<PAGE> 1
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 SEPTEMBER 30, 1999
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)
(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 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 October 31, 1999, there were 10,745,996 shares of Class A Common
Stock and 3,018,308 shares of Class B Common Stock of the Registrant
outstanding.
<PAGE> 2
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I -- FINANCIAL INFORMATION:
Item 1: Financial Statements
Consolidated Balance Sheets as of September 30, 1999 and March 31, 1999...................................3
Consolidated Statements of Operations for the Three and Six Months
Ended September 30, 1999 and 1998.........................................................................4
Consolidated Statements of Cash Flows for the Six Months Ended
September 30, 1999 and 1998...............................................................................5
Notes to Consolidated Financial Statements................................................................6
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations.....................................................................................8
Item 3: Quantitative and Qualitative Disclosure about Market Risk................................................12
PART II -- OTHER INFORMATION:
Item 4: Submission of Matters to a Vote of Security Holders.....................................................13
Item 6: Exhibits and Reports on Form 8-K.........................................................................13
SIGNATURES..............................................................................................................14
</TABLE>
2
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DIAMOND TECHNOLOGY PARTNERS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1999 1999
------------ --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 38,107 $ 47,698
Accounts receivable, net of allowance of $628 and
$419 as of September 30, 1999 and March 31, 1999, respectively ............ 12,431 10,434
Prepaid expenses ............................................................ 2,638 1,790
Deferred income taxes ....................................................... 735 735
-------- --------
Total current assets .......................................................... 53,911 60,657
Computers, equipment and training software, net ............................... 6,125 3,419
Other assets .................................................................. 4,939 3,010
Intangibles assets, net ....................................................... 6,638 --
-------- --------
Total assets .................................................................. $ 71,613 $ 67,086
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................ $ 2,754 $ 1,468
Note payable, current portion ............................................... 500 --
Other accrued liabilities ................................................... 7,309 12,317
-------- --------
Total current liabilities ..................................................... 10,563 13,785
Note payable, less current portion ............................................ 500 --
-------- --------
Total liabilities ............................................................. 11,063 13,785
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, 10,972 issued as of September 30, 1999 and
10,005 issued as of March 31, 1999 ........................................ 11 10
Class B common stock, $.001 par value, 20,000 shares
authorized, 3,241 issued as of September 30, 1999 and
3,649 issued as of March 31, 1999 ......................................... 3 4
Additional paid-in capital .................................................. 47,797 42,152
Notes receivable from sale of common stock .................................. (264) (32)
Retained earnings ........................................................... 23,068 16,451
-------- --------
70,615 58,585
Less Class A Common Stock in treasury, at cost, 513 shares
and 304 shares held at September 30 and March 31, 1999, respectively ........ 10,065 5,284
-------- --------
Total stockholders' equity .................................................... 60,550 53,301
-------- --------
Total liabilities and stockholders' equity .................................... $ 71,613 $ 67,086
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
3
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DIAMOND TECHNOLOGY PARTNERS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTER FOR THE SIX MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 1998 1999 1998
------------------- -------------------
<S> <C> <C> <C> <C>
Net revenue $30,467 $20,136 $56,185 $38,511
------- ------- ------- -------
Operating expenses:
Project personnel and related expenses 16,198 10,583 30,143 20,482
Professional development and recruiting 3,052 2,305 5,137 4,256
Marketing and sales 1,534 1,113 3,132 2,157
Management and administrative support 4,165 2,846 7,704 5,395
------- ------- ------- -------
Total operating expenses 24,949 16,847 46,116 32,290
------- ------- ------- -------
Income from operations 5,518 3,289 10,069 6,221
Interest income, net 413 649 778 1,246
------- ------- ------- -------
Income before taxes 5,931 3,938 10,847 7,467
Income taxes 2,313 1,555 4,230 2,949
------- ------- ------- -------
Net income $ 3,618 $ 2,383 $ 6,617 $ 4,518
======= ======= ======= =======
Basic earnings per share of common stock $ 0.27 $ 0.18 $ 0.49 $ 0.34
