UNITED STATES SECURITIES AND EXCHANGE

COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

Commission File Number: 000-22125

Diamond Management & Technology Consultants, Inc.

(Exact name of registrant as specified in its charter)

 

Registrant’s telephone number, including area code: (312) 255-5000

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.001 per share

NASDAQ Global Select Market

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the Registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes o     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the Registrant is a shell company (as defined in rule 12b-2 of the Exchange Act):  Yes o     No þ

 

As of September 30, 2009 there were 27,038,844 shares of Common Stock of the Registrant outstanding. The aggregate market value of the Common Stock of the Registrant held by non-affiliates as of September 30, 2009 was an estimated $158.8 million, computed based upon the closing price of $6.85 per share on September 30, 2009.

 

As of May 31, 2010, there were 27,247,539 shares of Common Stock of the Registrant outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Part III of this Annual Report on Form 10-K incorporates by reference portions of the Registrant’s definitive proxy statement, to be filed with the Securities and Exchange Commission no later than 120 days after the close of its fiscal year.

 

 

DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.

 

Annual Report on Form 10-K for the Fiscal Year Ended
March 31, 2010

 

TABLE OF CONTENTS

 

 

Disclosure Regarding Forward-Looking Statements

 

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act relating to our operations, results of operations and other matters that are based on our current expectations, estimates and projections, based on information currently available to us, and we assume no obligation to update any forward-looking statements. Words such as “expects,” “intends,” “plans,” “projects,” “believes,” “estimates” and similar expressions are used to identify these forward-looking statements. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Forward-looking statements are based upon assumptions as to future events that may not prove to be accurate. Actual outcomes and results may differ materially from what is expressed or forecast in these forward-looking statements. For a discussion of some of the risk and uncertainties that could cause actual outcomes and results to materially differ, please see the section below entitled “Risk Factors.”

 

In this Annual Report on Form 10-K, we use the terms “Diamond^®,” “we,” “our Company,” “the Company,” “our,” and “us” to refer to Diamond Management & Technology Consultants, Inc. (formerly DiamondCluster International, Inc. from November 2000 through August 2006 and Diamond Technology Partners Incorporated from its founding in 1994 through November 2000) and its wholly-owned subsidiaries. All references to years, unless otherwise noted, refer to our fiscal year, which ends March 31.

 

 

Overview

 

Diamond Management & Technology Consultants, Inc. is a Delaware corporation formed in 1996 and is the parent of three subsidiaries. Diamond commenced its business in 1994 as a management and technology consulting firm. We help leading organizations worldwide to understand and leverage information, information analytics, and information technology to realize value in their businesses. Recognizing that information and technology increasingly shape market dynamics and corporate performance, Diamond’s small teams of experts work across functional and organizational boundaries to improve growth and profitability. Since the greatest value in a strategy, and its highest risk, resides in its implementation, Diamond also provides proven execution capabilities. Diamond intends to deliver three critical elements to every project: fact-based objectivity, spirited collaboration, and sustainable results.

 

Our firm offers our clients skills in strategy, information technology, operations and program management to help companies improve operations, increase flexibility, reduce costs, address changing regulations and markets, and grow their businesses. We combine innovative strategic thinking, industry expertise, relevant service lines, and a thorough understanding of technology to deliver results for our clients. We work collaboratively with our clients using small, multidisciplinary teams because we believe the most lasting and significant improvements occur when the client is integrally involved in the change. Our multidisciplinary approach enables our consultants to develop and execute innovative strategies that may not be identified by consulting firms that use more traditional team structures. We go to market by vertical industry and focus on businesses that are strategically dependent upon technology, and in particular information technology. We currently serve clients primarily in five industries: financial services, insurance, healthcare, “enterprise,” and public sector. The Company’s “enterprise” practice serves clients across several industries, including manufacturing, retail, distribution, travel and transportation, telecommunications and consumer packaged goods.

 

In July 2006, the Company sold portions of its international operations that included the offices and respective operations in Barcelona, Dubai, Madrid, Münich, Paris and São Paulo. These operations are reported as “discontinued operations” in the financial statements and related notes. The Company retained its consulting practices in North America, the United Kingdom (“U.K.”) and India, which are markets of global strategic focus. These operations are considered “continuing operations.” All previously reported data from the Consolidated Statements of Operations and Comprehensive Income (Loss) has been reclassified to conform to this presentation to allow for meaningful comparison. The Consolidated Statement of Cash Flows

is prepared on a combined basis (continuing operations plus discontinued operations) for all periods presented. All analytical and statistical references refer to data from continuing operations only unless otherwise stated.

 

During the fiscal year ended March 31, 2010, we generated net revenue of $177.2 million from clients. At March 31, 2010, we employed 527 consultants and 116 operations employees. Our physical locations are comprised of six offices in North America, Europe and Asia, which include Chicago, Hartford, London, Mumbai, New York City and Washington, D.C. For further information regarding net revenue and long lived assets by geographic region, see Note (5) “Geographic Data” of the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. We had one client that accounted for 12% of revenue for the fiscal year ended March 31, 2008, but no clients that individually accounted for more than 10% of revenue in fiscal years 2009 and 2010.

 

Industry Background and Opportunity

 

Demand in the consulting industry is driven by change. The business environment today is faced with significant changes on a wide variety of fronts, including globalization, regulatory requirements, economic cycles, new competition, industry and market consolidation, organizational restructurings, and new technologies. Management teams are constantly assessing the potential impact of these changes on their businesses. Many of these changes are significant and impact entire organizations. Other changes impact specific customer segments, products or functional areas.

 

Technological change is among the most pervasive of these changes because it is both necessitated by other changes and also because of dramatic changes in technology itself. Technology often fundamentally affects how a company relates to its customers, suppliers, employees, investors, and competitors. As such, organizations often invest significant resources in technology and technology is increasingly visible at the highest levels of executive management, including the CEO and the board of directors.

 

Management teams turn to consultants for a number of reasons, including the need for deep expertise in a specific area, shorter execution timeframes, risk mitigation, objective perspective, and the presence of an outside change agent. We believe that companies increasingly seek outside consultants that can provide a combination of innovative strategic analysis, in-depth industry expertise, and a thorough understanding of information technology and its applications to help them create and execute plans that will improve their businesses.

 

Our Services

 

Diamond provides services that help leading organizations worldwide understand and leverage information technology to improve operations, increase flexibility, reduce costs, address changing regulations and markets, and grow their businesses. We offer clients the skills of a traditional information technology service provider, with the objective, advisory role of the traditional strategic consulting firms. We currently operate globally with offices in North America, the United Kingdom, and India. We sell our services to “c-level” executives and their senior leadership teams.

 

We have a business model that we believe is preferred by clients. Our business model is collaborative and multidisciplinary, providing better value to clients through knowledge transfer and better results through our unique perspective that combines strategy and execution skills with business and technology skills. We believe this approach creates the most lasting and powerful improvements for our clients.

 

We go to market by vertical industry and focus on businesses that are strategically dependent on information technology. Our vertical industry practices provide the lens through which we go to market. Our service lines are what we do for our clients. While our service lines do not change significantly over time, our service offerings are designed to quickly adapt to client and market needs. By utilizing our consultants’ core skills in strategy, information technology, marketing, operations and program management to provide the foundation for our service offerings, we are able to be agile because we are not dependent upon a particular

economic, business, or technology cycle or product. Diamond currently has four service lines as illustrated in the graphic below:

 

 

 

Diamond’s high-impact teams help clients design and execute their most critical strategies. Senior executives rely on us to help them succeed in the marketplace by using powerful new business designs, advanced decision-making capabilities, deep market and customer insights, and proven delivery skills to create sustainable economic value.

 

Industries Served

 

We currently serve clients primarily through five vertical industries: financial services, insurance, healthcare, “enterprise,” and public sector. The Company’s “enterprise” practice serves clients across several industries, including manufacturing, retail, distribution, travel and transportation, telecommunications and consumer packaged goods. We are working to grow healthcare as a percent of revenue because this industry is less cyclical and is expected to increase long-term revenue predictability.

 

Financial Services Industry.  Our financial services industry practice provides services to capital markets firms, full-service retail and commercial banks, credit card issuers, credit card processors and payment system operators, retail brokerages and asset managers. We help these financial services clients with their most pressing issues, including the need to manage large technology and business transformations, grow revenues by developing information management strategies, improve service, improve productivity and effectiveness, drive industry-leading compliance and risk management initiatives, and assess various leading technologies. Representative clients in the financial services industry have included Goldman Sachs Group Inc. and American Express Company. Financial services clients represented approximately 30%, 30% and 31% of billed fee revenue during fiscal years 2008, 2009 and 2010, respectively.

 

Insurance Industry.  Our insurance industry practice provides services to life, property and casualty, reinsurance, and brokerage firms. We advise and collaborate with our clients to help them unlock the market value of their business strategies such as: improving the return on marketing and sales investments through customer experience improvement across acquisition, cross-sell and retention areas; exploiting the use of information to create competitive advantage through improved insight and decision making; creating more flexible product and service delivery architectures that increase speed to market and product profitability;

designing targeted solutions to meet the growing retirement populations’ needs; using IT innovation to drive global growth; and improving distribution service platforms. Representative clients in the insurance industry have included Allstate Corporation, The Guardian Life Insurance Company of America and Willis Group Holdings Limited. Insurance clients represented approximately 23%, 24% and 26% of billed fee revenue during fiscal years 2008, 2009 and 2010, respectively.

 

Healthcare Industry.  Our healthcare industry practice provides services across the healthcare value chain. Our clients include major pharmaceutical, biotech, device, health insurance, provider and disease management companies. We help our healthcare clients address some of their most important business and technology issues in the areas of healthcare reform, consumer directed healthcare strategy and execution, IT optimization and value extraction, integrated business and technology architecture, process and planning and large transformational program management. Representative healthcare clients have included Pfizer Inc., Bayer HealthCare LLC, CIGNA Corporation and Aetna Inc. Healthcare clients represented approximately 21%, 19% and 21% of billed fee revenue during fiscal years 2008, 2009 and 2010, respectively.

 

Enterprise Industry.  The enterprise practice is a cross-industry practice. Its role is to identify, incubate, and scale new vertical practices. The enterprise practice serves clients across several vertical industries, including consumer packaged goods, manufacturing, retail, distribution, telecommunications, media, and travel and transportation. We help our clients find solutions for complex business and technology problems such as data and information management, customer experience design, e-commerce, sales & operations planning, transformational technology platforms, supply chain processes, and data analytics. We help our clients better understand customer needs across the value chain, increase visibility to their customers, and assist with strategic alternatives to maximize growth and operating income. Representative enterprise practice clients have included United States Gypsum (USG), Kraft, Del Monte, PepsiAmericas, Sprint, Comcast, and First Group. Enterprise practice clients represented approximately 23%, 23% and 18% of billed fee revenue during fiscal years 2008, 2009 and 2010, respectively.

