . . . . . . . $ (0.52) $ (0.48) $ (0.63) $ (1.64) Weighted average shares outstanding. 8,419 6,419 8,419 6,419
The accompanying notes are an integral part of the condensed consolidated financial statements. 4
DA CONSULTING GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) SIX MONTHS ENDED JUNE 30, 2001 2000 -------- --------- Cash flows from operating activities: Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(5,297) $(10,542) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . 1,232 1,610 Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,807 (5,253) Writedown of fixed assets and reserve for leasehold abandonment. . . . . . . 6 1,935 Changes in operating assets and liabilities: Accounts receivable and unbilled revenue . . . . . . . . . . . . . . . . . 1,597 4,909 Income tax receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . - 2,259 Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . (45) (84) Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 (153) Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . . . (1,436) 430 Deferred income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (67) Total adjustments. . . . . . . . . . . . . . . . . . . . . . . . . 4,218 5,586 -------- --------- Net cash used in operating activities. . . . . . . . . . . . . . . (1,079) (4,956) -------- --------- Cash flows from investing activities: Proceeds from sale of property and equipment . . . . . . . . . . . . . . . . . 56 227 Sales of short-term investments. . . . . . . . . . . . . . . . . . . . . . . . - 2,389 Purchases of property and equipment. . . . . . . . . . . . . . . . . . . . . . (35) (65) -------- --------- Net cash provided by investing activities. . . . . . . . . . . . . 21 2,551 -------- --------- Cash flows from financing activities: Proceeds from revolving line of credit . . . . . . . . . . . . . . . . . . . . 862 340 -------- --------- Net cash provided by financing activities. . . . . . . . . . . . . 862 340 -------- --------- Effect of changes in foreign currency exchange rate on cash and cash equivalents (215) (254) -------- --------- Decrease in cash and cash equivalents. . . . . . . . . . . . . . . (411) (2,319) -------- --------- Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . 949 3,406 Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . $ 538 $ 1,087 ======== =========
The accompanying notes are an integral part of the condensed consolidated financial statements. 5 DA CONSULTING GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION AND BUSINESS DA Consulting Group, Inc. ("DACG(TM)") together with its subsidiaries, the "Company," is a leading international provider of employee education and software solutions to companies investing in business information technology. Through its offices in seven countries, DACG delivers customized services for documentation and training necessary for implementation of extended enterprise software applications; technical and non-technical employee education and continuous learning programs; e-Learning applications such as computer-based-training and learning management systems; and consulting on human resource management, change management and change communications. The consolidated financial statements include the accounts of DA Consulting Group, Inc. and all majority-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. (2) BASIS OF PRESENTATION The unaudited condensed consolidated financial statements included herein have been prepared by the Company without an audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, pursuant to such rules and regulations. The unaudited condensed consolidated financial statements should be read in conjunction with the Company's consolidated financial statements for the year ended December 31, 2000, 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. New Accounting Pronouncements At June 30, 2001, the Financial Accounting Standard Board issued Statement of Financial Accounting Standards No. 141, Business Combinations, which requires that all business combinations be accounted for using the purchase method. In addition, this Statement requires that intangible assets be recognized as assets apart from goodwill if certain criteria are met. As the provisions of this Statement apply to all business combinations initiated after June 30, 2001, management will consider the impact of this statement for future combinations. At June 30, 2001, the Financial Accounting Standard Board issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets, which established Standards for reporting acquired goodwill and other intangible assets. This Statement accounts for goodwill based on the reporting units of the combined entity into which an acquired entity is integrated. In accordance with the statement goodwill and indefinite lived intangible assets will not be amortized, goodwill will be tested for impairment at least annually at the reporting unit level, intangible assets deemed to have an indefinite life will be tested for impairment at least annually, and the amortization period of intangible assets with finite lives will not be limited to forty years. The provisions of this Statement are required to be applied starting with fiscal years beginning after December 15, 2001. The Company has approximately $370,000 of goodwill included in its balance sheet at June 30, 2001. Goodwill amortization for the six months ended June 30, 2001 was approximately 10,000. Implementation of SFAS 142 by the Company would result in elimination of amortization of goodwill from acquisition under the purchase method of accounting. 