Diluted earnings per share of common stock $ 0.22 $ 0.15 $ 0.41 $ 0.29
Shares used in computing basic earnings per
share of common stock 13,610 13,258 13,572 13,203
Shares used in computing diluted earnings
per share of common stock 16,672 15,507 16,305 15,579
</TABLE>
See accompanying notes to consolidated financial statements
4
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DIAMOND TECHNOLOGY PARTNERS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED SEPTEMBER 30,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income .............................................................. $ 6,617 $ 4,518
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ......................................... 1,072 466
Tax benefits from employee stock plans ................................ 1,145 709
Changes in assets and liabilities, net of effects of acquisition:
Accounts receivable ................................................. (90) (1,044)
Prepaid expenses and other .......................................... (776) (1,023)
Accounts payable .................................................... 1,108 (203)
Other assets and liabilities ........................................ (10,079) (1,789)
-------- --------
Net cash provided by (used in) operating activities ....................... (1,003) 1,634
-------- --------
Cash flows from investing activities:
Capital expenditures, net ............................................... (3,283) (746)
Payment for purchase of company ......................................... (3,214) --
Other assets ............................................................ -- (210)
-------- --------
Net cash used in investing activities ..................................... (6,497) (956)
-------- --------
Cash flows from financing activities:
Stock issuance costs .................................................... -- (1,523)
Common stock issued ..................................................... 2,690 19,653
Purchase of treasury stock .............................................. (4,781) (388)
-------- --------
Net cash provided by (used in) financing activities ....................... (2,091) 17,742
-------- --------
Net increase (decrease) in cash and cash equivalents ...................... (9,591) 18,420
Cash and cash equivalents at beginning of period .......................... 47,698 31,437
-------- --------
Cash and cash equivalents at end of period ................................ $ 38,107 $ 49,857
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ................................ $ 13 $ --
Cash paid during the period for income taxes ............................ 2,606 2,997
Supplemental disclosure of noncash investing and financing Activities:
Issuance of common stock for notes ...................................... $ 264 $ --
Issuance of acquisition note payable .................................... 1,000 --
Issuance of common stock in acquisition ................................. 1,842 --
</TABLE>
See accompanying notes to consolidated financial statements
5
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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 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. 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 and six months ended September 30, 1999, 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."
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).
C. BUSINESS COMBINATION
On April 23, 1999, the Company acquired OmniTech Consulting Group, Inc.
("OmniTech"), a Chicago-based change management firm specializing in web-based
and other multimedia corporate learning. Under the terms of the acquisition
agreement, the Company paid $4.0 million in cash, and issued a $1.0 million note
and 115,641 shares of the Company's Class A Common Stock. Additionally, OmniTech
may be paid a maximum of $2 million over the next two years upon achievement of
certain performance measures.
The acquisition is being accounted for under the purchase method of
accounting and, accordingly, the operating results of OmniTech have been
included in the Company's consolidated financial statements since the date of
acquisition. The excess of net assets acquired ("Goodwill") approximated $6.8
million and is being amortized on a straight-line basis over 25 years.
6
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The following summarized unaudited pro forma financial information for
the three and six months ended September 30, 1999 and 1998 assume the OmniTech
acquisition occurred as of April 1 of each year:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales ............... $ 30,467 $ 22,683 $ 56,729 $ 43,605
Net income .............. 3,618 2,577 6,518 4,828
Earnings per share:
Basic ................. 0.27 0.19 0.48 0.36
Diluted ................ 0.22 0.16 0.40 0.31
</TABLE>
These amounts are based upon certain assumptions and estimates, and do
not necessarily represent results that would have occurred if the acquisition
had taken place on the basis assumed above, nor are they indicative of the
results of future combined operations.
D. STOCK SPLIT (SUBSEQUENT EVENT)
The Company's Board of Directors approved a three for two stock split
of the Company's Class A and Class B Common Stock, effective November 1, 1999.
Shareholders of record at the close of business on October 25, 1999 received an
additional share for every two shares of the Company's Class A or B Common Stock
held. The balance sheet and income statement in this Report on Form 10-Q have
not been restated to reflect this split.