 

Public Sector Industry.  The public sector industry practice provides services to U.S. local, state, and federal government agencies. Issues facing this sector today include increased scrutiny to demonstrate performance and measurable results for spending, the need to improve operational efficiency, demand for agencies to become more citizen-centric by minimizing complexity and improving responsiveness, broadband policy and homeland security. Representative clients in the public sector have included the U.S. Department of Justice, the Chicago Public Schools and the New York Economic Development Corporation. Public sector clients represented approximately 3%, 4% and 4% of billed fee revenue during fiscal years 2008, 2009 and 2010, respectively.

 

Our Competitive Strengths

 

We combine innovative strategic thinking, in-depth vertical industry expertise, a thorough understanding of information technology and its applications, complex program management skills and a global perspective to deliver economic impact for our clients. We offer clients the skills of a traditional information technology service provider, with the objective, advisory role of the traditional strategic consulting firms. We help our clients use information technology to improve operations, increase flexibility, reduce costs, address changing regulations and markets, and grow their businesses. We believe the following attributes, in combination, distinguish us from our competitors:

 

Objectivity.  We provide our clients with objective advice in the areas of strategy, information technology, operations and program management. We believe that the increasing cost and complexity of information technology and the changing structure within the consulting industry increase the value to senior management of an objective advisor, such as Diamond. We have intentionally avoided offering services or entering into alliances that might bias our objectivity, such as selling or reselling hardware or software, or offering software development services.

 

Collaborative and Multidisciplinary Model.  We work with our clients from the earliest stages of study and assessment, through idea generation, strategy creation, and execution, using relatively small teams skilled in the disciplines of strategy, information technology, operations and program management. We believe our business model provides our Company with a fundamental differentiation because it requires a collaborative

approach with the client, utilizes multidisciplinary teams, and effectively leverages the ongoing stream of new intellectual capital in our organization. Our model allows us to be an objective and trusted advisor who provides the high value services to our clients from strategy through execution. It demands that we work collaboratively with our clients, which we believe is best for dealing with important business issues because the most lasting and significant improvements occur when the client is integrally involved in the process. This approach transfers to the client critical knowledge and accountability that is necessary to enact lasting and productive change.

 

Delivery of Results.  Diamond delivers tangible results, not just recommendations. Our consultants work with client management to develop a complete cost/benefit analysis, which focuses on metrics such as shareholder value and return on invested capital. Diamond then works with the client to execute plans and achieve the results. We are currently expanding our execution services by adding junior-level staff to perform more of the execution work on our projects that is currently being performed by either in-house or third-party resources. This is a modest refinement of our current model that should allow us to grow more consistently, provide more value to our clients and allow our people more interesting leadership responsibilities and greater career opportunities.

 

Strategic Vertical Industry Insight and Expertise.  We focus on serving vertical industries that are strategically dependent on information technology. We believe our vertical industry focus enables us to define strategies and deliver results that effectively address the particular market dynamics, regulatory environments, and business opportunities facing our clients in that industry.

 

Ability to Quickly Evolve Our Offerings.  The consulting industry is affected by changes in economic, business, and technology cycles, which requires a consulting firm to be agile in order to maintain the relevancy of its services to the market. Our approach to identify and scale new service offerings as well as change our current service offerings enables us to meet client demands. Our people are skilled in three enduring competencies — strategy, information technology, and marketing and operations, as well as the underlying program management skills required to manage and orchestrate change — that are independent of particular economic, business, or technology cycles.

 

Strong Culture.  The most important asset of a consulting firm is its people. Teams with a strong culture that work well together provide superior results to our clients. We have developed a strong and enduring culture by recruiting primarily from leading graduate and undergraduate universities, promoting from within, and developing an environment of continuous learning and innovation that helps to retain our talented professionals (see “Employees and Culture”). We are committed to the long-term growth and development of each of our professionals.

 

Continuous Innovation.  We believe that an enduring, high-quality consulting firm must have three basic qualities: employ highly talented people, maintain a track record of high-impact work, and have the ability to continuously generate new and relevant intellectual capital. While a number of consulting firms have talented people and a strong client focus, the ability to continuously generate new intellectual capital is more difficult. Diamond has a systematic approach to innovation, which ensures that we stay ahead of the intellectual capital curve and deliver highly advanced thinking to our clients across industries and within industries.

 

Experienced and Motivated Management.  Our senior management team has deep expertise in consulting and experience managing this business through business, economic, and technology cycles, as well as skills in establishing and developing client relationships.

 

Our Growth Strategy

 

Our goal is to become the consultant of choice for clients looking for an objective partner to help them understand and leverage information technology to improve operations, increase flexibility, reduce costs, address changing regulations and markets, and grow their businesses. Our business model is designed to allow us to be an objective and trusted advisor who provides the high value services to our clients from strategy through execution. We believe our business model provides our Company with a fundamental differentiation because it requires a collaborative approach with the client, utilizes multidisciplinary teams, and effectively

leverages the ongoing stream of new intellectual capital in our organization. The following strategies guide our actions as we grow our business:

 

Continue to Diversify Across Industries, Service Lines and Geographic Locations.  We believe that diversifying our business across industries and key geographies will allow the Company to have steady growth through economic, business, and technology cycles. We expect the number of vertical industries we serve, as well as the services we offer and geographic locations in which we work, to change and grow as our expertise and client demands evolve. We expect to add additional service lines to meet the future needs of our clients and the market. We currently serve clients across the globe through offices in North America, the U.K. and India.

 

Focus on and Expand Relationships with Core Clients.  We develop strong, long-term relationships with our clients that often lead to repeat business and referrals. We achieve this by doing high-impact work and cultivating close relationships with CEOs and senior leadership teams, even after our work is complete. The access, contact, and goodwill generated through our existing client relationships afford us opportunities to provide additional services, often resulting in multiple projects at a single client and referrals to new clients. In the fourth quarter of fiscal year 2010, the average duration of a client relationship reached an all-time high of 37 months. In addition, we continued to work with 18 of our top 20 clients from the year-ago period.

 

Increase the Awareness of Our Brand through Intellectual Capital.  We intend to continue to invest in the development of our intellectual capital to bring leading-edge ideas to our client projects and to improve our brand and positioning in the markets we serve. We continuously seek to identify, disseminate, and incorporate new intellectual capital throughout our organization to keep abreast of business and information technology trends, while creating repeatable frameworks that can be leveraged to deliver results more effectively and efficiently. We believe that building a brand image facilitates both the lead generation process and the ability to attract and retain the best people by raising awareness of our firm, resulting in an increase in the number of new clients and recruitment opportunities.

 

Expand the Ratio of Partners to Staff.  Since the Company was founded, we have worked in teams that have typically had a ratio of one partner to six or seven staff consultants. We see an opportunity in the marketplace to increase our leverage within our current model, to one partner to up to twelve staff consultants over time. These additional staff consultants will be junior-level consultants performing more of the execution work on our projects that is currently being performed by either in-house or third-party resources. This is a modest refinement of our current model that is expected to allow us to grow more consistently, provide more value to our clients and allow our people more interesting leadership responsibilities and greater career opportunities.

 

Continue to Develop Client Analytics Capability.  In late 2006, we established the Diamond Information & Analytics Center in Mumbai to extend our information and analytics capabilities. The center is staffed by professionals with advanced statistics and econometrics capabilities and provides fast, insightful analysis of complex marketing and operational issues, where intelligent use of data holds the key to better decisions and actions. We anticipate being able to add value to clients across all verticals by helping them to better understand and compete in their markets. This capability should allow us to extend and broaden client relationships globally.

 

Business Development

 

We primarily serve “c-level” executives of national and multinational businesses. Our fees are sourced from both operating budgets as well as information technology budgets within our clients’ organizations. Our practice partners (the term “partner” is an internal designation only and does not refer to a partner of a general or limited partnership; all partners are officers of the Company) are assigned to an industry practice (see “Our Services: Industries Served”). Each vertical industry maintains a list of prospects and a senior partner is assigned revenue and profit contribution responsibility for each vertical.

 

Our business development process is designed to efficiently attract the Company’s best prospects, leverage the firm’s strong track record of project successes and references, and then sustain a long-term, value-added relationship. Our programs are designed to build brand recognition, create and provide for the

placement of new intellectual capital, promote industry practices, and develop and deepen client relationships in a focused manner.

 

We have a number of programs designed to create awareness of Diamond and its capabilities including: media relations, advertising, speeches, blogs and social media, books, published viewpoints, surveys, and the Company website. These programs are built around specific intellectual capital within our target industries, and are focused on executives within our target clients and prospects. Visit the Diamond website at www.diamondconsultants.com to download recent studies and whitepapers.

 

We also have a number of programs designed to create relationships with interested executives, while continuing to showcase the Company’s capabilities:

 

DiamondExchange.  DiamondExchange^® programs are designed to deepen and broaden relationships with prospective and existing client executives while engaging in a dialog about strategic business issues. CEOs and other senior executives within our target vertical industries are invited to participate in the Exchange, and to become regular members. DiamondExchange events are designed to build community among our member executives, guest participants, Diamond partners, our Diamond Fellows and other Diamond Network members (see below). The content of the DiamondExchange program showcases the Company’s capabilities, drawing on findings from recent client work and primary and secondary research to help executives understand the strategic risks and opportunities of emerging technologies. A proactive effort is made to ensure that current and former clients continue to participate in the DiamondExchange events, ensuring that the Company keeps them in a value-added relationship.

 

Diamond Network.  Diamond maintains a network of experts to augment its skills and relationships. Members of the Diamond Network help the firm to enhance its understanding of emerging marketplace developments, provide new client introductions, and enhance the value we provide to our clients. The network has the following components:

 

 

Dan Ariely, James B. Duke Professor of Behavioral Economics, Duke University

 

Vincent Barabba, Chairman, Kings County Ventures and Market Insight Corporation

 

Gordon Bell, Senior Researcher, Microsoft Bay Area Research Center

 

Dan Bricklin, Chief Technology Officer, Interland, Inc.

 

Linda Hill, Wallace Brett Donham Professor of Business Administration, Harvard Business School

 

Alan Kay, Ph.D., President, Viewpoints Research Institute, Inc; Fellow, HP Labs

 

Andrew Lippman, Ph.D., Co-founder, MIT Media Lab

 

Chunka Mui, Chairman, Diamond Fellows and Partner, Cornerloft Partners

 

David P. Reed, Ph.D., Information Architect and Independent Entrepreneur

 

Larry Smarr, Ph.D., founding director of the California Institute for Telecommunications and Information Technology and Harry E. Gruber, Professor in the Jacobs School’s Department of Computer Science and Engineering at UCSD

 

Marvin Zonis, Ph.D., Professor of International Economics, University of Chicago Booth School of Business

 

 

Employees and Culture

 

Employees.  As of March 31, 2010, Diamond had 643 employees. Of these employees, 527 were client-serving professionals and 116 were operations personnel comprising intellectual capital development, marketing, human resources, finance, accounting, legal, internal information systems, and administrative support. The responsibilities of our partners include client relationship development, business development, client management, program management and execution, thought leadership, professional staff development, and mentoring. As of March 31, 2010, we had 58 practice partners.

