8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): October 26, 2006

Diamond Management & Technology Consultants, Inc.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation) 000-22125
(Commission File Number) 36-4069408
(IRS Employer Identification Number)

John Hancock Center
875 North Michigan Avenue, Suite 3000
Chicago, Illinois 60611
(Address of principal executive offices)

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

Not Applicable
(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02. Results of Operations and Financial Condition

The registrant issued a press release on October 26, 2006 announcing financial results for its second fiscal quarter ended September 30, 2006 and issuing guidance for the third and fourth quarters and fiscal year ended 2007. A copy of the press release is attached hereto as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated herein by reference in its entirety.

In the attached press release, the Company discloses free cash flow from continuing operations, which is a non-GAAP term, defined as net cash provided by operating activities less capital expenditures and free cash flow from discontinued operations. Management believes that by providing more visibility on free cash flow and reconciling to net cash provided by operating activities below, the Company provides a consistent metric from which the quality of its business may be monitored.

Amounts in thousands:

	Three Months Ended
	September 30, 2006
Reported net cash provided by operating activities	$	7,724
Deduct: Cash used for capital expenditures, net		(830	)
Free cash flow from combined operations		6,894
Add back: Free cash flow used by discontinued operations		219
Free cash flow from continuing operations	$	7,113

Item 9.01. Financial Statements and Exhibits

(d) Exhibits:

Exhibit 99.1 — Press release dated October 26, 2006.

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SIGNATURE

      Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Diamond Management & Technology Consultants, Inc.
 

By /s/ Karl E. Bupp  

Karl E. Bupp 

Chief Financial Officer 

October 26, 2006

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EX-99.1

Exhibit 99.1

News Release

FOR IMMEDIATE RELEASE

Investor Contact:
Margaret M. Boyce
(312) 255-5784
margaret.boyce@diamondconsultants.com

Media Contact:
David Moon
312-255-4560
david.moon@diamondconsultants.com

DIAMOND REPORTS SECOND QUARTER RESULTS
Raises Net Revenue Growth Guidance to 16% to 20% for Fiscal Year 2007
Reports $23 Million Net Gain on Sale of Certain Portions of International Operations

CHICAGO, October 26, 2006—Diamond Management & Technology Consultants, Inc. (Nasdaq: DTPI), a premier global management and technology consulting firm, today announced results for its second quarter of fiscal year 2007 (ended September 30, 2006).

Financial Results

In the second quarter of fiscal year 2007, net revenue from continuing operations was $41.2 million up 13% compared to $36.6 million reported in the second quarter of fiscal year 2006. Net income was $24.6 million, or $0.73 per diluted share, primarily due to the $23.0 million net gain related to the sale of certain portions of its international operations during the second quarter.

“The market for our services is strong,” said Adam Gutstein, President and CEO of Diamond. “We are initiating and converting more opportunities, which resulted in 23 new clients in the second quarter.

“We are confident in the business and believe this is the right time to make investments for the future, to grow our business and to recognize people for their contributions to the Company’s performance,” Gutstein continued. “We are making important investments in people-related programs in the second, third and fourth quarters of the fiscal year that we expect will grow our revenue, improve profitability over the long term, and return superior results to shareholders.”

In the second quarter, net income from continuing operations was $18,000, or $0.00 per diluted share, reflecting a special bonus accrual of $4.6 million, payable in April 2007. The special bonus accrual expense, adjusted for income taxes, reduced second quarter earnings per diluted

(more)

Diamond Management & Technology Consultants, Inc. Second Quarter FY2007 Results/page 2

share for continuing operations by $0.08. This compares with $1.5 million, or $0.04 per diluted share, in the year-ago period. The investments the Company will make in the second half of fiscal year 2007 may have an impact on EPS in the third quarter, and are included in the Company’s updated guidance.

Free cash flow from continuing operations (cash flow from operating activities less capital expenditures and less free cash flow from discontinued operations) in the second quarter was $7.1 million. During the second quarter, the Company repurchased 1.0 million shares of its common stock, for $9.4 million. The Company ended the quarter with cash and cash equivalents of $105.9 million.