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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 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 Technology Partners Incorporated (the "Company" or "Diamond")
is an e-commerce services firm. Positioned as the CEO's guide to e-commerce, the
Company helps its leading national and multinational clients create and
implement digital strategies -- business strategies for the digital age. The
Company serves clients primarily in the telecommunications, energy, financial
services, insurance, healthcare, consumer products, and consumer services
industries. The Company offers services in Digital Strategy(sm) development,
program management, e-commerce solution delivery (through its Diamond
Marketspace Solutions(sm) offering), change management and profit improvement.
Diamond was founded upon a belief that effective e-commerce digital strategies
can be conceived only when strategy and technology are considered in tandem, not
in sequence.
The Company's revenues are comprised of professional fees for services
rendered to clients which are generally 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 consists 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.
RECENT DEVELOPMENTS
On October 21, 1999, the Company acquired Leverage Information Systems,
Inc., ("Leverage"), a San Francisco based architecture and development company
specializing in the building of complex web sites and intranets. The acquisition
will be accounted for under the purchase method of accounting.
8
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The Company's Board of Directors approved a three for two stock split
of the Company's Class A and Class B Common Stock, effective November 1, 1999.
Shareholders of record at the close of business on October 25, 1999 received an
additional share for every two shares of the Company's Class A or B Common Stock
held. The balance sheet and income statement in this Report on Form 10-Q have
not been restated to reflect this split.
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 FOR THE SIX MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 1998 999 1998
------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Operating expenses:
Project personnel and related expenses 53.2 52.6 53.7 53.2
Professional development and recruiting 10.0 11.5 9.1 11.0
Marketing and sales 5.0 5.5 5.6 5.6
Management and administrative support 13.7 14.1 13.7 14.0
---- ---- ---- ----
Total operating expenses 81.9 83.7 82.1 83.8
---- ---- ---- ----
Income from operations 18.1 16.3 17.9 16.2
Interest income, net 1.4 3.2 1.4 3.2
---- ---- ---- ----
Income before taxes 19.5 19.5 19.3 19.4
Income taxes 7.6 7.7 7.5 7.7
---- ---- ---- ----
Net income 11.9% 11.8% 11.8% 11.7%
==== ==== ==== ====
</TABLE>
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1998
The Company's net income of $3.6 million during the quarter ended
September 30, 1999 improved from $2.4 million during the same period in the
prior year as a result of increased revenues, partially offset by an increase in
the cost of its client-serving professionals and an increase in expenses
required to support the Company's growth during the period.
The Company's net revenues increased 51% to $30.5 million during the
quarter ended September 30, 1999 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, the acquisition of OmniTech, as
well as the leveraging of the Company's existing client base by undertaking
additional projects for these clients. The Company served 70 clients during the
quarter ended September 30, 1999 as compared to 39 clients during the same
period in the prior year.
Project personnel and related expenses increased $5.6 million to $16.2
million during the quarter ended September 30, 1999 as compared to the same
period in the prior year. In aggregate, project personnel and related expenses
increased 53% from the same period in the prior year due to increases in both
the number and compensation of its client-serving professionals. The Company
increased its client-serving professional staff from 229 at September 30, 1998
to 378 at September 30, 1999. As a percentage of net revenues, project personnel
and related expenses increased from 52.6% to 53.2% during the quarter ended
September 30, 1999, as compared to the same period in the prior year.
Professional development and recruiting expenses increased $0.7 million
to $3.1 million during the quarter ended September 30, 1999 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 10.0% as compared to 11.5% during the same
period in the prior year as a result of the Company's improved operating
leverage resulting from it's net revenue growth.
Marketing and sales expenses increased from $1.1 million to $1.5
million during the quarter ended September 30, 1999 as compared to the same
period in the prior year as a result of the Company's continued investment in
(i) the publication of its magazine, "Context", which transitioned from a
quarterly publication to a bi-monthly publication and is now being marketed at
selected newsstands across the United States (ii) the conduct of several one-day
digital strategy executive seminars for prospective clients, and (iii) the
hiring of a chief marketing officer and supporting staff to lead the corporate
branding and marketing initiatives for the Company. As a percentage of net
revenues, these expenses decreased from 5.5% to 5.0%.
