10-Q 1 mainbody.txt DA CONSULTING GROUP 10Q 09-30-2003 ================================================================================ UNITED STATES 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, 2003. 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 77057 HOUSTON, TEXAS (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (713) 361-3000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) NOT APPLICABLE (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) 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 --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES NO X --- --- NUMBER OF SHARES OUTSTANDING OF COMMON STOCK AS OF November 14, 2003: 8,418,604 ================================================================================ 1 DA CONSULTING GROUP, INC. INDEX PART I FINANCIAL INFORMATION PAGE NO. -------- Item 1. Financial Statements Condensed Consolidated Balance Sheets at September 30, 2003 (unaudited) and December 31, 2002 (audited). . . . 3 Condensed Consolidated Statements of Operations for the Three Months ended September 30, 2003 and 2002 (unaudited). . . . 4 Condensed Consolidated Statements of Operations for the Nine Months ended September 30, 2003 and 2002 (unaudited). . 4 Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2003 and 2002 (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 Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . 15 PART II OTHER INFORMATION Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . 15 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 16 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 2 PART I-FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DA CONSULTING GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts)

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)

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)

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)" and, together with its subsidiaries, the "Company") is an international provider of employee education and software solutions to companies investing in business information technology. Through its offices in six 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 DACG and all wholly 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, 2002, 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 (the "SEC"). 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, 2003 and the nine months ended September 30, 2003 are not necessarily indicative of the results which will be realized for the year ending December 31, 2003. 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 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 adopted 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. Adoption of SFAS 146 in the first quarter of 2003 did not have a material effect on the Company's financial statements. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure (SFAS 148), which amended SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123). The new standard provides alternative methods of transition for a voluntary change to the fair-value-based method of accounting for stock-based employee compensation. Additionally, the statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in the annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This statement is effective for financial statements for fiscal years ending after December 15, 2002. In compliance with SFAS 148, DACG has elected to continue to follow the intrinsic value method in accounting for its stock-based employee compensation arrangement as defined by Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employee, and has made the applicable disclosures to the condensed consolidated financial statements. 6 In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for contracts entered into or modified after June 3, 2003, and for hedging relationships designated after June 30, 2003. We do not expect that the adoption of this Statement will have a material impact on our financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of these instruments were previously classified as temporary equity. SFAS 150 will be effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this Statement will not have a material impact on our financial position or results of operations. (3) LIQUIDITY, GOING CONCERN AND MANAGEMENT'S PLANS Significant losses were incurred for fiscal years 1999 through 2002. The Company incurred significant losses in the first three quarters of 2003. The Company has reduced both facilities costs and staff. The Company is discussing possible merger opportunities and equity transactions. Continued losses and the uncertainty of the Company's ability to obtain additional capital raise substantial doubt about the Company's ability to continue as a going concern. To the extent a merger is not completed, the cash generated from the line of credit, possible equity transactions, receivables-based financing and continued operations are insufficient to meet the Company's current working capital needs, the Company will have to raise additional capital. No assurance can be given that additional funding will be available or, if available, will be on terms acceptable to the Company. Uncertainty regarding the amount and timing of any proceeds from the Company's plans to obtain additional capital raises substantial doubt about the Company's ability to continue as a going concern. The Company's independent auditors have advised Management that absent any significant improvements in the Company's financial position, their opinion on the financial statements for the year ended December 31, 2003 will include an explanatory paragraph discussing this going concern uncertainty. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. At September 30, 2003 the Company had borrowed $1.7 million exceeding the credit facility by $32,000. The facility is secured by a mortgage deed against all assets of the European Division, guaranteed by the Company and its CEO. The line may not exceed 133% of eligible European receivables. At November 11, 2003 the Company had borrowed $1,643,574 against the credit facility and had $1,420,701 in collateralized receivables. The line expires on February 25, 2004 unless renewed. At November 11, 2003 the Company had sold $0.1 million U. S. accounts receivables under a receivable based financing agreement representing all eligible U. S. accounts receivable. (4) INCOME TAXES At September 30, 2003 the Company had $12.0 million of net 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 asset requires that the Company achieve certain future earnings levels prior to the expiration of its net operating loss carryforwards. The Company has recorded a $12.0 million valuation allowance against deferred tax assets resulting in a net carrying value of zero. 7 (5) DEBT Revolving Line of Credit At September 30, 2003 the Company had borrowed $1.7 million exceeding the credit facility by $32,000. The facility is secured by a mortgage deed against all assets of the European Division, guaranteed by the Company and its CEO. The line may not exceed 133% of eligible European receivables. At November 11, 2003 the Company had borrowed $1,643,574 against the credit facility and had $1,420,701 in collateralized receivables. The line expires on February 25, 2004 unless renewed. 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 $0.5 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, 2003, the Company has sold $0.1 million eligible accounts receivable pursuant to this agreement. Insurance Financing The Company has a note payable for insurance financing with $0.1 million outstanding at September 30, 2003. Payments required under the note total $27,000 per month. (6) LEASE LIABILITIES The Company has recorded liabilities related to losses on leases abandoned and termination liabilities on leases requiring the leased property be returned to its original condition. During the three months ended September 30, 2003 payments charged to the reserve totaled $0.2 million. The reserve was reduced by $0.1 million during the first quarter of 2003 and $0.2 million during the third quarter of 2003 resulting in a reduction of general and administrative expenses. The balance remaining at September 30, 2003 was $0.4 million of which $0.2 million is recorded as long-term liability. During the nine months ended September 30, 2003 payments against the reserve totaled $0.3 million. (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):

