Attached files
file | filename |
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EX-31.1 - EXHIBIT 31.1 - DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC. | c95220exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC. | c95220exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC. | c95220exv32w1.htm |
EX-32.2 - EXHIBIT 32.2 - DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC. | c95220exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarter ended December 31, 2009
or
o | 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: 000-22125
DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 36-4069408 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
875 N. Michigan Avenue, Suite 3000, Chicago, Illinois | 60611 | |
(Address of principal executive offices) | (Zip Code) |
(312) 255-5000
Registrants Telephone Number, Including Area Code
Registrants Telephone Number, Including Area Code
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that registrant was required to submit and post such files.) Yes
o No þ
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the Registrant is a shell company (as defined in rule 12b-2 of
the Exchange Act): Yes o No þ
As
of January 31, 2010, there were 27,174,866 shares of Common Stock of the Registrant
outstanding.
DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED DECEMBER 31, 2009
FOR THE FISCAL QUARTER ENDED DECEMBER 31, 2009
TABLE OF CONTENTS
PART I |
||||||||
Item 1: Financial Statements |
||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
12 | ||||||||
23 | ||||||||
23 | ||||||||
23 | ||||||||
23 | ||||||||
24 | ||||||||
25 | ||||||||
26 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
Table of Contents
DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
March 31, | December 31, | |||||||
2009 | 2009 | |||||||
(Unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 46,112 | $ | 49,846 | ||||
Accounts receivable, net of allowance of $566 and $663
as of March 31, 2009, and December 31, 2009, respectively |
15,872 | 15,854 | ||||||
Deferred tax asset current portion |
6,747 | 3,910 | ||||||
Prepaid expenses |
1,323 | 1,717 | ||||||
Other current assets |
1,479 | 1,477 | ||||||
Total current assets |
71,533 | 72,804 | ||||||
Restricted cash |
4,099 | 4,104 | ||||||
Computers, equipment, leasehold improvements and software, net |
4,280 | 3,568 | ||||||
Deferred tax asset long-term portion |
7,757 | 5,428 | ||||||
Other assets |
1,480 | 1,652 | ||||||
Total assets |
$ | 89,149 | $ | 87,556 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 4,595 | $ | 4,079 | ||||
Accrued compensation |
4,269 | 8,302 | ||||||
Deferred revenue |
722 | 1,751 | ||||||
Accrued benefits |
2,481 | 2,009 | ||||||
Income taxes payable current portion |
1,493 | 2,861 | ||||||
Other accrued liabilities |
2,901 | 2,798 | ||||||
Total current liabilities |
16,461 | 21,800 | ||||||
Deferred rent long-term portion |
1,593 | 1,690 | ||||||
Accrued income tax liabilities long-term portion |
687 | 605 | ||||||
Net tax indemnification obligation |
368 | 189 | ||||||
Total liabilities |
19,109 | 24,284 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred Stock, $1.00 par value, 2,000 shares authorized, no shares issued |
| | ||||||
Common
Stock, $0.001 par value, 300,000 and 100,000 shares authorized, and 40,087
shares issued as of March 31, 2009, and December 31, 2009, respectively |
40 | 40 | ||||||
Additional paid-in capital |
622,967 | 616,322 | ||||||
Accumulated other comprehensive loss |
(4,636 | ) | (4,234 | ) | ||||
Accumulated deficit |
(442,261 | ) | (442,904 | ) | ||||
176,110 | 169,224 | |||||||
Less Common Stock in treasury, at cost, 12,885 and 13,062 shares held at
March 31, 2009, and December 31, 2009, respectively |
106,070 | 105,952 | ||||||
Total stockholders equity |
70,040 | 63,272 | ||||||
Total liabilities and stockholders equity |
$ | 89,149 | $ | 87,556 | ||||
See accompanying notes to condensed consolidated financial statements.
3
Table of Contents
DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
For the Three Months | For the Nine Months | |||||||||||||||
Ended December 31, | Ended December 31, | |||||||||||||||
2008 | 2009 | 2008 | 2009 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Revenue: |
||||||||||||||||
Net revenue |
$ | 36,960 | $ | 45,462 | $ | 116,279 | $ | 126,937 | ||||||||
Reimbursable expenses |
6,296 | 8,302 | 16,698 | 23,466 | ||||||||||||
Total revenue |
43,256 | 53,764 | 132,977 | 150,403 | ||||||||||||
Project personnel expenses: |
||||||||||||||||
Project personnel costs before reimbursable expenses |
27,168 | 31,219 | 87,058 | 91,451 | ||||||||||||
Reimbursable expenses |
6,296 | 8,302 | 16,698 | 23,466 | ||||||||||||
Total project personnel expenses |
33,464 | 39,521 | 103,756 | 114,917 | ||||||||||||
Gross margin |
9,792 | 14,243 | 29,221 | 35,486 | ||||||||||||
Other operating expenses: |
||||||||||||||||
Professional development and recruiting |
1,688 | 2,011 | 5,684 | 4,096 | ||||||||||||
Marketing and sales |
104 | 1,217 | 2,047 | 2,264 | ||||||||||||
Management and administrative support |
5,944 | 6,609 | 18,956 | 19,111 | ||||||||||||
Restructuring recovery |
| | (284 | ) | | |||||||||||
Total other operating expenses |
7,736 | 9,837 | 26,403 | 25,471 | ||||||||||||
Income from operations |
2,056 | 4,406 | 2,818 | 10,015 | ||||||||||||
Other income
(expense), net |
344 | (30 | ) | 629 | (32 | ) | ||||||||||
Income from continuing operations before income taxes |
2,400 | 4,376 | 3,447 | 9,983 | ||||||||||||
Income tax expense |
2,386 | 2,161 | 2,192 | 5,093 | ||||||||||||
Income from continuing operations after income taxes |
14 | 2,215 | 1,255 | 4,890 | ||||||||||||
Discontinued operations: |
||||||||||||||||
Gain from discontinued operations, net of income taxes |
| 17 | | 192 | ||||||||||||
Net income |
14 | 2,232 | 1,255 | 5,082 | ||||||||||||
Foreign currency translation adjustments |
(998 | ) | 53 | (1,764 | ) | 395 | ||||||||||
Unrealized gain (loss) on investment |
(133 | ) | | (15 | ) | 7 | ||||||||||
Comprehensive income (loss) |
$ | (1,117 | ) | $ | 2,285 | $ | (524 | ) | $ | 5,484 | ||||||
Basic income per share of common stock: |
||||||||||||||||
Income from continuing operations |
$ | 0.00 | $ | 0.08 | $ | 0.05 | $ | 0.18 | ||||||||
Income from discontinued operations |
| 0.00 | | 0.01 | ||||||||||||
Net income |
$ | 0.00 | $ | 0.08 | $ | 0.05 | $ | 0.19 | ||||||||
Diluted income per share of common stock: |
||||||||||||||||
Income from continuing operations |
$ | 0.00 | $ | 0.08 | $ | 0.05 | $ | 0.18 | ||||||||
Income from discontinued operations |
| 0.00 | | 0.01 | ||||||||||||
Net income |
$ | 0.00 | $ | 0.08 | $ | 0.05 | $ | 0.18 | ||||||||
Shares used in computing basic income per share of common stock |
25,621 | 26,918 | 26,239 | 27,135 | ||||||||||||
Shares used in computing diluted income per share of common stock |
25,906 | 27,571 | 26,658 | 27,584 |
The following amounts of stock-based compensation expense (SBC) are included in each of the respective expense categories reported above:
For the Three Months | For the Nine Months | |||||||||||||||
Ended December 31, | Ended December 31, | |||||||||||||||
2008 | 2009 | 2008 | 2009 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Project personnel costs before reimbursable
expenses |
$ | 3,029 | $ | 809 | $ | 9,102 | $ | 2,547 | ||||||||
Professional development and recruiting |
23 | 13 | 80 | 33 | ||||||||||||
Marketing and sales |
66 | 166 | 212 | 375 | ||||||||||||
Management and administrative support |
582 | 506 | 1,822 | 1,190 | ||||||||||||
Total SBC |
$ | 3,700 | $ | 1,494 | $ | 11,216 | $ | 4,145 | ||||||||
See accompanying notes to condensed consolidated financial statements.
