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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, 2000
or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-22125
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 36-4069408
(I.R.S. Employer
(State or other jurisdiction of Identification No.)
incorporation or organization)
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 July 31, 2000, there were 21,515,421 shares of Class A Common Stock
and 2,951,782 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, 2000
TABLE OF CONTENTS
<TABLE>
<C> <S> <C> <C>
PART I -- FINANCIAL INFORMATION:
Item 1: Financial Statements
Consolidated Balance Sheets as of March 31 and June 30,
2000........................................................ 3
Consolidated Statements of Net Income and Comprehensive
Income for the Three Months Ended June 30, 1999 and 2000.... 4
Consolidated Statements of Cash Flows for the Three Months
Ended June 30, 1999 and 2000................................ 5
Notes to Consolidated Financial Statements.................. 6
Management's Discussion and Analysis of Financial Condition
Item 2: and Results of Operations................................... 8
Item 3: Quantitative and Qualitative Disclosure about Market Risk... 10
PART II -- OTHER INFORMATION:
Item 6: Exhibits and Reports on Form 8-K............................ 11
SIGNATURES........................................................... 12
</TABLE>
2
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DIAMOND TECHNOLOGY PARTNERS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
March June 30,
31, 2000 2000
-------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $182,945 $192,898
Accounts receivable, net of allowance of $1,279 and
$1,756 as of March 31, 2000 and June 30, 2000,
respectively.......................................... 10,596 12,456
Income taxes receivable................................ 13,874 11,707
Prepaid expenses and deferred income taxes............. 7,144 7,247
-------- --------
Total current assets................................. 214,559 224,308
Computers, equipment and training software, net.......... 8,214 9,110
Other assets............................................. 15,981 19,126
Goodwill, net............................................ 10,656 15,920
-------- --------
Total assets....................................... $249,410 $268,464
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 3,759 $ 5,145
Note payable, current portion.......................... 500 500
Other accrued liabilities.............................. 26,333 27,242
-------- --------
Total current liabilities............................ 30,592 32,887
Note payable, less current portion....................... 500 --
-------- --------
Total liabilities.................................. 31,092 32,887
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, 21,958 issued as of March 31, 2000 and
22,194 issued as of June 30, 2000..................... 22 22
Class B common stock, $.001 par value, 20,000 shares
authorized, 2,701 issued as of March 31, 2000 and
2,999 issued as of June 30, 2000...................... 3 3
Additional paid-in capital............................. 195,372 204,370
Notes receivable from sale of common stock............. (232) (517)
Accumulated other comprehensive income................. 539 1,857
Retained earnings...................................... 32,679 39,907
-------- --------
228,383 245,642
Less Class A Common Stock in treasury, at cost, 770
shares held............................................. 10,065 10,065
-------- --------
Total stockholders' equity........................... 218,318 235,577
-------- --------
Total liabilities and stockholders' equity......... $249,410 $268,464
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
3
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DIAMOND TECHNOLOGY PARTNERS INCORPORATED
CONSOLIDATED STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Quarter
Ended June 30,
---------------
1999 2000
------- -------
<S> <C> <C>
Net revenue................................................... $25,718 $52,158
------- -------
Operating expenses:
Project personnel and related expenses...................... 13,945 27,700
Professional development and recruiting..................... 2,085 4,799
Marketing and sales......................................... 1,598 3,269
Management and administrative support....................... 3,485 6,956
Goodwill amortization....................................... 54 308
------- -------
Total operating expenses.................................. 21,167 43,032
------- -------
Income from operations........................................ 4,551 9,126
Other income, net............................................. 365 2,723
------- -------
Income before taxes........................................... 4,916 11,849
Income taxes.................................................. 1,917 4,621
------- -------
Net income.................................................... 2,999 7,228
Unrealized gain from securities, net of income tax expense of
$835......................................................... -- 1,318
------- -------
Comprehensive income.......................................... $ 2,999 $ 8,546
======= =======
Basic net income per share of common stock.................... $ 0.15 $ 0.30
Diluted net income per share of common stock.................. $ 0.13 $ 0.24
Shares used in computing basic net income per share of common
stock........................................................ 20,303 24,164
Shares used in computing diluted net income
per share of common stock.................................... 23,905 29,677
</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 Three
Months Ended June
30, 1999
------------------
1999 2000
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 2,999 $ 7,228
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 440 1,517
Deferred income taxes.................................. -- 835
Tax benefits from employee stock plans................... 354 2,551
Changes in assets and liabilities, net of effects of
acquisition:
Accounts receivable.................................... 232 (1,549)
Prepaid expenses and other............................. 950 1,249
Accounts payable....................................... 743 1,142
Other assets and liabilities........................... (9,865) 214
-------- --------
Net cash provided by (used in) operating activities........ (4,147) 13,187
-------- --------
Cash flows from investing activities:
Capital expenditures, net................................ (996) (2,070)
Payments for purchase of companies....................... (3,027) (3,241)
Other assets............................................. -- (1,176)
-------- --------
Net cash used in investing activities...................... (4,023) (6,487)
-------- --------
Cash flows from financing activities:
Repayment of note payable................................ -- (500)
Stock issuance costs..................................... -- (2)
Common stock issued...................................... 665 3,743
Purchase of treasury stock............................... (2,723) --
-------- --------
Net cash provided by (used in) financing activities........ (2,058) 3,241
-------- --------
Effect of exchange rate changes on cash.................... -- 12
-------- --------
Net increase (decrease) in cash and cash equivalents....... (10,228) 9,953
Cash and cash equivalents at beginning of period........... 47,698 182,945
-------- --------
Cash and cash equivalents at end of period................. $ 37,470 $192,898
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest................. $ 6 $ 13
Cash paid during the period for income taxes............. 202 1
Supplemental disclosure of noncash investing and financing
Activities:
Issuance of common stock for notes....................... $ 183 $ 422
Issuance of acquisition note payable..................... 1,000 --
Issuance of common stock in acquisitions................. 1,842 2,422
</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 subsidiaries. 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 ended June 30, 2000, are not
necessarily indicative of results for the full year.
