-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MmeLSJdPbjEgJZL3mSDyBZ5diioYt7gJ6hWcj+yyRp8E1eFgAjAocg51BgwzEQHY mgj0tjEjLKkH1d91sBkVbg== 0000899243-98-000034.txt : 19980112 0000899243-98-000034.hdr.sgml : 19980112 ACCESSION NUMBER: 0000899243-98-000034 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 18 FILED AS OF DATE: 19980109 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DA CONSULTING GROUP INC CENTRAL INDEX KEY: 0001051209 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 760418488 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-43989 FILM NUMBER: 98503980 BUSINESS ADDRESS: STREET 1: 5847 SAN FELIPE RD STE 3700 CITY: HOUSTON STATE: TX ZIP: 77057 BUSINESS PHONE: 7133613000 MAIL ADDRESS: STREET 1: 5847 SAN FELIPE RD STREET 2: STE 3700 CITY: HOUSTON STATE: TX ZIP: 77057 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 9, 1998 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- DA CONSULTING GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) --------------- TEXAS 7389 76-0418488 (STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 5847 SAN FELIPE ROAD, SUITE 3700 HOUSTON, TEXAS 77057 (713) 361-3000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) --------------- MICHAEL J. MACKEY CHIEF FINANCIAL OFFICER DA CONSULTING GROUP, INC. 5847 SAN FELIPE ROAD, SUITE 3700 HOUSTON, TEXAS 77057 (713) 361-3000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: BARRY M. ABELSON, ESQUIRE GARY W. ORLOFF, ESQUIRE PEPPER HAMILTON LLP BRACEWELL & PATTERSON, L.L.P. 3000 TWO LOGAN SQUARE 711 LOUISIANA STREET, SUITE 2900 EIGHTEENTH AND ARCH STREETS SOUTH TOWER, PENNZOIL PLACE PHILADELPHIA, PA 19103-2799 HOUSTON, TX 77002-2781 (215) 981-4000 (713) 223-2900 --------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 424(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED PROPOSED AMOUNT MAXIMUM MAXIMUM TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE - ----------------------------------------------------------------------------------------------- Common Stock, par value $0.01................. 2,875,000 Shares $13.00 $37,375,000 $11,026
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Includes 375,000 shares of Common Stock subject to the over-allotment option granted by the Company and the Selling Shareholders to the Underwriters. (2) Estimated solely for purposes of determining the registration fee in accordance with Rule 457(a) under the Securities Act of 1933. --------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED JANUARY 9, 1998 PROSPECTUS 2,500,000 SHARES LOGO [LOGO OF DA CONSULTING GROUP, INC. APPEARS HERE] COMMON STOCK Of the 2,500,000 shares of Common Stock offered hereby, 1,700,000 are being sold by DA Consulting Group, Inc. ("DACG" or the "Company") and 800,000 are being sold by the Selling Shareholders. See "Principal and Selling Shareholders." The Company will not receive any of the proceeds from the sale of shares by the Selling Shareholders. Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently anticipated that the initial public offering price will be between $11.00 and $13.00 per share. See "Underwriting" for information relating to the determination of the initial public offering price. Application has been made to list the Common Stock on the Nasdaq National Market under the symbol "DACG." SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON STOCK OFFERED HEREBY. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PROCEEDS TO PRICE TO UNDERWRITING PROCEEDS TO SELLING PUBLIC DISCOUNT(1) COMPANY(2)(3) SHAREHOLDERS(3) - -------------------------------------------------------------------------------- Per Share................... $ $ $ $ Total(3).................... $ $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) The Company and the Selling Shareholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated at $1,000,000. (3) The Company and certain Selling Shareholders of the Company have granted to the Underwriters a 30-day option to purchase up to an aggregate of 375,000 additional shares of Common Stock solely to cover over-allotments, if any. See "Underwriting." If all such shares are purchased, the total Price to Public, Underwriting Discount, Proceeds to Company, and Proceeds to Selling Shareholders will be $ , $ , $ , and $ , respectively. The Company will not receive any of the proceeds from the sale of shares by the Selling Shareholders. The shares of Common Stock are offered by the several Underwriters when, as and if delivered to and accepted by them and subject to their right to reject orders in whole or in part. It is expected that delivery of the certificates for the shares of Common Stock will be made on or about , 1998. WILLIAM BLAIR & COMPANY ROBERT W. BAIRD & CO. INCORPORATED PENNSYLVANIA MERCHANT GROUP LTD THE DATE OF THIS PROSPECTUS IS , 1998 [LOGO OF DA CONSULTING GROUP, INC.] [Photograph with the following caption appears here: Our mission is to ensure maximized return on our clients' long term IT investments by continuously improving the performance of their people as they work with technology. Our end-user support solutions are designed to ensure that education, communication and performance support enable the end-user to truly harness the power of corporate IT investments.] SOLUTIONS FOR PEOPLE AND TECHNOLOGY(TM) The Company intends to furnish to its shareholders annual reports containing audited financial statements and to make available quarterly reports containing unaudited financial statements for the first three quarters of each year. DA Foundation(R) and DA Team Teach(R) are registered trademarks and/or service marks of the Company. The Company also claims common law trademark rights in DA Consulting Group(TM), DA(TM), and the DACG logo, for which the Company has filed applications for federal registration in the United States Patent and Trademark Office. Furthermore, the Company claims common law trademark rights in various other marks, including, without limitation, DA Cornerstone(TM), DA PASS(TM), and the slogan Solutions for People and Technology(TM). All other trademarks or service marks appearing in this Prospectus are trademarks or service marks of the companies that utilize them. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING, AND SHORT-COVERING TRANSACTIONS IN THE COMMON STOCK AND THE IMPOSITION OF PENALTY BIDS DURING AND AFTER THE OFFERING. SEE "UNDERWRITING." PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and the Consolidated Financial Statements and related Notes thereto appearing elsewhere in this Prospectus. Unless indicated otherwise, all information contained in this Prospectus (i) assumes that the Underwriters' over-allotment option is not exercised and (ii) reflects a 4.2-for-1 split of the shares of Common Stock to be effected prior to the date of this Prospectus. See "Underwriting" and "Description of Capital Stock." Unless the context otherwise indicates, all references to the "Company" or "DACG" mean DA Consulting Group, Inc., its predecessors, and its subsidiaries. THE COMPANY DA Consulting Group, Inc. is a leading international provider of end-user support solutions to companies which are implementing enterprise resource planning ("ERP") software systems. Through its more than 545 employees in 15 offices worldwide, the Company provides customized change communications, education, and performance support services to its clients. Since 1988, the Company has provided services to over 275 clients, including 49 of the Fortune Global 500 and three of the Fortune Global 10. The number of clients served by the Company has increased from 25 in 1992 to 115 in the 12 months ended September 30, 1997. The Company's clients in 1997 included Bristol-Myers Squibb Company, Cadbury-Schweppes PLC, Compaq Computer Corporation, Hercules, Inc., Hewlett Packard Company, and Shell Petroleum, Inc. The Company's client base is diversified, with no single client representing more than 10% of the Company's revenue in 1996 or in the nine month period ended September 30, 1997. Recognizing the global nature of the ERP software market and the importance of being able to serve multi-national clients, the Company has built a substantial international presence. In addition to its four offices in the U.S., the Company also has 10 offices in Canada, Mexico, the United Kingdom, France, South Africa, Australia, and Singapore. ERP software systems, including those offered by SAP AG ("SAP"), J.D. Edwards & Company ("J.D. Edwards"), BAAN Company B.V. ("BAAN"), and Oracle Corporation ("Oracle"), are being implemented around the world by large and mid-size companies that are re-engineering their businesses and enhancing their information technology systems to remain competitive. Industry sources estimate that the worldwide market for ERP software license fees was $5.2 billion in 1996 and is expected to grow at a compound annual rate of 30.0% through 2001 to $19.0 billion. The Company believes that approximately three times the amount of license fees is spent on systems integration and implementation services, including end-user training and tools. In order for companies to maximize their returns on these substantial investments, it is critical that the end-users of these new ERP applications, whose job functions and work patterns are often substantially changed as a result of the new technology, are provided with the necessary training and tools to utilize these systems effectively. SAP has recommended that 12% of the expenses budgeted by its clients for systems integration and implementation services be dedicated to end-user training and tools. The Company was founded in 1984 in Houston, Texas as an end-user support company providing documentation services to the oil and gas industry. In 1988, the Company expanded its end-user support services to include training by providing a support solution in connection with one of the first major English language installations of SAP software in the world. SAP is a major international software company and the leading vendor of ERP software for business applications. In 1996, it is estimated that SAP represented approximately 34% of the $5.2 billion market for ERP software applications. Because of the substantial market opportunity represented by SAP, by 1990, the Company had made SAP end-user support its primary focus. In the nine months ended September 30, 1997, revenue from clients implementing SAP software represented 86% of the Company's billed consulting revenue. By focusing on end- user support, the Company has been successful in 3 institutionalizing its knowledge base and has developed proprietary content and reference materials, the DA Foundation(R), that are applied in developing customized solutions for each client. The Company has also developed DA Cornerstone(TM), its methodology for delivering consistently high quality service to its clients. More recently, the Company has broadened its complement of end-user support services by also providing change communications consulting and on-line help tools and by expanding its ERP capabilities to include applications such as J.D. Edwards, BAAN, and Oracle. The Company's staff has grown from 51 as of December 31, 1992 to over 545 as of September 30, 1997. When opening new offices, the Company uses core groups of existing senior Company consultants in order to transfer its strong corporate culture and its commitment to high quality service to new personnel in geographically and culturally disparate locations. In addition, DACG has developed a comprehensive series of training programs covering technical skills, project methodologies, and management and sales techniques to accelerate the development of its professional staff, expand their skills, and permit them to attain increasing levels of responsibility within the organization. The Company has experienced annual turnover of less than 20% for the last three years, which it believes is the result of providing its employees with a challenging and fulfilling work environment, a competitive compensation structure, and broad-based equity ownership. Upon completion of this offering, 256 employees (representing approximately one-half of the Company's employees as of September 30, 1997) will own, in the aggregate, approximately 20% of the post-offering, fully diluted equity of the Company. Capitalizing on the rapid growth of ERP implementations, the Company has increased its revenue from $3.3 million in 1992 to $26.2 million in 1996. For the nine months ended September 30, 1997, the Company generated $30.1 million of revenue, a 57.9% increase over the same period in 1996. Demand for the Company's services has expanded rapidly and the Company believes that, as companies around the world implement ERP systems and continue to enhance their technology to remain competitive, these companies will continue to require end- user support services. The Company's growth strategy includes (i) continued international expansion to maximize global market share and to serve multi- national clients, (ii) further development of relationships with leading ERP vendors, (iii) leveraging its large blue-chip client base, (iv) continued expansion of its consulting and sales organizations, and (v) extensions of its service offerings. The Company is a Texas corporation. Its executive offices are located at 5847 San Felipe Road, Suite 3700, Houston, Texas 77057 and its telephone number is (713) 361-3000. The Company's address on the world wide web is www.dacg.com. THE OFFERING Shares Offered by the Company............. 1,700,000 shares Shares Offered by the Selling Shareholders............................. 800,000 shares Shares Outstanding Immediately After the Offering................................. 6,509,378 shares (1) Use of Proceeds........................... To repay approximately $2.6 million in debt and for general corporate purposes, including working capital and possible acquisitions Proposed Nasdaq National Market Symbol.... DACG
- -------- (1) Includes 362,208 shares of Common Stock sold by the Company in December 1997. Excludes 448,589 shares of Common Stock reserved for issuance upon the exercise of outstanding stock options at a weighted average exercise price of $5.91 per share and 210,000 shares of Common Stock reserved for issuance upon the exercise of stock options which will be granted as of the date of this Prospectus at the initial public offering price per share. See "Management--Executive Compensation" and "Management--Employee Benefit Plans--1997 Stock Option Plan." 4 SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------------------- ----------------- 1992 1993 1994 1995 1996 1996 1997 ------ ------ ------ ------- ------- -------- -------- INCOME STATEMENT DATA: Revenue................ $3,316 $4,179 $7,501 $14,618 $26,202 $ 19,039 $ 30,056 Cost of revenue........ 1,956 2,484 4,028 7,661 14,190 10,219 16,702 ------ ------ ------ ------- ------- -------- -------- Gross profit........... 1,360 1,695 3,473 6,957 12,012 8,820 13,354 Selling and marketing expense............... 7 84 450 1,072 1,953 1,328 2,578 Development expense.... -- -- -- 707 1,250 926 836 General and administrative expense............... 1,250 1,482 2,629 4,014 6,597 4,621 8,362 Employee stock-related charge(1)............. -- -- -- -- 1,858 898 -- ------ ------ ------ ------- ------- -------- -------- Operating income....... 103 129 394 1,164 354 1,047 1,578 Other income (expense), net................... (58) (22) (77) (84) 95 64 (63) ------ ------ ------ ------- ------- -------- -------- Income before taxes.... 45 107 317 1,080 449 1,111 1,515 Provision for income taxes................. 27 44 119 417 141 398 575 ------ ------ ------ ------- ------- -------- -------- Net income............. $ 18 $ 63 $ 198 $ 663 $ 308 $ 713 $ 940 ====== ====== ====== ======= ======= ======== ======== Net income per share... $ 0.07 $ 0.17 $ 0.19 Weighted average shares outstanding........... 4,463 4,274 5,054 OPERATING DATA: Number of employees(2).......... 51 65 140 257 353 357 548 Number of clients served................ 25 31 52 64 98 73 109 Total offices(2)....... 2 2 3 3 10 10 14 Offices outside of the U.S.(2)............... 1 1 2 2 8 8 10