 

Culture.  We believe our ability to provide effective multidisciplinary teams is dependent upon our ability to develop and sustain a business culture that is common across all competencies and industry practices in the organization. Diamond’s employees are talented and energetic professionals that come from a multitude of professional backgrounds. Diamond believes that this fosters an exciting and diverse work environment. Three primary elements comprise our culture:

 

 

Recruiting.  We believe our long-term success will depend on our ability to continue to attract, retain, and motivate highly skilled employees. We attribute our success in hiring these people to our ability to

provide individuals with high-impact client opportunities, multidisciplinary training, career development, attractive long-term career advancement opportunities, a small-team work environment, a collaborative approach to consulting, and competitive compensation.

 

Although a number of our current employees were hired directly from other firms, our primary long-term strategy is to hire professionals from the leading undergraduate and graduate business and technology programs at leading universities. Senior-level positions are predominantly filled from internal promotions.

 

Training and Professional Development.  Our training and professional development programs help us to deliver high-quality services to our clients, as well as to attract and retain highly skilled professionals. We have developed programs that ensure all individuals have the opportunity to develop consulting, business, and technology skills throughout their careers. Leveraging our innovation programs, our professional development programs reinforce our culture by exposing all professionals to the various services we provide while further developing deep skills in each professional’s principal area of expertise.

 

Compensation.  Our compensation programs have been structured to attract and retain highly skilled professionals by offering competitive base salaries coupled with annual cash bonus incentive opportunities. In April 2009, the Company shifted from primarily equity-based variable compensation to performance driven cash bonus awards. We will continue to issue equity to new hires and for major promotions as we believe it is important for our employees to be aligned with our public stockholders.

 

Our partners and non-partners are eligible to receive a cash bonus commensurate with their level of responsibility and based on overall Company performance as well as individual performance. Our partners are granted equity upon being elected a partner that typically vests ratably over five years. More information about our compensation programs may be found in our proxy statement under “compensation discussion and analysis.”

 

Competition

 

We operate in a competitive and rapidly changing global market and compete with a variety of organizations that offer services similar to those that we offer. Our clients generally retain us on a non-exclusive basis. We compete with a number of different types of businesses, including:

 

Traditional management and strategy consulting firms that focus on advising managements on organization and corporate strategy. Many of the traditional strategic consulting firms offer services in information technology.

 

Systems integration and IT consulting firms that design and implement technology solutions, including software installation, for departments and enterprises. These firms have grown in size and scope of services, including the provision of offshore software development.

 

Information technology product and service vendors that offer technical consulting to support their own products. Many of these firms have also developed various alliances with systems integration and IT consulting firms to augment their own capabilities.

 

In addition, we also compete with the internal strategy or technology departments of a client, as they may choose to conduct the work internally.

 

Many of our competitors are substantially larger than we are and have significantly greater financial, technical, and marketing resources; greater name recognition; and greater revenues. Furthermore, we face the challenge of competing for and retaining the best personnel available in the business services market. Mergers or consolidations in our market may create new, larger, or better-capitalized competitors with enhanced abilities to attract and retain professionals.

 

We believe that the principal criteria considered by prospective clients when selecting a consulting firm include skills and capabilities of consultants, scope of services, service model approach, global reach, technical and industry expertise, reputation and quality of past work, perceived value, and a results orientation.

We believe we are well positioned against our competitors. Furthermore, we believe the increasing complexity of technology, and the current structural changes in the consulting industry, increase the value to senior management of an objective advisor with deep expertise in strategy, marketing, operations and technology, including the ability to accelerate program execution.

 

Executive Officers of the Registrant

 

At present, our executive officers are as follows:

 

 

Adam J. Gutstein joined Diamond as a partner in January 1994 and became Chief Executive Officer on April 1, 2006. Mr. Gutstein was given the added title of President in September 2006. He has served as a director of the Company since August of 1999. From May 2000 through March 2006, Mr. Gutstein held various executive leadership positions in North America, Europe, Latin America and Asia, including Managing Director of International Operations. From July 1998 to April 2000, Mr. Gutstein served as Chief Operating Officer of the Company. Prior to joining Diamond, Mr. Gutstein was a Vice President at Technology Solutions Company and a Manager with Andersen Consulting, now Accenture.

 

Karl E. Bupp joined Diamond in April 1994 as a partner and Vice President of Financial Planning responsible for our internal planning, analysis, and treasury functions. Since July 1998, Mr. Bupp has served as our Chief Financial Officer. Prior to joining Diamond, Mr. Bupp was the Corporate Controller, and Director of Planning and Treasury Services for Technology Solutions Company. From 1985 to 1993, he held various financial management and analyst positions with MCI Telecommunications Corporation.

 

John J. Sviokla joined the Company in September 1998 as a partner and Vice President and became a member of our Board of Directors in August 1999. Since April 1, 2000, Dr. Sviokla has served as Vice Chairman. Prior to joining Diamond, Dr. Sviokla was a professor at the Harvard Business School from October 1986 to August 1998. His pioneering work on Marketspace established Harvard’s first course on electronic commerce, and he co-authored the seminal articles Managing in the Marketspace and Exploiting the Virtual Value Chain, both appearing in the Harvard Business Review. Dr. Sviokla has authored over 90 articles and cases, has edited books, and has been a consultant to large and small companies around the world. He is or has been a guest professor at many universities including Kellogg, MIT, The London Business School, the Melbourne Business School, and the Hong Kong Institute of Science and Technology.

 

Stephen Warrington joined Diamond as Vice President and Managing Partner, U.K. in December 2004 and became Vice President and Managing Partner, U.K. and India in March 2008. He has extensive experience in leading management advisory businesses and has worked widely in the U.K. and continental Europe serving top management of major companies. Mr. Warrington’s principal focus is in financial services, covering retail and investment banking, insurance, asset management and credit cards. His functional expertise includes strategy, marketing, operations and broad performance transformation programs. Prior to joining Diamond, Mr. Warrington held senior positions at Unisys from 2003 to 2004, McKinsey and Company from 1990 to 2003 and HSBC from 1984 to 1990.

 

Thomas E. Weakland joined the firm as a Principal in February 1994 and became Managing Partner of Diamond’s Global Sourcing Practice in 2002 and Managing Partner of the firm’s Healthcare practice in 2005. He has more than 20 years of experience helping organizations develop, manage and extract significant benefits through better aligning their business strategies with their technology capabilities. Mr. Weakland is considered a leading authority on strategic sourcing and has been widely quoted in The Wall Street Journal, Reuters and numerous other publications as well as National Public Radio and BBC Radio. Prior to joining

Diamond, Mr. Weakland served as senior consultant for General Electric Consulting and as a principal at Technology Solutions Company.

 

Available Information

 

The executive offices of Diamond Management & Technology Consultants, Inc. are located at Suite 3000, John Hancock Center, 875 North Michigan Avenue, Chicago, Illinois 60611, and our telephone number is (312) 255-5000. Our stock is traded on the NASDAQ Global Select Market under the symbol “DTPI.” Our internet address is http://www.diamondconsultants.com. We make available free of charge on the Investor Relations section of our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (the “SEC”) pursuant to Section 13(a) or 15(d) of the Exchange Act. We also make available through our website other reports filed with the SEC under the Exchange Act, including our proxy statements and reports filed by officers and directors under Section 16(a) of that Act, as well as our Code of Business Conduct and Ethics. We do not intend for information contained in our website to be part of this Annual Report on Form 10-K.

 

Any materials we file with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC, 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

 

 

You should carefully consider the risks described below. However, the risks described are not the only ones we face. Any of the following risks could have a material adverse effect on our business, financial condition and operating results. You also should refer to the other information contained in this report, including our financial statements and the related notes.

 

Our Profitability Will Suffer If We Are Not Able to Maintain Our Pricing and Chargeability and Control Our Costs.

 

Our profit margin, and therefore our profitability, is largely a function of the rates we are able to recover for our services and the chargeability of our professionals. Accordingly, if we are not able to maintain the pricing for our services or an appropriate chargeability rate for our professionals and simultaneously control our costs, we will not be able to sustain our profit margin and our profitability will suffer. The rates we are able to recover for our services are affected by a number of factors, including:

 

 

Our chargeability rates also are affected by a number of factors, including:

 

 

Our profitability is also a function of our ability to control our costs and improve our efficiency. Current and future cost reduction initiatives may not be sufficient to maintain our margins if a challenging economic environment existed for several quarters.

Our Inability to Attract and Retain Employees Could Have a Material Adverse Affect on our Business.

 

The Company’s success depends upon its ability to attract, retain and motivate highly skilled professionals at all levels. Qualified client-serving professionals are in great demand and are likely to remain a limited resource for the foreseeable future. The loss for any reason of a number of the Company’s client-serving professionals or executives or the inability to attract, retain and motivate qualified personnel could have a material adverse effect on the Company’s business, financial condition and results of operations.

 

Our Revenue Could Be Adversely Affected by the Loss of a Significant Client or the Failure to Collect a Large Account Receivable.

 

We have in the past derived, and may in the future derive, a significant portion of our revenue from a relatively limited number of major clients. From year to year, revenue from one or more individual clients may exceed 10% of our revenue. During the fiscal year ended March 31, 2010, we had no clients that individually accounted for over 10% of our net revenue. If we lose any major clients or any of our clients cancel or significantly reduce a large project’s scope, we would lose a significant amount of revenue. In addition, if we fail to collect a large account receivable or group of receivables, we could be subject to significant financial exposure.

 

A Significant or Prolonged Economic Downturn Could Have a Material Adverse Effect on Our Results of Operations.

 

Our results of operations are affected by the level of business activity of our clients, which in turn is affected by the level of economic activity in the customer segments, industries and markets that they serve. A decline in the level of business activity of our clients could have a material adverse effect on our revenue and profit margin. Future economic conditions could cause some clients to reduce or defer their expenditures for consulting services. We have implemented and will continue to implement cost-savings initiatives to manage our expenses as a percentage of revenue. However, current and future cost-management initiatives may not be sufficient to maintain our margins if the economic environment should weaken for a prolonged period.

 

Our Quarterly Operating Results Will Vary From Quarter to Quarter, Which May Increase the Volatility of Our Stock Price.

 

We have experienced, and may continue to experience in the future, significant fluctuations in our quarterly operating results, particularly when measured on a percentage basis. These fluctuations could result in increased volatility in the market price of our Common Stock.

 

Factors that may cause our quarterly operating results to significantly vary include:

 

 

The timing of revenue is difficult to forecast because our sales cycle is relatively long and our services are affected by the financial condition and management decisions of our clients, including the ability to cancel

our services on short notice, while a high percentage of our expenses are relatively fixed at the beginning of any period.