4
Table of Contents
DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Nine Months | ||||||||
Ended December 31, | ||||||||
2008 | 2009 | |||||||
(Unaudited) | (Unaudited) | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 1,255 | $ | 5,082 | ||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||
Restructuring recovery |
(284 | ) | | |||||
Depreciation and amortization |
1,339 | 1,229 | ||||||
Stock-based compensation |
11,216 | 4,145 | ||||||
Deferred income taxes |
1,365 | 5,166 | ||||||
Excess tax benefits from employee stock plans |
(262 | ) | (83 | ) | ||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
(1,300 | ) | 160 | |||||
Prepaid expenses and other |
(290 | ) | (321 | ) | ||||
Accounts payable |
268 | (49 | ) | |||||
Accrued compensation |
(843 | ) | 4,064 | |||||
Income taxes payable |
(2,098 | ) | (5,172 | ) | ||||
Restructuring accrual |
(55 | ) | | |||||
Other assets and liabilities |
(434 | ) | 93 | |||||
Net cash provided by operating activities |
9,877 | 14,314 | ||||||
Cash flows from investing activities: |
||||||||
Decrease (increase) in restricted cash |
3,085 | (5 | ) | |||||
Distribution from available-for-sale investments |
289 | | ||||||
Capital expenditures, net |
(1,297 | ) | (968 | ) | ||||
Net cash provided by (used in) investing activities |
2,077 | (973 | ) | |||||
Cash flows from financing activities: |
||||||||
Stock option and employee stock purchase plan proceeds |
1,575 | 1,203 | ||||||
Payment of employee withholding taxes from equity transactions |
(1,497 | ) | (518 | ) | ||||
Excess tax benefits from employee stock plans |
262 | 83 | ||||||
Common stock cash dividends |
(9,032 | ) | (5,724 | ) | ||||
Purchase of treasury stock |
(13,145 | ) | (4,872 | ) | ||||
Net cash used in financing activities |
(21,837 | ) | (9,828 | ) | ||||
Effect of exchange rate changes on cash |
(947 | ) | 221 | |||||
Net increase (decrease) in cash and cash equivalents |
(10,830 | ) | 3,734 | |||||
Cash and cash equivalents at beginning of period |
53,267 | 46,112 | ||||||
Cash and cash equivalents at end of period |
$ | 42,437 | $ | 49,846 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid during the period for interest |
$ | 41 | $ | 77 | ||||
Cash paid during the period for income taxes |
$ | 2,948 | $ | 5,005 |
See accompanying notes to condensed consolidated financial statements.
5
Table of Contents
DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Reporting
The accompanying unaudited interim condensed consolidated financial statements include the
accounts of Diamond Management & Technology Consultants, Inc., formerly DiamondCluster
International, Inc., and its wholly-owned subsidiaries. In this Quarterly Report on Form 10-Q, the
Company uses the terms Diamond, we, our Company, the Company, our, and us to refer to
Diamond Management & Technology Consultants, Inc. and its wholly-owned subsidiaries. All
intercompany accounts and balances have been eliminated in consolidation.
In the opinion of management, the condensed consolidated financial statements reflect all
adjustments that are necessary for a fair presentation of the Companys financial position, results
of operations, and cash flows as of the dates and for the periods presented. These adjustments are
of a normal and recurring nature. The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with U.S. generally accepted accounting principles,
(GAAP), for interim financial information. Consequently, these statements do not include all the
disclosures normally required by GAAP for annual financial statements nor those normally made in
the Companys Annual Report on Form 10-K. Accordingly, reference should be made to the Companys
Annual Report on Form 10-K for the fiscal year ended March 31, 2009, for additional disclosures,
including a summary of the Companys accounting policies, which have not changed except as
discussed in Note (I) below. The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities, and the amounts of
revenues and expenses during the period. Actual results could differ from those estimates. The
consolidated results of operations for the nine months ended December 31, 2009, are not necessarily
indicative of results for the full fiscal year.
The Company has evaluated subsequent events, through the time of filing this Form 10-Q with
the SEC on February 4, 2010. There were no new subsequent events that required recognition or
disclosure.
B. Restricted Cash
The Company initially deposited $5.5 million in a U.S. Dollar denominated bank account during
the fourth quarter of fiscal year 2006 to support the 4.3 million Euros bank guarantee described in
Note (C) below. Based upon the terms of the restrictions on the use of the pledged cash, the
Company has reported these funds as restricted cash on the Condensed Consolidated Balance Sheets.
The restricted cash is reflected in non-current assets based on the terms of the bank guarantee
which require that it be renewed annually until the appealed tax inspection is concluded (see
further discussion of the tax inspection in Note (C) below). Restricted cash totaled $4.1 million
at March 31, 2009, and December 31, 2009.
C. Discontinued Operations
On July 31, 2006, the Company sold a portion of its international operations which included
consulting operations in France, Germany, Spain, Brazil, and the United Arab Emirates as part of a
stock sale agreement. Prior to the stock sale, as a result of a tax inspection of the former
Spanish subsidiary for the tax years 1999 to 2000, the Company provided a bank guarantee in the
amount of 4.3 million Euros, secured by restricted cash, with the Spanish taxing authority in order
to appeal such authoritys assessment. In accordance with the terms of the transaction, the
Company agreed to indemnify the buyer for any liability related to this Spanish tax inspection
(tax indemnification obligation). The terms of the guarantee require that it be renewed annually
until the results of the appealed tax inspection are settled. At the time of the transaction, such
settlement was not expected before a period of approximately eight years.
6
Table of Contents
DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the fourth quarter of fiscal year 2008, the Spanish tax authorities ruled in favor of
the Company on a portion of the assessments that were being appealed. The remaining assessments
under appeal are based on the same merits and the Company believes that the tax authorities will
rule in favor of the Company on those appeals. As a result, $4.6 million of the
indemnification obligation was reversed during the fourth quarter of fiscal year 2008. In
addition, the Company also obtained a release in June 2008 of $3.1 million of the restricted cash
related to the portion of the assessments that had received a favorable ruling. The remaining $4.1
million classified as restricted cash as of December 31, 2009, secures the remaining bank
guarantee. For the assessments that are still under appeal, the maximum potential amount of future
payments under the tax indemnification obligation is approximately 2.8 million Euros, assuming the
full amount assessed is sustained at the end of the appeals process. The Company believes that it
is adequately reserved for any potential exposure related to this assessment. The current reserve
was determined based on advice from its third-party tax advisors and based upon guidance set forth
in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 460,
Guarantees. The Company holds shares of Diamonds Common Stock beneficially owned by third
parties in an escrow account for the benefit of recovering from the third parties a portion of any
payments made by the Company under the tax indemnification obligation from the sale transaction.
As a result of the favorable ruling on a portion of the assessments that were appealed, the Company
no longer expects to recover certain of these shares and intends to release such shares as part of
the conclusion of a portion of the tax assessments. The net tax indemnification obligation
reported on the Condensed Consolidated Balance Sheet is comprised of the current accrual net of the
current value of the escrow shares that the Company expects to recover. The change in the value of
the recoverable escrow shares due to fluctuations in the value of the Companys share price is
reflected in income from discontinued operations on the Condensed Consolidated Statements of
Operations and Comprehensive Income (Loss).
D. Income Taxes
The Company recorded income tax expense of $2.2 million in the quarter ended December 31,
2009, a 49% effective income tax rate, compared to income tax expense of $2.4 million, a 99%
effective income tax rate, in the same period in the prior fiscal year. Excluding the effect of
$0.6 million of income tax expense on a non-cash foreign exchange gain and $0.3 million income tax
expense related to ongoing income tax audits in the third quarter of fiscal year 2009, the
effective tax rate would have been 60% in the year ago period. The resulting decrease in the
effective tax rate is due to an increase in the domestic pre-tax income for the three months ended
December 31, 2009, relative to the corresponding period in the prior fiscal year partially offset
by an increase in international losses. Due to ongoing losses and valuation allowances on the
related international deferred tax assets, the Company currently does not recognize a reported tax
benefit on international losses or reported tax expense on international profits. These items
caused a significant difference between the effective tax rate and the statutory tax rate.
