10-Q 1 doc1.txt DA CONSULTING GROUP 10-Q 9-30-2002 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 00-24055 DA CONSULTING GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) TEXAS 76-0418488 (STATE OR OTHER JURISDICTION OF I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 5847 SAN FELIPE, SUITE 1100 HOUSTON, TEXAS 77057 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 361-3000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] NUMBER OF SHARES OUTSTANDING OF COMMON STOCK AS OF November 12, 2002, 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~~September 30, 2002 (unaudited) and December 31, 2001 (audited) . . . . . . . . . . . . . . . . . . . . . . . 3 Condensed Consolidated Statements of Operations for the Three Months ended ~~June~~September 30, 2002 and 2001 (unaudited) . . . . . . . . . . . . . . . . . . 4 Condensed Consolidated Statements of Operations for the ~~Six~~Nine Months ended ~~June~~September 30, 2002 and 2001 (unaudited) . . . . . . . . . . . . . . . . . . 4 Condensed Consolidated Statements of Cash Flows for the ~~Six~~Nine Months ended ~~June~~September 30, 2002 and 2001 (unaudited) . . . . . . . . . . . . . . . . . . 5 Notes to Unaudited Condensed Consolidated Financial Statements . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . 1011 Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . 1316 Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . 16 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 1417 Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1417

PART I-FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DA CONSULTING GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) ~~JUNE~~SEPTEMBER 30, DECEMBER 31, 2002 2001 ~~ASSETS (Unaudited) (Audited)~~ ------ --------- --- ----------- ASSETS (Unaudited) (Audited) ------ Current Assets: Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . $ ~~677~~459 $ 373 Accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . . 23,~~776~~766 4,053 Unbilled revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . ~~275~~209 38 Deferred tax asset. . . . . . . . . . . . . . . . . . . . . . . . . . . ~~673~~156 629 Prepaid expenses and other current assets . . . . . . . . . . . . . . . ~~412~~395 352 --------------- -------------- Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 4,~~813~~985 5,445 --------------- -------------- Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . 43,~~283~~977 5,394 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ~~212~~208 177 Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,~~027~~291 5,990 ~~Intangible assets~~Goodwill, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 206 --------------- -------------- Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 1512,~~541~~667 $ 17,212 =============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current Liabilities: Revolving line of credit . . . . . . . . . . . . . . . . . . . . . . . $ ~~753~~1,015 $ 1,077 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,~~490~~468 1,759 Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,~~895~~310 3,272 --------------- -------------- Total current liabilities . . . . . . . . . . . . . . . . . . . . . 5,~~138~~793 6,108 --------------- -------------- Lease abandonment liabilities. . . . . . . . . . . . . . . . . . . . . . 572 801 --------------- -------------- 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 85 shares issued; 8,418,604 shares outstanding . . . . . . . . . . ~~. .~~ 85 85 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 34,039 34,039 Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . (2124,~~444~~901) (20,782) Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . (1,~~327~~399) (1,517) Treasury stock, 153,173 shares at cost . . . . . . . . . . . . . . . . (1,522) (1,522) --------------- -------------- Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . 96,~~831~~302 10,303 --------------- -------------- Total liabilities and shareholders' equity . . . . . . . . . . $ 1512,~~541~~667 $ 17,212 =============== ============== The accompanying notes are an integral part of the condensed consolidated financial statements.