 

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, any of which could seriously harm our business. The business and technology consulting services market, which 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 revenue than ours. We believe that the principal competitive factors in our industry include:

 

 

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 consultants, the price at which others offer comparable services, and the extent of our competitors’ responsiveness to client 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 the market or providing services similar to ours. As a result, new and unknown market entrants could pose a threat to our business.

 

The Absence of Long-Term Contracts With Our Clients Reduces the Predictability of Our Revenue.

 

Our clients are generally able to reduce or cancel their use of our professional services without penalty and, in some circumstances, with little 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 will need to continuously acquire new clients and/or new projects with existing clients to meet our expenses. When a client defers, modifies or cancels a project, there is no assurance that we will be able to rapidly redeploy our professionals to other projects in order to minimize the non-chargeable time of employees and the resulting adverse impact on operating results. We may not be able to replace cancelled or reduced contracts with new business, or rapidly reduce our expenses to offset cancelled or reduced contracts. As a result, our revenue and profits could decline.

 

Failure to Meet Client Expectations Could Result in Losses and Negative Publicity.

 

A failure or inability by us 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 revenue. Our client engagements involve the creation and implementation of business strategies and other processes that can be critical to our clients’ businesses. We may be sued or unable to collect accounts receivable if a client is not satisfied with our service.

 

Our client contracts may not protect us from liability for damages in the event that we are sued. In addition, our liability insurance coverage may not continue to be available on reasonable terms or in sufficient amounts. The successful assertion of any large claim or group of claims against us or our failure to collect a large account receivable could result in a material adverse effect on our business.

The Price for Our Common Stock Has Been Volatile and Unpredictable.

 

The price of our Common Stock has historically been volatile. Our Common Stock has been listed on the NASDAQ Global Select Market since February 1997. From March 31, 2005 through March 31, 2010, our high and low sales price has ranged from a high of $16.25 to a low of $1.84. The market price of our Common Stock may experience fluctuations in the future for a variety of reasons. These include:

 

 

Fluctuations in the market prices of technology related companies or those of our clients may continue to occur and disproportionately impact our stock price. In addition, volatility or a significant decline in the price of our Common Stock could diminish or impair our ability to use equity-based awards, which are a component of our overall compensation system.

 

Inability to Keep Pace with Rapidly Changing Technology May Impair Our Ability to Remain Competitive.

 

Our failure to develop business and technology consulting services that keep pace with continuing changes in technology, evolving industry standards, information technology and client preferences would likely result in decreased demand for our services. Our challenges in this area include the need to:

 

 

We may not be able to meet these challenges on a timely or successful basis.

 

If We Are Unable to Protect Our Intellectual Property Rights or If We Infringe Upon the Intellectual Property Rights of Others Our Business 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, these efforts may be insufficient to prevent misappropriation of our proprietary information or to detect unauthorized use of our intellectual property rights.

 

Ownership of intellectual property developed during our client engagements is typically assigned to the client upon payment for our services. We generally retain the right to use any intellectual property that is previously developed by us or 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. Clients may demand assignment of ownership or restrictions on our use of the work product. In addition, disputes could arise if we infringe on the intellectual property rights of third parties. We may have to pay economic damages to the third parties and also indemnify our clients in these disputes and we could also suffer a loss of reputation which could adversely affect our business.

We Must Continue to Build Recognition and Client Acceptance of Our Name.

 

Diamond has invested significant efforts in building recognition and client acceptance of its name which was changed on August 1, 2006. We believe that market acceptance of the name and “brand” Diamond^® is an important aspect of our efforts to retain and attract clients.

 

Promoting and maintaining name recognition depends largely on the success of our marketing efforts and the ability of Diamond to provide high quality, reliable and cost-effective services. These efforts will require significant expenses, which will affect our results of operations. Client dissatisfaction with Company performance could diminish the value of our brand.

 

Our Global Operations Pose Complex Management, Business, Financial and Regulatory Risks, Which We May Not Adequately Address.

 

We conduct business in multiple countries around the world. During fiscal year 2010, 92% of our revenue was attributable to activities in North America and the remaining 8% was attributable to activities in Europe and Asia, which primarily include the U.K. and India. As a result, we are subject to a number of risks which we may not adequately address, including:

 

 

 

 

The Failure to Integrate or Negotiate Successfully 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. We may be unable to identify appropriate acquisition candidates. If we identify an appropriate acquisition candidate, we may not be able to negotiate the terms of the acquisition successfully, finance the acquisition or 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 revalue or write-down the value of goodwill and other intangible assets in connection with future acquisitions which would harm our operating results.

 

We May Need to Raise Additional Capital in the Future Which May Not Be Available.

 

We may not be able to raise capital or obtain debt financing in the future to meet our liquidity needs and finance our operations and future growth. We maintain a revolving line of credit, cash balances and cash generated from operations. 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 or acquire adequate liquidity to support our operations.

Future Sales of Our Common Stock in the Public Market Could Cause the Price of Our Stock to Decline.

 

In the future, our stockholders could sell substantial amounts of our Common Stock in the public market which could cause our market price to decline. A substantial number of outstanding shares of Common Stock and shares of our Common Stock issuable upon exercise or vest of equity awards will become eligible for future sale in the public market at various times. It has been the Company’s practice to issue equity awards to its employees on a broad basis. As a result, our employees and former employees own a significant portion of the Company’s Common Stock, particularly on a fully-diluted basis. As these equity awards vest, these individuals may choose to sell their Common Stock. An increase in the number of shares of our Common Stock in the public market could adversely affect prevailing market prices and could impair our future ability to raise capital through the sale of our equity securities.

 

Our Charter Documents and Delaware Law May Discourage an Acquisition of Diamond.

 

Provisions of our certificate of incorporation, by-laws, and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. We may issue shares of preferred stock in the future without stockholder approval and upon such terms as our Board of Directors may determine. Our issuance of this preferred stock could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of our outstanding stock. Our charter and by-laws also provide that special stockholders meetings may be called only by our Chairman of the Board of Directors, by our Secretary at the written request of the Chairman or by our Board of Directors, with the result that any third-party takeover not supported by the Board of Directors could be subject to significant delays and difficulties. In addition, our Board of Directors is divided into three classes, each of which serves for a staggered three-year term, which may make it more difficult for a third party to gain control of our Board of Directors.

 

Certain of Our Contracts Pose Unique Risks.

 

We work for various federal, state and local governmental entities and agencies primarily in our “public sector” industry practice. These clients have legal remedies at their disposal that our commercial clients may not have in the event of a dispute with us, such as extensive audit rights and the ability to impose penalties, sanctions and debarment. In addition, in both the public sector practice and in our commercial practice, we sometimes enter into fixed-fee contracts. If we are not successful in properly estimating our costs and timing for completing engagements, unexpected costs or unanticipated delays, whatever the cause, could cause our contracts to be less profitable or unprofitable, which would have an adverse effect on our results of operations.

 

 

None.

 

 

Our international headquarters and principal administrative, information systems, financial, accounting, marketing, legal and human resources operations are located in leased office space in Chicago, Illinois. We also have leased office space in Hartford, London, Mumbai, New York City and Washington, D.C. We opened our New York City and Mumbai, India offices in March 2006 and our Hartford office in May 2006. We do not own any real property. We believe that our leased facilities are adequate to meet our current needs and that additional facilities are available for lease to meet future needs.

 

 

From time to time, we are party to various lawsuits and claims in the ordinary course of business. As of the date of this Annual Report on Form 10-K, we are not party to any claims or actions that we believe could have a material adverse effect on our results of operations or financial position.

 

 

Market Information

 

The Common Stock is quoted on the NASDAQ Global Select Market under the symbol “DTPI.” The following table sets forth for the periods indicated the high and low intraday sales prices for our Common Stock.

 

 

Holders

 

On May 28, 2010, the closing price of Common Stock was $9.93 per share. At such date, we had approximately 6,351 holders of record of Common Stock.

 

Dividends

 

Holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors (“Board”) out of funds legally available therefore, subject to any preferential dividend rights of outstanding Preferred Stock, if any. There was no Preferred Stock issued or outstanding as of March 31, 2010. On June 1, 2009, the Company announced that its Board of Directors approved a change in the Company’s dividend schedule from annual to quarterly. The Board declared the following quarterly cash dividends during the fiscal year ended March 31, 2010:

 

 

The Board declared the following annual cash dividend on its Common Stock during the fiscal year ended March 31, 2009:

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The information required by this item appears under “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” included elsewhere in this Annual Report on Form 10-K.

 

Shareholder Return Performance Graph

 

The following graph compares the cumulative five-year total stockholder return on our Common Stock from March 31, 2005 through March 31, 2010, with the cumulative total return on (i) the NASDAQ Composite Index and (ii) the Dow Jones US Business Support Services TSM Index. The comparison assumes the investment of $100 on March 31, 2005, in our Common Stock and in each of the indices and, in each case, assumes reinvestment of all dividends.

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Diamond Management & Technology Consultants Inc., The NASDAQ Composite Index

And The Dow Jones US Business Support Services TSM Index

 

 

*$100 invested on 3/31/05 in stock or index, including reinvestment of dividends.

Fiscal year ending March 31.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

The Board has authorized, from time to time, the repurchase of the Company’s Common Stock in the open market or through privately negotiated transactions. During the period beginning with the inception of the Buy-back Program in October 1998 until the meeting of directors on September 14, 2004, the Board had authorized the repurchase of up to 6.0 million shares, of which 5.3 million shares were repurchased at an aggregate cost of $70.5 million as of September 14, 2004. At the meeting of directors on September 14, 2004, the Board restated the aggregate amount of repurchases that could be made under the Buy-back Program to be based on a maximum dollar amount rather than a maximum number of shares. The authorization approved the repurchase of shares under the Buy-back Program having an aggregate market value of no more than $25.0 million. In April 2005, July 2006, March 2007 and February 2008, the Board authorized the repurchase of an additional $50.0 million, $35.0 million, $50.0 million and $25.0 million, respectively, of shares of the Company’s outstanding Common Stock under the existing Buy-back Program, resulting in an aggregate market value of up to $185.0 million in addition to the 5.3 million shares repurchased prior to September 14, 2004. In the absence of an additional buy-back authorization from the Board, the Buy-back Program expires when the existing authorized amounts for share repurchases have been expended. During the quarter ended March 31, 2010, the Company did not repurchase any additional shares. During the fiscal year ended March 31, 2010, the Company repurchased approximately 0.8 million shares at an average price of $6.05. As of March 31, 2010, the amount available for repurchase under the Board authorization was $22.1 million.

 

 

 

 

 

The selected financial data presented below has been derived from our consolidated financial statements. The data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Consolidated Financial Statements and the notes thereto and other financial information appearing elsewhere in this Annual Report on Form 10-K.

