<PAGE>
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 December 31, 1999
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
(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 January 31, 2000, there were 17,580,888 shares of Class A Common
Stock and 3,711,535 shares of Class B Common Stock of the Registrant
outstanding.
1
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DIAMOND TECHNOLOGY PARTNERS INCORPORATED
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION:
<TABLE>
<CAPTION>
Item 1: Financial Statements
<S> <C> <C>
Consolidated Balance Sheets as of December 31, 1999 and March 31, 1999...3
Consolidated Statements of Operations for the Three and Nine Months
Ended December 31, 1999 and 1998.........................................4
Consolidated Statements of Cash Flows for the Nine Months Ended
December 31, 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 6: Exhibits and Reports on Form 8-K........................................13
SIGNATURES...............................................................................14
</TABLE>
2
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, March 31,
1999 1999
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................................ $46,997 $47,698
Accounts receivable, net of allowance of $1,670 and
$419 as of December 31, 1999 and March 31, 1999, respectively...... 12,496 10,434
Prepaid expenses..................................................... 6,546 1,790
Deferred income taxes................................................ 735 735
--- ---
Total current assets................................................... 66,774 60,657
Computers, equipment and training software, net........................ 8,069 3,419
Other assets........................................................... 6,725 3,010
Intangibles assets, net................................................ 9,821 --
------- -------
Total assets........................................................... $91,389 $67,086
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 3,447 $ 1,468
Note payable, current portion........................................ 500 --
Other accrued liabilities............................................ 11,863 12,317
------- -------
Total current liabilities.............................................. 15,810 13,785
Note payable, less current portion..................................... 500 --
------- -------
Total liabilities...................................................... 16,310 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, 18,137 issued as of December 31, 1999 and
15,008 issued as of March 31, 1999................................. 18 15
Class B common stock, $.001 par value, 20,000 shares
authorized, 3,723 issued as of December 31, 1999 and
5,474 issued as of March 31, 1999.................................. 4 4
Additional paid-in capital........................................... 58,051 42,146
Notes receivable from sale of common stock........................... (341) (32)
Retained earnings.................................................... 27,412 16,451
------- -------
85,144 58,585
Less Class A Common Stock in treasury, at cost, 771 shares
and 456 shares held at December 31 and March 31, 1999, respectively.. 10,065 5,284
------ -----
Total stockholders' equity............................................. 75,079 53,301
------ ------
Total liabilities and stockholders' equity............................. $91,389 $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>
For the Quarter For the Nine Months
Ended December 31, Ended December 31,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue $36,640 $21,194 $92,825 $59,705
------- ------- ------- -------
Operating expenses:
Project personnel and related expenses 19,475 11,120 49,618 31,602
Professional development and recruiting 3,696 2,584 8,833 6,840
Marketing and sales 1,875 1,214 5,007 3,371
Management and administrative support 4,956 2,828 12,660 8,223
------- ------- ------- -------
Total operating expenses 30,002 17,746 76,118 50,036
------- ------- ------- -------
Income from operations 6,638 3,448 16,707 9,669
Interest income, net 486 669 1,264 1,915
------- ------- ------- -------
Income before taxes 7,124 4,117 17,971 11,584
Income taxes 2,779 1,606 7,009 4,555
------- ------- ------- -------
Net income $ 4,345 $ 2,511 $10,962 $ 7,029
======= ======= ======= =======
Basic earnings per share of common stock $ 0.21 $ 0.13 $ 0.53 $ 0.35
Diluted earnings per share of common stock $ $0.16 $ 0.11 $ 0.43 $ 0.30
Shares used in computing basic earnings per
share of common stock 20,839 20,015 20,519 19,874
Shares used in computing diluted earnings
per share of common stock 27,289 22,748 25,401 23,162
</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 Nine Months
Ended December 31,
------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................ $ 10,962 $ 7,029
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization....................................... 2,012 741
Tax benefits from employee stock plans.............................. 7,252 709
Changes in assets and liabilities, net of effects
of acquisition:
Accounts receivable............................................... (56) (2,050)
Prepaid expenses and other........................................ (4,677) (557)
Accounts payable.................................................. 1,651 163
Other assets and liabilities...................................... (7,027) (49)
--------- --------
Net cash provided by (used in) operating activities..................... 10,117 5,986
--------- --------
Cash flows from investing activities:
Capital expenditures, net............................................. (5,966) (1,821)
Acquisitions, net of cash acquired.................................... (4,240) --