Diamond served 63 clients in continuing operations during the second quarter of fiscal year 2007, compared with 51 clients in the first quarter and 43 in the year-ago period. The Company added 23 new clients in the second quarter compared with 12 in the first quarter and 17 in the year-ago period. The top five clients represented 41% of revenue during the second quarter compared to 40% in the first quarter and 40% in the year-ago period. The Company ended the second quarter with 502 client-serving professionals, up from 449 in the first quarter and 454 in the year-ago period.

Shareholder Rights Plan Terminated

As part of its ongoing review of policies, procedures and corporate governance, on September 11, 2006, the Company executed an amendment to terminate its shareholder rights plan (commonly referred to as a “poison pill”). The amendment accelerated the expiration date of the rights under the plan. As a result, the plan expired on October 1, 2006.

Business Outlook

“Our improving trends and the continued strong market make us more positive on our outlook,” said Gutstein. “As a result, we are raising net revenue guidance for the third quarter and full fiscal year 2007.”

Third Quarter FY07
In the third quarter, the Company anticipates its continuing operations to generate net revenue of $42 to $45 million, pretax income of $2.5 to $5.5 million, earnings per diluted share of $0.03 to $0.08, and free cash flow of $6 to $8 million. The Company expects its income tax rate to be between 50% and 65%.

Fourth Quarter FY07
In the fourth quarter, the Company anticipates its continuing operations to generate net revenue of $44 to $47 million, pretax income of $5 to $6 million, earnings per diluted share of $0.08 to $0.10, and free cash flow of $6 to $8 million. The Company expects its income tax rate to be between 45% and 50%.

Diamond Management & Technology Consultants, Inc. Second Quarter FY2007 Results/page 3

Fiscal Year 2007
For fiscal year 2007, the Company is raising net revenue growth guidance to 16% to 20%. It anticipates its continuing operations to generate net revenue in the range of $168 to $174 million, pretax income of $12 to $16 million, earnings per diluted share of $0.17 to $0.24 and free cash flow of $18 to $23 million. The Company expects its income tax rate to be between 46% and 50%. Reported earnings per diluted share will include an additional $0.70 from discontinued operations from the first half of the fiscal year.

Conference Call
Diamond management will host a conference call today, October 26, 2006, at 8:00 am CT to discuss the results of the quarter. The dial-in number for the conference call is 888-391-0075 for North American callers and 212-676-4900 for international callers. The replay will be available until November 2, 2006 and can be accessed by calling 402-977-9140, then entering passcode number 21306664. The call will be broadcast live and archived on Diamond’s web site at www.diamondconsultants.com.

About Diamond
Diamond (Nasdaq: DTPI) is a premier global management consulting firm that helps leading organizations develop and implement growth strategies, improve operations, and capitalize on technology. Mobilizing multidisciplinary teams from our highly skilled strategy, technology, and operations professionals worldwide, Diamond works collaboratively with clients, unleashing the power within their own organizations to achieve sustainable business advantage. To learn more visit www.diamondconsultants.com.

Forward-Looking Statements
Statements in this press release that do not involve strictly historical or factual matters are forward-looking statements within the meaning of the “safe harbor” provisions of the federal securities laws. Forward-looking statements involve risks and uncertainties and speak only as of the date of this release. Actual results may differ materially due to such factors as the ability of the Company to maintain its pricing and utilization rates and control its costs, recruitment and retention of personnel, possible termination of projects by major clients, variations in the timing, initiation or completion of client assignments, absence of long-term contracts with clients, growth management, project risks, and technological advances. The risks and uncertainties associated with our business are highlighted in our filings with the SEC, including our Form 10-Q for the first quarter of fiscal year 2007, ended June 30, 2006.

DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

	For the Three Months						For the Six Months
	Ended September 30,						Ended September 30,
	2006			2005			2006			2005
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
REVENUE:
Net revenue	$	41,163		$	36,554		$	82,059		$	72,151
Reimbursable expenses		5,447			4,900			10,781			9,103
Total revenue		46,610			41,454			92,840			81,254
PROJECT PERSONNEL EXPENSES:
Project personnel costs before reimbursable expenses		32,510			22,997			60,483			47,268
Reimbursable expenses		5,447			4,900			10,781			9,103
Total project personnel expenses		37,957			27,897			71,264			56,371
GROSS MARGIN		8,653			13,557			21,576			24,883
OTHER OPERATING EXPENSES:
Professional development and recruiting		2,009			1,572			4,252			2,982
Marketing and sales		650			961			1,359			1,589
Management and administrative support		7,341			6,230			13,948			12,171
Restructuring charges (recovery)		—			2,350			(24	)		2,350
Total other operating expenses		10,000			11,113			19,535			19,092
INCOME (LOSS) FROM OPERATIONS		(1,347	)		2,444			2,041			5,791
OTHER INCOME, NET		1,118			868			1,980			1,554
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(229	)		3,312			4,021			7,345
INCOME TAX EXPENSE (BENEFIT)		(247	)		1,861			1,915			4,715
INCOME FROM CONTINUING OPERATIONS AFTER INCOME TAXES		18			1,451			2,106			2,630
DISCONTINUED OPERATIONS:
Gain on disposal of discontinued operations including income tax benefit of $574		23,036			—			23,036			—
Income (loss) from discontinued operations, net of income taxes		1,549			(11,672	)		872			(14,373	)
DISCONTINUED OPERATIONS, NET OF INCOME TAXES		24,585			(11,672	)		23,908			(14,373	)
NET INCOME (LOSS)	$	24,603		$	(10,221	)	$	26,014		$	(11,743	)
BASIC INCOME (LOSS) PER SHARE OF COMMON STOCK:
INCOME FROM CONTINUING OPERATIONS	$	0.00		$	0.04		$	0.06		$	0.08
INCOME (LOSS) FROM DISCONTINUED OPERATIONS		0.75			(0.35	)		0.73			(0.43	)
NET INCOME (LOSS)	$	0.75		$	(0.31	)	$	0.80		$	(0.35	)
DILUTED INCOME (LOSS) PER SHARE OF COMMON STOCK:
INCOME FROM CONTINUING OPERATIONS	$	0.00		$	0.04		$	0.06		$	0.07
INCOME (LOSS) FROM DISCONTINUED OPERATIONS		0.73			(0.34	)		0.70			(0.40	)
NET INCOME (LOSS)	$	0.73		$	(0.29	)	$	0.77		$	(0.33	)
SHARES USED IN COMPUTING BASIC INCOME (LOSS) PER SHARE		32,681			33,270			32,625			33,622
SHARES USED IN COMPUTING DILUTED INCOME (LOSS) PER SHARE		33,514			34,657			33,921			36,110

The following amounts of stock-based compensation expense (“SBC”) are included in each of the respective expense categories reported above:

	For the Three Months				For the Six Months
	Ended September 30,				Ended September 30,
	2006		2005		2006		2005
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Project personnel costs before reimbursable expenses	$	2,913	$	2,027	$	5,743	$	4,234
Professional development and recruiting		22		16		56		28
Marketing and sales		115		96		167		202
Management and administrative support		719		618		1,563		1,039
SBC from continuing operations	$	3,769	$	2,757	$	7,529	$	5,503
SBC included in income (loss) from discontinued operations		109		616		527		1,918
	$	3,878	$	3,373	$	8,056	$	7,421
SBC recorded against the gain on disposal of discontinued operations		1,379		—		1,379		—
Total SBC	$	5,257	$	3,373	$	9,435	$	7,421