6 (3) LIQUIDITY The Company believes its current cash balances, receivable-based financing, revolving line of credit and cash provided by future operations will be sufficient to meet the Company's working capital and cash needs for at least the next 12-month period. However, there can be no assurance that such sources of funds will be sufficient to meet these needs. The Company may seek additional financing through public or private placement of equity. The Company's need for additional financing will be principally dependent on the degree of market demand for the Company's services. There can be no assurance that the Company would be able to obtain additional financing on acceptable terms, if at all. (4) INCOME TAXES At June 30, 2001, the Company had $6.5 million of deferred tax assets, primarily consisting of net operating loss carryforwards, net of a $2.6 million valuation allowance attributable to prior years, which was recorded at June 30, 2001. In determining the amount of the valuation allowance, the Company considered numerous factors, including, among other things, historical profitability, estimated future taxable income and the volatility of earnings of the industry in which it operates. The primary factors considered in evaluating the realizability of the deferred tax asset and the level of valuation allowance were continued operating losses for the Americas through June 30, 2001, the Company's projection of future operating results and the number of years it will take to recover the tax asset in a difficult market. The provision for income taxes of $2.6 million for the six months ended June 30, 2001 reflects the valuation allowance. The remaining future benefit from utilization of net operating loss carryforwards could be subject to limitations if significant ownership changes occur in the Company. Additionally, the Company's ability to realize the entire benefit of its deferred tax asset requires the Company achieve certain future earnings levels prior to the expiration of its net operating loss carryforwards. To realize the net value of the deferred tax assets in the future, the Company would need to earn about $18.2 million before the expiration of the net operating loss carryforwards. Further, the Company could be required to record additional valuation allowances for a portion or all of its deferred tax assets if market conditions deteriorate further and future earnings are below, or projected to be below, its current estimates. The Company will periodically review its deferred tax asset to determine if such asset is realizable. The effective tax rate for the Americas for the six months ended June 30, 2001 was 0%. The effective tax rate of foreign operations was 30%. (5) DEBT Revolving Line of Credit In March 2000, the Company signed a credit facility agreement with an available line of approximately $1,065,000, based on eligible foreign accounts receivable. At June 30, 2001, the Company had drawn down $1.0 million of this line. The interest rate on this line of credit was 7.25% at June 30, 2001. Accounts Receivable Financing In March 2000, the Company signed an agreement with a bank, which provides for financing of eligible U.S. accounts receivable under a purchase and sale agreement. The maximum funds available under the agreement is $5 million. At June 30, 2001, the Company had sold $348,000 in accounts receivable pursuant to this agreement. 7 (6) OTHER CHARGES During the three month period ended March 31, 2000, the Company implemented a restructuring 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 of 2000. The Company reserved approximately $1.5 million expense attributable to involuntary employee termination benefits during the first quarter 2000, of which approximately $1.5 million has been paid through June 30, 2001. In addition, the Company reserved approximately $0.9 million related to the abandonment of leases and approximately $1.0 million related to the writedown of leasehold improvements, furniture and equipment held by its Americas division in the first quarter of 2000. During the fourth quarter of 2000, due to weakening in the real estate market, the Company recorded an additional $1.3 million reserve for lease abandonment resulting in a total annual charge of $2.2 million. Due to additional cost reductions implemented, an estimated liability of $0.6 million for future lease payments related to idle property was recorded during the second quarter of 2001 and included in general and administrative expenses. During 2000 and 2001, a combined $2.8 million has been reserved for lease abandonment, approximately $1.4 million has been paid against the reserve. Approximately $1.4 million remained accrued for future lease payments related to abandoned leases at June 30, 2001. (7) COMPREHENSIVE INCOME Comprehensive income is comprised of two components: net loss and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains and losses that under generally accepted accounting principles are recorded as an element of shareholders' equity and are excluded from net loss. Other comprehensive income is comprised of foreign currency translation adjustments from international subsidiaries. The components of comprehensive income are listed below (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------ ------------------- 2001 2000 2001 2000 -------- -------- -------- --------- Net loss. . . . . . . . . . . . . $(4,349) $(3,073) $(5,297) $(10,542) Other comprehensive income (loss) 116 (90) (215) (254) -------- -------- -------- --------- Comprehensive loss. . . . . . . . $(4,233) $(3,163) $(5,512) $(10,796) ======== ======== ======== =========