Other assets.......................................................... -- (875)
--------- --------
Net cash used in investing activities................................... (10,206) (2,696)
--------- --------
Cash flows from financing activities:
Stock issuance costs.................................................. -- (1,523)
Common stock issued................................................... 4,169 20,065
Purchase of treasury stock............................................ (4,781) (2,984)
--------- --------
Net cash provided by (used in) financing activities..................... (612) 15,558
--------- --------
Net increase (decrease) in cash and cash equivalents.................... (701) 18,848
Cash and cash equivalents at beginning of period........................ 47,698 31,437
--------- --------
Cash and cash equivalents at end of period.............................. $ 46,997 $50,285
========= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.............................. $ 19 $ 14
Cash paid during the period for income taxes.......................... 2,709 4,241
Supplemental disclosure of noncash investing and financing
Activities:
Issuance of common stock for notes.................................... $ 264 $ 60
Issuance of acquisition note payable.................................. 1,000 --
Issuance of common stock in acquisitions.............................. 4,177 --
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
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 nine months ended December 31, 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 Combinations
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 and Leverage 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 and Leverage approximated $10.0 million, and are being amortized on a
straight-line basis over 25 years and 7 years, respectively.
6
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The following summarized unaudited pro forma financial information for the
three and nine months ended December 31, 1999 and 1998 assume the OmniTech
and Leverage acquisitions occurred as of April 1 of each year:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended December 31, Ended December 31,
<S> <C> <C> <C> <C>
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
(in millions, except per share data)
(Unaudited)
Net Revenue................................................. $36,685 $24,106 $94,139 $68,050
Net income.................................................. 4,345 2,605 10,424 7,437
Earnings per share:
Basic..................................................... 0.21 0.13 0.51 0.37
Diluted................................................... 0.16 0.11 0.41 0.32
</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
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 Consolidated Balance Sheets and Consolidated Statements of Operations
in this Report on Form 10-Q have been restated to reflect this split.
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
Diamond Technology Partners Incorporated ("Diamond") is an e-business
services firm that synthesizes business strategy with information technology
("IT") to create an innovative Digital Strategy for leading national and
multinational corporations. We serve clients primarily in the financial
services, consumer products and services, telecommunications and utilities, and
insurance and healthcare industries. We offer services in Digital Strategy(sm)
development, program management, e-commerce solution delivery (through our
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.
Our revenues are comprised of professional fees for services rendered to our
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, 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 we from time to time 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 consists 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 clients. The remainder of our costs are comprised of the expenses
associated with the development of the 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
costs. Marketing and sales expenses consist primarily of the costs associated
with the development and maintenance of our marketing materials and programs.
Management and administrative support expenses consist primarily of the costs
associated with operations, 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 periodically 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 client 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
<PAGE>
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 Nine Months
Ended December 31, Ended December 31,
------------------ ------------------
1999 1998 1999 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 52.5 53.5 52.9
Professional development and recruiting 10.1 12.2 9.5 11.5
Marketing and sales 5.1 5.7 5.4 5.6
Management and administrative support 13.5 13.3 13.6 13.8
----- ----- ----- -----
Total operating expenses 81.9 83.7 82.0 83.8
----- ----- ----- -----
Income from operations 18.1 16.3 18.0 16.2
Interest income, net 1.3 3.1 1.4 3.2
----- ----- ----- -----
Income before taxes 19.4 19.4 19.4 19.4
Income taxes 7.5 7.6 7.6 7.6
----- ----- ----- -----
Net income 11.9% 11.8% 11.8% 11.8%
===== ===== ===== =====
</TABLE>
Quarter Ended December 31, 1999 Compared to Quarter Ended December 31, 1998
Our net income of $4.3 million during the quarter ended December 31, 1999
improved from $2.5 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 73% to $36.6 million during the quarter ended
December 31, 1999 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, and two
acquisitions. We served 66 clients during the quarter ended December 31, 1999 as
compared to 45 clients during the same period in the prior year.