 
DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

	September 30,			March 31,
ASSETS	2006			2006
	(Unaudited)			(Unaudited)
Current assets:
Cash and cash equivalents	$	105,877		$	75,392
Accounts receivable, net of allowance of $616 and $629 as of September 30, 2006 and March 31, 2006, respectively		15,688			11,908
Deferred tax asset — current portion		1,861			1,457
Prepaid expenses and other current assets		5,522			3,105
Current assets from discontinued operations		—			21,097
Total current assets		128,948			112,959
Computers, equipment, leasehold improvements and software, net		2,314			1,431
Deferred tax asset — long-term portion		8,620			8,008
Other assets		1,882			3,322
Non-current assets from discontinued operations		—			2,767
Total assets	$	141,764		$	128,487
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,179		$	2,260
Income taxes payable		1,190			899
Share repurchase payable		854			—
Tender offer purchase payable		1,805			—
Accrued compensation		6,691			4,966
Other accrued liabilities		14,083			9,385
Current liabilities of discontinued operations		—			14,746
Total current liabilities		26,802			32,256
Restructuring accrual, less current portion		456			527
Net tax indemnification obligation		3,434			—
Non-current liabilities from discontinued operations		—			3,816
Total liabilities		30,692			36,599
Stockholders’ equity:
Common stock, 32,223 shares outstanding as of September 30, 2006 and 32,499 shares outstanding as of March 31, 2006		544,825			546,293
Accumulated other comprehensive income (loss)		(2,889	)		2,473
Accumulated deficit		(430,864	)		(456,878	)
Total stockholders’ equity		111,072			91,888
Total liabilities and stockholders’ equity	$	141,764		$	128,487

 
DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

	For the Three Months						For the Six Months
	Ended September 30,						Ended September 30,
	2006			2005			2006			2005
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Cash flows from operating activities:
Net income (loss)	$	24,603		$	(10,221	)	$	26,014		$	(11,743	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Restructuring charges (recovery)		2			11,157			(478	)		11,157
Depreciation and amortization		527			704			929			1,418
Stock-based compensation		3,878			3,373			8,056			7,421
Gain on sale of discontinued operations		(22,462	)		—			(22,462	)		—
Deferred income taxes		(1,593	)		1,519			(1,034	)		4,104
Changes in assets and liabilities:
Accounts receivable		(6,417	)		(2,421	)		(9,471	)		(649	)
Prepaid expenses and other		(264	)		131			(513	)		(411	)
Accounts payable		(15	)		(78	)		(554	)		(705	)
Restructuring accrual		(260	)		(55	)		(1,191	)		(904	)
Other assets and liabilities		9,725			2,406			8,122			(5,354	)
Net cash provided by operating activities		7,724			6,515			7,418			4,334
Cash flows from investing activities:
Net proceeds from sale of discontinued operations		28,049			—			28,049			—
Net redemptions of short-term investments		—			—			—			55,975
Capital expenditures, net		(830	)		(386	)		(1,655	)		(765	)
Other assets		47			—			47			60
Net cash provided by (used in) investing activities		27,266			(386	)		26,441			55,270
Cash flows from financing activities:
Stock option and employee stock purchase plan proceeds		868			2,314			1,542			5,715
Shares withheld for minimum withholding taxes		(292	)		(683	)		(2,500	)		(2,382	)
Proceeds due to employees from employee sales of common stock		2,431			—			2,431			—
Tax benefits from employee stock plans, net of adjustments		(2	)		8			1,265			49
Purchase of treasury stock		(8,553	)		(16,791	)		(8,553	)		(25,474	)
Net cash used in financing activities		(5,548	)		(15,152	)		(5,815	)		(22,092	)
Effect of exchange rate changes on cash		(145	)		(242	)		117			(822	)
Net increase (decrease) in cash and cash equivalents		29,297			(9,265	)		28,161			36,690
Cash and cash equivalents at beginning of period (1)		76,580			88,225			77,716			42,270
Cash and cash equivalents at end of period (1)	$	105,877		$	78,960		$	105,877		$	78,960
Non-cash financing activities:
Treasury stock repurchase obligation	$	854		$	1,111		$	854		$	1,111
Tender offer purchase obligation		1,805			—			1,805			—
Reclassification of stock-based compensation balance to additional paid-in capital		—			2,174			—			2,174

(1) Cash and cash equivalents includes $2,324 of cash and cash equivalents classified as discontinued operations as of March 31, 2006.