DA CONSULTING GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) THREE MONTHS ENDED ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ~~JUNE~~SEPTEMBER 30, 2002 2001 2002 2001 ----------- ------------- ---------- ----------- Revenue. . . . . . . . . . . . . . . $ 5,~~419~~893 $ 75,~~607~~843 $12 18,~~317~~210 $16 21,~~143~~986 Cost of revenue. . . . . . . . . . . 3,~~405~~414 43,~~572~~332 710,~~180~~594 912,~~565~~897 ----------- ------------- ---------- ----------- Gross profit . . . . . . . . . . . 2,~~014~~479 32,~~035~~511 57,~~137~~616 69,~~578~~089 Selling and marketing expense. . . . 614 606 ~~987~~ 1,~~184~~798 2,~~045~~651 Development expense. . . . . . . . . 3640 ~~174~~28 81121 ~~632~~660 General and administrative expense . 2,~~305~~024 2,~~999~~222 46,~~426~~450 68,~~522~~745 ----------- ------------- ---------- ----------- Operating loss . . . . . . . . . . (~~933~~199) (~~1,125~~345) (~~554~~753) (2,~~621~~967) ----------- ------------- ---------- ----------- Interest income (expense), net . . . (510) 8(42) (1021) 2(40) Other expense, net . . . . . . . . . (222) (47201) (5576) (41242) ----------- ------------- ---------- ----------- Total other expense, net . . . . . (732) (39243) (6597) (39282) ----------- ------------- ---------- ----------- Loss before income taxes . . . . . ~~. .~~ (~~940~~231) (~~1,164~~588) (~~619~~850) (23,~~660~~249) Provision (benefit) for income taxes 3,226 (~~192~~30) 3,~~185~~269 43 2,~~637~~607 ----------- ------------- ---------- ----------- Net loss . . . . . . . . . . . . . $ (~~748~~3,457) $ (~~4,349~~558) $ (~~662~~4,119) $ (5,~~297~~856) =========== ============= ========== =========== Basic loss per share . . . . . . . . $ (0.0941) $ (0.5207) $ (0.0849) $ (0.6370) Weighted average shares outstanding. 8,419 8,419 8,419 8,419 Diluted loss per share . . . . . . . $ (0.0941) $ (0.5207) $ (0.0849) $ (0.6370) Weighted average shares outstanding. 8,419 8,419 8,419 8,419 The accompanying notes are an integral part of the condensed consolidated financial statements.

DA CONSULTING GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2002 2001 ---------- ----------- Cash flows from operating activities: Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ~~. . . .~~ $ (~~662~~4,119) $(5,~~297~~856) ---------- ----------- Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Loss on disposal of fixed assets. . . . . . . . . . . . . . . . . ~~. . .~~ 25 6 Depreciation and amortization . . . . . . . . . . . . . . . . . . ~~. . .~~ 1,~~114~~447 1,~~232~~869 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . .3,269 ~~. . 43~~ 2,807 Writedown of fixed assets and reserve for leasehold abandonment 157 Changes in operating assets and liabilities: Accounts receivable and unbilled revenue . . . . . . . . . . . . .116 1,~~040~~626 ~~1,597~~ Prepaid expenses and other current assets. . . . . . . . . . . . . (6043) (45) Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . (3531) 5759 Accounts payable and accrued expenses. . . . . . . . . . . . . . . (~~1,043~~627) (12,~~436~~225) ---------- ----------- Total adjustments . . . . . . . . . . . . . . . . . . . . . ~~. 1~~4,~~084~~156 4,~~218~~338 ---------- ----------- Net cash provided by (used in) operating activities . . . . .37 ~~422~~ (1,~~079~~518) ---------- ----------- Cash flows from investing activities: Proceeds from sale of property and equipment . . . . . . . . . . . . .24 .274 ~~. . 20 56~~ Purchases of property and equipment. . . . . . . . . . . . . . . . . ~~. . . .~~ (431) (3530) ---------- ----------- Net cash provided by (used in) investing activities . . . . .(7) .244 ~~. . . . 16 21~~ ---------- ----------- Cash flows from financing activities: ---------- ----------- (~~Repayment~~Repayments) proceeds from revolving line of credit, net. . . . . . ~~. . . . . . .~~ (~~324~~62) ~~862~~939 ---------- ----------- Net cash provided by (used in) financing activities . . . . . (~~324~~62) ~~862~~939 ---------- ----------- Effect of changes in foreign currency exchange rate on cash and cash equivalents . ~~190~~. . . . . . . . . . . . . . . . . . . . 118 (~~215~~284) ---------- ----------- Increase (decrease) in cash and cash equivalents . . . . . . .86 ~~304~~ (~~411~~619) Cash and cash equivalents at beginning of period. . . . . . . . . . . ~~. . . . . .~~ 373 949 ---------- ----------- Cash and cash equivalents at end of period. . . . . . . . . . . . . . ~~. . . . . .~~ $ ~~677~~459 $ ~~538~~330 ========== =========== Noncash activities: Other liabilities 801 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 or 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, learning management systems; and consulting on human resource management, change management and change communications. The condensed 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 should be read in conjunction with the Company's consolidated financial statements for the year ended December 31, 2001, included in the Company's Annual Report on Form 10-K. The unaudited condensed consolidated financial statements included herein have been prepared by the Company without an audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, pursuant to such rules and regulations. Operating results for the three months ended September 30, 2002 and the nine months ended September 30, 2002 are not necessarily indicative of the results which will be realized for the year ending December 31, 2002. The unaudited condensed consolidated financial information included herein reflects all adjustments, consisting only of normal recurring adjustments, which are