Project personnel and related expenses increased $8.4 million to $19.5
million during the quarter ended December 31, 1999 as compared to the same
period in the prior year. In aggregate, project personnel and related expenses
increased 75% from the same period in the prior year due to increases in both
the number and compensation of our client-serving professionals. We increased
our client-serving professional staff from 234 at December 31, 1998 to 433 at
December 31, 1999. As a percentage of net revenues, project personnel and
related expenses increased from 52.5% to 53.2% during the quarter ended December
31, 1999, as compared to the same period in the prior year.
Professional development and recruiting expenses increased $1.1 million to
$3.7 million during the quarter ended December 31, 1999 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 decreased to 10.1% as compared to 12.2% during the same period in the
prior year as a result of our improved operating leverage resulting from our net
revenue growth.
Marketing and sales expenses increased from $1.2 million to $1.9 million
during the quarter ended December 31, 1999 as compared to the same period in the
prior year as a result of our continued investment in (i) 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 (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 our corporate branding and marketing
initiatives. As a percentage of net revenues, these expenses decreased from 5.7%
to 5.1% as a result of our improved operating leverage resulting from our net
revenue growth.
9
<PAGE>
Management and administrative support expenses increased from $2.8 million
to $5.0 million, or 75%, during the quarter ended December 31, 1999 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 increased from 13.3%
to 13.5%.
Nine Months Ended December 31, 1999 Compared to Nine Months Ended December 31,
1998
Our net income of $11.0 million during the nine months ended December 31,
1999 improved from $7.0 million during the same period in the prior year as a
result of increased revenues, combined with an improvement in the utilization of
our client-serving professionals, partially offset by an increase in expenses
required to support our growth during the period.
Our net revenues increased 55% to $92.8 million during the nine months
ended December 31, 1999 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, and
two acquisitions. We served 126 clients during the nine months ended December
31, 1999 as compared to 68 clients during the same period in the prior year.
Project personnel and related expenses increased $18.0 million to $49.6
million during the nine months ended December 31, 1999 as compared to the same
period in the prior year. In aggregate, project personnel and related expenses
increased 57% from the same period in the prior year due to increases in both
the number and compensation of our client-serving professionals. We increased
our client-serving professional staff from 234 at December 31, 1998 to 433 at
December 31, 1999. As a percentage of net revenues, project personnel and
related expenses increased from 52.9% to 53.5% during fiscal 2000.
Professional development and recruiting expenses increased $2.0 million
during the nine months ended December 31, 1999 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
decreased to 9.5% as compared to 11.5% during the same period in the prior year
a result of our improved operating leverage resulting from our net revenue
growth.
Marketing and sales expenses increased from $3.4 million to $5.0 million
during the nine months ended December 31, 1999 as compared to the same period in
the prior year as a result of our investment in (i) 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 (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 our corporate branding and marketing
initiatives. As a percentage of net revenues, these expenses decreased from
5.6% to 5.4% as a result of our improved operating leverage resulting from our
net revenue growth.
Management and administrative support expenses increased from $8.2 million
to $12.7 million, or 54%, during the nine months ended December 31, 1999 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 13.8% to 13.6% as a result of our improved operating leverage
resulting from our net revenue growth.
Liquidity and Capital Resources
In April 1998, we sold approximately 650,000 shares of Class A Common Stock
as part of a secondary offering and received net proceeds of approximately $15.9
million.
On September 7, 1999, we entered into a revolving line of credit with 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 December 31, 1999, we had approximately $9.8 million
available under this line of credit.
Our billings for the quarter ended December 31, 1999 totaled $48.6 million.
These amounts include billings to clients for out-of-pocket expenses that are
reimbursed by clients which are not included in recognized revenues. Our gross
accounts receivable balance of $14.2 million at December 31, 1999 represents 26
days of billings for the quarter.