SEPTEMBER 30, 1997 ---------------------- ACTUAL AS ADJUSTED(3) ------- -------------- BALANCE SHEET DATA: Cash and cash equivalents............................... $ 683 $16,512 Working capital......................................... 2,100 20,575 Total assets............................................ 14,070 29,683 Total debt.............................................. 2,646 -- Shareholders' equity.................................... 4,602 23,077
- -------- (1) Represents a charge for stock awarded to employees and payments in lieu thereof. Exclusive of this charge, operating income, net income, and net income per share would have been $2,212,000, $1,460,000, and $0.33, respectively, in the year ended December 31, 1996, and $1,945,000, $1,270,000, and $0.30, respectively, in the nine month period ended September 30, 1996. (2) At period end. (3) Adjusted to give effect to the sale of the shares of Common Stock offered by the Company hereby (at an assumed initial public offering price of $12.00 per share), the application of the estimated net proceeds therefrom, and the repayment to the Company of outstanding shareholder notes of $503,000, upon completion of this offering. See "Use of Proceeds" and "Certain Relationships and Related Transactions." 5 RISK FACTORS In addition to the other information in this Prospectus, the following factors should be considered carefully in evaluating an investment in the shares of Common Stock offered hereby. This Prospectus contains certain forward-looking statements that involve substantial risks and uncertainties. When used in this Prospectus, the words "anticipate," "believe," "estimate," "expect," and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements. From time to time, the Company or its representatives have made or may make forward- looking statements, orally or in writing. Such forward-looking statements may be included in various filings of the Company with the Securities and Exchange Commission (the "Commission"), or in press releases or oral statements made by or with the approval of an authorized executive officer of the Company. The Company's actual results, performance or achievements may differ materially from those expressed or implied by these forward-looking statements as a result of certain factors, including those set forth below and elsewhere in this Prospectus. Dependence on SAP and the ERP Software Market. A substantial portion of the Company's revenue is derived from the provision of end-user support services in connection with ERP software implementations by the Company's clients. Revenue from providing end-user support services to clients implementing SAP software represented 80%, 83%, and 86% of the Company's billed consulting revenue during the years ended December 31, 1995 and 1996 and the first nine months of 1997, respectively. The Company's future success in its SAP-related services depends largely on its continued relationships with and authorizations from SAP. These relationships and authorizations are generally subject to termination by SAP on short notice. In addition, SAP could further modify its software in order to make the implementation cycles for its new releases shorter and less complicated, thereby possibly reducing the need for customized end-user support, or SAP could increase its provision of end-user support services for its software applications. SAP could also cease referring the Company to its customers as a provider of end-user support services. Any one or more of these circumstances could have a material adverse effect on the Company. The Company is therefore dependent on the continued growth of the ERP software market and, in particular, the continued market acceptance of SAP software. Any deterioration in such market or market acceptance would have a material adverse effect on the Company. The Company believes that the "Year 2000" problem has accelerated ERP implementations as many companies are upgrading their technology in lieu of incurring the substantial costs associated with modifying legacy computer code. There can be no assurance that the rate of ERP implementations will continue at the same pace after January 1, 2000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Market." Management of a Geographically-Dispersed Organization. The Company currently operates offices in seven countries on five continents. The successful operation of such geographically dispersed offices requires considerable management and financial resources and results in significant ongoing expense. Additionally, expansion into new geographic regions requires significant start-up costs which may negatively impact the Company's results of operations during periods of such expansion. International operations and the provision of services in foreign markets are subject to risks involving currency exchange rate fluctuations, trade barriers, exchange controls, national and regional labor strikes, civil disturbances and war, and increases in duties, taxes, and governmental royalties, as well as changes in laws and policies governing operations of foreign-based companies. There can be no assurance that such factors will not have a material adverse effect on the Company. The Company's growth strategy includes continued expansion of its international operations through the addition of new offices. There can be no assurance that the Company will be successful in opening or managing such new offices. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Business Strategy." Fluctuating Quarterly Results; Project Risks. The Company's operating results have fluctuated from period to period in the past and may fluctuate significantly in future periods. These variations result from a number of factors, such as the number and nature of client projects commenced or completed during a period, the timing of new office openings, the expansion of service offerings to include support solutions for new ERP software vendors, the utilization rates of the Company's professional staff, and the number of business days in a 6 particular period. It is difficult to forecast the timing of revenue because project cycles depend on factors such as the size and scope of assignments and circumstances specific to particular clients or industries. The Company could fail to complete a project under the guaranteed "not-to-exceed" or fixed fee price set forth in certain of the Company's contracts, exposing the Company to unrecoverable budget overruns, which could materially adversely affect the Company. Additionally, client engagements are generally terminable with little or no notice or penalty, and the Company's failure to meet a client's expectations could damage its relationship with that client and cause the client to terminate the Company's engagement. A client's unanticipated decision to terminate or postpone a project may result in higher than expected numbers of unassigned Company professionals or severance costs, which could materially adversely affect the Company's results of operations and could also result in damage to the Company's reputation, thereby adversely affecting its ability to attract business from new or existing clients. Typically, the Company's expenses relating to a new office will exceed for a period of time the revenues attributable to that office. In addition, the expansion of the Company's service offerings to include support solutions for new ERP software vendors or upgrades of existing software requires significant up front expenses. Accordingly, the timing and frequency of office openings and service expansions could adversely affect the Company's results of operations. The Company's most significant expenses relate to salaries and benefits for its professional staff. Since these expenses are generally fixed, the Company's results of operations in a particular period may be materially adversely affected if revenue falls below expectations. Staff utilization rates vary from period to period due not only to changes in the Company's volume of business, but also to the timing of employee vacations, hiring and training, and project terminations or postponements. In the past, the Company has experienced some seasonality in its business, with somewhat lower levels of revenue and profitability in the first and fourth quarters of the year. This trend has resulted from the timing of project start-ups and completions, as well as from reduced staff utilization due to holidays and vacations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Need to Attract and Retain Professional Employees. The Company's continued success and future growth will depend upon its ability to attract, develop and retain a sufficient number of highly skilled, motivated professional employees. Competition for personnel qualified to deliver most of the Company's services is intense, and many of the companies with which the Company competes for qualified professionals have substantially greater financial and other resources than the Company. Competition for qualified personnel can be expected to increase as competition in the Company's service offerings increases. There can be no assurance that the Company will be able to recruit, develop, and retain a sufficient number of highly skilled, motivated professionals to compete successfully. In addition, competition for qualified personnel may also lead to increased costs for such personnel which the Company may not be able to offset by increases in billing rates. The loss of a significant number of professional personnel is likely to have a material adverse effect on the Company, particularly its ability to complete existing projects or secure new projects. See "Business--Recruiting and Personnel Development." Substantial Competition. The market for the Company's services is highly competitive and is subject to low barriers to entry and rapid change. The Company faces competition for client assignments from a number of companies having significantly greater financial, technical, and marketing resources and greater name recognition than the Company. Principal competitors for the Company's services include the consulting practices of the large international accounting firms, the in-house service units of the ERP vendors, the professional services groups of many large technology and management consulting companies, and smaller niche service providers. Many of these companies have substantially greater resources than the Company and also provide implementation services needed by clients. There can be no assurance that such competitors will not focus more on providing end-user support services in the future. Clients may also elect to use their internal resources to satisfy their needs for the services the Company provides. There can be no assurance that the Company will compete successfully with existing or new competitors or with potential clients' internal resources. The Company may also face competition as a result of the increasing acceptance in the workplace of computer-based training, an approach which the Company, through a relationship with CBT Systems, Ltd. ("CBT Systems"), currently uses as one basis for providing educational support to its clients' end-users. As computer-based training becomes more accepted in the workplace, and the related technology is further developed, this training approach may replace some or all 7 of the non-computer-based training support provided by the Company to its clients. In addition, the growth of computer-based training usage may encourage other competitors to enter the market for the Company's services. One or more of these circumstances, or the termination of the Company's relationship with CBT Systems, could have a material adverse effect on the Company. See "Business--Competition." Dependence on Key Personnel. The success of the Company is highly dependent upon the efforts and abilities of Nicholas H. Marriner, its Chief Executive Officer, Patrick J. Newton, its Chief Operating Officer, and Michael J. Mackey, its Chief Financial Officer, as well as on its other key employees. Each of the Company's executive officers is party to an employment agreement with the Company containing customary noncompetition, nondisclosure, and nonsolicitation covenants. There can be no assurance that these agreements will prevent the loss of any of these individuals or Company business. The loss of the services of any of these key executives could have a material adverse effect on the Company. See "Management." Management of Growth. The Company's rapid growth has placed significant demands on the Company's management, administrative, operating and financial resources, particularly given the geographically-dispersed nature of the Company's operations. The Company's ability to manage future growth will require the Company to continue to enhance its operating, financial, and management information systems and to expand, develop, motivate, and manage effectively its professional and administrative work force. If the Company is unable to manage growth effectively, the quality of the Company's services, its ability to retain key personnel, and its results of operations are likely to be materially adversely affected. Should the Company acquire businesses in the future, there can be no assurance that it will be successful in integrating the acquired businesses into the Company's infrastructure or retaining their key personnel. The Company's growth could be adversely affected by client dissatisfaction, reductions in clients' spending allocations for services the Company provides, increased competition, pricing or labor cost pressures, and general economic trends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Business Strategy." Rapid Technological Change. The Company's future success will depend on its ability to gain expertise in technological advances, such as the latest releases from ERP software vendors, and to respond quickly to evolving industry trends and client needs. The Company's efforts to gain technological expertise and to develop new technologies require the Company to incur significant expense. There can be no assurance that the Company will be successful in adapting to these advances in technology or in addressing changing client needs on a timely basis. In addition, there can be no assurance that the services or technologies developed by others will not significantly reduce demand for the Company's services or render the Company's services obsolete. See "Business--Research and Development." Limited Protection of Proprietary Expertise, Methodologies and Software. To protect its proprietary rights, the Company relies only on a combination of trade secret laws, employee nondisclosure policies, and third party confidentiality agreements. There can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate to prevent misappropriation of such rights or that third parties will not independently develop functionally equivalent or superior methodologies or software. Moreover, there can be no assurance that third parties will not assert infringement claims against the Company in the future that would result in costly litigation or license arrangements regardless of the merits of such claims. Additionally, because the Company's engagements are typically work- for-hire based, the Company assigns ownership of, or grants a royalty-free license to use, the materials the Company develops specifically for its clients to those clients upon project completion. See "Business--Intellectual Property and Other Proprietary Rights." Effect of Anti-Takeover Provisions. The Company's Board of Directors has the authority to issue preferred stock and to determine the price, rights, conversion ratios, preferences, and privileges of that stock without further vote or action by the holders of the Common Stock. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights, including economic rights, of the holders of any shares of preferred stock issued in the future. Any such issuance may discourage third parties from attempting to acquire control of the Company. Furthermore, the Company is subject to the Business Combination Law of the Texas 8 Business Corporation Act ("TBCA"), which prohibits the Company from engaging in a "business combination" with an "interested shareholder" for a period of three years after the date of the transaction in which the person first becomes an "interested shareholder," unless the business combination is approved in a prescribed manner. The application of these statutes and certain other provisions of the Company's Restated Articles of Incorporation and Restated Bylaws could have the effect of discouraging, delaying or preventing a change of control of the Company not approved by the Board of Directors, which could adversely affect the market price of the Company's Common Stock. See "Description of Capital Stock." Shares Eligible for Future Sale. Upon completion of this offering, the Company will have outstanding 6,509,378 shares of Common Stock. The shares of Common Stock sold in this offering (other than shares, if any, purchased by affiliates of the Company) will be freely tradeable. Substantially all of the shares to be outstanding upon completion of this offering (other than the 2,500,000 shares being offered hereby) are subject to the lock-up agreements described below. Of the shares to be outstanding upon completion of this offering, 4,009,378 shares are "restricted," as that term is defined in the Securities Act of 1933, as amended (the "Securities Act"). Of these restricted shares, 3,629,740 have been held for more than one year and, as such, will be salable upon expiration of the lock-up agreements described below, subject to certain volume and manner of sale restrictions imposed by Rule 144 of the Securities Act. See "Shares Eligible for Future Sale." Sales of a substantial number of shares of Common Stock in the public market following this offering, or the perception that such sales could occur, could adversely affect the market price for the Company's Common Stock. All directors, executive officers, and principal shareholders, and certain other employees, of the Company who hold in the aggregate approximately shares of Common Stock have agreed, subject to certain exceptions, not to sell or otherwise dispose of any of their shares or options for a period of 180 days after the date of this Prospectus without the prior written consent of William Blair & Company, L.L.C. The Company has also agreed not to issue, sell, or otherwise dispose of any of its shares or grant any options (other than options granted or shares issued in connection with the Company's 1997 Stock Option Plan or unregistered shares issued in connection with any acquisition) during such 180 day period. William Blair & Company, L.L.C. may, however, in its sole discretion and at any time without notice, release for public sale all or any portion of the shares subject to such lock-up agreements. See "Underwriting." No Prior Market for Common Stock; Possible Volatility of Stock Price. Prior to this offering, there was no public market for the Common Stock, and there can be no assurance that an active public market for the Common Stock will develop or be sustained after this offering. Accordingly, purchasers of the Common Stock may experience difficulty selling or otherwise disposing of their shares. The initial public offering price was determined by negotiations among the Company and the Representatives of the Underwriters and may not be indicative of market prices of the Common Stock after this offering. See "Underwriting." The market price for the Common Stock following the offering may be highly volatile. Prices for the Common Stock will be determined by the marketplace and may be influenced by many factors, including the depth and liquidity of the trading market, investor perception of the Company, and general economic and market conditions and trends. In addition, factors such as the Company's financial results, quarterly variations in the Company's financial results, changes in earnings estimates by analysts, reported earnings that vary from such estimates, press releases by the Company or others, and developments affecting the Company, its competitors or its industry generally may have a significant impact on the market price of the Common Stock. Stock markets have, on occasion, experienced extreme price and volume fluctuations which have often been unrelated to the operating performance of the affected companies. Dilution. Persons participating in this offering will incur immediate and substantial dilution in the net tangible book value of their shares. To the extent that currently outstanding options to purchase Common Stock are exercised, there will be further dilution. See "Dilution." Significant Unallocated Net Proceeds. A substantial portion of the anticipated net proceeds of this offering has not been designated for specific uses. Therefore, the Company will have broad discretion with respect to the use of the net proceeds of this offering. See "Use of Proceeds." 9 USE OF PROCEEDS The net proceeds to the Company from the sale of the 1,700,000 shares of Common Stock being offered hereby by the Company are estimated to be approximately $18.0 million ($19.3 million if the Underwriters' over-allotment option is exercised in full), assuming an initial public offering price of $12.00 per share, after deducting the underwriting discount and estimated offering expenses. The Company will use a portion of the net proceeds of the offering to repay debt of the Company, approximately $2.6 million of which was outstanding on September 30, 1997, which bears interest at an annual rate equal to the prime rate of interest plus 0.5% (or 9.0% as of the date of this Prospectus) and matures in November 1998. The Company will use the remaining net proceeds (together with $503,000 in proceeds from the repayment to the Company of outstanding shareholder notes) for working capital to support the planned growth of its business and for other general corporate purposes, which may include acquisitions of complementary businesses. From time to time, the Company evaluates possible acquisitions, but it is not currently considering any specific acquisition. The Company intends to invest the net proceeds from this offering in short-term, interest-bearing, investment-grade obligations pending application thereof in the manner described above. The Company will not receive any proceeds from the sale of shares of Common Stock by the Selling Shareholders. DIVIDEND POLICY Following this offering, the Company does not intend to pay cash dividends as it intends to retain all earnings to support its planned growth. Any payment of future dividends will depend upon the Company's results of operations, financial condition, cash requirements, contractual restrictions with respect to dividends, and other factors deemed relevant by the Board of Directors of the Company. 10 CAPITALIZATION The following table sets forth the short-term debt and total capitalization of the Company as of September 30, 1997, on an actual basis and as adjusted to reflect (i) the sale of the 1,700,000 shares of Common Stock offered hereby by the Company (at an assumed initial public offering price of $12.00 per share) and application of the net proceeds therefrom, after deducting the underwriting discount and estimated offering expenses, and (ii) the proceeds of the repayment of outstanding shareholder notes. This table should be read in conjunction with the Company's Consolidated Financial Statements and related Notes thereto and other financial information appearing elsewhere in this Prospectus. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."
SEPTEMBER 30, 1997 ------------------- ACTUAL AS ADJUSTED ------ ----------- (IN THOUSANDS) Short-term debt: Revolving line of credit................................. $2,646 $ -- ------ ------- Total short-term debt.................................. $2,646 $ -- ====== ======= Long-term debt............................................. $ -- $ -- Shareholders' equity: Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued actual or as adjusted...... -- -- Common stock, $0.01 par value; 40,000,000 shares authorized; 4,447,170 shares outstanding, actual; 6,147,170 shares outstanding, as adjusted(1)............ 45 62 Additional paid-in capital............................... 2,853 20,808 Retained earnings........................................ 2,409 2,409 Treasury stock, at cost; 19,803 shares................... (85) (85) Notes receivable from shareholders....................... (503) -- Cumulative foreign currency translation adjustment....... (117) (117) ------ ------- Total shareholders' equity............................. 4,602 23,077 ------ ------- Total capitalization................................. $4,602 $23,077 ====== =======
- -------- (1) Excludes 448,589 shares of Common Stock reserved for issuance upon the exercise of outstanding stock options at a weighted average exercise price of $5.91 per share, 210,000 shares of Common Stock reserved for issuance upon the exercise of stock options which will be granted effective as of the date of this Prospectus at the initial public offering price per share, and 601,411 shares of Common Stock reserved for future grants under the 1997 Stock Option Plan. Also excludes 362,208 shares of Common Stock sold by the Company in December 1997. See "Management--Executive Compensation" and "Management--Employee Benefit Plans--1997 Stock Option Plan." 11 DILUTION At September 30, 1997, the net tangible book value of the Company was $4.6 million, or $1.03 per share of Common Stock. Net tangible book value per share represents the amount of the Company's total tangible assets minus its total liabilities, divided by the number of outstanding shares of Common Stock. After giving effect to (i) the sale by the Company of the 1,700,000 shares of Common Stock offered hereby by the Company (assuming an initial public offering price of $12.00 per share) and after deducting the underwriting discount and estimated offering expenses, and (ii) the repayment of outstanding shareholder notes, the net tangible book value of the Company at September 30, 1997 would have been $23.1 million, or $3.75 per share. This represents an immediate increase in net tangible book value to existing shareholders of $2.72 per share and an immediate dilution to purchasers of Common Stock in the offering of $8.25 per share. The following table illustrates the per share dilution: Assumed initial public offering price........................... $12.00 Net tangible book value before this offering.................... 1.03 Increase attributable to this offering.......................... 2.72 ---- Net tangible book value after this offering..................... 3.75 ------ Dilution per share to new shareholders.......................... $ 8.25 ======
The following table summarizes, as of September 30, 1997, the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price paid per share by current shareholders and by the purchasers of Common Stock in this offering, assuming an initial public offering price of $12.00 per share, before deducting the underwriting discount and estimated offering expenses:
TOTAL SHARES PURCHASED CONSIDERATION AVERAGE ----------------- ------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------- ------- ----------- ------- --------- Existing shareholders........ 4,447,170 72.3% $ 2,813,000 12.1% $0.63 New shareholders............. 1,700,000 27.7 20,400,000 87.9 12.00 --------- ----- ----------- ----- Total...................... 6,147,170 100.0% $23,213,000 100.0% ========= ===== =========== =====
The foregoing tables assume no exercise of options outstanding as of September 30, 1997 to purchase an additional 448,589 shares of Common Stock at a weighted average exercise price of $5.91 per share. To the extent these options are exercised, there will be further dilution to new shareholders in the net tangible book value of their shares. See "Management--Employee Benefit Plans--1997 Stock Option Plan." In addition, the second table does not reflect the sale of 800,000 shares by Selling Shareholders in this offering. Such sales will reduce the number of shares held by existing shareholders as of September 30, 1997 to 3,647,170, or approximately 59.3% of the total shares of Common Stock to be outstanding after this offering, and will increase the number of shares to be purchased by the new shareholders to 2,500,000, or 40.7% of the total shares of Common Stock to be outstanding after this offering. See "Principal and Selling Shareholders." 12 SELECTED CONSOLIDATED FINANCIAL DATA The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Company's Consolidated Financial Statements and related notes thereto, and other financial information included elsewhere in this Prospectus. The balance sheet and income statement data at and for the nine months ended September 30, 1996 and 1997 have been derived from unaudited financial statements of the Company which, in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial condition and results of operations of the Company. The results of operations for the nine months ended September 30, 1997 are not necessarily indicative of the results that may be expected for the full year.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------------------- ----------------- 1992 1993 1994 1995 1996 1996 1997 ------ ------ ------ ------- ------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Revenue................ $3,316 $4,179 $7,501 $14,618 $26,202 $ 19,039 $ 30,056 Cost of revenue........ 1,956 2,484 4,028 7,661 14,190 10,219 16,702 ------ ------ ------ ------- ------- -------- -------- Gross profit........... 1,360 1,695 3,473 6,957 12,012 8,820 13,354 Selling and marketing expense............... 7 84 450 1,072 1,953 1,328 2,578 Development expense.... -- -- -- 707 1,250 926 836 General and administrative expense............... 1,250 1,482 2,629 4,014 6,597 4,621 8,362 Employee stock-related charge(1)............. -- -- -- -- 1,858 898 -- ------ ------ ------ ------- ------- -------- -------- Operating income....... 103 129 394 1,164 354 1,047 1,578 Other income (expense), net................... (58) (22) (77) (84) 95 64 (63) ------ ------ ------ ------- ------- -------- -------- Income before taxes.... 45 107 317 1,080 449 1,111 1,515 Provision for income taxes................. 27 44 119 417 141 398 575 ------ ------ ------ ------- ------- -------- -------- Net income............. $ 18 $ 63 $ 198 $ 663 $ 308 $ 713 $ 940 ====== ====== ====== ======= ======= ======== ======== Net income per share... $ 0.07 $ 0.17 $ 0.19 Weighted average shares outstanding........... 4,463 4,274 5,054 BALANCE SHEET DATA (AT PERIOD END): Cash and cash equivalents........... $ 284 $ 366 $ 104 $ 592 $ 2,199 $ 1,708 $ 683 Working capital........ 130 201 313 761 1,629 2,239 2,100 Total assets........... 1,113 1,667 1,784 4,675 8,058 7,065 14,070 Total debt............. 274 305 205 562 731 504 2,646 Shareholders' equity... 250 314 503 1,126 2,580 2,992 4,602