 

 

 

 

 

 

The following discussion and analysis should be read in conjunction with the information contained in the Consolidated Financial Statements and related Notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis also contains forward-looking statements that involve risks and uncertainties. See “Disclosure Regarding Forward-Looking Statements” and “Risk Factors” contained in this Annual Report on Form 10-K. We use the terms “we,” “our,” “us,” “the Company,” and “Diamond” in this report to refer to Diamond Management & Technology Consultants, Inc. and its wholly-owned subsidiaries.

 

Overview

 

Diamond is a management and technology consulting firm. Clients engage Diamond Management & Technology Consultants, Inc. to help their companies grow, improve margins, and increase the productivity of their investments. Working together to design and execute business strategies that capitalize on changing market forces and technology, Diamond’s consultants are experts in helping clients attract and retain customers, increase the value of their information, and plan and execute projects that turn strategy into measurable results.

 

Diamond’s capabilities are rooted in deep strategy, technology, operations, and industry experience. The firm’s approach to client service is based on objectivity, collaboration, and an unwavering commitment to its clients’ best interests.

 

In March 2006, our Board of Directors approved a strategy to focus the Company on its markets in North America, the U.K. and India. As part of the Board approved strategy, we committed to sell the portions of our international operations that included offices and respective operations in Barcelona, Dubai, Madrid, Münich, Paris and São Paulo and as a result these are reported as “discontinued operations” in the financial statements and related notes. North America, the U.K. and India are considered “continuing operations.” All previously reported data from the Consolidated Statements of Operations and Comprehensive Income (Loss) has been reclassified to conform to this presentation to allow for meaningful comparison. The Consolidated Statements of Cash Flows is prepared on a combined basis (continuing operations plus discontinued operations) for all periods presented. All analytical and statistical references refer to data from continuing operations only unless otherwise stated.

 

During the fiscal year ended March 31, 2010, we generated net revenue of $177.2 million from 88 clients. At March 31, 2010, we employed 527 consultants and 116 operations employees. Our operations are comprised of six offices in North America, Europe and Asia, which include Chicago, Hartford, London, Mumbai, New York City and Washington, D.C.

 

Our revenue is driven by our ability to secure new client engagements, maintain existing client engagements and develop and implement solutions that add value to our clients. Our revenue is comprised

of professional fees for services rendered to our clients plus reimbursable expenses. Prior to the commencement of a client engagement, we and our client agree on fees for services based upon the scope of the project, our staffing requirements, and the level of client involvement. We recognize revenue as services are performed. Our services are performed in accordance with the terms of the client engagement agreement. We bill our clients for these services on either a monthly or semi-monthly basis in accordance with the terms of the client engagement agreement. Accordingly, we recognize amounts due from our clients as the related services are rendered and revenue is earned even though we may be contractually required to bill for those services at an earlier or later date than the date services are provided. Provisions are made based on our experience for estimated uncollectible amounts. These provisions, net of write-offs of accounts receivable, are reflected in the allowance for doubtful accounts. We also defer a portion of the revenue from each client engagement to cover the estimated costs that are likely to be incurred subsequent to targeted project completion. We refer to this as “project run-on.” This portion of the project revenue is reflected in deferred revenue and is calculated based on our historical project run-on experience. While we have been required to make revisions to our clients’ estimated deliverables and to incur additional project costs in some instances, to date there have been no such revisions that have had a material adverse effect on our operating results.

 

Approximately 90% of our revenues and expenses are denominated in the U.S. Dollar, which limits the impact of foreign currency exchange rate fluctuations on consolidated revenues and expenses. Approximately 10% of our revenues and expenses are generated from international transactions, which are denominated in foreign currencies. The most common foreign currencies that we operate under are the British Pound Sterling, the Indian Rupee, and the Euro.

 

In the fourth quarter of fiscal year 2009, the Company initiated a tender offer that was completed on March 9, 2009, (“Tender Offer”) which provided employees the opportunity to exchange certain previously granted but unvested Restricted Stock Units (“Eligible RSUs”) for Diamond Common Stock at an exchange ratio of one Eligible RSU for 0.80 shares of Common Stock. The shares are subject to a restriction on sale or transfer, with such restrictions lapsing over a minimum period of approximately six months and up to a maximum period of approximately four years, depending on the level of the employee. As a result of the Tender Offer, Diamond issued 1.2 million shares of Common Stock after withholding approximately 0.5 million shares to pay employee taxes incurred on the value of the stock received in the exchange, and recorded a $16.7 million pre-tax charge for stock-based compensation expense in the fourth quarter of fiscal year 2009 under the income statement caption “Stock-based compensation acceleration — tender offer.” Of the $16.7 million pre-tax charge, $14.3 million was attributed to project personnel costs (“project personnel tender offer expense”), impacting gross margin, with the remaining $2.4 million attributed to other operating expenses (“other operating tender offer expense”). This had a significant impact on the quarterly and annual operating results as discussed below. Refer to Note (13) of the Consolidated Financial Statements for additional detail regarding the Tender Offer.

 

The largest portion of our operating expenses consists of project personnel costs. Project personnel costs before reimbursable expenses consist of payroll costs, variable incentive compensation, stock-based compensation expense, and related benefits expense associated with our consulting staff. Other expenses included in project personnel costs before reimbursable expenses are travel, third-party vendor payments and non-billable costs associated with the delivery of services to our clients. Net revenue less project personnel costs before reimbursable expenses (“gross margin”) is considered by management to be an important measure of our operating performance and is driven largely by the chargeability of our consultant base, the prices we charge to our clients, project personnel compensation costs, and the level of non-billable costs associated with securing new client engagements and developing new service offerings. Chargeability represents a measure of our project personnel’s time spent on billable consulting work based on standard available business days.

 

Gross margin increased $19.9 million in the fourth quarter of fiscal year 2010 compared to the fourth quarter of fiscal year 2009. The increase is primarily due to an increase in net revenue of $14.4 million and the $14.3 million project personnel tender offer expense in the fourth quarter of fiscal year 2009 with no similar expense in the fourth quarter of fiscal year 2010, partially offset by an increase in project personnel costs before reimbursable expenses of $8.8 million related to higher project personnel headcount and variable compensation expense.

Gross margin increased to $50.3 million in fiscal year 2010, a $26.1 million increase, compared to $24.2 million for fiscal year 2009. The increase is primarily related to a $25.1 million increase in net revenue and the $14.3 million project personnel tender offer expense in fiscal year 2009 with no similar expense in fiscal year 2010, partially offset by an increase in project personnel costs before reimbursable expenses of $13.2 million. The increase in project personnel costs before reimbursable expenses was primarily related to increased headcount and higher variable compensation expense partially offset by decreased stock based compensation expense. Our practice headcount increased to 527 at March 31, 2010, compared to 465 at March 31, 2009. Our annualized net revenue per practice professional was $367 thousand for fiscal year 2010 compared to $315 thousand for fiscal year 2009.

 

Our other recurring operating expenses are comprised of expenses associated with the development of our business and the support of our client-serving professionals, such as professional development and recruiting, marketing and sales, management and administrative support, and stock-based compensation expense earned by personnel working in these functional areas. Professional development and recruiting expenses consist primarily of recruiting and training course content development and delivery costs. Marketing and sales expenses consist primarily of the costs associated with the development and maintenance of our marketing materials and programs. Management and administrative support expenses consist primarily of the expenses associated with operations including finance, information technology, human resources, facilities administration and support (including the renting of office space) and legal services.

 

Management believes that income from operations, which is gross margin less other operating expenses, is an important measure of our operating performance. Income (loss) from continuing operations before income taxes increased to income of $5.8 million in the fourth quarter of fiscal year 2010, a $22.2 million increase, compared to a loss from continuing operations before income taxes of $16.4 million in the fourth quarter of the prior fiscal year. The increase is primarily due to the $19.9 million increase in gross margin described above and the $2.4 million other operating tender offer expense in the fourth quarter of fiscal year 2009. Income (loss) from continuing operations before income taxes increased to income of $15.8 million in fiscal year 2010, a $28.7 million increase, compared to a loss from continuing operations before income taxes of $13.0 million in fiscal year 2009. The increase is primarily due to the $26.1 million increase in gross margin described above, the $2.4 million other operating tender offer expense in fiscal year 2009, and a $1.1 million decrease in training expense, partially offset by lower interest income in fiscal year 2010.

 

We regularly review our fees for services, professional compensation and overhead costs to ensure that our services and compensation are competitive within the industry, and that our overhead costs are aligned with our revenue level. In addition, we regularly monitor the progress of client projects with client senior management. We manage the activities of our professionals by closely monitoring engagement schedules and staffing requirements for new engagements. However, a rapid decline in the demand for the professional services that we provide could result in lower chargeability of our professionals than we planned. In addition, because most of our client engagements are terminable by our clients without penalty, an unanticipated termination of a client project could require us to maintain underutilized employees. While professional staff levels must be adjusted to reflect active engagements, we must also maintain a sufficient number of senior professionals to oversee existing client engagements and participate in our sales efforts to secure new client assignments. Our chargeability for the fourth quarter of fiscal year 2010 was 77% which increased from 69% in the fourth quarter of the prior fiscal year. Our chargeability for fiscal year 2010 was 74% compared to 63% for fiscal year 2009.

 

Free cash flow was $21.1 million for the fiscal year ended March 31, 2010, compared to $13.0 million in fiscal year 2009. Management believes that the free cash flow from continuing operations metric, which is a non-GAAP measure, defined as net cash provided by operating activities ($22.4 million) net of capital expenditures ($1.3 million), provides a consistent metric from which the performance of the business may be monitored.

 

Critical Accounting Policies and Estimates

 

We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”). As such, we are required to make certain estimates, judgments and assumptions that we

believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

 

Revenue Recognition

 

We earn revenues from a range of consulting services, including helping organizations worldwide to leverage technology to develop and implement growth strategies, improve operations, and capitalize on technology. Our revenues are comprised of professional fees for services rendered to our clients plus reimbursement of out-of-pocket expenses and exclude applicable taxes. 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. Revenue is recognized over the term of the client engagement in direct proportion to the level of services performed by each member of the engagement team during the period relative to the estimated total level of effort required to perform the project. Therefore, the amount of revenue recognized in a period is for all intents and purposes, equal to the amount that would be recognized based on the stated contract price and the ratio of direct costs incurred in the period to perform the service to the total estimated direct costs of the project.

 

Service revenue recognition inherently involves a degree of estimation. Examples of important estimates in this area include determining the level of effort required to execute the project, calculating costs incurred and assessing our progress toward project completion on an ongoing basis. We believe that these are critical accounting estimates because they can materially affect our revenues and earnings and require us to make judgments about matters that are uncertain. We utilize a number of management processes to monitor project performance and revenue recognition including monthly reviews of the progress of each project against plan, staff and resource usage, service quality and client feedback. From time to time, as part of our normal management process, circumstances are identified that require us to revise our estimates of the timing of revenues to be realized on a project. To the extent that a revised estimate affects revenue previously recognized, we record the full effect of the revision in the period when the underlying facts become known.