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Management and administrative support expenses increased from $2.8
million to $4.2 million, or 46%, during the quarter ended September 30, 1999 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 14.1% to 13.7% as a result of the Company's improved
operating leverage resulting from the Company's net revenue growth.
SIX MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1998
The Company's net income of $6.6 million during the six months ended
September 30, 1999 improved from $4.5 million during the same period in the
prior year as a result of increased revenues, partially offset by an increase in
expenses required to support the Company's growth during the period.
The Company's net revenues increased 46% to $56.2 million during the
six months ended September 30, 1999 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, the acquisition of OmniTech, as
well as the leveraging of the Company's existing client base by undertaking
additional projects for these clients. The Company served 108 clients during the
six months ended September 30, 1999 as compared to 53 clients during the same
period in the prior year.
Project personnel and related expenses increased $9.7 million to $30.1
million during the six months ended September 30, 1999 as compared to the same
period in the prior year. In aggregate, project personnel and related expenses
increased 47% from the same period in the prior year due to increases in both
the number and compensation of its client-serving professionals. The Company
increased its client-serving professional staff from 229 at September 30, 1998
to 378 at September 30, 1999. As a percentage of net revenues, project personnel
and related expenses increased from 53.2% to 53.7% during fiscal 2000.
Professional development and recruiting expenses increased $0.9 million
during the six months ended September 30, 1999 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 9.1% as compared to 11.0% during the same period in the
prior year a result of the Company's improved operating leverage resulting from
it's net revenue growth.
Marketing and sales expenses increased from $2.2 million to $3.1
million during the six months ended September 30, 1999 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, "Context", which transitioned from a quarterly
publication to a bi-monthly publication and is now being marketed at selected
newsstands across the United States (ii) the conduct of several one-day digital
strategy executive seminars for prospective clients, and (iii) the hiring of a
chief marketing officer and supporting staff to lead the corporate branding and
marketing initiatives for the Company. As a percentage of net revenues, these
expenses remained consistent at 5.6% for both six-month periods.
Management and administrative support expenses increased from $5.4
million to $7.7 million, or 43%, during the six months ended September 30, 1999
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 14.0% to 13.7% as a result of the Company's improved
operating leverage resulting from the Company's net revenue growth.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended June 30, 1998, the Company sold approximately
650,000 shares of Class A Common Stock. Net proceeds to the Company totaling
approximately $15.9 million were realized in April 1998.
On November 12, 1998, the Company entered into a revolving line of
credit with a commercial bank under which the Company may borrow up to $10.0
million at an annual interest rate based on the prime rate or based on the LIBOR
plus 1.75%, at the Company's discretion. This line of credit has been reduced to
account for letters of credit outstanding. As of September 30, 1999, the Company
had approximately $9.8 million available under this line of credit.
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The Company's billings for the quarter ended September 30, 1999 totaled
$37.6 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 $13.1 million at
September 30, 1999 represents 32 days of billings for the quarter.
In October 1998 the Company's Board of Directors authorized the
repurchase, from time to time, of up to one million shares of the Company's
Class A Common Stock. These repurchases were authorized to be made in the open
market or in privately negotiated transactions. At September 30, 1999 the number
of shares purchased under this authorization was approximately 513,000 shares at
an aggregate cost of $10.1 million. The Company intends to fund the repurchases
through its cash balances.
The Company currently anticipates that 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
2000. 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" or "Y2K"). The Company has conducted an assessment
of the potential impact of the Year 2000 Issue on its operations and mission
critical vendors. In light of the fact that the Company has only been in
existence for a little over five years, the Company's key financial, information
and operation systems have been designed to be Year 2000 compliant without the
need for any modifications or conversions. Accordingly, the Company does not
expect the Year 2000 Issue to have a material effect on the Company's
consolidated financial position, results of operation or cash flows.
The Company has participated in certain projects that involve Y2K
issues for some of its clients. Generally, the Company includes provisions in
client contracts that, among other things, disclaim implied warranties, limit
the duration of express warranties, and limit the Company's liability to the
amount of fees paid by the client to the Company in connection with the project.