necessary, in the opinion of management, for a fair presentation of the Company's financial position, results of operations and cash flows for the interim periods presented. New Accounting Pronouncements In June 2001, the Financial Accounting Standard Board finalized FASB Statement No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires us to recognize acquired intangible assets apart from goodwill if the acquired intangible asset meets certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that we reclassify the carrying amounts of intangible assets and goodwill based upon the criteria of SFAS 141. SFAS 142 requires, among other things, that we no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires us to identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires us to complete a transitional goodwill impairment test six months from the date of adoption and to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142 which we have done. The adoption of SFAS 141 and SFAS 142 have not had a material impact on our financial position and results of operations. 6 The Company has approximately $0.2 million of goodwill included in its balance sheet at September 30, 2002. Goodwill amortization for the year ended December 31, 2001, was $19,000. Implementation of SFAS 142 by the Company resulted in the elimination of amortization of goodwill for the current and future fiscal years. In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS 143), which amends SFAS No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies, is applicable to all companies. SFAS 143, which is effective for fiscal years beginning after June 15, 2002, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. As used in SFAS 143, a legal obligation is an obligation that a party is required to settle as a result of an existing or enacted law, statute, ordinance, or written or oral contract or by legal construction of a contract under the doctrine of promissory estoppel. While we are not yet required to adopt SFAS 143, we do not believe the adoption will have a material effect on our financial condition or results of operations. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a business segment. SFAS 144 also eliminates the exception to consolidation for a subsidiary for which control is likely to be temporary. The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The provisions of SFAS 144 generally are to be applied prospectively. It is anticipated that the financial impact of SFAS 144 will not have a material effect on the Company. In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (SFAS 145). This statement eliminates the current requirement that gains and losses on debt extinguishment must be classified as extraordinary items in the income statement. Instead, such gains and losses will be classified as extraordinary items only if they are deemed to be unusual and infrequent, in accordance with the current GAAP criteria for extraordinary classification. In addition, SFAS 145 eliminates an inconsistency in lease accounting by requiring that modifications of capital leases that result in reclassification as operating leases be accounted for consistent with sale-leaseback accounting rules. The statement also contains other nonsubstantive corrections to authoritative accounting literature. The changes related to debt extinguishment will be effective for fiscal years beginning after May 15, 2002, and the changes related to lease accounting will be effective for transactions occurring after May 15, 2002. Adoption of this standard will not have any immediate effect on the Company's consolidated financial statements. The Company will apply this guidance prospectively. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146), which addresses accounting for restructuring and similar costs. SFAS 146 supersedes previous accounting guidance, principally Emerging Issues Task Force (EITF) Issue No. 94-3. The Company will adopt the provisions of SFAS 146 for restructuring activities initiated after December 31, 2002. SFAS 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of a company's commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may affect the timing of recognizing future restructuring costs as well as the amount recognized. (3) MANAGEMENT'S RESTRUCTURING AND LIQUIDITY During the second quarter of 2000, management began to restructure the global operations of the Company. As part of the plan, management was required to downsize the Company based upon current and future projected operating results. Some of the restructuring initiatives taken by management were as follows: 7 - Reduction in the number of consultants - Reduction of administrative personnel - Reduction in office space - Various other cost cutting measures Management completed the restructuring of the Company during the third quarter of 2001 and achieved overall profitability in the fourth quarter of 2001 and first quarter of 2002. The Company recorded a loss in the second and third quarters of 2002 due to a decline in revenue and losses related to leases. There can be no assurance that profitability will be achieved in the future. The Company believes its current cash balances, revolving line of credit, receivable-based financing and cash provided by future operations will be sufficient to meet the Company's working capital and cash need for the next 12 months. However, there can be no assurance that such sources will be sufficient to meet these future expenses and the Company's future needs. The Company may seek additional financing through a private or public 