B. Business Combinations
In May 2000, the Company acquired Momentus Group Limited ("Momentus"), a
London-based e-business consulting company. Under the terms of the acquisition
agreement, the Company paid approximately $2.9 million in cash and delivered
44,252 shares of the company's Class A Common Stock. Additionally, Momentus may
be paid a maximum of 69,265 shares of the Company's Class A Common Stock over
the next two years upon the achievement of certain performance measures.
In October 1999, the Company acquired Leverage Information Systems, Inc.,
("Leverage"), a San Francisco based systems architecture and development
company specializing in the building of complex web sites and intranets. Under
the terms of the acquisition, the Company paid $1.0 million in cash and issued
97,500 shares of the Company's Class A Common Stock.
In April 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 two years following the
closing date upon achievement of certain performance measures.
The acquisitions are being accounted for under the purchase method of
accounting and, accordingly, the operating results of OmniTech, Leverage, and
Momentus have been included in the Company's consolidated financial statements
since the date of acquisition. The excess of net assets acquired ("Goodwill")
recorded for OmniTech, Leverage, and Momentus approximated $16.7 million, and
is being amortized on a straight-line basis ranging from 7 to 25 years.
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DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following summarized unaudited pro forma financial information for the
three months ended June 30, 1999 and 2000 assume the OmniTech, Leverage, and
Momentus acquisitions occurred as of April 1 of each year:
<TABLE>
<CAPTION>
Three Months
Ended June 30,
---------------
1999 2000
------- -------
(in millions,
except per
share data)
<S> <C> <C>
Net Revenue............................................... $26,803 $52,379
Net income................................................ 2,428 7,150
Earnings per share:
Basic................................................... 0.12 0.30
Diluted................................................. 0.10 0.24
</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.
7
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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
We are an e-business services firm that synthesizes business and industry
insight with technology expertise to create innovative digital strategies for
leading national and multinational businesses. Once conceived, we believe such
strategies must be implemented rapidly in order to maximize competitive
benefits. We have experienced substantial revenue growth since our inception,
generating net revenues of $52.2 million from 67 clients during the three
months ended June 30, 2000. We employed 506 client-serving professionals as of
June 30, 2000.
Our revenues are comprised of professional fees for services rendered to our
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, 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 in accordance with the terms of
the client engagement. Out-of-pocket expenses are reimbursed by our clients and
offset against expenses incurred and are not included in recognized revenues.
Provisions are made for estimated uncollectible amounts based on our
experience. Although from time to time we have been required to make revisions
to our clients' estimated deliverables, to date none of such revisions has had
a material adverse effect on our operating or financial results.
The largest portion of our costs consist primarily of employee-related
expenses for our client-serving professionals and other direct costs, such as
third-party vendor costs and unbilled travel costs associated with the delivery
of services to our clients. The remainder of our costs are comprised of the
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, and management and administrative support. Professional
development and recruiting expenses consist primarily of recruiting and
training content development and delivery costs. Marketing and sales expenses
consist primarily of the costs associated with our development and maintenance
of our 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.
We regularly review our fees for services, professional compensation and
overhead costs to ensure that our services and compensation are competitive
within the industry. In addition, we monitor the progress of client projects
with client senior management. We manage activities of our professionals by
closely monitoring engagement schedules and staffing requirements for new
engagements. Because most of our client engagements are, and may be in the
future, terminable by our clients without penalty, an unanticipated termination
of a client project could require us to maintain underutilized employees. While
professional staff must be adjusted to reflect active engagements, we must
maintain a sufficient number of senior professionals to oversee existing client
engagements and participate in our sales efforts to secure new client
assignments.