(8) 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. 8 The following table summarizes the Company's computation of earnings per share for the three months and six months ended June 30, 2001 and 2000 (in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------- 2001 2000 2001 2000 -------- -------- -------- --------- Basic loss per share. . . . . . . . . . . . . . . . . . $ (0.52) $ (0.48) $ (0.63) $ (1.64) ======== ======== ======== ========= Net loss. . . . . . . . . . . . . . . . . . . . . . . . $(4,349) $(3,073) $(5,297) $(10,542) ======== ======== ======== ========= Weighted average shares outstanding . . . . . . . . . . 8,419 6,419 8,419 6,419 Computation of diluted earnings per share: Common shares issuable under outstanding stock options - - - - Less shares assumed repurchased with proceeds from exercise of stock options. . . . . . . . . . . . . . . - - - - -------- -------- -------- --------- Adjusted weighted average shares outstanding . . . . . 8,419 6,419 8,419 6,419 ======== ======== ======== ========= Diluted loss per share. . . . . . . . . . . . . . . . . $ (0.52) $ (0.48) $ (0.63) $ (1.64) ======== ======== ======== =========
Approximately 963,000 antidilutive options were excluded from the calculation of diluted earnings per share for the three months and six months ended June 30, 2001. (9) GEOGRAPHIC FINANCIAL DATA Revenue from the Company's operations are presented below by operating division (in thousands):
EUROPE, MIDDLE EAST AMERICAS & AFRICA ASIA PACIFIC TOTAL ---------- ------------- -------------- --------- THREE MONTHS ENDED JUNE 30, 2001 Revenue. . . . . . . . . . . . $ 1,242 $ 4,717 $ 1,648 $ 7,607 Operating income (loss). . . . (1,903) 584 194 (1,125) 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, 2001 Revenue. . . . . . . . . . . . $ 3,652 $ 9,390 $ 3,101 $ 16,143 Operating income (loss). . . . (3,287) 621 45 (2,621) Total assets . . . . . . . . . 7,220 8,286 3,278 18,784 SIX MONTHS ENDED JUNE 30, 2000 Revenue. . . . . . . . . . . . $ 4,593 $ 6,163 $ 3,633 $ 14,389 Operating loss . . . . . . . . (12,186) (2,452) (964) (15,602) Total assets . . . . . . . . . 10,137 4,848 8,775 23,760
9 DA CONSULTING GROUP, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is an international provider of education for employees of companies which are implementing business information technology. The Company provides customized change communications, education and performance support services designed to maximize its clients' returns on their substantial investments in business information technology. Recognizing the global nature of its existing and prospective client base, the Company has built a substantial international presence. The Company is currently organized into three divisions: the Americas Division; the EMEA Division, which includes Europe; and the Asia Pacific Division, which includes its Australia and Asia operations. RESULTS OF OPERATIONS. THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000 Revenue. Revenue decreased by $0.4 million, or 5.1%, from $8.0 million in the second quarter of 2000 to $7.6 million in the second quarter of 2001, reflecting decreases in volume of professional services and bill rates partially offset by an increase in product revenue from 262,000 in 2000 to 345,000 in 2001. Revenue from the Americas Division decreased by 52.2% from $2.6 million to $1.2 million; revenue from the EMEA Division increased by 60.8% from $2.9 million to $4.7 million; and revenue from the Asia Pacific Division decreased by 33.7% from $2.5 million to $1.6 million. The Company ended the second quarter with 265 total employees, down from 337 employees at the end of the same period of the prior year. Billable headcount has decreased 24% compared to the first quarter 2001 and decreased 18% compared to the second quarter of 2000. Revenue for the second quarter of 2001 was 10.9% less than revenue in the first quarter of 2001 due to the continued weak performance in the United States. The Company expects continued weakness in the upcoming quarters. Gross profit. Gross profit increased by $0.2 million, or 10.0%, from $2.8 million in the second quarter of 2000 to $3.0 million in the second quarter of 2001 and increased as a percent of revenue from 34.4% in the second quarter of 2000 to 39.9% in the second quarter of 2001. The increase in the gross profit margin percentage is primarily attributable to improved recovery of travel costs, increased product sales offset partially by decreased bill rates. Selling and marketing expense. Selling and marketing expense decreased $0.3 million or 24.4%, from $1.3 million in the second quarter of 2000 to $1.0 million in the second quarter of 2001. The decrease is the result of cost reduction measures taken in the first quarter of 2000 and moving to a localized marketing and telesales effort in support of a team of account managers in 2001. Sales and marketing headcount totaled 22 persons at the end of June 30, 2000 and 2001. Development expense. Development expense decreased $1.5 million, or 90.0%, from $1.7 million in the second quarter of 2000 to $0.2 million in the second quarter of 2001. Primary expenditures for development in the first quarter of 2000 were for preparation of tools for the Version 4.6 SAP upgrade and development of the Company's proprietary web-based learning management system, Dynamic IQ, completed in 2000. The Company announced it will pursue investors or buyers for its web-based learning management system, Dynamic IQ. Revenue will not be negatively impacted as the product was recently introduced to the marketplace. The cost of the Dynamic IQ has previously been expensed. General and administrative expense. General and administrative expense decreased by $1.4 million, or 31.9%, from $4.4 million in the second quarter of 2000 to $3.0 million in the second quarter of 2001. The decrease in expense is due primarily to a reduction in headcount in the areas of finance, administration and human resources as a result of the cost containment plans. General and administrative personnel total 39 at the end of the second quarter of 2001 compared to 61 at the end of the second quarter of 2000. Expenses were reduced additionally in the second quarter of 2001 by the reversal of incentive compensation and other employee related accruals totaling $0.5 million and increased by charges establishing additional liabilities for idle leased facilities of $0.6 million. 