 

Allowance for Doubtful Accounts and Deferred Revenue

 

We earn our revenues by providing consulting services to clients. We bill our clients for these services on either a monthly or semi-monthly basis in accordance with the terms of the client engagement. Accordingly, we recognize amounts due from our clients as the related services are rendered and revenue is earned even though we may not be able to bill for those services until a later date. The terms of our client engagements also require us to assume the risk of non-collection of amounts billed to clients.

 

Management makes estimates of the amount of our billed and unbilled accounts receivable that may not be collected from clients. We believe the allowance for doubtful accounts is a critical accounting estimate because it can materially affect our operating results and requires us to make judgments about matters that are uncertain. In making these estimates, management specifically analyzes individual client balances, the composition of the aging of accounts receivable, historical bad debts, customer credit-worthiness and current economic trends, and considers our overall experience with estimating uncollectible amounts. We recognize the effect of changes in our estimates, assumptions and assessments of the factors impacting the collectability of amounts due from customers on an ongoing basis. As of March 31, 2010, our accounts receivable balance was $22.9 million, including unbilled accounts receivable of $7.8 million, and net of an allowance for doubtful accounts of $0.5 million. Unbilled receivables represent revenues and reimbursable expenses earned for services performed that have not been billed. Unbilled receivables are typically billed the following month.

 

Although we and our clients agree on the scope of projects, expected deliverables and related fees in advance, from time to time we have made revisions to the scope of work and deliverables without making a corresponding adjustment to the fees for the project. We refer to this as “project run-on” as these revisions generally cause a project to extend beyond its targeted completion. We monitor our actual project run-on

experience on an ongoing basis and perform monthly reviews of projects in progress against plan. We provide for project run-on costs based on our analysis of historical experience. These provisions, net of actual costs incurred on completed projects, are reflected in deferred revenue. The deferred revenue balance was $1.4 million as of March 31, 2010. The balance was primarily comprised of the estimated gross amount of services to be rendered subsequent to the targeted project completion date as well as prepaid client fees related to consulting services that the Company expects to earn in future periods. While we have been required to make revisions to our clients’ estimated deliverables and to incur additional project costs in some instances, to date there have been no such revisions that have had a material adverse effect on our operating results.

 

Stock-based Compensation

 

We have adopted various stock incentive and option plans that authorize the granting of qualified and non-qualified stock options, stock appreciation rights (“SARs”) and Stock Awards (restricted stock and restricted stock units (“RSUs”)) to officers and employees, and non-qualified stock options, SARs and Stock Awards to certain persons who were not employees on the date of grant, including non-employee members of our Board of Directors.

 

We recognize the cost of all share based compensation arrangements in the financial statements based on their fair value. Share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating the amount of expected dividends. Additionally, expected forfeitures are estimated in determining stock-based compensation expense. If actual forfeitures differ from the estimates, the difference is recorded in the period in which it occurs.

 

Operating Expenses

 

The largest portion of our operating expenses consists of project personnel costs. Project personnel costs before reimbursable expenses consist of payroll costs, stock-based compensation expense related to project personnel, variable incentive compensation, and related benefits associated with professional staff. Other related expenses include travel, third-party vendor payments and non-billable costs associated with the marketing and delivery of services to our clients. The amount of these project personnel costs can vary substantially from period to period depending largely on revenue. Declines in revenue will often result in reduced chargeability of professional personnel and lower operating margins.

 

Our other recurring operating expenses are comprised of expenses associated with the development of our business and the support of our client-serving professionals, such as professional development and recruiting, marketing and sales, management and administrative support, and stock-based compensation expense earned by personnel working in these functional areas. Professional development and recruiting expenses consist primarily of recruiting and training course content development and delivery costs. Marketing and sales expenses consist primarily of the costs associated with the development and maintenance of our marketing materials and programs. Management and administrative support expenses consist primarily of the costs associated with operations including finance, information technology, facilities administration and support (including the renting of office space), and legal services.

 

Valuation of Deferred Tax Assets

 

In determining our current income tax provision we assess temporary differences resulting from differing treatments of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are recorded in our consolidated balance sheets. When we maintain deferred tax assets we must assess the likelihood that these assets will be recovered from future taxable income. To the extent we believe recovery is not more likely than not, we establish a valuation allowance to reduce the net deferred tax asset to a value we believe will be recoverable by future taxable income. We believe the accounting estimate related to the valuation allowance is a critical accounting estimate because it is highly susceptible to change from period to period as it requires management to make assumptions about the Company’s future income over the life of the deferred tax asset and the impact of increasing or decreasing the

valuation allowance is potentially material to our results of operations. Management’s assumptions about future income require significant judgment because actual income has fluctuated in the past and may continue to do so.

 

In estimating future income, we use our internal operating budgets and long-range planning projections. We develop our budgets and long-range projections based on recent results, trends, economic and industry forecasts influencing our performance, our project pipeline, and other appropriate factors.

 

We have deferred tax assets which have arisen primarily as a result of temporary differences between the tax bases of assets and liabilities and their related amounts in the financial statements as well as operating losses incurred in international jurisdictions. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized and adjust the valuation allowances accordingly. Management judgment is required in determining any valuation allowance recorded against the gross deferred tax assets. As of March 31, 2010, the valuation allowance against deferred tax assets was $2.7 million attributable to net operating loss carryforwards in certain foreign and certain state jurisdictions, as well as U.S. federal capital loss carryforwards. The need to maintain a valuation allowance is reviewed on at least a quarterly basis.

 

Recent Accounting Pronouncements

 

For a discussion of recent accounting pronouncements, please refer to Note (3) of the Notes to the Consolidated Financial Statements.

 

Revenue

 

On a consolidated basis, net revenue increased $25.1 million, or 16%, in fiscal year 2010 compared to fiscal year 2009 primarily due to an increase in our service offerings which contributed to increased demand at our largest clients, an increase in chargeability of our project personnel, and higher realized billing rates, all of which benefitted from the improving economic environment. Net revenue decreased $30.1 million, or 17%, in fiscal year 2009 as compared to fiscal year 2008 primarily due to the weakness in the global economy. We continue to focus on expanding our current client base as well as increasing current revenue streams by further penetrating existing clients.

 

We served 88 clients during fiscal year 2010, compared to 99 clients during fiscal year 2009 and 109 clients during fiscal year 2008. Average revenue per client increased to $2.0 million during fiscal year 2010 from $1.5 million during fiscal year 2009. Average revenue per client decreased to $1.5 million during fiscal year 2009 from $1.7 million during fiscal year 2008.

 

Revenue from new clients (defined as clients that generated revenue in the current period but were absent from the prior period) accounted for 8% of revenue during fiscal year 2010, 13% of revenue during fiscal year 2009, and 14% of revenue during the fiscal year 2008. For fiscal years 2008, 2009 and 2010, revenue and new client revenue mix by the industries that we serve was as follows:

 

Operating Expenses

 

Project Personnel Costs

 

Project personnel costs before reimbursable expenses increased $13.2 million, or 12%, during fiscal year 2010 as compared to fiscal year 2009. The increase in project personnel costs was primarily due to increased headcount and higher variable compensation expense partially offset by decreased project personnel stock-based compensation expense resulting from lower overall outstanding equity awards due to the completion of the fourth quarter fiscal year 2009 Tender Offer. As a percentage of net revenue, project personnel costs before reimbursable expenses decreased from 75% during fiscal year 2009 to 72% during fiscal year 2010 primarily due to higher chargeability and the resulting 16% increase in net revenue in fiscal year 2010.

 

Project personnel costs before reimbursable expenses decreased $12.1 million, or 10%, during fiscal year 2009 as compared to fiscal year 2008. The decrease in project personnel costs was primarily due to decreased project personnel compensation and benefits expense attributed to lower headcount and decreased stock-based compensation expense (excluding the impact of the tender offer) resulting from a lower overall value of annual equity awards granted in the first quarter of fiscal year 2009. As a percentage of net revenue, project personnel costs before reimbursable expenses increased from 69% during fiscal year 2008 to 75% during fiscal year 2009 primarily due to the 17% decline in net revenue in fiscal year 2009.

 

The following table summarizes practice personnel data for fiscal years 2008, 2009 and 2010:

 

 

 

 

Stock-based compensation acceleration — tender offer (project personnel)

 

The Company completed a Tender Offer on March 9, 2009, which provided employees the opportunity to exchange certain previously granted but unvested Restricted Stock Units (“Eligible RSUs”) for Diamond Common Stock at an exchange ratio of one Eligible RSU for 0.80 shares of Common Stock. In fiscal year 2009, as a result of the Tender Offer, Diamond issued 1.2 million shares after withholding approximately 0.5 million shares to pay employee taxes incurred on the value of the stock received in the exchange, and recorded a $14.3 million charge to project personnel expenses for Stock-based compensation acceleration — tender offer. Refer to Note (13) of the Consolidated Financial Statements for additional detail.

 

Professional Development and Recruiting

 

Professional development and recruiting expenses decreased $1.1 million, or 17%, during fiscal year 2010 as compared to fiscal year 2009. The decrease was primarily due to a reduction in firm-wide meetings in fiscal year 2010 and other firm-wide expense management initiatives. The costs incurred to recruit consultants include travel and lodging costs for our consultants and recruiting staff, travel expense reimbursements for candidates, costs related to our summer intern program and sourcing fees related to non-campus searches.

 

Professional development and recruiting expenses decreased $2.7 million, or 29%, during fiscal year 2009 as compared to fiscal year 2008. The decrease was primarily due to decreased costs for training and campus recruiting initiatives, as well as lower costs incurred for experienced recruiting initiatives and sourcing fees. The costs incurred to recruit consultants include travel and lodging costs for our consultants and recruiting staff, travel expense reimbursements for candidates, costs related to our summer intern program and sourcing fees related to non-campus hire searches.

Marketing and Sales

 

Marketing and sales expenses did not change significantly during fiscal year 2010 as compared to the prior fiscal year.

 

Marketing and sales expenses decreased $1.3 million, or 30%, during fiscal year 2009 as compared to fiscal year 2008. The decrease was primarily due to lower marketing expenditures related to our DiamondExchange^® events in fiscal year 2009, and costs incurred in fiscal year 2008 for a pilot online advertising campaign to raise brand awareness.

 

Management and Administrative Support

 

Overall management and administrative support expenses did not change significantly during fiscal year 2010 as compared to fiscal year 2009 due to offsetting activity. Higher variable compensation expense was offset by decreased stock-based compensation expense resulting from lower overall outstanding equity awards due to the completion of the fourth quarter fiscal year 2009 Tender Offer, as well as a reduction in facilities rental expense, as indicated in Note (9) of the Consolidated Financial Statements. The decrease in rent expense resulted from favorable operating lease extensions for the Chicago office headquarters and the London office effective July 14, 2008 and December 25, 2009, respectively. Management and administrative support expenses include the rent expense associated with our six offices in North America, the U.K. and India.