8
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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,
------------
1999 2000
----- -----
<S> <C> <C>
Net revenues................................................ 100.0% 100.0%
----- -----
Operating expenses:
Project personnel and related expenses.................... 54.2 53.1
Professional development and recruiting................... 8.1 9.2
Marketing and sales....................................... 6.2 6.3
Management and administrative support..................... 13.6 13.3
Goodwill amortization..................................... 0.2 0.6
----- -----
Total operating expenses................................ 82.3 82.5
----- -----
Income from operations...................................... 17.7 17.5
Other income, net........................................... 1.4 5.2
----- -----
Income before taxes......................................... 19.1 22.7
Income taxes................................................ 7.4 8.8
----- -----
Net income.................................................. 11.7% 13.9%
===== =====
</TABLE>
Quarter Ended June 30, 2000 Compared to Quarter Ended June 30, 1999
Our net income of $7.2 million during the quarter ended June 30, 2000
improved from $3.0 million during the same period in the prior year as a result
of increased revenues, partially offset by an increase in the cost of our
client-serving professionals and an increase in expenses required to support
our growth during the period.
Our net revenues increased 103% to $52.2 million during the quarter ended
June 30, 2000 as compared to the same period in the prior year. The increase in
our net revenues reflects an increase in the volume of services delivered to
new clients, continued services to our existing client base, as well as three
acquisitions. We served 67 clients during the quarter ended June 30, 2000 as
compared to 89 clients during the same period in the prior year.
Project personnel and related expenses increased $13.8 million to $27.7
million during the quarter ended June 30, 2000 as compared to the same period
in the prior year. In aggregate, project personnel and related expenses
increased 99% from the same period in the prior year due to increases in both
the number and compensation of our client-serving professionals to respond to
growth. We increased our client-serving professional staff from 296 at June 30,
1999 to 506 at June 30, 2000. As a percentage of net revenues, project
personnel and related expenses decreased from 54.2% to 53.1% during the quarter
ended June 30, 2000, as compared to the same period in the prior year.
Professional development and recruiting expenses increased $2.7 million to
$4.8 million during the quarter ended June 30, 2000 as compared to the same
period in the prior year. This increase reflects our 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 increased to 9.2% as compared to 8.1% during the same period in the
prior year.
Marketing and sales expenses increased from $1.6 million to $3.3 million
during the quarter ended June 30, 2000 as compared to the same period in the
prior year as a result of increased spending in:
. The publication of our 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;
. The conduct of several Diamond Exchange and Insight seminars for
prospective clients; and
9
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. The hiring of a chief marketing officer and supporting staff to lead our
corporate branding and marketing initiatives.
As a percentage of net revenues, these expenses remained consistent.
Management and administrative support expenses increased from $3.5 million
to $7.0 million, or 100%, during the quarter ended June 30, 2000 as compared to
the same period in the prior year as a result of the additional facilities,
equipment and personnel necessary to support our growth and increased
consulting capacity. As a percentage of net revenues, these expenses decreased
from 13.6% to 13.3% as a result of our improved operating leverage resulting
from our net revenue growth.
Liquidity and Capital Resources
In March 2000, we completed a public offering and sold 1,500,000 shares of
Class A Common Stock at a price of $80.13 per share. We realized approximately
$114.0 million in connection with the sale, net of payment of the underwriters'
commissions and other expenses of the offering. In the offering, an additional
1,775,000 shares were sold by selling stockholders.
We maintain a revolving line of credit pursuant to the terms of an unsecured
credit agreement from a commercial bank under which we 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 our discretion. This line of credit has been reduced to
account for letters of credit outstanding. As of June 30, 2000, we had
approximately $9.8 million available under this line of credit.
Our billings for the quarter ended June 30, 2000 totaled $71.0 million.
These amounts include billings to clients for out-of-pocket expenses that are
reimbursed by clients which are not included in recognized revenues. Our gross
accounts receivable balance of $14.2 million at June 30, 2000 represents 18
days of billings for the quarter.
In October 1998 our Board of Directors authorized the repurchase, from time
to time, of up to one million shares of our Class A Common Stock. These
repurchases were authorized to be made in the open market or in privately
negotiated transactions. At June 30, 2000, the number of shares purchased under
this authorization was 769,950 shares at an aggregate cost of $10.1 million. We
intend to fund future repurchases through our cash balances.
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 2001. Should our business expand
more rapidly than expected, we believe that additional bank credit would be
available to fund any additional operating and capital requirements. In
addition, we could consider seeking additional public or private debt or equity
financing to fund future growth opportunities.
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 us and our management. These forward-looking statements are
subject to risks and uncertainties that could cause our 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 we undertake 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 cause our 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, 2000.
10
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PART II. OTHER INFORMATION
Item 1 -- 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-3 (File No. 333-30666) and
incorporated herein by reference)
3.2 By-Laws (filed as Exhibit 3.2 to the Registration Statement on
Form S-3 (File No. 333-30666) and incorporated herein by
reference)
27.0 Financial Data Schedule
99.1 Risk Factors (filed as Exhibit 99.1 to the Registration Statement
on Form S-3 (File No. 333-30666) 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 13, 2000 By: /s/ Melvyn E. Bergstein
___________________________________
Melvyn E. Bergstein
Chairman, Chief Executive Officer
and Director
Date: August 13, 2000 By: /s/ Karl E. Bupp
___________________________________
Karl E. Bupp
Vice President, Chief
FinancialOfficer and Treasurer
12
