Attached files

file filename
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
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
Registrant’s 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
 
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 Company’s 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 Company’s Annual Report on Form 10-K. Accordingly, reference should be made to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2009, for additional disclosures, including a summary of the Company’s 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 authority’s 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 Diamond’s 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 Company’s 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. subsidiary’s 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. subsidiary’s 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 Company’s 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 entity’s financial statements on a recurring basis (at least annually). The adoption of FSP No. 157-2 did not have a material impact on the Company’s financial condition or results of operations.

 

9


Table of Contents

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 Company’s 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 Company’s 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 Company’s 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 Company’s 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.

 

10


Table of Contents

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 Company’s 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 Company’s 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.

 

11


Table of Contents

DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
ITEM 2. MANAGEMENT’S 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, Diamond’s 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.
Diamond’s capabilities are rooted in deep strategy, technology, operations, and industry experience. The firm’s 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.

 

12


Table of Contents

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 personnel’s 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.

 

13


Table of Contents

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.

 

14


Table of Contents

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.

 

15


Table of Contents

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.

 

16


Table of Contents

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. subsidiary’s 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. subsidiary’s 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.

 

17


Table of Contents

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 authority’s 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 Diamond’s 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.

 

18


Table of Contents

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, Moody’s 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 Company’s 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 Company’s 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.

 

19


Table of Contents

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 authority’s 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.

 

20


Table of Contents

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 Diamond’s 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 Company’s 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 Company’s 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.

 

21


Table of Contents

DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the Company’s market risk during the quarter ended December 31, 2009. This information is set forth in the Company’s 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.

 

22


Table of Contents

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 project’s 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.

 

23


Table of Contents

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 Company’s 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 Company’s 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 Company’s publicly announced Buy-back Program, included in this column are transactions under the Company’s 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.

 

24


Table of Contents

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 Company’s 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 Company’s 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

 

25


Table of Contents

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