The Company recorded income tax expense of $5.1 million, a 51% effective income tax rate, in
the nine months ended December 31, 2009, compared to income tax expense of $2.2 million, a 64%
effective income tax rate, in the same period in the prior fiscal year. Excluding the effect of
the $1.5 million valuation allowance reversal in the first quarter of fiscal year 2009 described
below, $0.3 million and $0.6 million of income tax expense on non-cash foreign exchange gains in
the second and third quarters of fiscal year 2009, respectively, and $0.3 million income tax
expense related to ongoing income tax audits in the third quarter of fiscal year 2009, the
effective tax rate would have been 70% for the nine months ended December 31, 2008. The resulting
decrease in the effective tax rate is primarily due to an increase in domestic pre-tax income and a
decrease in international losses for the nine months ended December 31, 2009, relative to the
corresponding period in the prior fiscal year. As a result, international losses represented a
smaller percentage of consolidated income. Due to ongoing losses and valuation allowances on the
related international deferred tax assets, the Company currently does not recognize a reported tax
benefit on international losses or reported tax expense on international profits. These items
caused a significant difference between the effective tax rate and the statutory tax rate.
The Company has deferred tax assets which have arisen primarily as a result of temporary
differences between the tax bases of assets and liabilities and their related amounts in the
financial statements as well as operating losses incurred primarily in fiscal year 2002 and fiscal
year 2003. Deferred income taxes decreased $5.2 million during the nine months ended December 31,
2009. The decrease is primarily related to the fiscal year 2009 tender offer, and was caused by
stock-based compensation expense income tax deductions taken for book purposes in the prior fiscal
year which were not deductible for income tax purposes until the current fiscal year. As the
deduction for book purposes exceeded the deduction for income tax purposes, the resulting decrease
in deferred income taxes is reflected within the operating section of the condensed consolidated
statement of cash flows for the nine months ended December 31, 2009, in Deferred income taxes
with a corresponding decrease in Income taxes payable.
7
Table of Contents
DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
ASC 740, Income Taxes, requires the establishment of a valuation allowance to reflect the
likelihood of realization of deferred tax assets. Management judgment is required in determining
any valuation allowance recorded against the gross deferred tax assets. As of December 31, 2009,
the remaining valuation allowance against deferred tax assets was $6.7 million attributable to net
operating loss carryforwards in foreign and certain state jurisdictions, as well as U.S. federal
capital loss carryforwards.
In May 2008, the Company received a letter from the U.K. tax authorities confirming a
correction to the characterization of a U.K. subsidiarys losses for the fiscal years ended March
31, 2002 and 2003. Based on this determination, the Company implemented a tax planning strategy to
utilize the U.K. subsidiarys net operating loss carryforwards, which resulted in the reversal of a
$1.5 million international tax valuation allowance in the first quarter of fiscal year 2009, as
management determined that it was more likely than not that the related deferred tax assets would
be realized.
E. Income Per Share
Basic income per share is computed using the weighted average number of common shares
outstanding. Diluted income per share is computed using the weighted average number of common
shares outstanding and, where dilutive, the assumed exercise of stock options and stock
appreciation rights (SARs) and vesting of restricted stock and restricted stock units (using the
treasury stock method). Following is a reconciliation of the shares used in computing basic and
diluted income per share for the three and nine months ended December 31, 2008 and 2009 (in
thousands):
Three Months | Nine months | |||||||||||||||
Ended December 31, | Ended December 31, | |||||||||||||||
2008 | 2009 | 2008 | 2009 | |||||||||||||
Shares used in computing basic income per share |
25,621 | 26,918 | 26,239 | 27,135 | ||||||||||||
Dilutive effect of stock options, SARs and restricted stock/units |
285 | 653 | 419 | 449 | ||||||||||||
Shares used in computing diluted income per share |
25,906 | 27,571 | 26,658 | 27,584 | ||||||||||||
Antidilutive securities not included in dilutive income per
share calculation |
8,850 | 4,181 | 8,075 | 5,177 | ||||||||||||
F. Geographic Data
The Company operates in only one segment, providing management and technology consulting
services. Even though the Company has different legal entities operating in various countries, its
operations and management are performed on a global basis.
Data regarding net revenue based on the geographic regions in which the Company operates is
presented below for the periods presented in the Condensed Consolidated Statements of Operations
and Comprehensive Income (Loss) (in thousands):
Three Months | Nine months | |||||||||||||||
Ended December 31, | Ended December 31, | |||||||||||||||
2008 | 2009 | 2008 | 2009 | |||||||||||||
Net revenue: |
||||||||||||||||
North America |
$ | 32,917 | $ | 41,618 | $ | 103,674 | $ | 115,418 | ||||||||
United Kingdom and India |
4,043 | 3,844 | 12,605 | 11,519 | ||||||||||||
Total net revenue |
$ | 36,960 | $ | 45,462 | $ | 116,279 | $ | 126,937 | ||||||||
The segregation of revenue by geographic region is based upon the location of the legal entity
performing the services. The Company had one client during the three months ended December 31,
2009, and no clients during the nine months ended December 31, 2009, that accounted for over 10% of
revenue in the respective periods. The Company had no clients that accounted for over 10% of
revenue during three months and nine months ended December 31, 2008.
8
Table of Contents
DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Data regarding long-lived assets based on the geographic regions in which the Company operates
is presented below for the periods presented in the Condensed Consolidated Balance Sheets (in
thousands):
March 31, | December 31, | |||||||
2009 | 2009 | |||||||
Long-lived assets: |
||||||||
North America |
$ | 5,176 | $ | 4,567 | ||||
United Kingdom and India |
584 | 553 | ||||||
Total long-lived assets |
$ | 5,760 | $ | 5,120 | ||||
G. Lease Commitments
The Company leases office space and equipment under various non-cancelable operating leases.
On December 25, 2009, the Company renewed its operating lease for its London office which expired
on December 24, 2009. Under the terms of the lease renewal, the Company is contractually obligated
to pay a total of approximately $1.7 million in future estimated lease payments for the period
January 1, 2010, through December 31, 2014. The following table was updated from amounts
previously reported in the Annual Report on Form 10-K for the fiscal year ended March 31, 2009, to
include the effects of this lease as of December 31, 2009. The minimum future lease payments under
operating leases with non-cancelable terms in excess of one year are as follows (amounts in
thousands):
Year Ended March 31, | ||||
2010 |
$ | 428 | (1) | |
2011 |
1,549 | |||
2012 |
1,303 | |||
2013 |
1,414 | |||
2014 |
1,466 | |||
Thereafter |
571 | |||
$ | 6,731 | |||
(1) | Includes the period of January 1, 2010 through March 31, 2010. |
H. Dividends
On June 1, 2009, the Company announced that its Board of Directors approved a change in the
Companys dividend schedule from annual to quarterly. The Board declared the following quarterly
cash dividends during the nine months ended December 31, 2009, and annual cash dividend during the
fiscal year ended March 31, 2009:
Fiscal Year Ended | Three Months Ended | Three Months Ended | Three Months Ended | |||||||||||||
March 31, 2009 | June 30, 2009 | September 30, 2009 | December 31, 2009 | |||||||||||||
Declaration date |
November 11, 2008 | June 1, 2009 | August 19, 2009 | November 11, 2009 | ||||||||||||
Per share dividend |
$0.35 | $0.07 | $0.07 | $0.07 | ||||||||||||
Record date |
November 21, 2008 | June 10, 2009 | September 1, 2009 | November 20, 2009 | ||||||||||||
Total amount (in
thousands) |
$9,032 | $1,921 | $1,911 | $1,892 | ||||||||||||
Payment date |
December 5, 2008 | June 18, 2009 | September 15, 2009 | December 4, 2009 |
I. Recent Accounting Pronouncements
Effective April 1, 2009, the Company adopted FASB Staff Position (FSP) No. 157-2, Effective
Date of FASB Statement No. 157, (codified in ASC 820, Fair Value Measurements) which deferred
the implementation of SFAS No. 157 Fair Value Measurements, (codified in ASC 820, Fair Value
Measurements) for nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in an entitys financial statements on a recurring basis
(at least annually). The adoption of FSP No. 157-2 did not have a material impact on the Companys
financial condition or results of operations.