The Company also maintains insurance to protect against potential liability that
may arise in connection with Y2K issues at its clients. Although the Company has
no reason to believe that any such work will result in litigation against the
Company, it is possible that the Company could be adversely affected by
litigation in connection with these projects. There can be no assurance that the
Company will be able to obtain the desired contractual protections in
agreements, or that any such contractual provisions will prevent clients from
asserting claims against the Company with respect to the Y2K issue. There can
also be no assurance that the contractual protections, if any, obtained by the
Company or the insurance coverage will operate to protect the Company from, or
adequately limit the amount of, any liability arising from claims asserted
against the Company.
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 that 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
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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 cause
the Company's actual operating or financial results to differ materially, see
Exhibit 99.1 to this Quarterly Report on Form 10-Q.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes since March 31, 1999.
12
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PART II. OTHER INFORMATION
ITEM 1 -- 3
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual stockholder meeting on August 10, 1999 (the
"Annual Meeting"). At the Annual Meeting, Edward R. Anderson (20,854,439 votes
for, 84,526 votes withholding), Adam J. Gutstein (20,798,925 votes for, 140,040
votes withholding), and Christopher J. Moffitt (20,854,439 votes for, 84,526
votes withholding) were each elected to serve a three year term. Mark L. Gordon
(20,854,439 votes for, 84,526 votes withholding) and John J. Sviokla (20,854,239
votes for, 84,726 votes withholding) were elected to serve a two year term.
Melvyn E. Bergstein, Donald R. Caldwell, Alan C. Kay, John D. Loewenberg, and
Michael E. Mikolajczyk, each have terms in office that continue beyond the date
of the Annual Meeting. In addition, at the Annual Meeting the stockholders
approved amendments to the Diamond Technology Partners Incorporated 1998 Equity
Incentive Plan ( 20,448,985 votes for, 197,746 against, 292,234 votes
abstaining), the adoption of the Diamond Technology Partners Incorporated 1999
Employee Stock Purchase Plan (20,932,589 votes for, 4,616 against, 1,760
abstaining), and the appointment of KPMG LLP as independent auditors of the
Company for the fiscal year ended March 31, 2000 (18,492,151 votes for,
2,154,822 votes against, 291,992 votes abstaining).
ITEM 5
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Incorporation (filed as Exhibit 3.1 to the
Registration Statement on Form S-1 (File No. 333-17785) and
incorporated herein by reference)
3.2 By-Laws (filed as Exhibit 3.2 to the Registration Statement on
Form S-1 (File No. 333-17785) and incorporated herein by
reference)
27. Financial Data Schedule
99.1 Risk Factors
(b) Reports on Form 8-K
None
13
<PAGE> 14
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: November 12, 1999 By: /s/ MELVYN E. BERGSTEIN
----------------------------------------
Melvyn E. Bergstein
Chairman, Chief Executive Officer and
Director
Date: November 12, 1999 By: /s/ KARL E. BUPP
----------------------------------------
Karl E. Bupp
Vice President, Chief Financial Officer
and Treasurer
14
<PAGE> 15
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.3 Articles of Incorporation (filed as Exhibit 3.1 to the Registration
Statement on Form S-1 (File No. 333-17785) and incorporated herein by
reference)
3.4 By-Laws (filed as Exhibit 3.2 to the Registration Statement on Form S-1
(File No. 333-17785) and incorporated herein by reference)
27 Financial Data Schedule (for SEC use only)
99.1 Risk Factors
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 38,107
<SECURITIES> 0
<RECEIVABLES> 13,059
<ALLOWANCES> 628
<INVENTORY> 0
<CURRENT-ASSETS> 53,911
<PP&E> 10,178
<DEPRECIATION> 4,053
<TOTAL-ASSETS> 71,613
<CURRENT-LIABILITIES> 10,563
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 60,537
<TOTAL-LIABILITY-AND-EQUITY> 71,613
<SALES> 0
<TOTAL-REVENUES> 56,185
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 46,116
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14
<INCOME-PRETAX> 10,847
<INCOME-TAX> 4,230
<INCOME-CONTINUING> 6,617
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,617
<EPS-BASIC> .49
<EPS-DILUTED> .41
</TABLE>
<PAGE> 1
EXHIBIT 99.1
RISK FACTORS
In evaluating the Company and its business, prospective investors should
consider carefully the following risk factors in addition to the other
information contained herein. Statements in this Quarterly Report on Form 10-Q
contain forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the following risk factors.