- -------- (1) Represents a charge for stock awarded to employees and payments in lieu thereof. Exclusive of this charge, operating income, net income, and net income per share would have been $2,212,000, $1,460,000, and $0.33 respectively, in the year ended December 31, 1996, and $1,945,000, $1,270,000 and $0.30, respectively, in the nine month period ended September 30, 1996. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is a leading international provider of end-user support solutions to companies which are implementing ERP software systems. The Company addresses the growing needs of clients implementing ERP systems by providing their employees with the necessary training and tools to utilize these systems effectively. Since 1988, the Company has provided services to over 275 clients in their implementations of ERP software applications. The Company's revenue has increased from $3.3 million in 1992 to $26.2 million in 1996. In the nine month period ended September 30, 1997, revenue was $30.1 million, a 57.9% increase over the same period in 1996. This growth is attributable to various factors, including expansion of the Company's international presence through new office openings, increases in the number of projects completed by the Company for existing and new clients, expansion of the array of end-user support services provided by the Company to its clients, and broadening of the number of ERP vendors whose software implementations can be serviced by the Company (including BAAN, J.D. Edwards, and Oracle), as well as rapid growth in the ERP market, which has accelerated as a result of the "Year 2000" problem. Since 1992, the Company has increased its geographic presence from one office in the United States and one office in the United Kingdom to 15 offices located in seven countries on five continents. The Company is currently organized into three divisions: the Americas Division which includes its North, South, and Central America operations; the EMEA Division which includes its Europe, Middle East, and Africa operations; and the Asia Pacific Division which includes its Australia, New Zealand, and Asia operations. In the nine months ended September 30, 1997, the Americas, EMEA, and Asia Pacific Divisions represented 65.0%, 26.1%, and 8.9% of revenue, respectively. The number of clients served by the Company has increased substantially from 25 in 1992 to 115 in the 12 months ended September 30, 1997. The Company's client base is diversified, with no single client representing more than 20% of revenues in 1996 or the nine month period ended September 30, 1997. To support its rapid growth, the Company has expanded its staff from 51 as of December 31, 1992 to 548 as of September 30, 1997. The Company derives a substantial portion of its revenue from fees for professional services related to supporting end-users in the implementation of ERP systems. Revenue from clients implementing SAP software represented 86% of billed consulting revenue for the nine months ended September 30, 1997. The majority of the Company's projects involve from three to 10 consultants, are generally completed in three months to two years, and result in revenue from $200,000 to $1.5 million. The Company often performs multiple projects for a client in support of a phased implementation of the ERP software. The Company's services are generally provided pursuant to written contracts which can be terminated by the client with limited advance notice. The Company generally bills its clients monthly for the services provided by its consultants at agreed upon rates. Where permitted, clients also are billed for reimbursement of expenses incurred by the Company on the client's behalf. The Company provides services to its clients primarily on a time and materials basis, although many of its contracts contain "not-to-exceed" provisions and Company performance obligations. The remainder of the Company's contracts are on a fixed-price basis, representing approximately 15% of the Company's total revenue for the nine months ended September 30, 1997. Revenue from time and materials engagements is recognized as services are performed while revenue from fixed price contracts is recognized using the percentage-of-completion method. The Company also receives a small percentage of total revenue from license fees related to computer-based training products and other software products that are developed independently or co-developed by the Company. The Company believes that such license fees, which are not currently material, may increase in the future as the ERP middle market grows. Cost of revenue includes compensation and benefits paid to the Company's professional staff and all direct expenses of performing project work. The Company's financial performance is highly dependent upon 14 professional staff billing rates, costs, and utilization rates. The Company manages these parameters by establishing and monitoring project budgets and timetables and tracking staffing requirements for projects in progress and anticipated projects. Project terminations, completions, and scheduling delays may result in periods when consultants are not fully utilized. An unanticipated termination of a significant project could cause the Company to experience lower staff utilization resulting in a higher than expected number of unassigned consultants. In addition, the establishment of new services or new offices, employee vacations and training, and increases in the hiring of consultants may result in periods of lower staff utilization and downward pressure on gross margins. The Company's professional staff are generally employed on a full-time basis, and therefore the Company incurs substantially all of its staff-related costs even during periods of low utilization. In the past, the Company has experienced some seasonality in its business, with somewhat lower levels of revenue and profitability in the first and fourth quarters of the year. This trend has resulted from the timing of project start-ups and completions, as well as reduced utilization due to holidays and vacations. Selling and marketing expense relates principally to compensation and benefits paid to the Company's dedicated sales and marketing staff and all direct costs associated with the sales process, including the costs of travel, trade shows, marketing materials, and public relations. Development expense consists principally of compensation costs for the Company's in-house research and development and information technology and consulting services support teams. These personnel focus on development of methodologies and applications of new technologies in the end-user environment, including development of computer-based training courseware and performance support software and content. Development expense also includes personnel who provide technical support for the Company's professional staff in the field. General and administrative expense consists principally of salaries and benefits for executive management and for accounting, administrative, human resources, and recruiting and training staff, as well as compensation for the senior management in each of the Company's divisions. 15 RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain items from the Company's statements of income expressed as a percentage of revenue and the percentage change in such items for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997 compared to the prior period. The trends illustrated in the following table are not necessarily indicative of future results.
PERCENTAGE OF REVENUE ----------------------------------- NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, PERCENTAGE INCREASE (DECREASE) ------------------- -------------- -------------------------------------- NINE MONTHS 1994 1995 1996 1996 1997 1994 TO 1995 1995 TO 1996 1996 TO 1997 ----- ----- ----- ------ ------ ------------ ------------ ------------ Revenue................. 100.0% 100.0% 100.0% 100.0% 100.0% 94.9% 79.2% 57.9% Cost of revenue......... 53.7 52.4 54.2 53.7 55.6 90.2 85.2 63.4 ----- ----- ----- ------ ------ Gross profit............ 46.3 47.6 45.8 46.3 44.4 100.3 72.7 51.4 Selling and marketing expense................ 6.0 7.3 7.5 6.9 8.6 138.2 82.2 94.1 Development expense..... 0.0 4.8 4.8 4.9 2.8 -- 76.8 (9.7) General and administrative expense................ 35.0 27.5 25.2 24.3 27.8 52.7 64.3 81.0 Employee stock-related charge(1).............. 0.0 0.0 7.1 4.7 0.0 -- nmf nmf ----- ----- ----- ------ ------ Operating income........ 5.3 8.0 1.2 5.5 5.2 195.4 (69.6) 50.7 Other income (expense), net.................... (1.1) (0.6) 0.5 0.3 (0.2) 9.1 (213.1) (198.4) ----- ----- ----- ------ ------ Income before taxes..... 4.2 7.4 1.7 5.8 5.0 240.7 (58.4) 36.4 Provision for income taxes.................. 1.6 2.9 0.5 2.1 1.9 250.4 (66.2) 44.5 ----- ----- ----- ------ ------ Net income.............. 2.6% 4.5% 1.2% 3.7% 3.1% 234.8% (53.5)% 31.8% ===== ===== ===== ====== ======
- -------- (1) Represents a charge of $1,858,000 in the year ended December 31, 1996 and $898,000 in the nine month period ended September 30, 1996 for stock awarded to employees and payments in lieu thereof. Exclusive of this charge, operating income, and net income would have increased 90.0% and 120.2%, respectively, in the year ended December 31, 1996 over the year ended December 31, 1995, and decreased by 18.9% and 26.0%, respectively, in the nine month period ended September 30, 1997 over the nine month period ended September 30, 1996. NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1996 Revenue. Revenue increased by $11.0 million, or 57.9%, from $19.0 million for the nine months ended September 30, 1996 to $30.1 million for the nine months ended September 30, 1997. The Company experienced growth in each of its three divisions. Revenues from the Americas Division increased by 70.8% from $11.4 million to $19.5 million; revenue from the EMEA Division increased by 23.3% from $6.4 million to $7.8 million; and revenue from the Asia Pacific Division increased by 117.1% from $1.2 million to $2.7 million. The Company ended the 1997 period with 548 total employees, up from 353 employees at the beginning of the period. In addition, the Company opened four new offices during the period, increasing the total number of offices to 15. Gross profit. Gross profit increased by $4.5 million, or 51.4%, from $8.8 million for the nine months ended September 30, 1996 to $13.4 million for the nine months ended September 30, 1997, and decreased as a percentage of revenue from 46.3% in the nine months ended September 30, 1996 to 44.4% in the nine months ended September 30, 1997. Gross margin was negatively impacted by reduced staff utilization rates in the EMEA Division caused by the postponement of a number of large projects in South Africa early in 1997, as well as lower than expected revenue in Europe. In addition, the decrease in gross margin resulted from increased overtime expenses, principally in the second quarter of 1997, as a result of a shortage in professional staff to service increased consulting opportunities in the Americas Division, partially offset by increased billing rates in that division. 16 Selling and marketing expense. Selling and marketing expense increased by $1.3 million, or 94.1%, from $1.3 million for the nine months ended September 30, 1996 to $2.6 million for the nine months ended September 30, 1997, and increased as a percentage of revenue from 7.0% in the nine months ended September 30, 1996 to 8.6% in the nine months ended September 30, 1997. The increases were primarily attributable to a substantial increase in the Company's sales and marketing staff from 13 employees at December 31, 1996 to 24 at September 30, 1997. Development expense. Development expense decreased by $90,000, or 9.7%, from $926,000 for the nine months ended September 30, 1996 to $836,000 for the nine months ended September 30, 1997, and decreased as a percentage of revenue from 4.9% in the nine months ended September 30, 1996 to 2.8% in the nine months ended September 30, 1997. The decreases were primarily attributable to certain expenditures related to in-house software development incurred in 1996 which were eliminated in 1997 as a result of the Company's relationship with CBT Systems. The Company expects that development expense will increase both in dollars spent and as a percent of revenue in the future as the Company continues to extend its service offerings. See "Business--Business Strategy." General and administrative expense. General and administrative expense increased by $3.7 million, or 81.0%, from $4.6 million for the nine months ended September 30, 1996 to $8.4 million for the nine months ended September 30, 1997, and increased as a percentage of revenue from 24.3% in the nine months ended September 30, 1996 to 27.8% in the nine months ended September 30, 1997. The increases were primarily attributable to substantial expenditures in building the administrative infrastructure of the Company to support future growth. These expenditures related principally to increases in the Company's management and administrative staff (including the hiring of a chief financial officer, corporate controller, and executive vice president for human resources and the appointment of an executive vice president for research and development and five members of senior divisional management), information technology infrastructure investments, and increased occupancy costs related to the expansion of existing office space and the establishment of new offices. Employee stock-related charge. In the nine months ended September 30, 1996, the Company incurred a charge of $898,000 related to stock awarded to employees and payments in lieu thereof. Operating income. Operating income increased by $531,000, or 50.7%, from $1.0 million for the nine months ended September 30, 1996 to $1.6 million for the nine months ended September 30, 1997. Exclusive of the non-recurring compensation charge related to the employee stock issuances, operating income decreased by $367,000, or 18.9%, from $1.9 million for the nine months ended September 30, 1996 to $1.6 million for the nine months ended September 30, 1997 and decreased as a percentage of revenue from 10.2% for the nine months ended September 30, 1996 to 5.3% for the nine months ended September 30, 1997. Other income (expense), net. Other income (expense) decreased from income of $64,000 for the nine months ended September 30, 1996 to expense of $63,000 for the nine months ended September 30, 1997. This change reflects increased borrowings to support the Company's growth in the 1997 period. Provision for income taxes. The Company's effective tax rate increased from 35.8% in the nine months ended September 30, 1996 to 38.0% in the nine months ended September 30, 1997, primarily due to the increase in the proportion of U.S.