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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-26970
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
(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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (312) 255-5000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
As of July 31, 1998, there were 9,192,297 shares of Class A Common Stock
and 4,027,576 shares of Class B Common Stock of the Registrant outstanding.
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DIAMOND TECHNOLOGY PARTNERS INCORPORATED
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED JUNE 30, 1998
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I -- FINANCIAL INFORMATION:
Item 1: Financial Statements
Consolidated Balance Sheets as of June 30, 1998 and March 31, 1998 3
Consolidated Statements of Operations for the Three Months
Ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the Three Months Ended
June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
PART II -- OTHER INFORMATION:
Item 6: Exhibits and Reports of Form 8-K 11
SIGNATURES 12
</TABLE>
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DIAMOND TECHNOLOGY PARTNERS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1998 1998
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $46,840 $31,437
Accounts receivable, net of allowance of $797 and
$559 as of June 30, 1998 and March 31, 1998,
respectively 5,362 5,063
Prepaid expenses 1,117 548
Deferred income taxes 773 773
------- -------
Total current assets 54,092 37,821
Computers, equipment, and training software, net 1,842 1,644
Other assets 1,020 827
Deferred organization costs, net 47 60
------- -------
Total assets $57,001 $40,352
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,486 $ 1,734
Accrued compensation 2,642 6,535
Deferred revenue 1,392 1,129
Other accrued liabilities 2,048 2,187
------- -------
Total current liabilities 7,568 11,585
------- -------
Stockholders' equity:
Preferred Stock, $1.00 par value, 2,000 shares
authorized, no shares issued -- --
Class A common stock, $.001 par value, 40,000 shares
authorized, 9,133 issued as of June 30, 1998 and
7,298 issued as of March 31, 1998 9 7
Class B common stock, $.001 par value, 20,000 shares
authorized, 4,128 issued as of June 30, 1998 and
4,887 issued as of March 31, 1998 4 5
Additional paid-in capital 40,909 22,463
Notes receivable from sale of common stock (239) (323)
Retained earnings 8,750 6,615
------- -------
Total stockholders' equity 49,433 28,767
------- -------
Total liabilities and stockholders' equity $57,001 $40,352
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
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DIAMOND TECHNOLOGY PARTNERS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE QUARTER
ENDED JUNE 30,
1998 1997
---- ----
<S> <C> <C>
Net revenues $18,375 $12,101
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Operating expenses:
Project personnel and related expenses 9,899 6,726
Professional development and recruiting 1,951 1,476
Marketing and sales 1,044 817
Management and administrative support 2,549 1,822
------- -------
Total operating expenses 15,443 10,841
------- -------
Income from operations 2,932 1,260
Interest income, net 597 211
------- -------
Income before taxes 3,529 1,471
Income taxes (1,394) (604)
------- ------
Net income $ 2,135 $ 867
======= ======
Basic earnings per share of common stock $ 0.16 $ 0.07
Diluted earnings per share of common stock $ 0.14 $ 0.06
Shares used in computing basic earnings 13,147 11,578
per share of common stock
Shares used in computing diluted earnings 15,651 13,822
per share of common stock
</TABLE>
See accompanying notes to consolidated financial statements
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DIAMOND TECHNOLOGY PARTNERS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE QUARTER
ENDED JUNE 30,
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,135 $ 867
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 244 211
Changes in assets and liabilities:
Accounts receivable (299) (223)
Prepaid expenses and other (569) 156
Accounts payable (248) 279
Accrued compensation (3,892) 803
Deferred revenue 263 112
Income taxes payable -- (144)
Other accrued liabilities (139) 101
-------- --------
Net cash provided by (used in) operating activities (2,505) 2,162
-------- --------
Cash flows from investing activities:
Capital expenditures, net (429) (82)
Notes receivable (193) (54)
-------- --------
Net cash (used in) investing activities (622) (136)
-------- --------
Cash flows from financing activities:
Repayment of notes payable -- (2,000)
Stock issuance costs (1,523) (649)
Common stock issued 20,053 1,819
Repurchase of common stock -- (60)
-------- --------
Net cash provided by (used in) financing activities 18,530 (890)
-------- --------
Net increase in cash and cash equivalents 15,403 1,136
Cash and cash equivalents at beginning of period 31,437 17,547
-------- --------
Cash and cash equivalents at end of period $ 46,840 $ 18,683
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ -- $ 8
Cash paid during the period for income taxes 1,233 748
</TABLE>
See accompanying notes to consolidated financial statements
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DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. BASIS OF REPORTING
The accompanying consolidated financial statements of Diamond Technology
Partners Incorporated (the "Company") include the accounts of the Company and
its wholly owned subsidiary. All significant intercompany transactions and
balances have been eliminated in consolidation. Certain prior period amounts
have been reclassified to conform with current period presentation. In the
opinion of management, the consolidated financial statements reflect all normal
and recurring adjustments which 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. The consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Consequently, these statements do not include all
the disclosures normally required by generally accepted accounting principles
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 additional disclosures, including a summary of
the Company's accounting policies, which have not changed. The consolidated
results of operations for the quarter ended June 30, 1998, are not necessarily
indicative of results for the full year.