CONCENTRATION OF REVENUES
The Company has in the past derived, and may in the future derive, a
significant portion of its revenues from a relatively limited number of major
clients. During fiscal 1998 the Company had one client that individually
accounted for 9% of its net revenues. During fiscal 1999, the Company had two
clients that individually accounted for 15% and 10% of its net revenues. During
the first six months of fiscal 2000, the Company had one client that
individually accounted for 17% of its net revenues. From quarter to quarter,
revenues from one or more individual clients may exceed 10% of the Company's
revenues for the quarter. There can be no assurance that the Company's major
clients will continue their relationships with the Company and be a significant
source of revenue for the Company or that they will not terminate major projects
at any given time. Any unanticipated termination of a major project or the loss
of any one of the Company's large clients will have a material adverse effect on
the Company's business, financial condition and results of operations.
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company has experienced and may in the future continue to
experience fluctuations in its quarterly operating results. Factors that may
cause the Company's quarterly operating results to vary include the number of
active client projects, the requirements of client projects, the termination of
major client projects, the loss of major clients, the timing of new client
engagements and the timing of personnel cost increases. Certain of these factors
may also affect the Company's personnel utilization rates, which may cause
further variation in quarterly operating results. The timing of revenues is
difficult to forecast because the Company's sales cycle is relatively long and
the Company's services are impacted by both the financial condition and
management decisions of its clients and general economic conditions. Because a
high percentage of the Company's expenses are relatively fixed at the beginning
of any period and the Company's general policy is to not adjust its staffing
levels based upon what it views as short-term circumstances, a variation in the
timing, initiation or completion of client assignments, particularly at or near
the end of any quarter, can cause significant variations in operating results
from quarter to quarter and could result in losses for any particular period. In
addition, many of the Company's engagements are, and may be in the future,
terminable by its clients without penalty. A termination of a major project
could require the Company to maintain under utilized employees, resulting in a
higher than expected percentage of unassigned professionals, or to terminate the
employment of excess personnel. Due to all of the foregoing factors, there can
be no assurance that the Company's results of operations will not be below the
expectations of investors for any given fiscal period.
CONTROL BY CHIEF EXECUTIVE OFFICER; ELECTION OF FUTURE CHIEF EXECUTIVE OFFICERS
All employee-stockholders of the Company have granted a proxy to vote
their shares of Class B Common Stock to the person holding the position of Chief
Executive Officer of the Company. Accordingly, as of September 30, 1999, the
Company's current Chief Executive Officer controlled (including Class A Common
Stock owned by such individual) approximately 61.37% of the voting rights of the
outstanding Common Stock of the Company and will have the voting power to elect
the Company's entire Board of Directors and to approve all matters requiring
stockholder approval. In addition, an agreement among the Company and the
Partners requires that the Company's Chief Executive Officer be selected from
the Partners. This significantly limits the number of qualified persons that may
be considered for such office. Accordingly, there can be no assurance that the
Company will be successful in attracting future persons who are qualified to
serve as the Company's Chief Executive Officer and the inability to attract such
persons could have a material adverse effect on the Company's business,
financial condition and results of operations.
<PAGE> 2
RELIANCE ON KEY PERSONNEL; RECRUITMENT AND RETENTION OF PROFESSIONALS IN HIGHLY
COMPETITIVE E-COMMERCE BUSINESS
The Company's success depends upon the continued service of its key
executive officers and its ability to attract, retain and motivate highly
skilled professionals at all levels. As a result of the rapid growth of the
Internet and related e-commerce business, there is intense competition for
employees who have strategic, technical or creative experience relating to the
Internet. The Company cannot be certain that it will be successful in hiring a
sufficient number of highly skilled employees in the future, or that it will be
successful in retaining, training and motivating the employees the Company
hires. The loss for any reason of a key executive officer or a number of the
Company's client-serving professionals or the inability to attract qualified
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations.