(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. 8 The following table summarizes the Company's computation of loss per share for the periods ended September 30, 2003 and 2002 (in thousands, except per share amounts):

Approximately 1,728,000 antidilutive options and 3,000,000 antidilutive warrants were excluded from the calculation of diluted earnings per share for the periods ending in 2003. 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 2002. (9) PRO FORMA NET LOSS AND LOSS PER SHARE Had the compensation cost for the Company's stock-based compensation plan been determined consistent with SFAS 123, the Company's net loss per share at September 30, 2003 and 2002 would approximate the pro forma amounts below (in thousands, except per share amounts):

9 (10) GEOGRAPHIC FINANCIAL DATA Revenue from the Company's operations are presented below by operating divisions (in thousands):

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 fiscal years 1999 through 2002 the Company incurred significant losses before income taxes. The Company has incurred additional significant losses to date in 2003. At September 30, 2003, the Company had generated net operating loss carryforwards for tax reporting purposes of approximately $35 million recording $12 million of deferred tax assets of which the Company has recorded a valuation allowance against the deferred tax asset generated from the net operating loss carryforwards of approximately $12 million. This resulted in no deferred tax assets from net operating loss carryforwards based upon management's estimate of future taxable income. 10 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. 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 FASB issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 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 APB Opinion No. 25. The Company has adopted only the disclosure requirements of SFAS 123, as amended by SFAS 148, 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 value 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. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2002 Revenue. Revenue decreased by $1.6 million, or 26.6%, from $5.9 million in the third quarter of 2002 to $4.3 million in the third quarter of 2003, reflecting a decrease in all divisions. Product sales decreased from $0.3 million in 2002 to $0.2 million in 2003. Revenue from the Americas Division decreased by 48.2% from $1.4 million to $0.7 million; revenue from the EMEA Division decreased 19.9% from $3.7 million to $2.9 million; and revenue from the Asia Pacific Division decreased by 18.4% from $0.8 million to $0.7 million. The Company 11 ended the third quarter with 180 total employees, down from 241 employees at the end of the same period of the prior year. Billable employees total 144 at September 30, 2003 compared to 186 at September 30, 2002. Revenue for the third quarter of 2003 was 10% less than revenue in the second quarter of 2003. Gross profit. Gross profit decreased by $1.0 million, or 38.6%, from $2.5 million in the third quarter of 2002 to $1.5 million in the third quarter of 2003 and decreased as a percent of revenue from 42.1% in the third quarter of 2002 to 35.1% in the third quarter of 2003. The decrease in the gross profit margin percentage is primarily attributable to decreased staff utilization. Selling and marketing expense. Selling and marketing expense for the third quarter of 2002 was $0.6 million and for 2003 was $0.4 million reflecting 12 sales and marketing personnel in 2003 and 22 sales and marketing personnel in 2002. Development expense. Development expense decreased $7,000, or 17.5%, from $40,000 in the third quarter of 2002 to $33,000 in the third quarter of 2003. 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 $0.8 million, or 39.2%, from $2.0 million in the third quarter of 2002 to $1.2 million in the third quarter of 2003 The reduction in general and administrative expense was largely due to compensation, facilities, professional fees and depreciation. Facilities costs were reduced approximately $0.3 million due to reduced reserves for terminated leases in the third quarter of 2003 compared to a charge of $0.3 million in the third quarter of 2002. Operating loss. Operating loss was unchanged at $0.2 million in the third quarter of 2002 and 2003. The operating loss decreased $0.9 million compared to the operating loss in the second quarter of 2003 due to an increase in gross profit and a decline in expenses. Provision for income taxes. The Company did not record an income tax benefit in the third quarter of 2003 related to operating losses based upon management's estimate of future taxable income, against the deferred tax asset generated from the net operating loss carryforwards. At September 30, 2002 the Company recorded a valuation allowance against previously recorded tax losses resulting in a tax charge for the quarter of $3.2 million. At September 30, 2003 the Company had $12.0 million of net 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 asset requires that the Company achieve certain future earnings levels prior to the expiration of its net operating loss carryforwards. The Company has recorded a $12.0 million valuation allowance against deferred tax