B. EARNINGS PER SHARE
The Company calculated earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share", and they are
presented in accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 98.
SFAS 128 establishes standards for computing and presenting earnings per
share (EPS) and requires a dual presentation of basic and diluted earnings per
share. Basic earnings per share is computed using the weighted average number of
common shares outstanding. Diluted earnings per share is computed using the
weighted average number of common shares outstanding and the assumed exercise of
stock options and warrants (using the treasury stock method).
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in connection with the information
contained in the Consolidated Financial Statements and notes thereto appearing
elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report on Form
10-Q contains forward-looking statements that involve risks and uncertainties.
See "Forward-Looking Statements" below.
OVERVIEW
Diamond is a management consulting firm that synthesizes business strategy
with IT to create innovative "digital strategies" for leading national and
multinational corporations.
The Company's revenues are comprised of professional fees for services
rendered to clients which are billed either monthly or semi-monthly in
accordance with the terms of the client engagement. Prior to the commencement of
a client engagement, the Company and its client agree on fees for services based
upon the scope of the project, Diamond staffing requirements and the level of
client involvement. The Company recognizes revenues as services are performed in
accordance with the terms of the client engagement. Out-of-pocket expenses are
reimbursed by clients and offset against expenses incurred and are not included
in recognized revenues. Provisions are made for estimated uncollectible amounts
based on the Company's experience. Although the Company from time to time has
been required to make revisions to its clients' estimated deliverables, to date
none of such revisions has had a material adverse effect on the Company's
operating or financial results.
The largest portion of the Company's costs consist primarily of
employee-related expenses for its client-serving professionals and other direct
costs, such as third-party vendor costs and unbilled travel costs associated
with the delivery of services to clients. The remainder of the Company's costs
are comprised of the expenses associated with the development of the business
and the support of its client-serving professionals, such as professional
development and recruiting, marketing and sales, and management and
administrative support. Professional development and recruiting expenses consist
primarily of recruiting and training costs. Marketing and sales expenses consist
primarily of the costs associated with the Company's development and maintenance
of its marketing materials and programs. Management and administrative support
expenses consist primarily of the costs associated with operations, finance,
information systems, facilities and other administrative support for project
personnel.
The Company regularly reviews its fees for services, professional
compensation and overhead costs to ensure that its services and compensation are
competitive within the industry. In addition, Diamond periodically monitors the
progress of client projects with its clients' senior management. The Company
manages activities of its professionals by closely monitoring engagement
schedules and staffing requirements for new engagements. Because most of the
Company's client engagements are, and may be in the future, terminable by the
client without penalty, an unanticipated termination of a client project could
require the Company to maintain underutilized employees. While professional
staff must be adjusted to reflect active engagements, the Company must maintain
a sufficient number of senior professionals to oversee existing client
engagements and participate in the Company's sales efforts to secure new client
assignments.
RECENT DEVELOPMENTS
The Company completed an offering of 3,000,000 shares of Class A Common
Stock in April 1998. In connection with this offering, the Company sold
approximately 650,000 shares of Class A Common Stock and the selling
shareholders sold approximately 2,350,00 shares of Class A Common Stock. Net
proceeds to the Company totaling approximately $15.9 million were realized in
April 1998.