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DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Effective April 1, 2009, the Company adopted FASB Staff Position Emerging Issues Task Force
(FSP EITF) 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions
Are Participating Securities (codified in ASC 260, Earnings Per Share). According to FSP EITF
03-6-1, unvested share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents are participating securities and should be included in the computation of
earnings per share using the two-class method as described in SFAS No. 128, Earnings per Share
(codified in ASC 260, Earnings Per Share). The adoption of FSP EITF 03-6-1 did not have a
material impact on the Companys financial condition or results of operations.
Effective April 1, 2009, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 165, Subsequent Events, (codified in ASC 855, Subsequent Events) which establishes
general standards of accounting and disclosure for events that occur after the balance sheet date
but before the financial statements are issued. The adoption of SFAS No. 165 did not have a
material impact on the Companys financial condition or results of operations.
Effective July 1, 2009, the Company adopted SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles, (codified in ASC 105,
Generally Accepted Accounting Principles) which establishes the FASB Accounting Standards
Codification as the source of authoritative U.S. generally accepted accounting principles to be
applied by nongovernmental entities. The Accounting Standards Codification supersedes all existing
non-SEC accounting and reporting standards. The adoption of SFAS No. 168 did not have an impact
on the Companys financial condition or results of operations.
J. Fair Value Measurements
ASC 820, Fair Value Measurements, defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. Fair value is defined by ASC 820
as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. ASC 820 establishes a three-level
fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy requires
entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The
three levels of inputs used to measure fair value are as follows:
| Level 1 Quoted prices in active markets for identical assets and liabilities. |
| Level 2 Quoted prices in active markets for similar assets and liabilities, or
other inputs that are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the financial instrument. |
| Level 3 Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets and liabilities. This
includes certain pricing models, discounted cash flow methodologies and similar
techniques that use significant unobservable inputs. |
The Companys financial assets that are measured at fair value on a recurring basis consist of cash
and cash equivalents and restricted cash and are measured using Level 1 inputs.
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DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
K. Line of Credit
On July 31, 2009, the Company entered into a credit agreement with Harris N.A. (Harris Bank)
to secure a revolving line of credit. Pursuant to the terms of the credit agreement, the Company
may borrow up to $12.5 million. The extensions of credit from Harris Bank may be made in the form
of loans and letters of credit, and certain other credit and financial accommodations. The Company
is required to adhere to certain operating and financial covenants including a minimum net worth of
$30.0 million and, when borrowing against the credit facility, a minimum interest coverage ratio of
1.5 to 1. The minimum interest coverage is measured as the ratio of earnings before interest and
tax expense to interest
expense for the past four fiscal quarters. For the fiscal quarters ended September 30, 2009,
and December 31, 2009, calculation of these amounts shall be from April 1, 2009, through the
respective balance sheet date.
The annual interest rate under this credit agreement is at the Companys option, LIBOR plus
one hundred and twenty five basis points or a base rate. The base rate is generally defined as the
greatest of: a) the prime rate, b) the sum of the Federal Funds rate plus one half of one percent,
or c) the one month LIBOR rate plus one hundred basis points. The Company agrees to pay an annual
commitment fee to Harris Bank equal to one-quarter of one percent on the unused credit facility
from August 1, 2009, through the termination date of the agreement. Pursuant to the terms of the
agreement, outstanding letters of credit issued by Harris Bank for the Company cannot exceed $2.5
million and any outstanding obligations under the line of credit are secured by substantially all of the
Companys assets. As of December 31, 2009, the Company had letters of credit outstanding totaling
$214 thousand and there have been no cash borrowings against the line of credit since it was
established. The Harris Bank credit agreement expires July 31, 2011.
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DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the information contained in the
Condensed Consolidated Financial Statements and notes thereto appearing elsewhere in this Quarterly
Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009.
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and
uncertainties. See Disclosure Regarding Forward-Looking Statements below.
We use the terms we, our, us, the Company and Diamond in this report to refer to Diamond
Management & Technology Consultants, Inc. and its wholly-owned subsidiaries.
Overview
Diamond is a management and technology consulting firm. Clients engage Diamond Management &
Technology Consultants, Inc. to help their companies grow, improve margins, and increase the
productivity of their investments. Working together to design and execute business strategies that
capitalize on changing market forces and technology, Diamonds consultants are experts in helping
clients attract and retain customers, increase the value of their information, and plan and execute
projects that turn strategy into measurable results.
Diamonds capabilities are rooted in deep strategy, technology, operations, and industry
experience. The firms approach to client service is based on objectivity, collaboration, and an
unwavering commitment to its clients best interests.
We generated net revenue (revenue before reimburseable expenses) of $45.5 million in the
quarter ended December 31, 2009, compared with $37.0 million in the quarter ended December 31,
2008. At December 31, 2009, we employed 496 consultants and 114 operations employees. Our
operations are comprised of six offices in North America, Europe and Asia, which include Chicago,
Hartford, London, Mumbai, New York City and Washington, D.C.
Our revenue is driven by our ability to secure new client engagements, maintain existing
client engagements and develop and implement solutions that add value to our clients. Our revenue
is comprised of professional fees for services rendered to our clients plus reimbursable expenses.
Prior to the commencement of a client engagement, we and our client agree on fees for services
based upon the scope of the project, our staffing requirements, and the level of client
involvement. We recognize revenue as services are performed. Our services are performed in
accordance with the terms of the client engagement agreement. We bill our clients for these
services on a semi-monthly, monthly or milestone basis in accordance with the terms of the client
engagement agreement. Accordingly, we recognize amounts due from our clients as the related
services are rendered and revenue is earned even though we may be contractually required to bill
for those services at an earlier or later date than the date services are provided. Provisions are
made based on our experience for estimated uncollectible amounts. These provisions, net of
write-offs of accounts receivable, are reflected in the allowance for doubtful accounts. We also
defer a portion of the revenue from each client engagement to cover the estimated costs that are
likely to be incurred subsequent to targeted project completion which we refer to as project
run-on. This portion of the project revenue is reflected in deferred revenue and is calculated
based on our historical project run-on experience. While we have been required to make revisions
to our clients deliverables and to incur additional project costs in rare instances, to date there
have been no such revisions that have had a material adverse effect on our operating results.
Approximately 90% of our revenues and expenses are denominated in the U.S. Dollar, which
limits the impact of foreign currency exchange rate fluctuations on consolidated revenues and
expenses. Approximately 10% of our revenues and expenses are generated from international
transactions, which are denominated in foreign currencies. The most common foreign currencies that
we operate under are the British Pound Sterling, the Indian Rupee, and the Euro.
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DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
In the fourth quarter of fiscal year 2009, the Company initiated a tender offer that was
completed on March 9, 2009, (Tender Offer) which provided employees the opportunity to exchange
certain previously granted but unvested Restricted Stock Units (Eligible RSUs) for Diamond Common
Stock at an exchange ratio of one Eligible RSU for 0.80 shares of
Common Stock. The shares are subject to a restriction on sale or transfer, with such restrictions
lapsing over a minimum period of approximately six months and up to a maximum period of
approximately four years, depending on the level of the employee. As a result of the Tender Offer,
Diamond issued 1.2 million shares of Common Stock after withholding approximately 0.5 million
shares to pay employee taxes incurred on the value of the stock received in the exchange, and
recorded a $16.7 million pre-tax charge for stock-based compensation expense in the quarter ended
March 31, 2009. Of the $16.7 million pre-tax charge, $14.3 million was attributed to project
personnel costs, impacting gross margin, with the remaining $2.4 million attributed to other
operating expenses.
The largest portion of our operating expenses consists of project personnel costs. Project
personnel costs before reimbursable expenses consist of payroll costs, variable incentive
compensation, stock-based compensation expense, and related benefits expense associated with our
consulting staff. Other expenses included in project personnel costs are travel, third-party vendor
payments and non-billable costs associated with the delivery of services to our clients. Net
revenue less project personnel costs before reimbursable expenses (gross margin) is considered by
management to be an important measure of our operating performance and is driven largely by the
chargeability of our consultant base, the prices we charge to our clients, project personnel
compensation costs, and the level of non-billable costs associated with securing new client
engagements and developing new service offerings. Chargeability represents a measure of our
project personnels time spent on billable consulting work based on standard available business
days.