-based income, which is taxed at a higher statutory rate. Such proportion was higher in the 1997 period than in the 1996 period partly because the 1996 period included the $898,000 employee stock-related charge. Exclusive of the employee stock-related charge, the effective tax rate would have been 36.8% in the nine months ended September 30, 1996. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Revenue. Revenue increased by $11.6 million, or 79.2%, to $26.2 million for 1996 compared to $14.6 million for 1995. The Company experienced growth in each of its three divisions. Revenue from the Americas Division increased by 74.4% from $8.9 million to $15.6 million; revenue from the EMEA Division increased by 64.9% from $5.4 million to $8.9 million; and revenue from the Asia Pacific Division increased by 494.8% from $291,000 to $1.7 million. The Company ended 1996 with 353 total employees, up from 257 employees at the beginning of 1996. In addition, the Company opened seven new offices during 1996, increasing the total number of offices to 10. 17 Gross profit. Gross profit increased by $5.1 million, or 72.7%, from $7.0 million for 1995 to $12.0 million for 1996 and decreased as a percentage of revenue from 47.6% in 1995 to 45.8% in 1996. The decrease in gross margin related to increases in compensation to the Company's professional staff, partially offset by higher billing rates on new business. Selling and marketing expense. Selling and marketing expense increased by $881,000, or 82.2%, from $1.1 million in 1995 to $2.0 million for 1996 and increased as a percentage of revenue from 7.3% in 1995 to 7.5% in 1996. The growth in these expenses was primarily attributable to an increase in the Company's sales and marketing staff. Development expense. Development expense increased by $543,000, or 76.8%, from $707,000 for 1995 to $1.3 million for 1996 and remained constant as a percentage of revenue at 4.8%. The increase in these expenses was related principally to increases in the Company's development staff and related expenses. General and administrative expense. General and administrative expense increased by $2.6 million, or 64.3%, from $4.0 million for 1995 to $6.6 million for 1996, and decreased as a percentage of revenue from 27.5% in 1995 to 25.2% in 1996. The growth in these expenses was primarily attributable to increased administrative staff, including additions to human resources, recruiting, and training personnel. The decreases in these expenditures as a percentage of revenue reflected spreading these costs over a larger base of revenue. Employee stock-related charge. In 1996, the Company incurred a charge of $1.9 million related to stock awarded to employees and payments in lieu thereof. Operating income. Operating income decreased by $810,000, or 69.6%, from $1.2 million for 1995 to $354,000 for 1996. Exclusive of the non-recurring compensation charge, operating income increased by $1.0 million, or 90.0%, from $1.2 million for 1995 to $2.2 million for 1996, and increased as a percentage of revenue from 8.0% for 1995 to 8.4% for 1996. Other income (expense), net. Other income (expense) increased from expense of $84,000 for 1995 to income of $95,000 for 1996, as a result of miscellaneous nonoperational charges such as interest income. Provision for income taxes. The Company's effective tax rate declined from 38.6% for the year ended December 31, 1995 to 31.4% for the year ended December 31, 1996, due to the decrease in the proportion of U.S.-based income, which is taxed at a higher statutory rate. Such proportion was lower in 1996 primarily due to the $1,858,000 employee stock-related charge. Exclusive of the employee stock-related charge, the effective tax rate would have been 36.7% in 1996. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Revenue. Revenue increased by $7.1 million, or 94.9%, to $14.6 million for 1995 compared to $7.5 million for 1994. The Company experienced growth in each of its three divisions. Revenue from the Americas Division increased by 120.4% from $4.1 million to $8.9 million; revenue from the EMEA Division increased by 56.5% from $3.5 million to $5.4 million; and revenue from the Asia Pacific Division was $291,000 in its first year of operations. The Company ended 1995 with 257 total employees, up from 140 employees at the beginning of 1995. The Company opened no new offices during 1995. Gross profit. Gross profit increased by $3.5 million, or 100.3%, from $3.5 million for 1994 to $7.0 million for 1995, and increased as a percentage of revenue from 46.3% in 1994 to 47.6% in 1995. The increase in gross margin related to higher billing rates. Selling and marketing expense. Selling and marketing expense increased by $622,000, or 138.2%, from $450,000 for 1994 to $1.1 million for 1995, and increased as a percentage of revenue from 6.0% in 1994 to 7.3% in 1995. The increase was primarily attributable to a substantial increase in the Company's sales and marketing staff. Development expense. Development expense was $707,000, or 4.8% of revenue, in 1995, the first year that the Company established a formal research and development group. 18 General and administrative expense. General and administrative expense increased by $1.4 million, or 52.7%, from $2.6 million for 1994 to $4.0 million for 1995, and decreased as a percentage of revenue from 35.0% in 1994 to 27.5% in 1995. The growth in these expenses was primarily attributable to increased administrative staff. The decreases as a percentage of revenues reflected the spreading of these expenses over the larger base of revenues. Operating income. Operating income increased by $770,000, or 195.4%, from $394,000 in 1994 to $1.2 million in 1995, and increased as a percentage of revenue from 5.3% in 1994 to 8.0% in 1995. Other income (expense), net. Other income (expense) increased from expense of $77,000 for 1994 to expense of $84,000 for 1995 as a result of miscellaneous nonoperational charges. Provision for income taxes. The Company's effective tax rate increased from 37.5% for 1994 to 38.6% for 1995, due to the increase in U.S. income, which is taxed at a higher statutory rate. 19 QUARTERLY OPERATING RESULTS The following tables set forth unaudited income statement data for each of the seven quarters in the period beginning January 1, 1996 and ending September 30, 1997, as well as the percentage of the Company's total revenue represented by each item. In management's opinion, this unaudited information has been prepared on a basis consistent with the Company's audited annual financial statements and includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the quarters presented, when read in conjunction with the Financial Statements and related Notes thereto included elsewhere in this Prospectus. The operating results for any quarter are not necessarily indicative of results for any future period. See "Risk Factors--Fluctuating Quarterly Results; Project Risks."
THREE MONTH PERIOD ENDED -------------------------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, 1996 1996 1996 1996 1997 1997 1997 --------- -------- --------- -------- --------- -------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Revenue................ $5,677 $6,363 $6,999 $7,163 $8,084 $9,897 $12,075 Cost of revenue........ 3,218 3,335 3,666 3,971 4,553 5,609 6,540 ------ ------ ------ ------ ------ ------ ------- Gross profit........... 2,459 3,028 3,333 3,192 3,531 4,288 5,535 Selling and marketing expense............... 234 501 593 625 724 898 956 Development expense.... 182 353 391 324 245 250 341 General and administrative expense............... 1,331 1,514 1,776 1,976 2,354 2,558 3,450 Employee stock-related charge(1)............. -- -- 898 960 -- -- -- ------ ------ ------ ------ ------ ------ ------- Operating income....... 712 660 (325) (693) 208 582 788 Other income (expense), net................... (24) 37 51 31 (2) (33) (28) ------ ------ ------ ------ ------ ------ ------- Income before taxes.... 688 697 (274) (662) 206 549 760 Provision for income taxes................. 250 257 (109) (257) 78 209 288 ------ ------ ------ ------ ------ ------ ------- Net income............. $ 438 $ 440 $ (165) $ (405) $ 128 $ 340 $ 472 ====== ====== ====== ====== ====== ====== ======= Net income per share... $(0.08) $ 0.03 $ 0.07 $ 0.09 Weighted average shares outstanding........... 5,033 5,054 5,054 5,054 AS A PERCENTAGE OF REVENUE -------------------------------------------------------------------- Revenue................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenue........ 56.7 52.4 52.4 55.4 56.3 56.7 54.2 ------ ------ ------ ------ ------ ------ ------- Gross profit........... 43.3 47.6 47.6 44.6 43.7 43.3 45.8 Selling and marketing expense............... 4.1 7.9 8.5 8.8 9.0 9.1 7.9 Development expense.... 3.2 5.5 5.6 4.5 3.0 2.5 2.8 General and administrative expense............... 23.5 23.8 25.3 27.6 29.1 25.8 28.6 Employee stock-related charge................ -- -- 12.8 13.4 0.0 0.0 0.0 ------ ------ ------ ------ ------ ------ ------- Operating income....... 12.5 10.4 (4.6) (9.7) 2.6 5.9 6.5 Other income (expense), net................... (0.4) 0.6 0.7 0.5 0.0 (0.3) (0.2) ------ ------ ------ ------ ------ ------ ------- Income before taxes.... 12.1 11.0 (3.9) (9.2) 2.6 5.6 6.3 Provision for income taxes................. 4.4 4.1 (1.5) (3.5) 1.0 2.1 2.4 ------ ------ ------ ------ ------ ------ ------- Net income............. 7.7% 6.9% (2.4)% (5.7)% 1.6% 3.5% 3.9% ====== ====== ====== ====== ====== ====== =======
- -------- (1) Represents a charge for stock awarded to employees and payments in lieu thereof. Exclusive of this charge, operating income and net income would have been $573,000 and $392,000, respectively, for the three month period ended September 30, 1996, and $267,000 and $190,000, respectively, for the three month period ended December 31, 1996. LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company has financed its operations and growth with cash flow from operations, supplemented by the issuance of Common Stock and by short-term borrowings under its revolving bank line of credit and from shareholders. The Company's cash and marketable securities was $104,000 at December 31, 1994, $592,000 at December 31, 1995, $2.2 million at December 31, 1996 and $683,000 at September 30, 1997. The Company's working capital was $313,000 at December 31, 1994, $761,000 at December 31, 1995, $1.6 million at December 31, 1996 and $2.1 million at September 30, 1997. 20 The Company's operating activities used cash of $2.8 million for the nine months ended September 30, 1997, compared with cash provided of $1.5 million for the same period in 1996. The lower levels of cash from operations in the nine months ended September 30, 1997 primarily resulted from an increase in receivables. The Company's operating activities provided cash of $1.9 million in 1996 compared to $443,000 in 1995 and a use of cash of $11,000 in 1994. These increases in cash provided by operations resulted from higher net income and an increase in the Company's payables. The Company's investing activities used cash of $1.5 million for the nine months ended September 30, 1997, compared with a use of $477,000 for the same period in 1996. The Company's investing activities used cash of $709,000 in 1996 compared to $264,000 in 1995 and $172,000 in 1994. These increases in the use of cash from investing activities resulted from increased purchases of computer and office equipment and leasehold improvements related to expansion of the Company's business and the support of new office openings. The Company's financing activities provided cash of $2.9 million for the nine months ended September 30, 1997, compared with using cash of $12,000 for the same period in 1996. The increase in cash from financing activities in the nine months ended September 30, 1997 resulted from a private placement of shares of Common Stock in February 1997 and borrowings from the revolving line of credit. The Company's financing activities generated cash of $372,000 in 1996 and $350,000 in 1995 and a use of cash of $97,000 in 1994. The cash generated from financing activities resulted from funds borrowed from shareholders and under the revolving line of credit and the issuance of stock, while cash used in financing activities resulted from payments under the revolving line of credit. The Company has a $5.0 million revolving line of credit with a commercial bank, which bears interest at the prime rate of interest plus 0.5% and is secured by the Company's accounts receivable generated from its North American operations. The Company's credit agreement contains customary financial and other covenants with which the Company is currently in compliance. The Company utilizes this line of credit, which matures in November 1998, to finance a portion of its working capital needs. There was a $2.6 million outstanding balance on September 30, 1997. It is anticipated that a portion of the net proceeds of this offering will be used to repay the outstanding balance on the revolving line of credit as of the date of the completion of this offering. During 1998, the Company expects to make approximately $2.0 million in capital expenditures primarily for office furniture, computer and office equipment, and leasehold improvements to support the anticipated growth in its professional and administrative staff. Capital expenditures in the nine months ending September 30, 1997 were $1.5 million. The Company believes the net proceeds from this offering, together with its current cash balances, cash provided by future operations, and its revolving line of credit, will be sufficient to meet the Company's working capital and cash needs for at least the next 12 months. The Company capitalizes software development costs beginning when product technological feasibility is established and concluding when the product is ready for general release. At such time, software development costs are amortized on the straight-line basis over a maximum of three years or the expected life of the product, whichever is less. The Company capitalized approximately $238,000 of software development costs relating to computer- based training software development and its commencement of the development of packaged consulting applications during the nine months ended September 30, 1997, and did not recognize any associated amortization expense during the period. Research costs related to software development are expensed as incurred. Because the Company has been and is currently able to match the local currency component of client engagements to the amount of operating costs transacted in local currency, the Company has not needed to and does not currently hedge against currency fluctuations. 21 EFFECTS OF INFLATION Inflation has not had a significant effect on the Company's business during the past three years. The Company cannot predict what effect, if any, inflation may have on its future results of operations. 