10 Other charges. During the three month period ended March 31, 2000, the Company implemented a restructuring 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 of 2000. The Company reserved approximately $1.5 million expense attributable to involuntary employee termination benefits during the first quarter 2000, of which approximately $1.5 million has been paid through June 30, 2001. In addition, the Company reserved approximately $0.9 million related to the abandonment of leases and approximately $1.0 million related to the writedown of leasehold improvements, furniture and equipment held by its Americas division in the first quarter of 2000. During the fourth quarter of 2000, due to weakening in the real estate market, the Company recorded an additional $1.3 million reserve for lease abandonment resulting in a total annual charge of $2.2 million. Due to additional cost reductions implemented, an estimated liability of $0.6 million for future lease payments related to idle property was recorded during the second quarter of 2001 and included in general and administrative expenses. During 2000 and 2001, a combined $2.8 million has been reserved for lease abandonment, approximately $1.4 million has been paid against the reserve. Approximately $1.4 million remained accrued for future lease payments related to abandoned leases at June 30, 2001. Operating loss. Operating loss decreased from $4.7 million in the second quarter of 2000 to an operating loss of $1.1 million in the second quarter of 2001. This decrease resulted from improved gross margins, coupled with lower operating expenses partially offset by a decline in revenue as compared to the second quarter of 2000. Provision for income taxes. At June 30, 2001, the Company had $6.5 million of deferred tax assets, primarily consisting of net operating loss carryforwards, net of a $2.6 million valuation allowance attributable to prior years, which was recorded at June 30, 2001. In determining the amount of the valuation allowance, the Company considered numerous factors, including, among other things, historical profitability, estimated future taxable income and the volatility of earnings of the industry in which it operates. The primary factors considered in evaluating the realizability of the deferred tax asset and the level of valuation allowance were continued operating losses for the Americas through June 30, 2001, the Company's projection of future operating results and the number of years it will take to recover the tax asset in a difficult market. The provision for income taxes of $3.2 million for the three months ended June 30, 2001 reflects the valuation allowance. The remaining future benefit from utilization of net operating loss carryforwards could be subject to limitations if significant ownership changes occur in the Company. Additionally, the Company's ability to realize the entire benefit of its deferred tax asset requires the Company achieve certain future earnings levels prior to the expiration of its net operating loss carryforwards. To realize the net value of the deferred tax assets in the future, the Company would need to earn about $18.2 million before the expiration of the net operating loss carryforwards. Further, the Company could be required to record additional valuation allowances for a portion or all of its deferred tax assets if market conditions deteriorate further and future earnings are below, or projected to be below, its current estimates. The Company will periodically review its deferred tax asset to determine if such asset is realizable. The effective tax rate for the Americas for the three months ended June 30, 2001 was 0%. The effective tax rate of foreign operations was 30%. Net loss. The Company's net loss increased by $1.2 million from $3.1 million in the second quarter of 2000 to a net loss of $4.3 million in the second quarter of 2001 for reasons discussed above. Loss per share increased from $0.48 in the second quarter of 2000 to a loss per share of $0.52 in the second quarter of 2001. 11 SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000 Revenue. Revenue increased by $1.7 million, or 12.2%, from $14.4 million for the six months ended June 30, 2000 to $16.1 million for the first six months ended June 30, 2001, reflecting increases in product sales, volume of professional services and bill rates in the first quarter of 2001 partially offset by revenue and bill rate declines in the second quarter of 2001. Revenue from the Americas Division decreased by 20.5% from $4.6 million to $3.7 million; revenue from the EMEA Division increased by 52.4% from $6.2 million to $9.4 million; and revenue from the Asia Pacific Division decreased by 14.6% from $3.6 million to $3.1 million. Product revenue increased from $293,000 in the first half of 2000 to $690,000 in the first half of 2001. Gross profit. Gross profit increased by $3.4 million, or 105.6%, from $3.2 million for the six months ended June 30, 2000 to $6.6 million for the six months ended June 30, 2001 and increased as a percent of revenue from 22.2% in 2000 to 40.7% in 2001. The increase in the gross profit margin percentage is primarily attributable to increased product sales, staff utilization, improved recovery of travel costs and increased bill rates. Selling and marketing expense. Selling and marketing expense decreased $0.7 million or 24.9%, from $2.7 million for the six months ended June 30, 2000 to $2.0 million for the same period of 2001. The decrease is the result of cost reduction measures taken in the first quarter of 2000 and moving to a localized marketing and telesales effort in support of a team of account managers in 2001. Development expense. Development expense decreased $1.6 million, or 71.3%, from $2.2 million for the six months ended June 30, 2000 to $0.6 million for the same period of 2001. Primary expenditures for development in the first quarter of 2000 were for preparation of tools for the Version 4.6 SAP upgrade and development of the Company's proprietary web-based learning management system, Dynamic IQ, completed in 2000. General and administrative expense. General and administrative expense decreased by $4.0 million, or 38.0%, from $10.5 million for the six months ended June 30, 2000 to $6.5 million for the same period in 2001. 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. Expenses were reduced additionally in the second quarter of 2001 by the reversal of incentive compensation and other employee related accruals totaling $0.5 million and increased by charges establishing additional liabilities for idle leased facilities of $0.6 million. Other charges. During the three month period ended March 31, 2000, the Company implemented a restructuring 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 of 2000. The Company reserved approximately $1.5 million expense attributable to involuntary employee termination benefits during the first quarter 2000, of which approximately $1.5 million has been paid through June 30, 2001. In addition, the Company reserved approximately $0.9 million related to the abandonment of leases and approximately $1.0 million related to the writedown of leasehold improvements, furniture and equipment held by its Americas division in the first quarter of 2000. During the fourth quarter of 2000, due to weakening in the real estate market, the Company recorded an additional $1.3 million reserve for lease abandonment resulting in a total annual charge of $2.2 million. Due to additional cost reductions implemented, an estimated liability of $0.6 million for future lease payments related to idle property was recorded during the second quarter of 2001 and included in general and administrative expenses. During 2000 and 2001, a combined $2.8 million has been reserved for lease abandonment, approximately $1.4 million has been paid against the reserve. Approximately $1.4 million remained accrued for future lease payments related to abandoned leases at June 30, 2001. 12 Operating loss. Operating loss decreased from $15.6 million for the six months ended June 30, 2000 to an operating loss of $2.6 million for the same period of 2001. This decrease resulted from increases in revenue and resulting improved gross margins, coupled with lower operating expenses as compared to the first six months of 2000. Provision for income taxes. At June 30, 2001, the Company had $6.5 million of deferred tax assets, primarily consisting of net operating loss carryforwards, net of a $2.6 million valuation allowance attributable to prior years, which was recorded at June 30, 2001. In determining the amount of the valuation allowance, the Company considered numerous factors, including, among other things, historical profitability, estimated future taxable income and the volatility of earnings of the industry in which it operates. The primary factors considered in evaluating the realizability of the deferred tax asset and the level of valuation allowance were continued operating losses for the Americas through June 30, 2001, the Company's projection of future operating results and the number of years it will take to recover the tax asset in a difficult market. The provision for income taxes of $2.6 million for the six months ended June 30, 2001 reflects the valuation allowance. The remaining future benefit from utilization of net operating loss carryforwards could be subject to limitations if significant ownership changes occur in the Company. Additionally, the Company's ability to realize the entire benefit of its deferred tax asset requires the Company achieve certain future earnings levels prior to the expiration of its net operating loss carryforwards. To realize the net value of the deferred tax assets in the future, the Company would need to earn about $18.2 million before the expiration of the net operating loss carryforwards. Further, the Company could be required to record additional valuation allowances for a portion or all of its deferred tax assets if market conditions deteriorate further and future earnings are below, or projected to be below, its current estimates. The Company will periodically review its deferred tax asset to determine if such asset is realizable. The effective tax rate for the Americas for the six months ended June 30, 2001 was 0%. The effective tax rate of foreign operations was 30%. Net loss. The Company's net loss decreased by $5.2 million from $10.5 million for the six months ended June 30, 2000 to a net loss of $5.3 million for the six months ended June 30, 2001 for the reasons discussed