assets resulting in a net carrying value of zero. Net loss. The Company's net loss decreased by $3.3 million from a $3.5 million loss in the third quarter of 2002 to a net loss of $0.2 million in the third quarter of 2003 largely due to the decision to record an additional valuation allowance against deferred tax assets in 2002. Loss per share decreased from a loss of $0.41 in the third quarter of 2002 to a loss per share of $0.02 in the third quarter of 2003. NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2002 Revenue. Revenue decreased by $4.2 million, or 23.2%, from $18.2 million for the nine months ended September 30, 2002 to $14.0 million for the nine months ended September 30, 2003, reflecting decreases in EMEA and Asia divisions and a small increase in America. Product sales decreased from $1.1 million in 2002 to $0.7 million in 2003. Revenue from the Americas Division increased by 1.4% from $3.2 million to $3.3 million; revenue from the EMEA Division decreased by 31.6% from $11.1 million to $7.6 million; and revenue from the Asia Pacific Division decreased by 19.5% from $3.9 million to $3.1 million. The Company ended the nine months with 180 total employees, down from 241 employees at the end of the same period of the prior year. Billable headcount has decreased to 144 at September 30, 2003 compared to 186 at September 30, 2002. 12 Gross profit. Gross profit decreased by $3.2 million, or 42.4%, from $7.6 million for the nine months ended September 30, 2002 to $4.4 million for the nine months ended September 30, 2003 and decreased as a percent of revenue from 41.8% in 2002 to 31.4% in 2003. The decrease in the gross profit margin percentage is primarily attributable to decreases in staff utilization. Selling and marketing expense. Selling and marketing expense decreased $0.2 million or 8.3%, from $1.8 million for the nine months ended September 30, 2002 to $1.6 million for the same period of 2003. Sales and marketing personnel total 12 at September 30, 2003 compared to 22 at September 2002. Development expense. Development expense decreased $26,000, or 21.5%, from $121,000 for the nine months ended September 30, 2002 to $95,000 for the same period of 2003. Two people are involved in development in both 2002 and 2003. General and administrative expense. General and administrative expense decreased by $1.7 million, or 25.9%, from $6.5 million for the nine months ended September 30, 2002 to $4.8 million for the same period in 2003. The decrease in expense is due primarily to a reduction in personnel, facilities and depreciation. General and administrative personnel total 22 at the end of nine months ended September 30, 2003 compared to 30 at the end of the same period of 2002. Depreciation expense included in general and administrative costs decreased from $1.4 million in the nine months ended September 30, 2002 to $0.9 million for the same period of 2003. The third quarter of 2002 included a $0.2 million increase for a change in estimated life. Expenses for the first three quarters of 2003 include an $0.4 million credit for reduction of lease reserves compared to a charge of $0.5 million for lease terminations in first three quarters of 2002. Operating loss. Operating loss increased by $1.3 million from a loss of $0.8 million for the nine months ended September 30, 2002 to an operating loss of $2.1 million for the same period of 2003. The increased operating loss resulted from increased operating loss in the first two quarters of the year when revenue and margin declines exceeded expense reductions and explanations above. Provision for income taxes. The Company recorded a valuation allowance against previously recorded tax losses resulting in a tax charge year to date of $1.1 million for 2003 and $3.3 million for 2002. At September 30, 2003 the Company had $12.0 million of net 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 asset requires that the Company achieve certain future earnings levels prior to the expiration of its net operating loss carryforwards. The Company has recorded a $12.0 million valuation allowance against deferred tax assets resulting in a net carrying value of zero. Net loss. The Company's net loss decreased by $0.8 million from a $4.1 million loss for the nine months ended September 30, 2002 to a net loss of $3.3 million for the same period in 2003 reflecting an increased operating loss offset by a decrease in income tax expense. Loss per share decreased from a loss of $0.49 for the nine months ended September 30, 2002 to a loss per share of $0.40 for the same period of 2003. 