10
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Our allowance for doubtful accounts increased from $0.4 million to $1.7
million from March 31, 1999 to December 31, 1999 primarily due to reserves taken
to cover revenues generated at one client for which Diamond provided services
during the three months ended December 31, 1999. In connection with a
reorganization of this client, it may be necessary for the client to file a pre-
packaged bankruptcy petition under Chapter 11 of the Bankruptcy Code. Although
we have received payment from this client for all revenues recognized, payments
made to creditors of a bankrupt debtor within ninety days of a filing for
bankruptcy may be voided by the bankruptcy court in certain circumstances.
Because of this potential exposure, we have increased our allowance for doubtful
accounts.
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 December 31, 1999 the number of shares purchased
under this authorization was approximately 771,000 shares at an aggregate cost
of $10.1 million. We intend to fund future repurchases through our cash
balances.
We currently anticipate that existing cash balances, cash generated from
operations and amounts available under our current revolving line of credit,
will be sufficient to satisfy our operating cash needs for fiscal 2001. Should
our business expand more rapidly than expected, we believe that additional bank
credit would be available to fund such operating and capital requirements. In
addition, we 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 recent 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 at or after the
year 2000 (the "Year 2000 Issue" or "Y2K"). We have conducted an assessment of
the potential impact of the Year 2000 Issue on our operations and mission
critical vendors. In light of the fact that we have only been in existence for a
little over five years, our key financial, information and operation systems
have been designed to be Year 2000 compliant without the need for any
modifications or conversions. Accordingly, we do not expect the Year 2000 Issue
to have a material effect on our consolidated financial position, results of
operation or cash flows.
We have participated in certain projects that involve Y2K issues for some
of our clients. Generally, we include provisions in client contracts that, among
other things, disclaim implied warranties, limit the duration of express
warranties, and limit our liability to the amount of fees paid by the client to
us in connection with the project. We also maintain insurance to protect against
potential liability that may arise in connection with Y2K issues at our clients.
Although we have no reason to believe that any such work will result in
litigation against us, it is possible that we could be adversely affected by
litigation in connection with these projects. There can be no assurance that we
will be able to obtain the desired contractual protections in agreements, or
that any such contractual provisions will prevent clients from asserting claims
against us with respect to the Y2K issue. There can also be no assurance that
the contractual protections, if any, obtained by us or the insurance coverage
will operate to protect us from, or adequately limit the amount of, any
liability arising from claims asserted against us.
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.
11
<PAGE>
Quantitative and Qualitative Disclosure About Market Risk
There have been no material changes since March 31, 1999.
12
<PAGE>
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-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>
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: February 11, 2000 By: /s/ Melvyn E. Bergstein
---------------------------
Melvyn E. Bergstein
Chairman, Chief Executive Officer and Director
Date: February 11, 2000 By: /s/ KARL E. BUPP
--------------------
Karl E. Bupp
Vice President, Chief Financial Officer and
Treasurer
14
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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
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<PAGE>
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<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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 46,997
<SECURITIES> 0
<RECEIVABLES> 14,166
<ALLOWANCES> 1,670
<INVENTORY> 0
<CURRENT-ASSETS> 66,774
<PP&E> 12,950
<DEPRECIATION> 4,881
<TOTAL-ASSETS> 91,389
<CURRENT-LIABILITIES> 15,810
<BONDS> 0
0
0
<COMMON> 22
<OTHER-SE> 75,057
<TOTAL-LIABILITY-AND-EQUITY> 91,389
<SALES> 0
<TOTAL-REVENUES> 92,825
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 76,118
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32
<INCOME-PRETAX> 17,971
<INCOME-TAX> 7,009
<INCOME-CONTINUING> 10,962
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,962
<EPS-BASIC> .53
<EPS-DILUTED> .43
</TABLE>
<PAGE>
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. Our
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.
Our Revenues Could Be Adversely Affected by the Loss of a Significant Client or
the Failure to Collect a Large Account Receivable
We have in the past derived, and may in the future derive, a significant
portion of our revenues from a relatively limited number of major clients.
During fiscal 1999, we had two clients that individually accounted for 15% and
10% of our net revenues. During the first nine months of fiscal 2000, we had
one client who individually accounted for 16% of our net revenues. From quarter
to quarter, revenues from one or more individual clients may exceed 10% of our
revenues for the quarter. If we lose any major clients or any of our clients
cancel or significantly reduce a large project's scope, we would lose a
significant amount of revenue. In addition, failure by a significant client to
pay would result in our failure to collect a large account receivable.