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RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, selected
statements of operations data as a percentage of net revenues:
<TABLE>
<CAPTION>
FOR THE QUARTER
ENDED JUNE 30,
1998 1997
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<S> <C> <C>
Net revenues 100.0% 100.0%
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Operating expenses:
Project personnel and related expenses 53.9 55.6
Professional development and recruiting 10.6 12.2
Marketing and sales 5.7 6.7
Management and administrative support 13.8 15.1
----- -----
Total operating expenses 84.0 89.6
----- -----
Income from operations 16.0 10.4
Interest income, net 3.2 1.8
----- -----
Income before taxes 19.2 12.2
Income taxes (7.6) (5.0)
----- -----
Net income 11.6% 7.2%
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</TABLE>
QUARTER ENDED JUNE 30, 1998 COMPARED TO QUARTER ENDED JUNE 30, 1997
The Company's net income of $2.1 million during the quarter ended June 30,
1998 improved from $867,000 during the same period in the prior year as a result
of increased revenues, combined with an improvement in the utilization of its
client-serving professionals, partially offset by an increase in expenses
required to support the Company's growth during the period.
The Company will be required to award bonuses to Partners and employees at
the end of the fiscal year ending March 31, 1999 under its bonus programs if the
Company's overall performance during the quarter ended June 30, 1998 is
sustained for the remainder of the fiscal year. The Company has recognized bonus
expense of $2.6 million during the quarter ended June 30, 1998 as compared to
$800,000 during the same period in the prior year.
The Company's net revenues increased 51.8% to $18.4 million during the
quarter ended June 30, 1998 as compared to the same period in the prior year.
The increase in the Company's net revenues reflects an increase in the volume of
services delivered to new clients, as well as the leveraging of the Company's
existing client base by undertaking additional projects for these clients. The
Company served 40 clients during the quarter ended June 30, 1998 as compared to
33 clients during the same period in the prior year.
Project personnel and related expenses increased $3.2 million to $9.9
million during the quarter ended June 30, 1998 as compared to the same period in
the prior year. In aggregate, project personnel and related expenses increased
47.1% from the same period in the prior year due to increases in the both the
number and salaries of its client-serving professionals, combined with the
increase in bonus expense during the current period. The Company increased its
client-serving professional staff from 146 at June 30, 1997 to 187 at June 30,
1998. As a percentage of net revenues, project personnel and related expenses
decreased from 55.6% to 53.9% during fiscal 1999, reflecting the improvement in
the utilization of client-serving professionals.
Professional development and recruiting expenses increased $475,000 during
the quarter ended June 30, 1998 as compared to the same period in the prior
year. This increase reflects the Company's recruiting and training of a higher
number of client-serving professionals and an associated increase in recruiting
and training resources. As a percentage of net revenues, these expenses
decreased to 10.6% as compared to 12.2% during the same period in the prior year
as a result of the Company's improved operating leverage resulting from the net
revenue growth.
Marketing and sales expenses increased from $817,000 to $1.0 million during
the quarter ended June 30, 1998 as compared to the same period in the prior year
as a result of the Company's investment in (i) the publication of its magazine,
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"Context", which was launched during the third quarter of fiscal 1998 and (ii)
the promotion of the new book, "Unleashing the Killer App", which was
co-authored by one of the Company's partners and one of the Company's Diamond
Fellows. As a percentage of net revenues, these expenses decreased from 6.7% to
5.7%.
Management and administrative support expenses increased from $1.8
million to $2.5 million, or 39.9%, during the quarter ended June 30, 1998 as
compared to the same period in the prior year as a result of the additional
facilities, equipment and personnel necessary to support the Company's growth
and increased consulting capacity. As a percentage of net revenues, these
expenses decreased from 15.1% to 13.8% as a result of the Company's improved
operating leverage resulting from the Company's net revenue growth.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the offering of 3,000,000 shares of common stock during
the quarter ended June 30, 1998, the Company sold approximately 650,000 shares
of Class A Common Stock and selling shareholders sold approximately 2,350,000
shares of Class A Common Stock. Net proceeds to the Company totaling
approximately $15.9 million were realized in April 1998.