Gross margin increased $4.5 million, or 45%, in the third quarter of fiscal year 2010 compared
to the third quarter of fiscal year 2009 primarily due to a $8.5 million increase in net revenue,
partially offset by an increase in project personnel costs before reimbursable expenses as
discussed later under Project Personnel Costs. Our practice headcount was 496 at December 31,
2009, compared to 473 at December 31, 2008. Our annualized net revenue per practice professional
was $370 thousand for the third quarter of fiscal year 2010 compared to $305 thousand for the third
quarter of fiscal year 2009. The increase from the third quarter of fiscal year 2009 is primarily
related to increased net revenue and higher chargeability.
Our other recurring operating expenses are comprised of expenses associated with the
development of our business and the support of our client-serving professionals, such as
professional development and recruiting, marketing and sales, management and administrative
support, and stock-based compensation expense earned by personnel working in these functional
areas. Professional development and recruiting expenses consist primarily of recruiting and
training course content development and delivery costs. Marketing and sales expenses consist
primarily of the costs associated with the development and maintenance of our marketing materials
and programs. Management and administrative support expenses consist primarily of the costs
associated with operations including finance, information technology, human resources, facilities
administration and support (including the renting of office space) and legal services.
Management believes that income from operations, which is gross margin less operating
expenses, is an important measure of our operating performance. Income from operations increased
$2.4 million, or 114%, in the third quarter of fiscal year 2010 compared to the third quarter of
fiscal year 2009 primarily due to the $4.5 million increase in gross margin as discussed above,
partially offset by increases in other operating expenses. The increase in other operating
expenses in the third quarter of fiscal year 2010 compared to the third quarter of fiscal year
2009, as discussed below under Operating Expenses, was primarily due to increases in marketing
and sales expenses due to our DiamondExchange® event being held during the third quarter of fiscal
year 2010 with no similar event held in the third quarter of fiscal year 2009, increased training
costs related to new hire training and associated recruiting costs, and increased variable
compensation expense.
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DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
We regularly review our fees for services, professional compensation and overhead costs to
ensure that our services and compensation are competitive within the industry, and that our
overhead costs are aligned with our revenue level. In addition, we regularly monitor the progress
of client projects with client senior management. We manage the activities of our professionals by
closely monitoring engagement schedules and staffing requirements for new engagements. However, a
rapid decline in the demand for the professional services that we provide could result in lower
chargeability of our professionals than we planned. In addition, because most of our client
engagements are terminable by our clients without penalty, an unanticipated termination of a client
project could require us to maintain underutilized employees. While professional staff levels must
be adjusted to reflect active engagements, we must also maintain a sufficient number of senior
professionals to
oversee existing client engagements and participate in our sales efforts to secure new client
assignments. Our chargeability rate for the third quarter of fiscal year 2010 increased to 71%
compared to 60% in the third quarter of fiscal year 2009.
Free cash flow, a non-GAAP measure, was $13.3 million for the nine months ended December 31,
2009. Management believes that the free cash flow metric, defined as net cash provided by
operating activities ($14.3 million) less capital expenditures ($1.0 million), provides a
consistent metric from which the performance of the business may be monitored.
Disclosure Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act relating to our operations,
results of operations and other matters that are based on our current expectations, estimates and
projections, based on information currently available to us, and we assume no obligation to update
any forward-looking statements. Words such as expects, intends, plans, projects,
believes, estimates and similar expressions are used to identify these forward-looking
statements. These statements are not guarantees of future performance and involve risks and
uncertainties that are difficult to predict. Forward-looking statements are based upon assumptions
as to future events that may not prove to be accurate. Actual outcomes and results may differ
materially from what is expressed or forecast in these forward-looking statements. For a discussion
of risks, uncertainties, and other factors, that could cause actual outcomes and results to
materially differ, please see the section entitled Risk Factors in our Annual Report on Form 10-K
for the fiscal year ended March 31, 2009, and Item 1A, Risk Factors in this Form 10-Q.
Recent Accounting Pronouncements
See Note (I) to the condensed consolidated financial statements for a discussion of recent
accounting pronouncements.
Critical Accounting Policies and Estimates
We prepare our condensed consolidated financial statements in conformity with U.S. generally
accepted accounting principles. As such, we are required to make certain estimates, judgments and
assumptions that we believe are reasonable based upon the information available. These estimates
and assumptions affect the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the periods presented. For a
description of the significant accounting policies which we believe are the most critical to aid in
understanding and evaluating our reported financial position and results, refer to our Annual
Report on Form 10-K for the fiscal year ended March 31, 2009.
Revenue
Net revenue increased $8.5 million, or 23%, for the three months ended December 31, 2009, as
compared to the same period in the prior year. Net revenue increased $10.7 million, or 9%, for the
nine months ended December 31, 2009, as compared to the same period in the prior fiscal year.
We served 56 clients during the quarter ended December 31, 2009, compared to 57 clients during
the same period in the prior fiscal year. Average net revenue per client increased to $0.8 million
during the quarter ended December 31, 2009, compared to $0.7 million during the same period in the
prior fiscal year. We continue to focus on expanding our current client base as well as increasing
current revenue streams by further penetrating existing clients.
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DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
Revenue from new clients (defined as clients that generated revenue in the current period but
were absent from the prior period) accounted for 3% of revenue during the quarter ended December
31, 2009, compared to 3% during the same period in the prior fiscal year. For the quarters ended
December 31, 2008 and 2009, billed fee revenue and new client revenue mix by the industries that we
serve were as follows:
Billed Fee Revenue | New Client Revenue | |||||||||||||||
For the Three Months | For the Three Months | |||||||||||||||
Ended December 31, | Ended December 31, | |||||||||||||||
Industry | 2008 | 2009 | 2008 | 2009 | ||||||||||||
Financial Services |
33 | % | 29 | % | 17 | % | 35 | % | ||||||||
Insurance |
26 | % | 27 | % | 0 | % | 4 | % | ||||||||
Healthcare |
17 | % | 23 | % | 32 | % | 34 | % | ||||||||
Enterprise |
21 | % | 18 | % | 16 | % | 27 | % | ||||||||
Public Sector |
3 | % | 3 | % | 35 | % | 0 | % | ||||||||
100 | % | 100 | % | 100 | % | 100 | % | |||||||||
We served 74 clients during the nine months ended December 31, 2009, compared to 88 clients
during the same period of the prior fiscal year. Average net revenue per client increased to $1.7
million during the nine months ended December 31, 2009, compared to $1.3 million during the same
period of the prior fiscal year. As part of our growth effort, we continue to focus on expanding
our current client base as well as increasing current revenue streams by further penetrating
existing clients.
Revenue from new clients (defined as clients that generated revenue in the current period but
were absent from the prior period) accounted for 9% of revenue during the nine months ended
December 31, 2009, compared to 14% during the same period of the prior fiscal year. For the nine
months ended December 31, 2008 and 2009, billed fee revenue and new client revenue mix by the
industries that we serve were as follows:
Billed Fee Revenue | New Client Revenue | |||||||||||||||
For the Nine months | For the Nine months | |||||||||||||||
Ended December 31, | Ended December 31, | |||||||||||||||
Industry | 2008 | 2009 | 2008 | 2009 | ||||||||||||
Financial Services |
30 | % | 31 | % | 41 | % | 26 | % | ||||||||
Insurance |
24 | % | 26 | % | 6 | % | 29 | % | ||||||||
Healthcare |
19 | % | 21 | % | 15 | % | 36 | % | ||||||||
Enterprise |
24 | % | 18 | % | 31 | % | 6 | % | ||||||||
Public Sector |
3 | % | 4 | % | 7 | % | 3 | % | ||||||||
100 | % | 100 | % | 100 | % | 100 | % | |||||||||
Operating Expenses
Project Personnel Costs
Project personnel costs before reimbursable expenses increased $4.1 million, or 15%, during
the quarter ended December 31, 2009, as compared to the same period in the prior fiscal year. This
increase was primarily due to increased compensation expense resulting from an increase in project
personnel headcount and higher variable compensation expense, partially offset by a decrease in
ongoing project personnel stock-based compensation expense resulting from lower overall outstanding
equity awards due to the completion of the Tender Offer in the fourth quarter of the prior fiscal
year. As a percentage of net revenue, project personnel costs before reimbursable expenses
decreased to 69% during the quarter ended December 31, 2009, compared to 74% in the same period in
the prior fiscal year. This decrease was primarily due to increased net revenue and higher
chargeability.