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. (4) INCOME TAXES At September 30, 2002, the Company had $3.4 million of deferred tax assets primarily consisting of net operating loss carryforwards ("NOL"). The benefit from utilization of net operating loss carryforwards could be subject to limitations if significant ownership changes occur in the Company. The Company's ability to realize the entire benefit of its deferred tax assets requires that the Company achieve certain future earnings levels prior to the expiration of its NOL carryforwards. The Company has recorded a $7.6 million valuation allowance against deferred tax assets. A increase in the valuation allowance is a $3.3 million was recorded in the third quarter of 2002. The Company believes it will generate sufficient taxable income to realize the remaining deferred tax assets. The Company could be required to record a valuation allowance for a portion or all of its remaining deferred tax assets if market conditions deteriorate and future earnings are below, or projected to be below, its current estimates and management believes it is more likely than not the deferred tax assets will fail to be realized. (5) DEBT Revolving Line of Credit The Company has a credit facility from a foreign bank with an available line of approximately $1.1 million (750,000 Great Britain Pounds), collateralized by and based on eligible foreign accounts receivable, secured by a mortgage deed against all the assets of the Europe Division and guaranteed by the Company. At September 30, 2002, the Company had used approximately $1.0 million of the credit facility. The interest rate on this line of credit was 6% at September 30, 2002. The line of credit is available through March 2003, however, the line of credit is due upon demand. Accounts Receivable Financing The Company has an agreement with a bank, which provides for financing of eligible U.S. accounts receivable under a purchase and sale agreement. The maximum funds available under the agreement is $5.0 million. The agreement allows for the bank to request repurchase of an account receivable under certain conditions. The bank has never requested repurchase of a U.S. account receivable. At September 30, 2002, the Company had sold no accounts receivable pursuant to this agreement. (6) RESTRUCTURING CHARGE During the three months ended March 31, 2000, the Company implemented a plan to address the dramatic decline in training and documentation activity for enterprise resource planning implementations. The plan consisted of regional 8 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 three months ended March 31, 2000. The Company recognized approximately $1.5 million expense attributable to involuntary employee termination benefits during the three months ended March 31,2000, of which approximately $1.2 million had been paid at December 31, 2000. The remaining $0.3 million in termination pay was paid during 2001. During the three months ended March 31, 2000 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. 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. During the three months ended June 30, 2001, the Company recorded a $0.8 million charge for the abandonment of additional leases. The charge was included in general and administrative costs. During the three months ended June 30, 2002 the Company recorded losses on subleases of $0.2 million, which is included in general and administrative expense. Payments for unutilized leased office space totaling $2.2 million were charged against the reserve during 2000, 2001 and the first nine months ending September 30, 2002. At September 30, 2002, the Company has a remaining accrual of $1.0 million of which $0.6 million is included in long-term liabilities. (7) COMPREHENSIVE LOSS Comprehensive loss is comprised of two components: net loss and other comprehensive income (loss). Other comprehensive income (loss) is comprised of foreign currency translation adjustments from international subsidiaries that under accounting principles generally accepted in the United States of America are recorded as an element of shareholders' equity and are excluded from net loss. The components of comprehensive loss are listed below (in thousands):

THREE MONTHS ENDED ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ~~JUNE~~SEPTEMBER 30, ~~----------------- -----------------~~ 2002 2001 2002 2001 ------- ---~~-----~~ ------- ---~~-----~~ ~~Basic loss per share. . . . . . . . . . . . . . . . . . . . $(0.09) $ (0.52) $(0.08) $ (0.63)~~ ------- ---~~-----~~ ------- ---~~-----~~ Net loss. . . . . . . . . . . . . .$ .(3,457) ~~. . . . . . . . . . .~~ $ (~~748~~558) $ (4,~~349~~119) $ (~~662) $(~~5,~~297~~856) ======= ======== ======= ======== Weighted average shares outstanding . . . . . . . . . . . . 8,419 8,419 8,419 8,419 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~~Other ~~weighted~~comprehensive ~~average~~income ~~shares~~(loss) ~~outstanding~~(72) .(69) .118 .(284) .Comprehensive ~~. 8,419 8,419 8,419 8,419 ======= ======== ======= ======== Diluted~~ loss ~~per share~~. . . . . . . . ~~. . . . . . . . . . .~~ $ (~~0.09~~3,529) $ (~~0.52~~627) $ (~~0.08~~4,001) $ (~~0.63~~6,140) ========== ========== ========== ==========

9 (8) LOSS PER SHARE Basic loss per share has been computed based on the weighted average number of common shares outstanding during the applicable period. Diluted loss 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. Dilutive shares are excluded from the calculation below because the inclusion would be antidilutive. The following table summarizes the Company's computation of loss per share for the periods ended September 30, 2002 and 2001 (in thousands, except per share amounts):