above. Loss per share decreased from $1.64 for the six months ended June 3, 2000 to a loss per share of $0.63 for the same period of 2001 due partially to the number of shares outstanding and reasons discussed above. LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company has historically financed its operations and growth with cash flows from investment by stockholders, operations, short-term borrowings under revolving line of credit arrangements and receivables-based financing. The Company's cash and cash equivalents were $0.5 million at June 30, 2001, compared to $0.9 million at December 31, 2000. The Company's working capital deficit was $2.5 million at June 30, 2001 and $1.1 million at December 31, 2000. The Company's operating activities required cash of $1.1 million for the six months ended June 30, 2001, compared to $5.0 million for the same period in 2000. The decrease in cash used in operations resulted primarily from reduced operating losses incurred in of 2001. Investing activities provided cash of $21,000 in the six months ended June 30, 2001, compared to cash provided of $2.6 million for the same period in 2000. During the same period of 2000, the Company had net sales of short-term investments of $2.4 million. Financing activities provided cash of $0.9 million for the six months ended June 30, 2001 as a result of drawdowns on a short-term line of credit during the quarter compared to $340,000 during the during the six months ended June 30, 2000. The Company has an agreement with a bank, which provides for financing of eligible U.S. accounts receivable under a purchase and sale agreement. The maximum funds available under this agreement is $5.0 million. At June 30, 2001, the Company had sold $348,000 of receivables pursuant to this agreement. In March 2000, the Company obtained a credit facility from a bank with a maximum line of credit of approximately $1,065,000 based on eligible foreign accounts receivable. At June 30, 2001, the Company had borrowed $1.0 million against this line. 13 Capital expenditures for 2001 are not expected to be significant. The Company believes its current cash balances, receivable-based financing, revolving line of credit and cash provided by future operations will be sufficient to meet the Company's working capital and cash needs for at least the next 12-month period. However, there can be no assurance that such sources of funds will be sufficient to meet these needs. The Company may seek additional financing through public or private placement of equity. The Company's need for additional financing will be principally dependent on the degree of market demand for the Company's services. There can be no assurance that the Company would be able to obtain additional financing on acceptable terms, if at all. New Accounting Pronouncements At June 30, 2001, the Financial Accounting Standard Board issued Statement of Financial Accounting Standards No. 141, Business Combinations, which requires that all business combinations be accounted for using the purchase method. In addition, this Statement requires that intangible assets be recognized as assets apart from goodwill if certain criteria are met. As the provisions of this Statement apply to all business combinations initiated after June 30, 2001, Management will consider the impact of this statement for future combinations. At June 30, 2001, the Financial Accounting Standard Board issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets, which established Standards for reporting acquired goodwill and other intangible assets. This Statement accounts for goodwill based on the reporting units of the combined entity into which an acquired entity is integrated. In accordance with the statement goodwill and indefinite lived intangible assets will not be amortized, goodwill will be tested for impairment at least annually at the reporting unit level, intangible assets deemed to have an indefinite life will be tested for impairment at least annually, and the amortization period of intangible assets with finite lives will not be limited to forty years. The provisions of this Statement are required to be applied starting with fiscal years beginning after December 15, 2001. The Company has approximately $370,000 of goodwill included in its balance sheet at June 30, 2001. Goodwill amortization for the six months ended June 30, 2001 was approximately $10,000. Implementation of SFAS 142 by the Company would result in elimination of amortization of goodwill from acquisition under the purchase method of accounting. 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. 14 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, 2001, the Company did not hold any short-term investments. Currency exchange rate fluctuations between the U.S. dollar and the Euro, British pound, French franc, Canadian dollar, Singapore dollar, and the Australian dollar have an impact on revenue and expenses of the Company's international operations. Dramatic fluctuations could have a negative affect upon the Company's financial condition. DA CONSULTING GROUP, INC. PART II-OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None. (b) Reports on Form 8-K No reports on Form 8-K were filed during the reporting period ended June 30, 2001. 15 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, 2001 By: /s/ Virginia Pierpont -------------------------------------------- Virginia Pierpont Chairman and Interim Chief Executive Officer By: /s/ Dennis C. Fairchild -------------------------------------------- Dennis C. Fairchild Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) 16 -----END PRIVACY-ENHANCED MESSAGE-----