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DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
The following table summarizes practice personnel data for the quarters ended December 31,
2008 and 2009:
For the Three Months | ||||||||
Ended December 31, | ||||||||
2008 | 2009 | |||||||
Practice headcount |
473 | 496 | ||||||
Annualized net revenue per practice professional (in thousands) |
$ | 305 | $ | 370 | ||||
Chargeability rate |
60 | % | 71 | % | ||||
Annualized voluntary attrition |
11 | % | 11 | % | ||||
Total annualized attrition (1) |
22 | % | 15 | % |
(1) | Defined as voluntary attrition plus Company-initiated attrition. |
Project personnel costs before reimbursable expenses increased $4.4 million, or 5%, during the
nine months ended December 31, 2009, as compared to the same period in the prior fiscal year. This
increase was primarily due to increased variable compensation expense, partially offset by a
decrease in ongoing project personnel stock-based compensation expense resulting from lower overall
outstanding equity awards due to the completion of the Tender Offer in the fourth quarter of the
prior fiscal year, and lower payroll and benefits expense due to a decrease in average headcount
over the nine month period ended December 31, 2009. As a percentage of net revenue, project
personnel costs before reimbursable expenses decreased to 72% during the nine months ended December
31, 2009, compared to 75% in the same period in the prior fiscal year. This decrease was primarily
due to increased net revenue and higher chargeability.
Professional Development and Recruiting
Professional development and recruiting expenses increased $0.3 million, or 19%, during the
quarter ended December 31, 2009, as compared to the same period in the prior fiscal year. The
increase was primarily attributable to increased project personnel hiring and training costs.
Professional development and recruiting expenses decreased $1.6 million, or 28%, during the
nine months ended December 31, 2009, as compared to the same period in the prior fiscal year. This
decrease was primarily due to a reduction in firmwide training event costs and other firmwide
expense management initiatives in the current fiscal year. The costs incurred to recruit
consultants include travel and lodging costs for our consultants and recruiting staff, travel
expense reimbursements for candidates, costs related to our summer intern program and any sourcing fees
related to non-campus searches.
Marketing and Sales
Marketing and sales expenses increased $1.1 million, during the quarter ended December 31,
2009, as compared to the same period in the prior fiscal year. The increase was primarily due to
our DiamondExchange® event being held during the third quarter of fiscal year 2010, with no similar
event held in the third quarter of fiscal year 2009, and increased marketing activity.
Marketing and sales expenses increased $0.2 million, or 11%, during the nine months ended
December 31, 2009, as compared to the same period in the prior fiscal year. The increase was
primarily due to increased marketing activity during the current fiscal year.
Management and Administrative Support
Management and administrative support expenses did not change significantly and declined as a
percentage of net revenue during the three and nine month periods ended December 31, 2009, as
compared to the same periods in the prior fiscal year.
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DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
Other Income, Net
Other income, net decreased $0.4 million and $0.7 million during the three and nine months
ended December 31, 2009, respectively, as compared to the same periods in the prior fiscal year.
These decreases were primarily due to a decrease in interest income resulting from lower interest
rate yields in the quarter and nine months ended December 31, 2009, compared to the same periods in
the prior fiscal year.
Income Tax Expense
We recorded income tax expense of $2.2 million in the quarter ended December 31, 2009, a 49%
effective income tax rate, compared to income tax expense of $2.4 million, a 99% effective income
tax rate, in the same period in the prior fiscal year. Excluding the effect of $0.6 million of
income tax expense on a non-cash foreign exchange gain and $0.3 million income tax expense related
to ongoing income tax audits in the third quarter of fiscal year 2009, the effective tax rate would
have been 60% in the year ago period. The resulting decrease in the effective tax rate is due to
an increase in the domestic pre-tax income for the three months ended December 31, 2009, relative
to the corresponding period in the prior fiscal year partially offset by an increase in
international losses. Due to ongoing losses and valuation allowances on the related international
deferred tax assets, we currently do not recognize a reported tax benefit on international losses
or reported tax expense on international profits. These items caused a significant difference
between the effective tax rate and the statutory tax rate.
We recorded income tax expense of $5.1 million, a 51% effective income tax rate, in the nine
months ended December 31, 2009, compared to income tax expense of $2.2 million, a 64% effective
income tax rate, in the same period in the prior fiscal year. Excluding the effect of the $1.5
million valuation allowance reversal in the first quarter of fiscal year 2009 described below, $0.3
million and $0.6 million of income tax expense on non-cash foreign exchange gains in the second and
third quarters of fiscal year 2009, respectively, and $0.3 million income tax expense related to
ongoing income tax audits in the third quarter of fiscal year 2009, the effective tax rate would
have been 70% for the nine months ended December 31, 2008. The resulting decrease in the effective
tax rate is primarily due to an increase in domestic pre-tax income and a decrease in international
losses for the nine months ended December 31, 2009, relative to the corresponding period in the
prior fiscal year. As a result, international losses represented a smaller percentage of
consolidated income. Due to ongoing losses and valuation allowances on the related international
deferred tax assets, we currently do not recognize a reported tax benefit on international losses
or reported tax expense on international profits. These items caused a significant difference
between the effective tax rate and the statutory tax rate.
We have deferred tax assets which have arisen primarily as a result of temporary differences
between the tax bases of assets and liabilities and their related amounts in the financial
statements as well as operating losses incurred primarily in fiscal year 2002 and fiscal year 2003.
Deferred income taxes decreased $5.2 million during the nine months ended December 31, 2009. The
decrease is primarily related to the fiscal year 2009 tender offer, and was caused by stock-based
compensation expense income tax deductions taken for book purposes in the prior fiscal year which
were not deductible for income tax purposes until the current fiscal year. As the deduction for
book purposes exceeded the deduction for income tax purposes, the resulting decrease in deferred
income taxes is reflected within the operating section of the condensed consolidated statement of
cash flows for the nine months ended December 31, 2009, in Deferred income taxes with a
corresponding decrease in Income taxes payable.
ASC 740, Income Taxes, requires the establishment of a valuation allowance to reflect the
likelihood of realization of deferred tax assets. Management judgment is required in determining
any valuation allowance recorded against the gross deferred tax assets. As of December 31, 2009,
the remaining valuation allowance against deferred tax assets was $6.7 million attributable to net
operating loss carryforwards in foreign and certain state jurisdictions, as well as U.S. federal
capital loss carryforwards.
In May 2008, we received a letter from the U.K. tax authorities confirming a correction to the
characterization of a U.K. subsidiarys losses for the fiscal years ended March 31, 2002 and 2003.
Based on this determination, we implemented a
tax planning strategy to utilize the U. K. subsidiarys net operating loss carryforwards,
which resulted in the reversal of a $1.5 million international tax valuation allowance in the first
quarter of fiscal year 2009, as management determined that it was more likely than not that the
related deferred tax assets would be realized.
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DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
Discontinued Operations
On July 31, 2006, we sold a portion of our international operations which included consulting
operations in France, Germany, Spain, Brazil, and the United Arab Emirates as part of a stock sale
agreement. Prior to the stock sale, as a result of a tax inspection of the former Spanish
subsidiary for the tax years 1999 to 2000, we provided a bank guarantee in the amount of 4.3
million Euros, secured by restricted cash, with the Spanish taxing authority in order to appeal
such authoritys assessment. The terms of the guarantee require that it be renewed annually until
the results of the appealed tax inspection are settled. In accordance with the terms of the
transaction, we agreed to indemnify the buyer for any liability related to this Spanish tax
inspection (tax indemnification obligation). At the time of the transaction, such settlement was
not expected before a period of approximately eight years.
As discussed in Note (C) to the condensed consolidated financial statements, we hold shares of
Diamonds Common Stock beneficially owned by third parties in an escrow account for the benefit of
recovering from the third parties a portion of any payments made by us under the tax
indemnification obligation from the sale transaction. As a result of the favorable ruling on a
portion of the assessments that were appealed, we no longer expect to recover certain of these
shares and intend to release such shares as part of the conclusion of a portion of the tax
assessments. The net tax indemnification obligation reported on the Condensed Consolidated Balance
Sheet is comprised of the current accrual net of the current value of the escrow shares that we
expect to recover. The change in the value of the recoverable escrow shares due to fluctuations in
the value of our share price is reflected in income from discontinued operations on the Condensed
Consolidated Statements of Operations and Comprehensive Income (Loss).