ABSENCE OF LONG-TERM CONTRACTS
The Company's clients are generally able to reduce or cancel their use
of the Company's professional services without penalty and with little or no
notice. As a result, the Company believes that the number of clients or the
number and size of its existing projects are not reliable indicators or measures
of future revenue. The Company has in the past provided, and is likely in the
future to provide, services to clients without a long-term agreement. When a
client defers, modifies or cancels a project, the Company must be able to
rapidly deploy its professionals to other projects in order to minimize the
underutilization of employees and the resulting adverse impact on operating
results. In addition, the Company's operating expenses are relatively fixed and
cannot be reduced on short notice to compensate for unanticipated variations in
the number or size of projects in progress. For example, during the last quarter
of fiscal 1996 and the first quarter of fiscal 1997, the Company's then two
largest clients terminated projects with the Company, which together with the
increase in the Company's operating expenses caused by the Company's expansion,
resulted in a net loss for the first six months of fiscal 1997 of approximately
$1.1 million. Any unanticipated termination, significant reduction or
modification of its business relationships with any of its significant clients
or with a number of smaller clients could have a material adverse effect on the
Company's business, financial condition and results of operations.
MANAGEMENT OF GROWTH; INCREASED OPERATING EXPENSES
The Company has been experiencing a period of substantial growth that
has placed, and is anticipated to continue to place, a strain on the Company's
financial and other resources. During fiscal 1998 and the first six months of
fiscal 2000, the size of the Company's employee base more than doubled,
increasing from 223 to 479 full-time employees. Further increases are
anticipated in the future, either by means of organic growth or through the
acquisition of select companies that meet the Company's acquisition criteria. To
support the growth of its business, the Company has expanded its level of
operations every fiscal year. The Company's ability to manage the growth of its
professional staff will require it to continue to improve its operational,
financial and other internal systems, and to train, motivate and manage its
employees. If the Company's management is unable to manage growth effectively
and new employees are unable to achieve anticipated performance levels, if
revenues do not continue to increase sufficiently to cover the Company's
expanded level of operations and increased operating expenses, and if the
Company is unable to successfully integrate any newly acquired businesses, the
Company's business, financial condition and results of operations could be
adversely affected.
FAILURE TO MEET CLIENT EXPECTATIONS OR DELIVER ERROR-FREE SERVICES COULD RESULT
IN LOSSES AND NEGATIVE PUBLICITY
Because many of the Company's projects are critical to its clients, a
failure or inability of the Company or one of its subcontractors to meet a
client's expectations could damage the Company's reputation and adversely affect
its ability to attract new business. In particular, the Company's client
engagements in its Diamond Marketspace Solutions business involve the creation,
implementation and maintenance of eBusiness systems and other applications that
can be critical to the clients' businesses. Any defects or errors in these
applications or failure to meet clients' expectations could result in delayed or
lost revenues due to adverse client reaction, requirements to provide additional
services to a client at no charge, and claims for substantial damages against
the Company regardless of the Company's responsibility for such failure.
The Company's contracts generally limit its liability for damages that
may arise from negligent acts, errors, mistakes or omissions in rendering
services to the Company's clients. However, there can be no assurances that
these contractual provisions will protect the Company from liability for damages
in the event it is sued. In addition, the Company's general liability insurance
coverage may not continue to be available on reasonable terms or in sufficient
amounts to cover one or more large claims, or the insurer may disclaim coverage
as to any future claim. The successful assertion of any such large claim against
the Company could have material adverse affect on the Company's business,
financial condition and operating results.
<PAGE> 3
inception through September 30, 1999, the Company has written off accounts
receivable totaling approximately $3.6 million which it could not collect.