22 BUSINESS The Company is a leading international provider of end-user support solutions to companies which are implementing ERP software systems. Through its more than 545 employees in 15 offices worldwide, the Company provides customized change communications, education, and performance support services to clients. Since 1988, the Company has provided services to over 275 clients, including 49 of the Fortune Global 500 and three of the Fortune Global 10. The number of clients served by the Company has increased from 25 in 1992 to 115 in the 12 months ended September 30, 1997. The Company's clients in 1997 included Bristol-Myers Squibb Company, Cadbury-Schweppes PLC, Compaq Computer Corporation, Hercules, Inc., Hewlett Packard Company, and Shell Petroleum, Inc. The Company's client base is diversified, with no single client representing more than 10% of the Company's revenues in 1996 or in the nine month period ended September 30, 1997. Recognizing the global nature of the ERP software market and the importance of being able to serve multi-national clients, the Company has built a substantial international presence. In addition to its four offices in the U.S., the Company also has 11 offices in Canada, the United Kingdom, France, South Africa, Australia, and Singapore. The Company was founded in 1984 in Houston, Texas as an end-user support company providing documentation services to the oil and gas industry. In 1988, the Company expanded its end-user support services to include training by providing a support solution in connection with one of the first major English language installations of SAP software in the world. Because of the substantial market opportunity represented by SAP, by 1990, the Company had made SAP end-user support its primary focus. In the nine months ended September 30, 1997, revenue from clients implementing SAP software represented 86% of the Company's billed consulting revenue. By focusing on end-user support, the Company has been successful in institutionalizing its knowledge base, and has developed content and reference materials, the DA Foundation, that are applied in developing customized solutions for each client. The Company has also developed DA Cornerstone, the Company's methodology for delivering consistently high quality service to its clients. More recently, the Company has broadened its complement of end-user support services by also providing change communications consulting and on-line help tools and by expanding its ERP capabilities to include applications such as J.D. Edwards, BAAN, and Oracle. MARKET Many large and mid-sized businesses face a rapidly changing business environment, intense global competition, and accelerating technological change. To remain competitive, such businesses continually seek to improve the quality of products and services, lower costs, enhance employee efficiency, and increase value to customers. Businesses are implementing and utilizing advanced information technology solutions that enable them to redesign their business processes in such areas as product development, service delivery, manufacturing, human resources, finance, and accounting. A central element of this redesigning process for many companies is the replacement of legacy systems with ERP software applications which offer the increased functionality and flexibility which is critical to the competitive needs of businesses. These information technology conversions are being further accelerated by the "Year 2000" problem, which is causing many companies, as well as governmental agencies, educational institutions, and non-profit organizations, to upgrade their technology in lieu of incurring the substantial cost associated with modifying legacy computer code. As a result of these factors, the market for ERP software applications is experiencing rapid growth. Industry sources estimate that the worldwide market for ERP software license fees was $5.2 billion in 1996 and is expected to grow at a compound annual rate of 30.0% through 2001 to $19.0 billion. The ERP software market leader is SAP, a German company with a 1996 market share estimated to have been approximately 34%. The next largest ERP software providers are Oracle, J.D. Edwards, Peoplesoft, Inc. and BAAN, which, combined, had a 1996 market share estimated to have been approximately 28%. In addition to the expenditures for software license fees, it is estimated by industry sources that an additional three times that amount is spent on systems integration and implementation services. In certain cases, these services are provided by the ERP software developers, but in most cases they are provided by third party service providers, including information technology consulting firms and the large international accounting firms. 23 Because of the substantial effect technology changes have on workers' job functions, companies are increasingly recognizing the importance of providing their end-users, which include personnel and management across all business functions, with the training and tools necessary to utilize these newly implemented systems effectively. While it is a relatively small cost component of the overall ERP implementation, such training and tools are critical factors in companies achieving the expected returns on these substantial information technology investments. SAP has recommended that 12% of the expenses budgeted by its clients for systems integration and implementation services be dedicated to end-user training and tools. The Company believes that the percentage of expenditures is moving closer over time to the level recommended by SAP as clients increasingly recognize the importance of end- user support. The global market for end-user performance support services for ERP implementations is large and highly fragmented. Providers include large international systems integrators which are focused principally on systems integration and implementation, but also provide end-user support as a secondary service. In addition, there are a large number of smaller organizations which specialize in ERP support services, generally serving a limited geographic area and having a smaller base of technical and managerial resources. The Company believes that as companies implementing ERP software increasingly recognize the importance of end-user performance support services to the success of their ERP implementations, service providers having the dedicated resources and specialized skills to deliver these services effectively and consistently across a broad geographic area will be well positioned to gain an increasing share of this large and growing market. BUSINESS STRATEGY The Company's goal is to be the worldwide leader in ERP end-user support solutions by providing services to clients in all major countries and languages. The Company's business strategy to achieve this goal includes the following key components: Focus Exclusively on End-user Support Services for ERP Implementations. Since 1988, the Company has provided end-user support services in connection with ERP software implementations for over 275 clients in more than 30 countries. With more than 400 professional staff operating from 14 offices on five continents, the Company believes that it is the largest international company exclusively focused on providing such services. The Company believes that end-user performance is the single most important factor enabling a business enterprise to realize the benefits of the substantial investments made in ERP software. The Company believes that its substantial expertise, experience, and exclusive focus on providing these services enhance its competitive position and will allow it to continue to benefit from the rapid growth in the market for its services. Expand Extensive International Presence. Since 1992, when the Company had one office in the United States and one office in the United Kingdom, the Company has expanded its presence to 15 offices located in seven countries across North America, Australia, Asia, Europe, and Africa. The Company initially enters a new geographic market using its mobile consulting staff to serve the specific needs of a current client. When justified by ongoing market demand, the Company will establish a new office which it builds predominantly with DACG-trained local professionals after initially using senior Company consultants. The Company believes that its ability to provide consistently high-quality support services internationally is an important factor in attracting multinational clients with requirements for the Company's services across diverse geographic locations. The Company intends to continue to open new offices in strategically important locations with particular near-term focus on expanding its presence in the United States, Latin America, and Asia. See "--Company Organization and Project Management and Methodology" and "-- Facilities." Maintain and Establish Strong Relationships with ERP Software Vendors. In 1988, the Company provided performance support services for one of the first English language implementations of SAP software in the world. Since that time, the Company has provided support solutions to more than 180 clients installing SAP, while expanding its range of services to support implementations of several of the other leading ERP applications 24 developers, including J.D. Edwards (1996), Oracle (1996), and BAAN (1997). Because the quality of end-user performance support can substantially impact the success of an ERP installation, SAP has developed its own list of a limited number of preferred or qualified service providers. DACG is recognized by SAP as a National Implementation Partner in the United States, Australia, New Zealand, and South Africa. The Company believes that this status is important in enabling it to receive referrals from SAP for new business opportunities. The Company intends to continue to expand and develop new and existing relationships with ERP application vendors and to develop its service capabilities to support additional ERP applications. See "--Sales and Marketing." Leverage Large, Diversified, Blue-Chip Client Base. Since 1993, the Company has provided services to 49 of the Fortune Global 500 companies (including three of the top 10) as well as many other large companies worldwide. This blue-chip client base provides the Company with substantial credibility when soliciting business from potential new customers and has proven to be an important source of referrals. In addition, these customers often have geographically dispersed organizations with large numbers of end-users requiring performance support services and staged multi-year ERP implementation cycles, thereby providing the Company with a source of follow- on revenue opportunities. The Company's client base is diversified in that the 10 largest clients, in the aggregate, accounted for approximately 53% and 38% of the Company's revenue in 1996 and the first nine months of 1997, respectively. No single client accounted for more than 10% of the Company's revenue in either of these periods. See "--Clients." Expand Consulting and Sales Organizations. The Company's professional staff has grown from 40 as of December 31, 1992 to over 400 as of September 30, 1997 and full-time its sales staff has grown from two as of December 31, 1992 to 20 as of September 30, 1997. The Company intends to continue to expand and refine its recruiting process to attract the best available consulting and sales staff. When opening new offices, the Company uses core groups of existing senior Company consultants in order to transfer its strong corporate culture and its commitment to high quality service to new personnel in geographically and culturally disparate locations. In addition, DACG has developed a comprehensive series of training programs covering technical skills, project methodologies, and management and sales techniques to accelerate the development of its professional staff, expand their skills, and permit them to attain increasing levels of responsibility within the organization. The Company believes that its success in providing its employees with a challenging and fulfilling work environment, a competitive compensation structure, and broad-based equity ownership has resulted in annual turnover of less than 10% per year for the last three years. See "--Recruiting and Personnel Development." Extend Service Offerings. The Company has a significant commitment to continual expansion of its service offerings. Research and development are focused on three main areas: (1) the development of technology-based solutions that allow the Company's consultants to generate improved efficiencies as they develop end-user support solutions for clients; (2) the development of tools and content specific to the ERP applications produced by all of the major ERP vendors; and (3) the development of service solutions for areas complementary to existing businesses such as the development of intranet-based solutions for the delivery of end-user support services that support the Company's clients' needs for education and performance support beyond their ERP systems. The Company considers that its proprietary toolset and its relationship with CBT Systems to develop computer-based training titles are important means of gaining market share in the growing ERP middle market. SERVICES The Company delivers end-user support solutions designed to maximize the return on clients' ERP investments while taking into account each client's individual needs, resources, and requirements. ERP software has a significant direct impact on the working patterns of a corporation which must be managed in relation to both implementation of the software and support of that software over time. The Company performs a thorough review of the procedures and jobs which ERP end-users will need to perform and uses this information to develop the requisite end-user support solution for the client. Such solutions utilize the Company's proprietary methodology, DA Cornerstone, in the delivery of services consisting of change communications, education, and performance support programs developed by the Company. 