Liquidity and Capital Resources
The following table describes our liquidity and financial position as of December 31, 2008 and
2009:
December 31, | ||||||||
2008 | 2009 | |||||||
(in millions) | ||||||||
Working capital (1) |
$ | 47.8 | $ | 51.0 | ||||
Cash and cash equivalents (1) |
$ | 42.4 | $ | 49.8 | ||||
Stockholders equity (1) |
$ | 60.8 | $ | 63.3 | ||||
Unutilized bank credit facilities (2) |
$ | 17.8 | $ | 12.3 |
(1) | The increase in working capital, cash and cash equivalents, and
stockholders equity as of December 31, 2009, as compared to December 31, 2008, is
primarily related to increased net income and positive operating cash flows during
the twelve month period, partially offset by cash used for our share repurchase and
dividend programs. |
|
(2) | The decrease in unutilized bank credit facilities as of December 31, 2009,
as compared to December 31, 2008, is due to the expiration of the JP Morgan Chase
Bank, N.A. credit agreement and the commencement of our Harris N.A. credit agreement
on July 31, 2009. Our total borrowing capacity under the Harris N.A. credit
agreement is $12.5 million reduced by outstanding letters of credit totaling $0.2
million as of December 31, 2009, compared to a total borrowing capacity under the JP
Morgan Chase Bank, N.A. credit agreement of $20.0 million reduced by outstanding
letters of credit totaling $2.2 million as of December 31, 2008. We have never
borrowed against either line of credit. |
Our principal sources of liquidity consist of existing cash and cash equivalents, cash flow
from operations, and proceeds received upon the exercise of stock options by our employees. We
anticipate that these sources will provide sufficient liquidity to fund our operating, capital,
stock repurchase program and Common Stock dividend requirements at least through fiscal year 2011.
Over the past several years, these internal sources of liquidity have been adequate to support our
operating and
capital expenditure requirements as well as to provide the funding needed for our stock repurchase
program and dividend payments.
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DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
Our cash is invested in highly-liquid, short-term investments with little to no principal
risk. These investments must be rated either AAA or A1/P1 by Standard & Poors, Moodys or Fitch,
Inc. We do not invest in nonconsolidated conduits, collateralized debt obligations, auction-rate
securities, or structured investment vehicles, and we do not have any plans to invest in such
investments in the foreseeable future.
On July 31, 2009, the Company entered into a credit agreement with Harris N.A. (Harris Bank)
to secure a revolving line of credit. Pursuant to the terms of the credit agreement, the Company
may borrow up to $12.5 million. The extensions of credit from Harris Bank may be made in the form
of loans and letters of credit, and certain other credit and financial accommodations. The Company
is required to adhere to certain operating and financial covenants including a minimum net worth of
$30.0 million and, when borrowing against the credit facility, a minimum interest coverage ratio of
1.5 to 1. The minimum interest coverage is measured as the ratio of earnings before interest and
tax expense to interest expense for the past four fiscal quarters. For the fiscal quarters ending
September 30, 2009, and December 31, 2009, calculation of these amounts shall be from April 1, 2009
through the respective balance sheet date.
The annual interest rate under this credit agreement is at the Companys option, LIBOR plus
one hundred and twenty five basis points or a base rate. The base rate is generally defined as the
greatest of: a) the prime rate, b) the sum of the Federal Funds rate plus one half of one percent,
or c) the one month LIBOR rate plus one hundred basis points. The Company agrees to pay an annual
commitment fee to Harris Bank equal to one-quarter of one percent on the unused credit facility
from August 1, 2009, through the termination date of the agreement. Pursuant to the terms of the
agreement, outstanding letters of credit issued by Harris Bank for the Company cannot exceed $2.5
million and any outstanding obligations under the line of credit are secured by substantially all of the
Companys assets. As of December 31, 2009, the Company had letters of credit outstanding totaling
$214 thousand and there have been no cash borrowings against the line of credit since it was
established. The Harris Bank credit agreement expires July 31, 2011.
Cash
and cash equivalents totaled $49.8 million at December 31,
2009 compared with $46.1 million at March 31, 2009, an
increase of $3.7 million.
Cash Flows from Operating Activities
Cash
provided by operating activities was $14.3 million for the nine
months ended December 31, 2009, primarily resulting from the net
income reported for the period, adjusted for depreciation and
stock-based compensation expense, and the increase in accrued
compensation.
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DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
Our billings for the three and nine months ended December 31, 2009, totaled $55.0 million and
$153.0 million, respectively, compared to $43.7 million and $134.6 million, respectively, for the
three and nine months ended December 31, 2008. The increase in billings is due to an increase in
revenue and reimbursable expenses primarily due to increased demand
for our services and improving economic conditions. These amounts include value added tax
(VAT) and billings to clients for reimbursable expenses (which are not included in net revenue).
Our gross accounts receivable balance of $16.5 million at December 31, 2009, represented 27 days of
billings for the quarter ended December 31, 2009. At December 31, 2008, the gross receivable
balance was $14.6 million which represented 30 days of billings for the quarter ended December 31,
2008. The increase in accounts receivable at December 31, 2009, as compared to December 31, 2008,
was principally due to increased revenue during the twelve month period. An increase or decrease
in accounts receivable and days of billings in accounts receivable between periods is primarily the
result of the timing of the collection of payments and issuance of invoices, and therefore, we do
not believe it is indicative of a trend in the business.
Cash Flows from Investing Activities
Cash used in investing activities was $1.0 million for the nine months ended December 31,
2009, and primarily related to capital expenditures which consisted of leasehold improvements,
purchases of computer hardware, and software licenses.
Cash Flows from Financing Activities
Cash used in financing activities was $9.8 million for the nine months ended December 31,
2009, resulting from the payment of common stock cash dividends of $5.7 million, the repurchase of
common stock totaling $4.9 million, and the payment of employee withholding taxes from equity
transactions of $0.5 million. These were offset by $1.2 million in proceeds from option exercises
and the issuance of common stock in connection with the Employee Stock Purchase Plan and $0.1
million of tax benefits for stock-based compensation credited to additional paid-in capital.
Contractual Obligations
On December 25, 2009, we renewed our operating lease for our London office space, which
expired on December 24, 2009. Under the terms of the lease renewal, we are contractually obligated
to pay a total of approximately $1.7 million in future estimated lease payments for the period
January 1, 2010, through December 31, 2014. There have been no other material changes to the
Contractual Obligations presented in our Annual Report on Form 10-K for the fiscal year ended
March 31, 2009.
Contingencies
From time to time, we undergo various tax examinations and audits related to our holding
company and its subsidiaries. As a result of a tax inspection of a former Spanish subsidiary for
the tax years 1999 to 2000, on January 3, 2006, we provided a bank guarantee in the amount of 4.3
million Euros with the Spanish taxing authority in order to appeal such authoritys assessment.
The Spanish subsidiary was sold on July 31, 2006, as discussed in Note (C) to the condensed
consolidated financial statements, and in accordance with the terms of the sale transaction, we
agreed to indemnify the buyer for any liability related to this Spanish tax inspection (tax
indemnification obligation). The terms of the guarantee require that it be renewed annually until
the results of the appealed tax inspection are settled. At the time of the transaction, such
settlement was not expected before a period of approximately eight years.
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DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
During the fourth quarter of fiscal year 2008, the Spanish tax authorities ruled in our favor
on a portion of the assessments that were being appealed. The remaining assessments under appeal
are based on the same merits and we believe that the tax authorities will rule in our favor on
those appeals. As a result, we reversed $4.6 million of the indemnification obligation during the
fourth quarter of fiscal year 2008. In addition, we also obtained a release in June 2008 of $3.1
million of the restricted cash related to the portion of the assessments that had received a
favorable ruling. The remaining $4.1 million classified as restricted cash as of December 31,
2009, secures the remaining bank guarantee. For the assessments that are still under appeal, the
maximum potential amount of future payments under the tax indemnification obligation is
approximately 2.8 million Euros, assuming the full amount assessed is sustained at the end of the
appeals process. We believe that we are adequately reserved for any potential exposure related to
this assessment. The current reserve was
determined based on advice from our third-party tax advisors and based upon guidance set forth in
ASC 460, Guarantees. We hold shares of Diamonds Common Stock beneficially owned by third
parties in an escrow account for the benefit of recovering from the third parties a portion of any
payments made by the Company under the tax indemnification obligation from the sale transaction.