~~EUROPE,~~THREE ~~MIDDLE~~MONTHS ~~EAST~~ENDED ~~AMERICAS~~NINE &MONTHS ~~AFRICA~~ENDED ~~ASIA~~SEPTEMBER ~~PACIFIC~~30, ~~TOTAL~~SEPTEMBER 30, -------------------- -------------------- 2002 2001 2002 2001 --------- --------- --------- ~~THREE~~--------- ~~MONTHS~~Basic ~~ENDED~~loss ~~JUNE~~per ~~30,~~share. ~~2002 Revenue~~. . . . . . . . . . . ~~$ 1,080 $ 2,976 $ 1,363 $ 5,419 Operating loss~~ . . . . . . . ~~(254)~~$ (~~641~~0.41) ~~(38)~~$ (~~933~~0.07) ~~THREE~~$ ~~MONTHS ENDED JUNE 30, 2001 Revenue~~(0.49) .$ (0.70) .========= .========= .========= .========= .Net .loss ~~. .~~ $ 1(3,~~242~~457) $ ~~4,717 $ 1,648 $ 7,607 Operating income~~ (~~loss~~558). .$ . (14,~~903~~119) ~~584~~$ ~~194~~ (15,~~125~~856) ~~SIX~~========= ~~MONTHS~~========= ~~ENDED~~========= ~~JUNE~~========= ~~30,~~Weighted ~~2002~~average ~~Revenue.~~shares .outstanding ~~. . . . . . . . . $ 1~~8,~~786~~419 ~~$ 7~~8,~~435~~419 ~~$ 3~~8,~~096~~419 ~~$12~~8,~~317~~419 ~~Operating~~Computation ~~income~~of ~~(loss).~~diluted .earnings .per ~~(697)~~share: ~~(24)~~Common ~~167~~shares ~~(554)~~issuable ~~Total~~under ~~assets.~~outstanding .stock .options .- .- .- .- .Less ~~6,675~~shares ~~5,774~~assumed ~~3,092~~repurchased ~~15,541~~with ~~SIX~~proceeds ~~MONTHS~~from ~~ENDED~~exercise ~~JUNE~~of ~~30,~~stock ~~2001~~options ~~Revenue.~~- .- .- .- .Adjusted .weighted .average .shares .outstanding .8,419 .8,419 ~~$ 3~~8,~~652~~419 ~~$ 9~~8,~~390~~419 $========= ~~3,101~~========= ~~$16,143~~========= ~~Operating~~========= ~~income~~Diluted (loss). .per .share $ (~~3,287~~0.41) ~~621~~$ 45 (~~2,621~~0.07) ~~Total~~$ ~~assets~~(0.49) .$ (0.70) .========= .========= .========= ~~. . 7,220 8,286 3,278 18,784~~=========

Approximately 1,480,000 antidilutive options and 3,000,000 antidilutive warrants were excluded from the calculation of diluted earnings per share for the periods ending in 2002. Approximately 1,329,000 antidilutive options and 3,000,000 antidilutive warrants were excluded from the calculation of diluted earnings per share for the periods ending in 2001. (9) GEOGRAPHIC FINANCIAL DATA Revenue from the Company's operations are presented below by operating divisions (in thousands):

10 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. CRITICAL ACCOUNTING POLICIES Income Taxes The Company recognizes deferred income taxes for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are determined based on the difference between the financial statement carrying amount and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance is provided against deferred tax assets which management considers more likely than not will fail to be realized. For the years ended December 31, 1999, 2000 and 2001, the Company incurred losses before income taxes of $11.3, $20.6 and $3.2 million, respectively. The Company incurred a loss before income taxes of $0.9 million for the nine months ended Septemeber 30, 2002. During the above periods, the Company generated net operating loss carryforwards for tax reporting purposes of approximately $32.1 million recording $11.0 million of deferred tax assets of which the Company has recorded a valuation allowance of approximately $7.6 million resulting in $3.4 million of deferred tax assets net of the allowance based upon managements estimate of future taxable income in the United States, against the deferred tax asset generated from the net operating loss carryforwards. There can be no assurance that management's restructuring plan in the United States will yield sufficient future taxable income necessary to utilize the net operating loss carryforwards recorded as a deferred tax asset by the Company. The ultimate realization of the deferred tax asset is dependent upon management's ability to grow the revenues of the Company in the United States, adhere to the cost saving measures put in place during the restructuring and generate sufficient future taxable income. Any future decline, if any, in the demand for the Company's services or the Company's inability to return to profitability in the United States will result in the Company being required to increase the valuation allowance against the deferred tax asset which would adversely affect the Company's financial position and operating results. Long-lived Assets Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets which considers the discounted future net cash flows. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs of disposal. 11 Revenue Recognition The majority of the Company's contracts with clients are based on time and expenses incurred with the remainder of the revenue generated from fixed price contracts. Accordingly, service revenue under both types of contracts is recognized as services are performed and the realization of the revenue is assured. Contract costs include direct labor costs and reimbursable expenses, and those indirect costs related to contract performance such as indirect labor. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Unbilled revenue represents the revenue earned in excess of amounts billed and deferred income represents billings in excess of revenue earned. Revenue includes reimbursable expenses directly incurred in providing services to clients. The Company recognizes product revenue upon shipment to the client if no further services are required. Accounting for Stock Options In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), which sets forth accounting and disclosure requirements for stock option and other stock-based compensation plans. The statement encourages, but does not require, companies to record stock-based compensation expense using a fair-value method, rather than the intrinsic-value method prescribed by Accounting Principles Board ("APB") Opinion No. 25. The Company has adopted only the disclosure requirements of SFAS No. 123 and has elected to continue to record stock-based compensation expense using the intrinsic-value approach prescribed by APB No. 25. Accordingly, the Company computes compensation cost as the amount by which the intrinsic vale of the Company's common stock exceeds the exercise price on the date of grant. The amount of compensation cost, if any, is charged to income over the vesting period. Property and Equipment Property and equipment are stated at cost. Expenditures for substantial renewals and betterments are capitalized, while repairs and maintenance are charged to expense as incurred. Assets are depreciated or amortized using the straight-line method for financial reporting purposes and accelerated methods for tax purposes over their estimated useful lives. Computer equipment is depreciated over a useful life of three to five years. Furniture is depreciated over a seven year useful life. Leasehold improvements are amortized over the term of the lease. In 1999 the Company capitalized $3.3 million in implementation costs related to the Company's primary information system. Purchased software and internal software development costs related to the Company's primary information system are amortized over a seven year period. Gains or losses from disposals of property and equipment are reflected in other expense. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2001 Revenue. Revenue increased by $0.1 million, or 0.9%, from $5.8 million in the third quarter of 2001 to $5.9 million in the third quarter of 2002, reflecting an increase in America and decreases in Asia. Product sales increased from $0.1 million in 2001 to $0.3 million in 2002. Revenue from the Americas Division increased by 76.9% from $0.8 million to $1.4 million; revenue from the EMEA Division remained at $3.7 million; and revenue from the Asia Pacific Division decreased by 39.7% from $1.3 million to $0.8 million. The Company ended the third quarter with 241 total employees, down from 268 employees at the end of the same period of the prior year. Billable employees total 186 at September 30, 2002 compared to 209 at September 30, 2001. Revenue for the third quarter of 2002 was 8.7% greater than revenue in the second quarter of 2002 due to project delays in the second quarter of 2002. The Company expects revenue to decline in the fourth quarter of 2002 but expects improvement in the first quarter of 2003. Gross profit. Gross profit decreased by $32,000, or 1.3%, totaling $2.5 million in the third quarter of 2001 and the third quarter of 2002 and decreased as a percent of revenue from 43.0% in the third quarter of 2001 to 42.1% in the third quarter of 2002. The decrease in the gross profit margin percentage is primarily attributable to decreased project and product margins offset partially by improved staff utilization. 12 Selling and marketing expense. Selling and marketing expense for the third quarter of 2002 and 2001 was $0.6 million reflecting 22 sales and marketing personnel in 2002 and 23 sales and marketing personnel in 2001. Development expense. Development expense increased $12,000, or 42.9%, from $28,000 in the third quarter of 2001 to $40,000 in the third quarter of 2002. Development expense includes two persons responsible for the creation of tools and methodology used by consultants at client projects. General and administrative expense. General and administrative expense decreased by $0.2 million, or 8.9%, from $2.2 million in the third quarter of 2001 to $2.0 million in the third quarter of 2002 The reduction in general and administrative expense was largely due to depreciation expense which decreased from $0.6 million in the third quarter of 2001 to $0.3 million in the third quarter of 2002. Operating loss. Operating loss decreased by $0.1 million from a loss of $0.3 million in the third quarter of 2001 to an operating loss of $0.2 million in the third quarter of 2002. The decreased operating loss resulted from a decline in depreciation. The operating loss decreased compared to a $0.9 million operating loss in the second quarter of 2002. Provision (benefit) for income taxes. The tax rate was increased due to the Company's decision not to record further tax benefits from losses in America beginning in the second quarter of 2001 and the decision to provide an additional $3.3 million valuation allowance against previously recorded deferred tax assets. The decision was based upon a continued slow market for the Company's services in America and incremental expenses the Company believes will be needed to reach continued profitability. Tax expense or benefit is recorded on taxable income of Europe and Asia at approximately 30%. At September 30, 2002, the Company had $3.4 million of deferred tax assets primarily consisting of net operating loss carryforwards. The benefit from utilization of net operating loss carryforwards could be subject to limitations if significant ownership changes occur in the Company. The Company's ability to realize the entire benefit of its deferred tax assets requires that the Company achieve certain future earnings levels prior to the expiration of its NOL carryforwards. At September 30, 2002, the Company has recorded a $7.6 million valuation