PROTECTION OF INTELLECTUAL PROPERTY
The Company's success depends, in part, on its proprietary
methodologies and other intellectual property rights. It relies on a combination
of non-disclosure and other contractual agreements, and copyright and trademark
laws to protect its proprietary rights. The Company enters into confidentiality
agreements with its employees, requires that its clients enter into such
agreements, and limits access to and distribution of its proprietary
information. There can be no assurance that the steps taken by the Company will
be adequate to deter misappropriation of its proprietary information or that the
Company will be able to detect unauthorized use and take appropriate steps to
enforce its intellectual property rights.
The Company's business involves the development of e-commerce business
solutions, or killer apps, for specific client engagements. Ownership of such
intellectual property is the subject of negotiation and is frequently assigned
to the client, although the Company generally retains the right to use any
intellectual property that is developed during a client engagement that is of
general applicability and is not specific to the client's project. Issues
relating to the ownership of and rights to use intellectual property developed
during the course of a client engagement can be complicated and there can be no
assurance that clients will not demand assignment of ownership or restrictions
on the Company's use of the work which we produce for clients in the future or
that disputes will not arise that affect the Company's ability to resell or
reuse such intellectual property.
RAPID TECHNOLOGICAL ADVANCES
The Company's success will depend in part on its ability to develop
e-commerce business services which keep pace with continuing changes in the
Internet and related technology, evolving industry standards, IT and client
preferences. Among the Company's challenges in this area are the needs to
continue to develop its strategic and technical experience, develop new services
that meet changing customer needs and effectively use leading technologies.
There can be no assurance that the Company will be successful in addressing
these developments on a timely basis or that, if addressed, the Company will be
successful in the marketplace. The Company's delay in addressing or failure to
address these developments could have a material adverse effect on the Company's
business, financial condition and results of operations.
THE INTERNET PROFESSIONAL SERVICES MARKET IS HIGHLY COMPETITIVE
The e-commerce business services market is relatively new, includes a
large number of participants, is subject to rapid changes and is highly
competitive. The Company competes with, and faces potential competition for
client assignments and experienced personnel from, a number of companies that
have significantly greater financial, technical and marketing resources,
greater name recognition, and greater revenues than the Company. The Company
believes that the principal competitive factors in the segment of the
consulting industry in which the Company competes include scope of services,
service delivery approach, technical and industry expertise, perceived value,
objectivity and results orientation. The Company believes that its ability to
compete also depends in part on a number of competitive factors outside of its
control, including the ability of its competitors to hire, retain and motivate
senior project managers, the price at which others offer comparable services,
and the extent of its competitors' responsiveness to customer needs. There can
be no assurance that the Company will be able to compete successfully with its
competitors in the future.
There are relatively low barriers to entry into the e-commerce business
services market. In addition, the Company does not own any patented technology
that inhibits competitors from entering that market or providing services
similar to ours. As a result, new and unknown market entrants could pose a
threat to the Company's business. Current or future competitors may develop or
offer services that are comparable or superior to the Company's at a lower
price, which could significantly decrease its revenues.
POSSIBLE VOLATILITY OF STOCK PRICE
The Class A Common Stock of the Company has been listed on the Nasdaq
National Market since February 1997. The closing market price of the Class A
Common Stock has experienced variations, ranging from a high of $53.63 to a low
of $3.83 (each as adjusted for a 3-for-2 stock split effective November 1,
1999), and there can be no assurance that the market price of the Class A Common
Stock will not experience fluctuations in the future or will not fall below such
levels. The market price of the Class A Common Stock could be subject to wide
fluctuations in
<PAGE> 4
response to quarterly variations in operating results, changes in earnings
estimates by analysts, announcements of new contracts or service offerings by
the Company or its competitors, general economic or stock market conditions
unrelated to the Company's operating performance or other events or factors.
LIQUIDITY
The Company was not profitable in the first two quarters of fiscal
1997. While the Company has been profitable since the third quarter of fiscal
1997, there can be no assurance that the Company will continue to be profitable
in the future. The Company believes that existing cash resources, the amounts
available under its revolving line of credit and cash generated from operations
will be sufficient to satisfy its operating cash needs for at least the next 12
months. Any future decreases in its operating income, cash flow, or
stockholders' equity may impair the Company's future ability to raise additional
funds to finance operations. There can be no assurance that the Company will in
the future maintain adequate liquidity to support its operations.