As a result of the favorable ruling on a portion of the assessments that were appealed, we no
longer expect to recover certain of these shares and intend to release the escrow shares related to
a portion of the tax indemnification obligation.
Off Balance Sheet Arrangements
We do not maintain any off-balance sheet arrangements that would have a material current or
future impact on our financial condition or results of operations.
Treasury Stock Transactions
The Board has authorized, from time to time, the repurchase of the Companys Common Stock in
the open market or through privately negotiated transactions. During the period beginning with the
inception of the Buy-back Program in October 1998 until the meeting of directors on September 14,
2004, the Board had authorized the repurchase of up to 6.0 million shares, of which 5.3 million
shares were repurchased at an aggregate cost of $70.5 million as of September 14, 2004. At the
meeting of directors on September 14, 2004, the Board restated the aggregate amount of repurchases
that could be made under the Buy-back Program to be based on a maximum dollar amount rather than a
maximum number of shares. The authorization approved the repurchase of shares under the Buy-back
Program having an aggregate market value of no more than $25.0 million. In April 2005, July 2006,
March 2007 and February 2008, the Board authorized the repurchase of an additional $50.0 million,
$35.0 million, $50.0 million and $25.0 million, respectively, of shares of the Companys
outstanding Common Stock under the existing Buy-back Program, resulting in an aggregate market
value of up to $185.0 million in addition to the 5.3 million shares repurchased prior to September
14, 2004. In the absence of an additional buy-back authorization from the Board, the Buy-back
Program expires when the existing authorized amounts for share repurchases has been expended.
During the quarter ended December 31, 2009, the Company repurchased approximately 0.2 million
shares at an average price of $6.64. As of December 31, 2009, the amount available for repurchase
under the Buy-back Program was $22.1 million.
Summary
We believe that our current cash balances, existing lines of credit, and cash flow from
existing and future operations will be sufficient to fund our operating requirements at least
through fiscal year 2011. In addition, we could consider seeking additional public or private debt
or equity financing to fund future growth opportunities. However, there is no assurance that such
financing would be available to us on acceptable terms, or at all.
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DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the Companys market risk during the quarter ended
December 31, 2009. This information is set forth in the Companys Annual Report on Form 10-K for
the fiscal year ended March 31, 2009.
Item 4. Controls and Procedures
(a) Controls and Procedures. Our senior management, with the participation of our Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this quarterly
report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, our disclosure controls and procedures are effective
such that information relating to the Company (i) is recorded, processed, summarized and reported
within the time periods specified in SEC rules
and forms, and (ii) is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosures.
(b) Changes in Internal Control Over Financial Reporting. There have not been any changes in our
internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fiscal quarter to which this report relates that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
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DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in several legal claims or proceedings concerning matters arising in the
ordinary course of business. However, we do not expect that any of these matters, individually or
in the aggregate, will have a material effect or impact on our results of operation or financial
condition.
Item 1A. Risk Factors
Other than the changes to the risk factors below, there have been no other material changes to
our Risk Factors as reported in our Annual Report on Form 10-K for the fiscal year ended March 31,
2009.
Our Revenue Could Be Adversely Affected by the Loss of a Significant Client or the Failure to
Collect a Large Account Receivable.
We have in the past derived, and may in the future derive, a significant portion of our
revenue from a relatively limited number of major clients. From year to year, revenue from one or
more individual clients may exceed 10% of our revenue for the period. During the quarter ended
December 31, 2009, we had one client that individually accounted for 10% or more of our net
revenue. If we lose any major clients or any of our clients cancel or significantly reduce a large
projects scope, we would lose a significant amount of revenue. In addition, if we fail to collect
a large account receivable or group of receivables, we could be subject to significant financial
exposure.
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DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Board has authorized, from time to time, the repurchase of the Companys Common Stock in
the open market or through privately negotiated transactions. During the period beginning with the
inception of the Buy-back Program in October 1998 until the meeting of directors on September 14,
2004, the Board had authorized the repurchase of up to 6.0 million shares, of which 5.3 million
shares were repurchased at an aggregate cost of $70.5 million as of September 14, 2004. At the
meeting of directors on September 14, 2004, the Board restated the aggregate amount of repurchases
that could be made under the Buy-back Program to be based on a maximum dollar amount rather than a
maximum number of shares. The authorization approved the repurchase of shares under the Buy-back
Program having an aggregate market value of no more than $25.0 million. In April 2005, July 2006,
March 2007 and February 2008, the Board authorized the repurchase of an additional $50.0 million,
$35.0 million, $50.0 million and $25.0 million, respectively, of shares of the Companys
outstanding Common Stock under the existing Buy-back Program, resulting in an aggregate market
value of up to $185.0 million in addition to the 5.3 million shares repurchased prior to September
14, 2004. In the absence of an additional buy-back authorization from the Board, the Buy-back
Program expires when the existing authorized amounts for share repurchases has been expended.
During the quarter ended December 31, 2009, the Company repurchased approximately 0.2 million
shares at an average price of $6.64. As of December 31, 2009, the amount available for repurchase
under the Buy-back Program was $22.1 million.
Issuer Purchases of Equity Securities | ||||||||||||||||
Maximum Approximate Dollar | ||||||||||||||||
Average Price | Total Number of Shares | Value of Shares | ||||||||||||||
Total Number of | Paid per | Purchased as Part of | That May be Purchased | |||||||||||||
Period | Shares Purchased (1) | Share (1)(2) | Publicly Announced Plans | Under the Plan | ||||||||||||
October 1, 2009 |
245,373 | $ | 6.64 | 245,327 | $ | 22,060,589 | ||||||||||
October 31, 2009 |
||||||||||||||||
November 1, 2009 |
33,286 | $ | 7.50 | | $ | 22,060,589 | ||||||||||
November 30, 2009 |
||||||||||||||||
December 1, 2009 |
| | | $ | 22,060,589 | |||||||||||
December 31, 2009 |
(1) | In addition to purchases made under the Companys publicly announced Buy-back Program, included
in this column are transactions under the Companys stock-based compensation plans involving the
delivery to the Company of 33,332 shares of Common Stock to satisfy tax withholding obligations in
connection with the vesting of restricted shares granted to Company employees. |
|
(2) | Average price paid per share of stock repurchased under the Buy-back Program is execution
price, including commissions paid to brokers. |
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DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
The following is a list of exhibits required by Item 601 of Regulation S-K filed as part of
this Form 10-Q. Where so indicated, exhibits which were previously filed are incorporated herein by
reference. For exhibits incorporated by reference, the location of the exhibit in the previous
filing is indicated in parentheses.
Exhibit No. | Description | |||
3.1 | Form of Restated Certificate of Incorporation of the Company
(filed as Exhibit 3.1 to the Companys Quarterly Report on
Form 10-Q for the quarter ended September 30, 2009 (File No.
000-22125) and incorporated herein by reference). |
|||
3.2 | Amended and Restated By-laws of the Company (filed as Exhibit
3.2 to the Companys Quarterly Report on Form 10-Q for the
quarter ended September 30, 2006 (File No. 000-22125) and
incorporated herein by reference). |
|||
31.1 | * | CEO Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 302 of the Sarbanes-Oxley Act of
2002 |
||
31.2 | * | CFO Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 302 of the Sarbanes-Oxley Act of
2002 |
||
32.1 | * | CEO Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002 |
||
32.2 | * | CFO Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002 |
* | filed herewith |
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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.
DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC. |
||||
Date: February 4, 2010 | By: | /s/ Adam J. Gutstein | ||
Adam J. Gutstein | ||||
President and Chief Executive Officer | ||||
Date: February 4, 2010 | By: | /s/ Karl E. Bupp | ||
Karl E. Bupp | ||||
Chief Financial Officer |
26