Variability of Quarterly Operating Results May Result in Reduced Prices for Our
Common Stock
We have experienced, and may in the future continue to experience,
fluctuations in our quarterly operating results. These fluctuations could reduce
the market price of our common stock. Factors that may cause our 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; and
. the timing of new client engagements and personnel cost increases.
The timing of revenues is difficult to forecast because our sales cycle is
relatively long and our services are affected by both the financial condition
and management decisions of our clients and general economic conditions. A high
percentage of our expenses are relatively fixed at the beginning of any period.
Because our general policy is to not adjust our staffing levels based upon what
we view 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.
The Absence of Long-Term Contracts With Our Clients Reduces the Predictability
of Our Revenues
Our clients are generally able to reduce or cancel their use of our
professional services without penalty and with little or no notice. As a result,
we believe that the number of clients or the number and size of our existing
projects are not reliable indicators or measures of future revenue. We have in
the past provided, and are likely in the future to provide, services to clients
without long-term agreements. When a client defers, modifies or cancels a
project, we must be able to rapidly deploy our professionals to other projects
in order to minimize the underutilization of employees and the resulting adverse
impact on operating results. We may not be able to replace cancelled or reduced
contracts with new business.
<PAGE>
Our Chief Executive Officer Controls a Significant Portion of the Voting Rights
Which Limits Your Ability to Influence Corporate Matters
All of the holders of our Class B Common Stock have granted proxies to our
Chief Executive Officer to vote their shares. As a result, he will have the
voting power, which is 52% of the voting rights of our outstanding common stock
as of December 31, 1999, to significantly influence the election of our Board of
Directors and to affect all matters requiring stockholder approval. In addition,
an agreement among Diamond and our partners requires that our Chief Executive
Officer be selected from our partners. This significantly limits the number of
qualified persons that may be considered for that office. As a result, we may
not be successful in attracting future persons who are qualified to serve as our
Chief Executive Officer.
If We Are Unable to Hire, Train and Retain Highly Qualified Professionals, Our
Business and Growth Will Suffer
The loss for any reason of a key executive officer or any significant
number of our client-serving professionals or the inability to attract qualified
personnel would adversely impact our ability to service our clients. Our success
depends upon the continued service of our key executive officers and our ability
to attract, retain and motivate highly skilled professionals at all levels. As a
result of the rapid growth of the Internet, there is intense competition for
employees who have strategic, technical or creative experience relating to the
Internet. We may not be successful in hiring a sufficient number of highly
skilled employees in the future, or in retaining, training and motivating the
employees we hire.
Failure to Properly Manage Our Expanding Operations May Adversely Impact Our
Business
Continued rapid growth will place a significant strain on our financial and
other resources and could result in significant operating losses. During fiscal
1998, fiscal 1999 and the first nine months of fiscal 2000, the size of our
employee base more than doubled. Further increases are anticipated in the
future, either by means of organic growth or through the carefully targeted
acquisition of companies that meet our acquisition criteria. Our ability to
manage the growth of our professional staff will require us to continue to
improve our operational, financial and other internal systems. If our management
is unable to manage growth effectively and revenues do not increase sufficiently
to cover our increased expenses, our operations could be adversely affected.
We May Not Be Able to Effectively Expand Our Business Internationally, Which
Could Harm Our Business
We anticipate expanding our operations internationally in the near future.
A number of risks are inherent in international operations including: staffing
and managing operations, currency fluctuations, local economic problems and
imposition of government regulations. These and other unanticipated problems we
encounter establishing new international operations could divert our resources
and attention and adversely affect our operations.
The Failure to Successfully Integrate Any Future Acquisitions Could Harm Our
Business and Operating Results
If we acquire businesses in the future and are unable to successfully
integrate these businesses, it could harm our business and operating results. In
order to remain competitive or to expand our business, we may find it necessary
or desirable to acquire other businesses, products or technologies. If we
identify an appropriate acquisition candidate, we may not be able to negotiate
the terms of the acquisition successfully, to finance the acquisition or to
integrate the acquired businesses, products or technologies into our existing
business and operations. Further, completing a potential acquisition and
integrating an acquired business may strain our resources and require
significant management time. In addition, we may be required to amortize
significant amounts of goodwill and other intangible assets in connection with
future acquisitions which would harm our operating results.