The Company also maintains a revolving line of credit pursuant to the terms
of a secured credit agreement from a commercial bank under which the Company may
borrow up to $3.0 million at an annual interest rate based on the prime rate or
based on the LIBOR plus 2.5%, at the Company's discretion. This line of credit
is secured by a lien on all of the property of the Company and the Company's
wholly owned subsidiary. This line of credit has been reduced to account for
letters of credit outstanding. As of June 30, 1998, the Company had
approximately $2.4 million available under this line of credit.
The Company's billings for the quarter ended June 30, 1998 totaled $22.3
million. These amounts include billings to clients for out-of-pocket expenses
that are reimbursed by clients which are not included in recognized revenues.
The Company's gross accounts receivable balance of $6.2 million at June 30, 1998
represents 25 days of billings for the quarter.
The Company currently anticipates that the net proceeds received by the
Company from the April 1998 stock offering, together with amounts available
under its current revolving line of credit, cash generated from operations and
existing cash balances will be sufficient to satisfy its operating cash needs
for fiscal 1999. Should the Company's business expand more rapidly than
expected, the Company believes that additional bank credit would be available to
fund such operating and capital requirements. In addition, the Company could
consider seeking additional public or private debt or equity financing to fund
future growth opportunities.
YEAR 2000 ISSUE
Many existing computer programs were designed and developed without
considering the impact of the upcoming change in the century and consequently
use only two digits to identify a year in the date field. If not corrected, many
computer applications could fail or create erroneous results by or at the year
2000 (the "Year 2000 Issue"). The Company has reviewed the potential impact of
the Year 2000 Issue on its operations and has concluded that it will not be
material.
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FORWARD-LOOKING STATEMENTS
Statements contained anywhere in this report that are not historical facts
contain forward-looking statements including such statements identified by the
words "anticipate", "believe", "estimate", "expect" or similar terminology used
with respect to the Company and its management. These forward-looking statements
are subject to risks and uncertainties which could cause the Company's actual
results, performance and prospects to differ materially from those expressed in,
or implied by, the forward-looking statements. The forward-looking statements
speak only as of the date hereof and the Company undertakes no obligation to
revise or update them to reflect events or circumstances that arise in the
future. Readers are cautioned not to place undue reliance on forward-looking
statements. For a statement of the Risk Factors that might adversely affect the
Company's operating or financial results, see Exhibit 99.1 to this Quarterly
report on Form 10-Q.
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PART II. OTHER INFORMATION
ITEM 1 - 5
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
99.1 Risk Factors (filed as Exhibit 99.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1998 and incorporated
herein by reference)
(b) Reports on Form 8-K
None
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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 TECHNOLOGY PARTNERS INCORPORATED
Date: August 12, 1998 By: /s/ MELVYN E. BERGSTEIN
Melvyn E. Bergstein
Chairman, Chief Executive Officer and Director
Date: August 12, 1998 By: /s/ KARL E. BUPP
Karl E. Bupp
Vice President, Chief Financial Officer
(Principal Financial and
Accounting Officer)
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DIAMOND TECHNOLOGY PARTNERS INCORPORATED
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
27 Financial Data Schedule
99.1 Risk Factors (filed as Exhibit 99.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1998)
13
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 46,840
<SECURITIES> 0
<RECEIVABLES> 6,159
<ALLOWANCES> 797
<INVENTORY> 0
<CURRENT-ASSETS> 54,092
<PP&E> 4,181
<DEPRECIATION> 2,339
<TOTAL-ASSETS> 57,001
<CURRENT-LIABILITIES> 7,568
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 49,420
<TOTAL-LIABILITY-AND-EQUITY> 57,001
<SALES> 0
<TOTAL-REVENUES> 18,375
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 15,443
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,529
<INCOME-TAX> 1,394
<INCOME-CONTINUING> 2,135
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,135
<EPS-PRIMARY> .16
<EPS-DILUTED> .14
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