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 $42,000 at September 30, 2003, compared to $576,000 at December 31, 2002. The Company's working capital deficit was $3.0 million at September 30, 2003 and $1.3 million at December 31, 2002. The Company's operating activities used cash of $1.0 million for the nine months ended September 30, 2003, compared to cash provided of $37,000 for the same period in 2002. The increase in cash used by operations 13 resulted primarily from increased operating losses and reduced accrued expenses offset partially by a decrease in accounts receivable. Investing activities used $17,000 in cash for the nine months ended September 30, 2003, compared to $7,000 cash used for the first nine months in 2002 as the Company purchased office improvements and liquidated unneeded and older equipment. The Company anticipates the need to lease or acquire small amounts of computer equipment throughout 2003 and 2004. Financing activities provided cash of $0.5 million for the nine months ended September 30, 2003 using its line of credit compared to using $0.1 million cash to repay the line of credit during the nine months ended September 30, 2002. At September 30, 2003 the Company had borrowed $1.7 million, exceeding the credit facility by $32,000. The facility is secured by a mortgage deed against all assets of the European Division, guaranteed by the Company and its CEO. The line may not exceed 133% of eligible European receivables. At November 11, 2003 the Company had borrowed $1,643,574 against the credit facility and had $1,420,701 in collateralized receivables. The line expires on February 25, 2004 unless renewed. 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 $0.5 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, 2003, the Company has sold $0.1 million eligible accounts receivable pursuant to this agreement. The Company has a note payable for insurance financing with $0.1 million outstanding at September 30, 2003. Payments required under the note total $27,000 per month. Significant losses were incurred for fiscal years 1999 through 2002. The Company incurred significant losses in the first three quarters of 2003. The Company has reduced both facilities costs and staff. The Company is discussing possible merger opportunities and equity transactions. Continued losses and the uncertainty of the Company's ability to obtain additional capital raise substantial doubt about the Company's ability to continue as a going concern. To the extent a merger is not completed, the cash generated from the line of credit, possible equity transactions, receivables-based financing and continued operations are insufficient to meet the Company's current working capital needs, the Company will have to raise additional capital. No assurance can be given that additional funding will be available or, if available, will be on terms acceptable to the Company. Uncertainty regarding the amount and timing of any proceeds from the Company's plans to obtain additional capital raises substantial doubt about the Company's ability to continue as a going concern. The Company's independent auditors have advised Management that absent any significant improvements in the Company's financial position, their opinion on the financial statements for the year ended December 31, 2003 will include an explanatory paragraph discussing this going concern uncertainty. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. 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 14 historical results as a result of certain factors, including but not limited to: dependence on SAP AG and the ERP software market, risks associated with management of a geographically dispersed organization, fluctuating quarterly results, the need to attract and retain professional employees, substantial competition, dependence on key personnel, risks associated with management of growth, rapid technological change, limited protection of proprietary expertise, methodologies and software, as well as those set forth in the Risk Factors section and Management's Discussion and Analysis section in the Company's Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company from time to time holds short-term investments which consist of variable rate municipal debt instruments. The Company uses a sensitivity analysis technique to evaluate the hypothetical effect that changes in market interest rates may have on the fair value of the Company's investments. At September 30, 2003, 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. DA CONSULTING GROUP, INC. PART II-OTHER INFORMATION ITEM 3. DEFAULTS UPON SENIOR SECURITIES (a) At September 30, 2003 the Company had borrowed $32,000 in excess of its European credit facility. At November 11, 2003 the Company had borrowed $1,643,574 against the credit facility and had $1,420,701 in collateralized receivables. The maximum that could be borrowed at November 11, 2003 was $1,889,533. The credit facility expires on February 25, 2004 unless renewed. 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are included in this form 10-Q: 31.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of Virginia L. Pierpont, President and Chief Executive Officer 31.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of Virginia L. Pierpont, President and Chief Executive Officer 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Virginia L. Pierpont, President and Chief Executive Officer 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Dennis C. Fairchild, Chief Financial Officer (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: November 14, 2003 By: /s/ Virginia L. Pierpont --------------------------------------------- Virginia L. Pierpont President and Chief Executive Officer Dated: November 14, 2003 By: /s/ Dennis C. Fairchild --------------------------------------------- Dennis C. Fairchild Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) 16

DA CONSULTING GROUP INC 10-Q