<PAGE>
If We Are Unable to Adequately Protect Our Intellectual Property Rights or If We
Infringe Upon the Intellectual Property Rights of Others, Our Results of
Operations May Be Harmed
Failure to secure or maintain protection of our intellectual property could
adversely affect our ability to service our clients and generate revenue. We
rely on a combination of non-disclosure and other contractual agreements, and
copyright and trademark laws to protect our proprietary rights. We enter into
confidentiality agreements with our employees, require that our clients enter
into such agreements, and limit access to and distribution of our proprietary
information. However, the efforts may be insufficient to prevent
misappropriation of our proprietary information or detect unauthorized use of
our intellectual property rights.
Ownership of intellectual property developed during our client engagements
is the subject of negotiation and is frequently assigned to the client. We
generally retain 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 clients may demand assignment of ownership or restrictions on
our use of the work which we produce for clients in the future. In addition,
disputes may arise that affect our ability to resell or reuse such intellectual
property.
Failure to Meet Client Expectations Could Result in Losses and Negative
Publicity
A failure or inability by us or one of our subcontractors to meet a
client's expectations could damage our reputation and adversely affect our
ability to attract new business and result in delayed or lost revenues. Our
client engagements involve the creation, implementation and maintenance of
business systems and other applications that can be critical to our clients'
businesses. We may be sued or unable to collect account receivables if a client
is not satisfied with our service.
Our client contracts may not protect us from liability for damages in the
event we are sued. In addition, our general liability insurance coverage may not
continue to be available on reasonable terms or in sufficient amounts. The
successful assertion of any large claim against us or the failure by us to
collect a large account receivable could also result in significant financial
exposure to us.
An Inability to Keep Pace with Rapidly Changing Technology May Impair Our
Ability to Remain Competitive
Our failure to develop e-commerce business services that keep pace with
continuing changes in the Internet and related technology, evolving industry
standards, information technology and client preferences will result in
decreased demand for our services. Among our challenges in this area are the
needs:
. to continue to develop our strategic and technical experience;
. develop new services that meet changing customer needs; and
. effectively use leading technologies.
We may not address these developments on a timely or successful basis.
Competition in Our Industry is Intense and Could Harm Our Business
Increased competition in our industry could result in price reductions,
reduced gross margins or loss of market share which could seriously harm our
business. The e-commerce business services market is relatively new, includes a
large number of participants, is subject to rapid technological changes and is
highly competitive. We compete with a number of companies that have
significantly greater financial, technical and marketing resources, greater name
recognition, and greater revenues than us. We believe that the principal
competitive factors in our industry include:
. diagnostic capabilities;
<PAGE>
. effectiveness of strategic business models;
. scope of services;
. service delivery approach;
. technical and industry expertise;
. perceived value; and
. results orientation.
We believe that our ability to compete also depends in part on a number of
competitive factors outside of our control, including the ability of our
competitors to hire, retain and motivate senior project managers, the price at
which others offer comparable services, and the extent of our competitors'
responsiveness to customer needs. We may not be able to compete successfully
with our competitors in the future.
In addition, there are relatively low barriers to entry in our industry. We
do 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 our business.
We May Need to Raise Additional Capital in the Future Which May Not Be Available
We may not be able to raise capital in the future to meet our liquidity
needs and finance our operations and future growth. We were not profitable in
the first two quarters of fiscal 1997. While we have been profitable since the
third quarter of fiscal 1997, we may not continue to be profitable in the
future. We believe that existing cash resources, the amounts available under our
revolving line of credit and cash generated from operations will be sufficient
to satisfy our operating cash needs through 2001. Any future decreases in our
operating income, cash flow, or stockholders' equity may impair our future
ability to raise additional funds to finance operations. As a result, we may not
be able to maintain adequate liquidity to support our operations.