 

Management and administrative support expenses decreased $1.1 million, or 4%, in fiscal year 2009 as compared to fiscal year 2008. This decrease was primarily due to a decrease in rent expense as indicated in Note (9) of the Consolidated Financial Statements, and a decrease in compensation and benefits expense for management and administrative personnel. Management and administrative support expenses include the rent expense associated with our six offices in North America, the U.K. and India.

 

Stock-based compensation acceleration — tender offer (other operating)

 

The Company completed a Tender Offer on March 9, 2009, which provided employees the opportunity to exchange certain previously granted but unvested Restricted Stock Units (“Eligible RSUs”) for Diamond Common Stock at an exchange ratio of one Eligible RSU for 0.80 shares of Common Stock. In fiscal year 2009, as a result of the Tender Offer, Diamond issued 1.2 million shares after withholding approximately 0.5 million shares to pay employee taxes incurred on the value of the stock received in the exchange, and recorded a $2.4 million charge to other operating expenses for Stock-based compensation acceleration — tender offer. Refer to Note (13) of the Consolidated Financial Statements for additional detail.

 

Restructuring Charges (Recovery)

 

We recorded a restructuring recovery of $0.3 million during fiscal year 2009 as a result of extending the terms of our Chicago office headquarters lease on July 14, 2008. The terms of the lease extension allowed the Company to return unused office space that was previously included in the initial restructuring charge to the landlord, relieving the Company of this obligation.

 

Other Income, Net

 

Other income, net decreased $0.5 million, or 81%, during fiscal year 2010 as compared to fiscal year 2009 primarily due to a $0.7 million decrease in interest income caused by lower interest rate yields in fiscal year 2010 as compared to the previous fiscal year, and a $0.3 million cash distribution on an available-for-sale investment received in fiscal year 2009, partially offset by the effect of foreign currency losses on transactions denominated in non-functional currencies in fiscal year 2009.

 

Other income, net decreased $2.8 million, or 81%, during fiscal year 2009 as compared to fiscal year 2008 primarily due to a $2.4 million decrease in interest income caused by lower interest rate yields and a decrease in the average cash and cash equivalent balance in fiscal year 2009 as compared to the previous fiscal year. The effect of foreign currency losses on transactions denominated in non-functional currencies also

contributed to the decrease in other income, but was partially offset by a $0.3 million cash distribution on an available-for-sale investment received in fiscal year 2009.

 

Income Tax Expense

 

We recorded income tax expense of $3.7 million, a 23% effective income tax rate, in fiscal year 2010. The income tax expense was primarily related to earnings in the U.S. and U.K., partially offset by a $3.4 million valuation allowance reversal related to U.K. deferred tax assets. We recorded an income tax benefit of $4.2 million, a 32% effective income tax rate, in fiscal year 2009. The income tax benefit was primarily related to a $6.2 million tax benefit recorded on the $16.7 million Tender Offer stock-based compensation acceleration expense discussed above, partially offset by income tax expense recorded on continuing operations. We recorded income tax expense of $8.9 million, a 46% effective income tax rate, in fiscal year 2008. The income tax expense recorded in fiscal year 2008 related to income earned in North America. Due to valuation allowances on certain international deferred tax assets, the Company currently does not recognize a reported tax benefit on certain international losses or reported tax expense on certain international profits. These items cause a significant difference between the reported effective tax rate and the statutory tax rate.

 

We have deferred tax assets which have arisen primarily as a result of temporary differences between the tax bases of assets and liabilities and their related amounts in the financial statements as well as operating losses incurred in international jurisdictions. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized and adjust the valuation allowances accordingly. Management judgment is required in determining any valuation allowance recorded against the gross deferred tax assets. As of March 31, 2010, the valuation allowance against deferred tax assets was $2.7 million attributable to net operating loss carryforwards in certain foreign and certain state jurisdictions, as well as U.S. federal capital loss carryforwards.

 

The IRS examination of the Company’s fiscal year 2008 federal income tax returns was completed during fiscal year 2010, as was the fiscal year 2007 examination of the Company’s Indian subsidiary in India. The adjustments from the IRS and India examinations did not have a material impact on the Company’s operations.

 

Discontinued Operations

 

On July 31, 2006, we sold a portion of our international operations which included consulting operations in France, Germany, Spain, Brazil, and the United Arab Emirates as part of a stock sale agreement. Prior to the stock sale, as a result of a tax inspection of the former Spanish subsidiary for the tax years 1999 to 2000, we provided a bank guarantee in the amount of 4.3 million Euros, secured by restricted cash, with the Spanish taxing authority in order to appeal such authority’s assessment. The terms of the guarantee require that it be renewed annually until the results of the appealed tax inspection are settled. In accordance with the terms of the transaction, we agreed to indemnify the buyer for any liability related to this Spanish tax inspection (“tax indemnification obligation”). At the time of the transaction, such settlement was not expected before a period of approximately eight years.

 

During fiscal year 2008, the Spanish tax authorities ruled in favor of the Company on a portion of the assessments that were being appealed. The appeals of the remaining assessments were based on the same merits and the Company believed that the tax authorities would rule in favor of the Company on those appeals. As a result, $3.9 million of the indemnification obligation was reversed during the fourth quarter of fiscal year 2008. In addition, the Company also obtained a release in June 2008 of $3.1 million of the restricted cash related to the portion of the assessments that had received a favorable ruling.

 

During the fourth quarter of fiscal year 2010, the Spanish tax authorities ruled in favor of the Company on the assessed penalties related to the remaining tax assessments under appeal and indicated that the remaining underlying tax assessment would receive a favorable ruling on the same merits. As a result, the remaining $0.4 million of the indemnification obligation was reversed during the fourth quarter of fiscal year 2010. As of March 31, 2010, $4.1 million of restricted cash, which secures the bank guarantee related to the

tax assessment, has been classified as a current asset in the accompanying Consolidated Balance Sheet and is expected to be released in fiscal year 2011.

 

As discussed in Note (4) to the consolidated financial statements, we hold shares of Diamond’s Common Stock beneficially owned by third parties in an escrow account for the benefit of recovering from the third parties a portion of any payments made by us under the tax indemnification obligation from the sale transaction. As a result of the recent and remaining expected favorable rulings on the assessments that were appealed, the Company no longer expects to recover these shares and intends to release such shares in fiscal year 2011 as part of the favorable conclusion of the tax assessments. The change in the value of the recoverable escrow shares due to fluctuations in the value of our share price is reflected in income from discontinued operations on the Consolidated Statements of Operations and Comprehensive Income (Loss). The Company recorded a $0.3 million charge in the fourth quarter of fiscal year 2010 to reflect the expected release of the remaining escrow shares, which was offset by the $0.4 million reversal of the indemnification obligation discussed above.

 

Liquidity and Capital Resources

 

The following table describes our liquidity and financial position on March 31, 2009 and 2010:

 

 

 

 

Over the past two years, our principal sources of liquidity have consisted of existing cash and cash equivalents, cash flow from operations, and proceeds received upon the exercise of stock options by our employees. We anticipate that these sources will provide sufficient liquidity to fund our operating, capital, stock repurchase program and Common Stock dividend requirements at least through fiscal year 2011. These internal sources of liquidity have been adequate to support our operating and capital expenditure requirements as well as to provide the funding needed for our dividend payments and our stock repurchase program.

 

Our cash is invested in highly-liquid, short-term investments with little to no principal risk. These investments must be rated either AAA or A1/P1 by Standard & Poors, Moody’s or Fitch, Inc. We do not invest in nonconsolidated conduits, collateralized debt obligations, auction-rate securities, or structured investment vehicles, and we do not have any plans to invest in such investments in the foreseeable future.

On June 1, 2009, the Company announced that its Board of Directors approved a change in the Company’s dividend schedule from annual to quarterly. The Board declared the following quarterly cash dividends during the fiscal year ended March 31, 2010:

 

 

Our Board declared the following annual cash dividends during the fiscal years ended March 31, 2008, and 2009, respectively:

 

 

On July 31, 2009, the Company entered into a credit agreement with Harris N.A. (“Harris Bank”) to secure a revolving line of credit. Pursuant to the terms of the credit agreement, the Company may borrow up to $12.5 million. The extensions of credit from Harris Bank may be made in the form of loans and letters of credit, and certain other credit and financial accommodations. The Company is required to adhere to certain operating and financial covenants including a minimum net worth of $30.0 million and, when borrowing against the credit facility, a minimum interest coverage ratio of 1.5 to 1. The minimum interest coverage is measured as the ratio of earnings before interest and tax expense to interest expense for the past four fiscal quarters. For the fiscal quarters ended September 30, 2009, December 31, 2009, and March 31, 2010, calculation of these amounts shall be from April 1, 2009, through the respective balance sheet date.

 

The annual interest rate under this credit agreement is at the Company’s option, LIBOR plus one hundred and twenty five basis points or a base rate. The base rate is generally defined as the greatest of: a) the prime rate, b) the sum of the Federal Funds rate plus one half of one percent, or c) the one month LIBOR rate plus one hundred basis points. The Company agrees to pay an annual commitment fee to Harris Bank equal to one-quarter of one percent on the unused credit facility from August 1, 2009, through the termination date of the agreement. Pursuant to the terms of the agreement, outstanding letters of credit issued by Harris Bank for the Company cannot exceed $2.5 million and any outstanding obligations under the line of credit are secured by substantially all of the Company’s assets. As of March 31, 2010, the Company had letters of credit outstanding totaling $0.2 million and there have been no cash borrowings against the line of credit since it was established. The Harris Bank credit agreement expires July 31, 2011.

 

As of March 31, 2009 and through July 31, 2009, the Company maintained a revolving line of credit pursuant to the terms of a credit agreement with JP Morgan Chase Bank, N.A. (“Chase Bank”) under which the Company could borrow up to $20.0 million. Under the credit agreement, the Company was required to adhere to financial covenants. The Chase Bank credit agreement expired on July 31, 2009. The Company never borrowed cash against this line of credit during the two years it was in effect.

 

Cash Flows from Operating Activities

 

During the fiscal year ended March 31, 2010, net cash provided by operating activities was $22.4 million primarily resulting from the net income reported for the period, adjusted for depreciation and stock-based compensation expense, and the increase in accrued compensation partially offset by the increase in accounts receivable and deferred income taxes. The change in deferred tax asset includes the impact of a $6.1 million income tax deduction taken in fiscal year 2010 for financial statement purposes in excess of the deduction for

tax purposes. This portion of the change in deferred tax asset is not reflected in the Consolidated Statement of Cash Flows as there was no impact on net income in the current year.