25 From an initial focus on SAP end-user support, DACG has applied its skill set to other ERP technologies such as J.D. Edwards, BAAN, and Oracle, resulting in a portable cross industry, cross technology expertise. See "-- Company Organization and Project Management and Methodology." Change Communications Clients managing their business on ERP systems commit themselves to long- term change. Client end-users are affected by this change, seeing it on the desktop in the form of new software functionality and in day-to-day business activities in the form of new procedures and policies. Typical approaches to managing this change focus on establishing executive management support. The Company believes, however, that the key to successful ERP implementations is ensuring the support of end-users because their effective utilization of technology is critical to the success of ERP investments. Accordingly, the Company's change communications programs are focused on the end-user. Common change communications deliverables provided by the Company to its clients include kick-off meetings and speeches, facilitated collaborative work groups, multimedia presentations, video presentations, and newsletters. These deliverables, in addition to providing critical information, also serve to minimize a client's business disruption by preparing end-users for the impact of ERP-related changes. The business goals that drive the implementation of ERP software as identified by client executive management are used as the starting point for the development of change communications programs. An analysis is conducted that determines how the enterprise-wide issues presented by client management will impact each end-user's daily work routine. These issues are identified through the Company's use of facilitated collaborative workshops where the Company's staff work with client end-users to identify areas of greatest concern. Based on this review, a specific change communications program is developed for each segment of the end-user audience. This program ensures the progressive delivery of messages that start with the basic corporate message and then address issues that are specific to segments (such as the accounts receivable department) of the client's organization. Education The Company develops educational programs specific to each client's needs, taking into account the client's infrastructure and resources, the scope of the client's ERP system, and the client's language and cultural needs. In order to influence the way an end-user works and optimizes his or her utilization of a new system, educational programs are developed that focus on specific end-user job responsibilities, as well as on the overall business processes that impact the end-user. In developing educational content for a client, the Company utilizes its DA Foundation library which contains training content that addresses job roles and processes common to ERP software. The Company consults with the client to determine the appropriate media to use for delivering the educational content: instructor-led training; computer- based training; and/or distance learning. Virtually all the Company's clients utilize instructor-led training courses, which the Company customizes to meet the particular client's specifications and needs. Many companies, particularly those with large and geographically dispersed operations, find computer-based training to be an effective education delivery method from the standpoint of both cost and time. The Company believes that an integrated curriculum of instructor-led and computer-based training courses represents the optimal end-user education solution. The Company offers both custom and standardized computer-based training modules, utilizing the resources of the DA Foundation library. The Company has developed the standardized courseware under a co-development agreement with CBT Systems, one of the largest companies specializing in computer-based training development and distribution worldwide. Under the agreement, the Company and CBT Systems are jointly developing, in conjunction with SAP, a series of 20 computer-based training courses. As of December 31, 1997, 12 of these titles had been released; the remaining eight are scheduled to be released over the next six months. The Company considers the development of computer-based 26 training titles to be an important means of gaining market share in the growing ERP middle market as standardized computer-based courses represent a less expensive means of training for clients that do not require a customized solution. The Company also uses distance learning as a method to distribute educational content within client organizations. Distance learning solutions are most often utilized by companies with large remote user audiences and significant information technology infrastructures because they involve distributing content by using wide area networks, corporate intranets, and video conferencing technology. Performance Support A critical component of the Company's end-user support solution is the documentation of ERP processes which affect end-users. This documentation is designed to assist workers in performing their jobs following training. In utilizing a new system, end-users of technology frequently encounter situations in which they require assistance. In order to limit workers' downtime and provide workers with easy access to assistance, paper-based and on-line references containing relevant policies, processes, and procedures are often the most effective aids. In coordination with the design of educational programs, the Company works with each client to assess the ongoing documentation and performance support needs of the particular audience of end- users. Utilizing the DA Foundation, the Company then develops support content for the client, creating a clearly defined set of policies, processes, and procedures relating the particular ERP software application. Based upon the client's information technology infrastructure, budget, and timing needs, the appropriate media for performance support is determined. Hard copy performance support can be delivered by quick reference guides and printed documentation. This type of performance support solution is most often used by those clients who have limited time frames in which to develop an end- user support solution. These clients can migrate to a more technologically advanced solution at a later date. More sophisticated performance support solutions can be delivered through the client's corporate intranet, where DACG will design and maintain a repository of the end-user support deliverables. DACG's most sophisticated performance support solution is an electronic performance support system ("EPSS") which provides comprehensive end-user support on demand at the desktop so that end-users can minimize interruptions in seeking help or information relating to a job task. End-users can access the EPSS from their own desktop and find the answers to the questions they have about a particular task. Building a comprehensive EPSS solution can be challenging and costly. To simplify its development, the Company has created a proprietary software technology, DA PASS. DA PASS is context sensitive, which means it can track the location of the client end-users in the client's ERP system, in order to provide support based on the particular application being run, thereby allowing the Company to create customized ERP end-user support accessible at a transactional or task level. The Company can link system task, business procedure, training, and computer-based training files to ERP transactions using the DA PASS technology, providing sophisticated support to end-users. A DA PASS solution is typically recommended to those clients that already have existing corporate intranets, although the Company can consult with a client to construct a corporate intranet site if required. The support content ultimately developed for each of the Company's clients is used to regularly update and expand the DA Foundation library. For example, although the Company currently utilizes DA PASS on SAP applications only, as it expands its service offerings to include support for other ERP vendors' software, it will be able to utilize the DA Foundation library as the basis for expanding DA PASS to provide performance support content for such other software applications. Representative Engagements While each client project is different, the following case studies illustrate the range of support solution services the Company has provided to its clients. 27 Cadbury-Schweppes PLC ("Cadbury"). United Kingdom-based Cadbury, the third largest soft drink vendor in the world, decided to replace its legacy computer systems with "Year 2000" compliant SAP ERP software. Starting with an initial engagement with Cadbury's subsidiary, Mott's Inc., the Company utilized 10 consultants over the course of eight months to develop a full suite of change communication, education, and performance support deliverables for Mott's Canadian SAP roll-out. Following successful delivery of this solution, the Company was retained by Mott's to deliver end-user support services for Mott's United States SAP roll-out. These engagements were supported by the Company's North America Mobile Group. During this period, Cadbury acquired Dr Pepper/Seven Up, Inc. and began to implement SAP within this organization from Dr Pepper's base in Dallas. DACG was again retained to deliver end-user support services for this SAP installation. This engagement was supported by the Company's Dallas branch and its North America Mobile Group. Hercules, Incorporated ("Hercules"). DACG was initially engaged in 1993 by Hercules, a U.S.-based global manufacturer of chemical and pharmaceutical products, to deliver an end-user support solution in support of Hercules' implementation of SAP. Hercules had more than 2,000 employees entering transactions and accessing data on its SAP system. As part of its investment in technology, Hercules planned to utilize intranet and internet sites to provide it with a competitive advantage. On the basis of the Company's understanding of web technologies and Hercules' business, DACG was selected to assist Hercules in assessing tangible benefits it could derive from internet/intranet technology. DACG analyzed the means by which Hercules could deploy web technology through the internet and a corporate intranet to facilitate employee communication, improve information management, and enhance product marketing. The Company then provided its consulting services to assist in the design and implementation of Hercules' intranet and internet sites. Both the internet and intranet sites were functional within four to five months from the project start date and Hercules successfully achieved its objectives. This project demonstrated DACG's ability to capitalize on its expertise in ERP software applications to provide ERP-related intranet services. Cultor Food Science ("Cultor"). A subsidiary of Finland-based Cultor Ltd., U.S.-based Cultor Food Science is a worldwide leader in providing food processors with innovative food ingredients, bulking agents, flavorings, and food protectants. In order to support its aggressive growth plans and customer support initiatives, Cultor purchased SAP R/3 applications. Because of the urgency of its needs, Cultor agreed to become a pilot client for Accelerated SAP ("ASAP"), allotting only six months to have the new systems operational. With only three months remaining before implementation, Cultor recognized its need for outside expertise in training. Using its existing content and its consulting tool set, DACG successfully developed an end-user support solution that met the requirements of SAP's ASAP methodology and Cultor's need for rapid delivery of end-user support. The Company's consultants provided education and performance support deliverables to cover a wide range of Cultor business processes, including financial accounting and control, materials management, sales and distribution, production planning, plant maintenance, asset management, and quality management. The Company's DA Cornerstone methodology facilitated a smooth and efficient implementation of the SAP applications within the client's deadline. Cabletron Systems, Incorporated ("Cabletron"). U.S.-based Cabletron is a worldwide leader in providing high performance intranet and internet solutions, including LAN and WAN switches, and network management software. DACG was engaged by Cabletron in 1996 to support Cabletron's implementation of SAP software. The Company developed an end-user support solution covering a wide range of Cabletron processes, including financial accounting, purchasing, inventory management, production planning, and sales and delivery processing. The Company was responsible for the development of an end-user support solution for 1,100 end-users located across the United States. Delivery of change communications to Cabletron's staff was a critical component in preparing end-users for use of the SAP system as all 1,100 end-users were trained in a one month period prior to Cabletron's commencing use of the system. PetroFina SA ("PetroFina"). Brussels-based PetroFina is a leading international oil and petrochemical firm employing over 13,000 people. Having worked on the development of an R/2 end-user support solution for 28 PetroFina since 1994, DACG was selected to provide end-user support services to PetroFina for its R/3 roll out in 1996. The Company developed an end-user support solution that covered a wide range of PetroFina's business processes, supported over 50 end-user job profiles, and was delivered in a number of languages. Through the delivery of a train-the-trainer program, the design of all training curricula, the building of an on-line performance support solution, and the delivery of the foregoing in multiple languages, the Company ensured the successful roll-out of PetroFina's information technology investment across Europe. DACG was retained by PetroFina on the basis of its solid European presence, its proven ability to deliver international end-user support solutions, and its multi-cultural and multilingual consulting capabilities. CLIENTS The Company provides its support solution services around the world to large and mid-sized companies, many of which have information intensive, multinational operations. The Company has provided services to more than 200 clients, including many of the world's leading corporations, in a broad range of industries such as oil and gas, technology, pharmaceutical and chemicals, utilities, and telecommunications, consumer products, and manufacturing. The following is a representative list of the Company's clients served during the nine months ended September 30, 1997. Adgas Compaq Computer Corporation Occidental Chemical Corporation AlliedSignal Inc. Dealer Solutions LLC PetroFina SA Amerada Hess Corporation Deere & Company Public Service Electric & Gas (PSEG) AMP Inc. Exxon Company South Africa Post Office Berlex Laboratories, Hercules, Inc. Service Corporation Inc. International Bristol-Myers Squibb Hewlett-Packard Company Shell Petroleum Inc. Company Browning-Ferris Kimball International Solvay America Inc. Industries Cabletron Systems, Inc. M/A-COM Swift & Co. Cadbury-Schweppes PLC Mobil Oil Corporation Tenneco Packaging, Inc. Chiron Diagnostics Montell USA Inc. Woodside Offshore Petroleum The Company's ten largest clients, in the aggregate, accounted for approximately 59%, 53%, and 38% of its revenue in 1995, 1996, and the first nine months of 1997, respectively. No single client of the Company accounted for more than 10% of the Company's revenues in 1996 and the first nine months of 1997. In 1995, one client, for which the Company provided services on multiple projects for numerous client subsidiaries, represented 17.7% of the Company's revenue for that year. COMPANY ORGANIZATION AND PROJECT MANAGEMENT AND METHODOLOGY Organization The Company divides its organization into three operating divisions: the Americas Division, which includes its North, South, and Central America operations (comprised of a total of six offices as of September 30, 1997); the EMEA Division, which includes its Europe, Middle East, and Africa operations (comprised of a total of five offices as of September 30, 1997); and the Asia Pacific Division, which includes its Australia, New Zealand and Asia operations (comprised of a total of four offices as of September 30, 1997). Each division is headed by a member of the Company's management and is further divided into regions which are generally headed by a 29 Company vice president. Regions are divided into branches, with each branch generally organized into five tiers: consultants; project leaders; project managers; operations managers; and branch managers. Specifically defined responsibilities, communicated through formal training programs and review processes, exist at each level, providing the Company's employees with clearly defined roles and accountability