allowance against deferred tax assets. The Company believes it will generate sufficient taxable income to realize the remaining deferred tax assets. The Company could be required to record a valuation allowance for a portion or all of its remaining deferred tax assets if market conditions deteriorate and future earnings are below, or are projected to be below, its current estimates and management believes it is more likely than not the deferred tax assets will fail to be realized. Net loss. The Company's net loss increased by $2.9 million from a $0.6 million loss in the third quarter of 2001 to a net loss of $3.5 million in the third quarter of 2002 largely due to the decision to record an additional valuation allowance against deferred tax assets offset partially by reduced expenses. Loss per share increased from a loss of $0.07 in the third quarter of 2001 to a loss per share of $0.41 in the third quarter of 2002. NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2001 Revenue. Revenue decreased by $3.8 million, or 17.2%, from $22.0 million for the nine months ended September 30, 2001 to $18.2 million for the nine months ended September 30, 2002, reflecting decreases in all divisions. Product sales increased from $0.8 million in 2001 to $1.1 million in 2002. Revenue from the Americas Division decreased by 27.9% from $4.5 million to $3.2 million; revenue from the EMEA Division decreased by 15.3% from $13.1 million to $11.1 million; and revenue from the Asia Pacific Division decreased by 12.1% from $4.4 million to $3.9 million. The Company ended the nine months with 241 total employees, down from 268 employees at the end of the same period of the prior year. Billable headcount has decreased to 186 at September 30, 2002 compared to 209 at September 30, 2001. Gross profit. Gross profit decreased by $1.5 million, or 16.2%, from $9.1 million for the nine months ended September 30, 2001 to $7.6 million for the nine months ended September 30, 2002 and increased as a percent of revenue from 41.3% in 2001 to 41.8% in 2002. The increase in the gross profit margin percentage is primarily attributable to modest increases in staff utilization offset partially by a modest decline in project margin and margin on product sales. 13 Selling and marketing expense. Selling and marketing expense decreased $0.9 million or 32.2%, from $2.7 million for the nine months ended September 30, 2001 to $1.8 million for the same period of 2002. The decrease is the result of reduced personnel costs, recruiting fees and a reduced expenditure for outside marketing professional fees and reduced commissions. Sales and marketing personnel total 22 at September 30, 2002 compared to 23 at September 2001. Development expense. Development expense decreased $0.6 million, or 81.7%, from $0.7 million for the nine months ended September 30, 2001 to $0.1 million for the same period of 2002. The decrease resulted primarily from reduction of personnel from 7 in 2001 to 2 in 2002 and reduced spending on development of a learning management system which was completed in 2001. General and administrative expense. General and administrative expense decreased by $2.2 million, or 26.3%, from $8.7 million for the nine months ended September 30, 2001 to $6.5 million for the same period in 2002. The decrease in expense is due primarily to a reduction in personnel, facilities, professional fees and depreciation. General and administrative personnel total 30 at the end of nine months ended September 30, 2002 compared to 35 at the end of the same period of 2001. Depreciation expense included in general and administrative costs decreased from $1.8 million in the nine months ended September 30, 2001 to $1.4 million for the same period of 2002. The third quarter of 2002 included a $0.2 million increase for a change in estimated life. Expenses for the first 9 months of 2001 included $0.6 million in charges for the termination of leases offset by the reversal of employee related reserves totaling $0.5 million. Operating loss. Operating loss decreased by $2.2 million from a loss of $3.0 million for the nine months ended September 30, 2001 to an operating loss of $0.8 million for the same period of 2002. The decreased operating loss resulted from a decline in operating expenses in excess of the decline in revenue. Provision (benefit) for income taxes. The tax rate was increased due to the Company's decision not to record further tax benefits from losses in America beginning in the second quarter of 2001 and the decision to provide an additional $3.3 million valuation allowance against previously recorded deferred tax assets. The decision was based upon a continued slow market for the Company's services in America and incremental expenses the company believes will be needed to reach continued profitability. Tax expense or benefit is recorded on taxable income of Europe and Asia at approximately 30%. At September 30, 2002, the Company had $3.4 million of deferred tax assets primarily consisting of net operating loss carryforwards. The benefit from utilization of net operating loss carryforwards could be subject to limitations if significant ownership changes occur in the Company. The Company's ability to realize the entire benefit of its deferred tax assets requires that the Company achieve certain future earnings levels prior to the expiration of its NOL carryforwards. At September 30, 2002, the Company has recorded a $7.6 million valuation allowance against deferred tax assets. The Company believes it will generate sufficient taxable income to realize the remaining deferred tax assets. The Company could be required to record a valuation allowance for a portion or all of its remaining deferred tax assets if market conditions deteriorate and future earnings are below, or are projected to be below, its current estimates and management believes it is more likely than not the deferred tax assets will fail to be realized. Net loss. The Company's net loss decreased by $1.8 million from a $5.9 million loss for the nine months ended September 30, 2001 to a net loss of $4.1 million for the same period in 2002 largely due to expense reductions offset partially by a decline in revenue. Loss per share decreased from a loss of $0.70 for the nine months ended September 30, 2001 to a loss per share of $0.49 for the same period of 2002. 