Diamond Management & Technology Consultants (DTPI)

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 $0.7 million as of March 31, 2009. The balance was primarily comprised of the estimated gross amount of services to be rendered subsequent to the targeted 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 account for stock-based compensation in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment”. Under the fair value recognition provisions of this statement, 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 other direct costs can vary substantially from period to period depending largely on revenue. However, project personnel and related expenses are relatively stable in nature, and declines in revenue will often result in reduced utilization 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. SFAS No. 109, “Accounting for Income Taxes,” requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Management judgment is required in determining any valuation allowance recorded against the gross deferred tax assets. As of March 31, 2009, the remaining valuation allowance against deferred tax assets was $6.0 million attributable to net operating loss carryforwards in foreign and certain state jurisdictions, as well as unrealized U.S. federal capital loss carryforwards. The need to maintain a valuation allowance is reviewed on at least a quarterly basis.

 

 

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, 2009, our accounts receivable balance was $15.9 million, including unbilled accounts receivable of $6.7 million, and net of an allowance for doubtful accounts of $0.6 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 $0.7 million as of March 31, 2009. The balance was primarily comprised of the estimated gross amount of services to be rendered subsequent to the targeted 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 account for stock-based compensation in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment”. Under the fair value recognition provisions of this statement, 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 other direct costs can vary substantially from period to period depending largely on revenue. However, project personnel and related expenses are relatively stable in nature, and declines in revenue will often result in reduced utilization 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. SFAS No. 109, “Accounting for Income Taxes,” requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Management judgment is required in determining any valuation allowance recorded against the gross deferred tax assets. As of March 31, 2009, the remaining valuation allowance against deferred tax assets was $6.0 million attributable to net operating loss carryforwards in foreign and certain state jurisdictions, as well as unrealized U.S. federal capital loss carryforwards. The need to maintain a valuation allowance is reviewed on at least a quarterly basis.

 

 

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, 2009, our accounts receivable
balance was $15.9 million, including unbilled accounts
receivable of $6.7 million, and net of an allowance for
doubtful accounts of $0.6 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 $0.7 million as of
March 31, 2009. The balance was primarily comprised of the
estimated gross amount of services to be rendered subsequent to
the targeted 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 account for stock-based compensation in accordance with
Statement of Financial Accounting Standards (“SFAS”)
No. 123R, “Share-Based Payment”. Under the fair
value recognition provisions of this statement, 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 other direct costs can vary substantially from
period to period depending largely on revenue. However, project
personnel and related expenses are relatively stable in nature,
and declines in revenue will often result in reduced utilization
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. SFAS No. 109, “Accounting for
Income Taxes,” requires the establishment of a valuation
allowance to reflect the likelihood of realization of deferred
tax assets. Management judgment is required in determining any
valuation allowance recorded against the gross deferred tax
assets. As of March 31, 2009, the remaining valuation
allowance against deferred tax assets was $6.0 million
attributable to net operating loss carryforwards in foreign and
certain state jurisdictions, as well as unrealized
U.S. federal capital loss carryforwards. The need to
maintain a valuation allowance is reviewed on at least a
quarterly basis.

 

 

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, 2009, our accounts receivable
balance was $15.9 million, including unbilled accounts
receivable of $6.7 million, and net of an allowance for
doubtful accounts of $0.6 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 $0.7 million as of
March 31, 2009. The balance was primarily comprised of the
estimated gross amount of services to be rendered subsequent to
the targeted 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 account for stock-based compensation in accordance with
Statement of Financial Accounting Standards (“SFAS”)
No. 123R, “Share-Based Payment”. Under the fair
value recognition provisions of this statement, 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 other direct costs can vary substantially from
period to period depending largely on revenue. However, project
personnel and related expenses are relatively stable in nature,
and declines in revenue will often result in reduced utilization
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. SFAS No. 109, “Accounting for
Income Taxes,” requires the establishment of a valuation
allowance to reflect the likelihood of realization of deferred
tax assets. Management judgment is required in determining any
valuation allowance recorded against the gross deferred tax
assets. As of March 31, 2009, the remaining valuation
allowance against deferred tax assets was $6.0 million
attributable to net operating loss carryforwards in foreign and
certain state jurisdictions, as well as unrealized
U.S. federal capital loss carryforwards. The need to
maintain a valuation allowance is reviewed on at least a
quarterly basis.

 

 

DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.