 

Our billings for the fiscal year ended March 31, 2010 totaled $212.8 million compared to $177.2 million for the fiscal year ended March 31, 2009. The change in billings is due to an increase in consulting services revenue and reimbursable expenses from revenue generating projects. These amounts include value added tax (“VAT”) (which is not included in net revenue) and billings to clients for reimbursable expenses. Our gross accounts receivable balance of $23.4 million at March 31, 2010, represented 35 days of billings for the year ended March 31, 2010. At March 31, 2009, the gross receivable balance was $16.4 million which represented 35 days of billings for the year ended March 31, 2009. The increase in accounts receivable at March 31, 2010, as compared to March 31, 2009, was principally due to the higher revenue. An increase or decrease in accounts receivable and days of billings in accounts receivable between periods is primarily the result of the timing of the collection of payments and issuance of invoices, and therefore, it is not indicative of a trend in the business.

 

Cash Flows from Investing Activities

 

Cash used in investing activities was $1.3 million for capital expenditures in fiscal year 2010, which primarily consisted of computer hardware and software purchases and capitalized labor costs for the customization of internal use software.

 

Cash Flows from Financing Activities

 

Cash used in financing activities was $11.4 million for fiscal year 2010 resulting from Common Stock cash dividend distributions of $7.6 million, the repurchase of Diamond Common Stock totaling $4.9 million, and payment of employee withholding taxes from equity transactions of $0.6 million. These were offset by $1.6 million in proceeds from the issuance of Common Stock in connection with the Employee Stock Purchase Plan and option exercises, and $0.1 million in excess tax benefits from employee stock plans.

 

In February 2008, we completed a modified “Dutch Auction” tender offer and purchased 2.6 million shares of our Common Stock at a purchase price of $6.24 per share, for a cost of $16.5 million. The purchase price includes costs we recorded for advisory and agent fees related to the tender offer.

 

Contractual Obligations

 

At March 31, 2010, we had the following contractual obligations (amounts in thousands):

 

 

 

 

Off Balance Sheet Arrangements

 

We do not maintain any off-balance sheet arrangements that would have a material current or future impact on our financial condition or results of operations.

 

Treasury Stock Transactions

 

The Board has authorized, from time to time, the repurchase of the Company’s Common Stock in the open market or through privately negotiated transactions. During the period beginning with the inception of the Buy-back Program in October 1998 until the meeting of directors on September 14, 2004, the Board had authorized the repurchase of up to 6.0 million shares, of which 5.3 million shares were repurchased at an aggregate cost of $70.5 million as of September 14, 2004. At the meeting of directors on September 14, 2004, the Board restated the aggregate amount of repurchases that could be made under the Buy-back Program to be based on a maximum dollar amount rather than a maximum number of shares. The authorization approved the repurchase of shares under the Buy-back Program having an aggregate market value of no more than $25.0 million. In April 2005, July 2006, March 2007 and February 2008, the Board authorized the repurchase of an additional $50.0 million, $35.0 million, $50.0 million and $25.0 million, respectively, of shares of the Company’s outstanding Common Stock under the existing Buy-back Program, resulting in an aggregate market value of up to $185.0 million in addition to the 5.3 million shares repurchased prior to September 14, 2004. During the fiscal year ended March 31, 2010, we repurchased 0.8 million shares at an average price of $6.05, resulting in an aggregate cost of $4.9 million. During the period beginning with the inception of the Buy-back Program in October 1998 through March 31, 2010, the number of shares repurchased under the current and prior authorizations was 23.4 million shares at an aggregate cost of $233.4 million and an average price of $9.97 per share. As of March 31, 2010, the amount available for repurchase under the Buy-back Program was $22.1 million.

 

The Company, in an effort to reduce the treasury share balance, decided in the fourth quarter of fiscal year 2005 to issue treasury shares whenever shares are issued under its equity incentive plans. During the fiscal year ended March 31, 2010, the Company issued 0.9 million treasury shares related to RSU vestings, stock option and SAR exercises, ESPP purchases and restricted stock grants.

 

Summary

 

We believe that our current cash balances, existing lines of credit, and cash flow from existing and future operations will be sufficient to fund our operating requirements at least through fiscal year 2011. In addition, we could consider seeking additional public or private debt or equity financing to fund future growth opportunities. However, there is no assurance that such financing would be available to us on acceptable terms, or at all.

 

 

Foreign Currency Risk

 

Approximately 10% of our revenues and expenses are generated internationally in the respective countries of our foreign subsidiaries and are typically denominated in the local currency of each country. Accordingly, all foreign subsidiaries use the local currency as their functional currency. Our international business is subject to risks typical of any international business, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions and foreign exchange rate volatility. Our future results could be materially adversely impacted by changes in these or other factors.

 

The financial statements of our non-U.S. businesses are typically denominated in the local currency of the foreign subsidiary. As a result, we are also exposed to foreign exchange rate fluctuations as the financial results of foreign subsidiaries are translated into U.S. dollars in consolidation. As exchange rates fluctuate, these results, when translated, may vary from expectations and adversely impact overall expected results and profitability. However, approximately 90% of our revenues and expenses are denominated in the U.S. Dollar, which reduces the extent of foreign currency risk.

 

Interest Rate Risk

 

The Company invests its cash in highly liquid investments with original maturities of three months or less as well as in other short-term debt instruments. The interest rate risk associated with our investing activities at March 31, 2010, is not material in relation to our consolidated financial position, results of operations or cash flows. We have not used derivative financial instruments in fiscal year 2010 to alter the interest rate characteristics of our investment holdings.

 

The information required by this item is contained in the consolidated financial statements and schedules set forth in Item 15(a) under the captions “Financial Statements and Schedules” as a part of this report.

 

 

Not applicable.

 

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this annual report (the “Evaluation Date”). Based on this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that information relating to the Company (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:

 

(i) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

 

(ii) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

 

(iii) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Due to inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we assessed the effectiveness of our internal control over financial reporting as of March 31, 2010, using the criteria set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has concluded that our internal control over financial reporting is effective as of March 31, 2010. KPMG LLP, our independent registered public accounting firm, has issued an audit report on our internal control over financial reporting which is included herein.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting identified in connection with the evaluation referred to above that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Report of Independent Registered Public Accounting Firm

 

The Stockholders and Board of Directors

Diamond Management & Technology Consultants, Inc.:

 

We have audited Diamond Management & Technology Consultants, Inc.’s (the Company) internal control over financial reporting as of March 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, Diamond Management & Technology Consultants, Inc. maintained, in all material respects, effective internal control over financial reporting as of March 31, 2010 based on criteria in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Diamond Management & Technology Consultants, Inc. as of March 31, 2009 and 2010, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity and cash flows for each of the years in the three-year period ended March 31, 2010, and the financial statement schedule as listed in the accompanying index, and our reports dated June 9, 2010 expressed an unqualified opinion on those consolidated financial statements and accompanying schedule.

 

/s/ KPMG LLP

 

Chicago, Illinois

June 9, 2010

 

None.

 

Part III of this Annual Report on Form 10-K incorporates by reference portions of the Registrant’s definitive proxy statement, to be filed with the Securities and Exchange Commission no later than 120 days after the close of its fiscal year; provided that if such proxy statement is not filed with the Commission in such 120-day period, an amendment to this Form 10-K shall be filed no later than the end of the 120-day period.

 

 

Information with respect to Directors of the Company will be set forth in the Proxy Statement under the headings “The Board of Directors and its Committees” and “Election of Directors,” which information is incorporated herein by reference, or in an amendment to this Form 10-K. Information regarding the executive officers of the Company is included in Part I of this Form 10-K as permitted by Instruction 3 to Item 401(b) of Regulation S-K. Information required by Item 405 of Regulation S-K will be set forth in the Proxy Statement under the heading “Section 16(a) Beneficial Ownership Reporting Compliance,” which information is incorporated herein by reference, or in an amendment to this Form 10-K.

 

The Company has adopted a Code of Business Conduct and Ethics applicable to all employees, its Board of Directors and other representatives. The Code of Business Conduct and Ethics is supplemented by a Code of Ethics for Senior Financial Officers setting forth additional requirements applicable only to the Company’s senior officers (together with the Code of Business Conduct and Ethics, the “Code”). The Code is re-affirmed annually by existing employees. A copy of the Code is filed as Exhibit 14 to this Annual Report on Form 10-K.

 

 

Information with respect to executive compensation will be set forth in the Proxy Statement under the heading “Executive Compensation,” which information is incorporated herein by reference, or in an amendment to this Form 10-K.

 

 

The following table summarizes information about the Company’s equity incentive plans as of March 31, 2010:

 

 

 

 

Information with respect to security ownership of certain beneficial owners and management will be set forth in the Proxy Statement under the heading “Beneficial Ownership of Common Stock,” which information is incorporated herein by reference, or in an amendment to this Form 10-K.

 

 

Information with respect to certain relationships and related transactions is set forth in Note (17) to the Consolidated Financial Statements included herein, and in the Proxy Statement, which information is incorporated herein by reference, or in an amendment to this Form 10-K.

 

 

Information with respect to principal accountant fees and services will be set forth in the Proxy Statement under the heading “Principal Accountant Fees and Services,” which information is incorporated herein by reference, or in an amendment to this Form 10-K.

 

 

(a) Financial Statements and Schedules

 

(1) The consolidated financial statements and schedules listed in the index on page F-1 are filed as part of this Form 10-K.

 

All information for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission is either included in the consolidated financial statements or is not required under the related instructions or is inapplicable, and therefore has been omitted.

 

(2) see (a) (1) above

 

(3) see (b) below

 

(b) Exhibits

 

The following is a list of exhibits required by Item 601 of Regulation S-K filed as part of this Form 10-K. Where so indicated, exhibits which were previously filed are incorporated herein by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated in parentheses.

 

 

 

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Diamond Management & Technology Consultants, Inc.

 

Adam J. Gutstein

President and Chief Executive Officer

 

Date: June 9, 2010

 

POWER OF ATTORNEY

 

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Adam J. Gutstein, his true and lawful attorney-in-fact and agent, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each said attorney-in-fact and agent, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

The Stockholders and Board of Directors

Diamond Management & Technology Consultants, Inc.:

 

We have audited the accompanying consolidated balance sheets of Diamond Management & Technology Consultants, Inc. and subsidiaries (the Company) as of March 31, 2009 and 2010, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity and cash flows for each of the years in the three-year period ended March 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Diamond Management & Technology Consultants, Inc. and subsidiaries as of March 31, 2009 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2010, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Diamond Management & Technology Consultants, Inc.’s internal control over financial reporting as of March 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated June 9, 2010 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

 

Chicago, Illinois

June 9, 2010

DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.

 

CONSOLIDATED BALANCE SHEETS

March 31, 2009 and 2010

 

 

See accompanying notes to consolidated financial statements.

DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

Fiscal Years ended March 31, 2008, 2009 and 2010