14 LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company has historically financed its operations and growth with cash flows from the sale of common stock, operations, short-term borrowings under revolving line of credit arrangements and receivables-based financing. The Company's cash and cash equivalents were $0.5 million at September 30, 2002, compared to $0.4 million at December 31, 2001. The Company's working capital deficit was $0.8 million at September 30, 2002 and $0.7 million at December 31, 2001. The Company's operating activities provided cash of $ 37,000 for the nine months ended September 30, 2002, compared to a $1.5 million use of cash for the same period in 2001. The increase in cash provided by operations resulted primarily from decreased operating losses and a decrease in accounts receivable, offset partially by a decrease in accounts payable and an increase in valuation allowances for deferred taxes. Investing activities used $7,000 in cash in the nine months ended September 30, 2002, compared to cash provided of $0.2 million for the nine months in 2001 as the company liquidated unneeded and older equipment. The Company anticipates the need to lease or acquire small amounts of computer equipment throughout 2002 and 2003. Financing activities used cash of $0.1 million for the nine months ended September 30, 2002 to pay down its line of credit compared to $0.9 million cash provided by using the line of credit during the nine months ended September 30, 2001. The Company has a revolving line of credit from a foreign bank with a maximum line of credit of approximately $1.1 million based on eligible foreign accounts receivable. At September 30, 2002, the Company had borrowed $1.0 million against this line. The Company has an agreement with a bank, which provides for financing of eligible U.S. accounts receivable under a purchase and sale agreement. The maximum funds available under this agreement is $5.0 million. At September 30, 2002, the Company had sold no receivables pursuant to this agreement. 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. 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. 15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company from time to time holds short-term investments which consist of variable rate municipal debt instruments. The Company uses a sensitivity analysis technique to evaluate the hypothetical effect that changes in market interest rates may have on the fair value of the Company's investments. At September 30, 2002, the Company did not hold any short-term investments. Currency exchange rate fluctuations between the U.S. dollar and the Euro, British pound, Canadian dollar, Singapore dollar, and the Australian dollar have an impact on revenue and expenses of the Company's international operations. Dramatic fluctuations could have a negative affect upon the Company's financial condition. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures - The Corporation's Principal Executive Officer and Principal Financial Officer have reviewed and evaluated the effectiveness of the Corporation's disclosure controls and procedures [as defined in Rules 240.13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange Act)] as of a date within ninety days before the filing date of this quarterly report. Based on that evaluation, the Principal Executive Officer and the Principal Financial Officer have concluded that the Corporation's disclosure controls and procedures are effective, providing them with material information relating to the Corporation as required to be disclosed in the reports the Corporation files or submits under the Exchange Act on a timely basis. (b) Changes in internal controls - There were no significant changes in the Corporation's internal controls or in other factors that could significantly affect the Corporation's disclosure controls and procedures subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in the Corporation's internal controls. 16 DA CONSULTING GROUP, INC. PART II-OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are included in this form 10-Q: 99.1 Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 99.2 Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 99.3 Chief Executive Officer Certification pursuant to Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.4 Chief Financial Officer Certification pursuant to Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K None 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: October 30, 2002 By: /s/ Virginia L. Pierpont ------------------------------------ Virginia L. Pierpont President and Chief Executive Officer By: /s/ Dennis C. Fairchild ------------------------------------ Dennis C. Fairchild Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) 17

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