for implementing and effectuating end-user support solutions world-wide. The operations manager, a designated senior individual with extensive project management experience, has primary responsibility for defining the scope of the engagement and satisfying client expectations regarding this scope. The operations manager also has responsibility for managing resource availability of staff from within the Company's organization and for managing project costs. The project manager has responsibility for the execution of the planned project and the production of all deliverables within budget and on-time. The project manager oversees project staffing and works with the operations manager to locate additional Company resources if required. Company-wide executive management, strategic planning, and financial administration are conducted from the Company's corporate headquarters in Houston, Texas. Project Methodology and Management The Company's DA Cornerstone project management methodology is a key component in its delivery of quality end-user support solutions to its clients. DA Cornerstone is DACG's comprehensive six phase, end-user support methodology that addresses key end-user support program deliverables, activities, and milestones throughout the life cycle of an ERP implementation. Each phase has associated tools that facilitate the completion of that phase's activities and deliverables. DA Cornerstone phases include: Analyze: The operations manager, together with the project manager or leader, analyzes the client needs, resources, and requirements. Once this process is complete, the Company submits to the client an end-user support strategy document comprised of change communication, education, and performance support strategies and deliverables for its approval. Prototype Once the change communication, education, and performance and Design: support strategies are approved, the project manager or leader, with the support of the operations manager, designs deliverables and sets up appropriate development strategies for the support solution. The client must approve the end-user support program design. Develop: The entire project team executes the change communications, education, and performance support development strategies, and submits all deliverables for frequent internal and client review. Implement: The entire project team delivers the change communication, education program, and performance support to the end-users. Evaluate: The operations manager and the project manager evaluate the effectiveness of the end-user support program using appropriate tools. Support: The operations manager and the project manager set up the post implementation, long- term maintenance strategy for the end- user support program. The Company's project staff develops each end-user support component through an iterative draft and review process that directly involves client end-users in the development of content specific to their needs. This review process typically consists of three stages and has quality control steps embedded in each stage as formal checkpoints. These checkpoints are intended to ensure that the client is satisfied with the deliverables, that the content is accurate and adheres to the Company's own standards, and that the project is delivered in a cost-effective and timely manner. The success of a given project engagement from a cost, time, and client satisfaction standpoint is the responsibility of the assigned operations and project managers. 30 SALES AND MARKETING The Company generates business through a field sales force which sells directly and pursues client and vendor referrals and trade show leads. In addition, the Company co-markets, in the form of joint sales calls and marketing materials, with ERP vendors and CBT Systems. The Company's direct sales efforts are performed worldwide by its 20 full- time sales personnel, each of whom has either a branch territory or regional focus. The sales personnel generate leads from several sources, including referrals from the Company's existing clients and from attendance at industry trade shows. Among its sales and marketing efforts, the Company's sales force has presented the Company's expertise at SAPPHIRE, the annual SAP America conference for SAP service providers and end-users. Other shows at which the Company participates and has an opportunity to demonstrate its expertise include: SAP conferences in the United States (ASUG, the Americas SAP User Group), South Africa (SAPHILA), Latin America (SAP Universe), Europe, Australia, and Singapore; J.D. Edwards conferences (Focus and User Group); and BAAN world conferences. The Company also uses internet-based marketing, direct mail, advertising in trade magazines, road show events, and networking through regional business communities to generate potential sources for new business. The Company's strategic business alliances, including those which the Company maintains with SAP, J.D. Edwards, and CBT Systems, are a source of generating new business. DACG is recognized by each of SAP, Oracle, and J.D. Edwards as a preferred or qualified provider of end-user support services. As part of its overall relations with SAP, the Company has SAP National Implementation Partner status in the United States, Australia, New Zealand, and South Africa. This status allows for participation in SAP's partner program and exhibitor attendance at SAP conferences. In addition, the Company develops and delivers to potential clients joint proposals with certain of these business alliance partners, with the proposals covering software applications, software implementation services, and end-user support solutions. The Company has been successful in obtaining new business through these joint proposals. The Company's services require a substantial financial commitment by clients and, therefore, typically involve a long sales cycle. Once a lead is generated, the Company endeavors to understand quickly the potential client's business needs and objectives in order to develop the appropriate solution and bid accordingly. The Company's operations and project managers are involved throughout the sales cycle to ensure mutual understanding of client goals, including time to completion and technological requirements. Sales cycles for end-user support solution projects typically range from one to six months from the time the Company initially meets with a prospective client until the client decides whether to authorize commencement of an engagement. The retention of the Company typically occurs at the beginning of the design/prototype stage of the software implementation. RECRUITING AND PERSONNEL DEVELOPMENT As of September 30, 1997, DACG's personnel consisted of 548 employees, 408 of which were professional staff, 24 of which were sales and marketing staff, 19 of which were research and development staff, and 97 of which are administrative staff. The Company believes that its success depends in large part on its attracting, retaining, and motivating talented, creative, and professional employees at all levels. The Company seeks to hire personnel with prior consulting experience in ERP end-user education programs, education professionals with a background in information technology, and information technology professionals with experience with education or communication programs. Strong project management, analytical and communications skills and meaningful international experience are also considered. Recruiting is coordinated company-wide through the Company's human resources department. Training and mentoring are integral parts of the Company's staff development program. The Company's training programs ensure that its professional staff understands the impact of technology on people, is able to communicate effectively at all levels within a client organization, and has the ability to communicate with its 31 clients' technical, business, and management staff in order to gain an understanding of client end-user support requirements. Ongoing training includes a blend of in-house and external training. In-house training includes basic ERP training, more detailed ERP software education, project management, consultancy skills, and leadership training. The use of DA Foundation materials and the application of performance support technologies such as DA PASS are also covered. In addition, all consultants are required to attend a DA Cornerstone methodology training program, and to be approved for its use before being assigned to any consulting project. External training programs focus on project and time management skills. The Company believes that its culture is central to its ability to attract and retain highly skilled and motivated professionals. Extensive technical, management, and sales training enable DACG professionals to expand their skills and attain increasing levels of responsibility within the organization. The Company attracts and motivates its professional and administrative staff by offering competitive packages of base and incentive compensation and benefits. All professional staff members are eligible for bonuses. The Company appreciates the importance of recognition and a promotion track for its administrative staff and fully integrates this staff into the conduct of its business. The Company has experienced staff retention rates in excess of 80% over each of the past three years. Further, all of the Company's employees are eligible to receive stock options. After the completion of this offering, 256 employees (representing approximately one-half of the Company's employees as of September 30, 1997) will own, in the aggregate, approximately 20% of the post-offering, fully diluted equity of the Company. See "Management--1997 Stock Option Plan." RESEARCH AND DEVELOPMENT DACG established a research and development department in 1995 to support and maintain its end-user support content and consulting methodologies. The division, which consisted of 19 persons as of September 30, 1997, is responsible for developing and maintaining DA PASS, DA Foundation, and the Company's consulting methodologies, including the development of the Company's proprietary toolset used for the rapid deployment of end-user support solutions. The division is also responsible for developing computer-based training in cooperation with CBT Systems. The Company's research and development department continually applies technology developments to the Company's content and tools. As technology has advanced, DACG has kept pace with this development, expanding its deliverables from traditional hard copy materials and instructor led training to include on-line documentation, multimedia training, EPSS, and web-based education and performance support solutions. The division works directly with the Company's human resources department to ensure that the Company's consultants are trained to support each new release of the consulting methodologies. The Company considers research and development as a key to the expansion of its service offerings and plans to increase its expenditures in this area in 1998. COMPETITION The global market for end-user performance support services for ERP implementations is large and highly fragmented and is subject to low barriers to entry and rapid change. Providers include large international systems integrators, such as the consulting practices of the large international accounting firms, which are focused principally on systems integration and implementation but also provide end-user support as a secondary service. In addition, the Company competes with the professional services groups of many large technology and management consulting companies and a large number of smaller organizations which specialize in ERP support services, generally serving a limited geographic area and having a smaller base of technical and managerial resources. In addition, clients may elect to use internal resources to satisfy their needs for the services the Company provides. The Company faces competition for client assignments from a number of companies having significantly greater financial, technical, and marketing resources and greater name recognition than the 32 Company. The Company believes that the key competitive factors forming the basis upon which these companies compete are experience, reputation, industry focus, international presence, service offerings, and price relative to the value of the services provided. The Company believes that it competes effectively and will continue to compete effectively with respect to each of these factors both in the United States and internationally. FACILITIES Currently, the Company maintains 15 offices on five continents. The Company's headquarters is at 5847 San Felipe Road, Suite 3700, Houston, Texas, where it leases approximately 20,000 square feet of space. This lease expires in June 2004. The Company also maintains domestic offices in the metropolitan areas of Boston, Dallas, and Philadelphia, and foreign offices in Toronto, Mexico City, London, Paris, Singapore, Melbourne, Sydney, Brisbane, Durban, Johannesburg, and Cape Town. Each of these offices is located near one or more significant clients of the Company, and, except for Durban, have terms which will expire in between one and seven years (exclusive of renewal options exercisable by the Company). The Company's strategy is to locate offices in areas where it has significant client work. All of the Company's offices are electronically linked together and have access to all of the Company's capabilities and core consulting tools. From time to time, the Company uses office space provided at client sites to facilitate performance of its services and maximize client contact. Where the Company operates in a country without an established office, operations are handled on a mobile basis with corporate support being delivered from one of its regional centers in Houston, London, Sydney, or Johannesburg. The Company believes that its facilities are adequate for its current needs and that additional facilities can be leased to meet future needs. INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS The Company relies upon a combination of nondisclosure and other contractual arrangements and trade secret laws to protect its proprietary rights. The Company generally enters into confidentiality agreements with its key employees and clients, thereby seeking to limit distribution of proprietary information. There can be no assurance that the steps taken by the Company in this regard will be adequate to deter misappropriation of proprietary information or that the Company will be able to detect unauthorized use of and take appropriate steps to enforce its intellectual property rights. Software developed and other materials prepared by the Company in connection with client engagements are usually assigned to the Company's clients following the termination of the engagement. The Company retains the right to use the general know-how developed by the Company in the course of the engagement, and this accumulated knowledge is the basis for the DA Foundation. The Company also retains all rights to certain of its proprietary methodologies and software (such as DA PASS and computer-based training software), the benefit of which the Company provides to the client by royalty-free license. DA Foundation and DA Team Teach are registered trademarks and/or service marks of the Company. The Company also claims common law trademark rights in DA Consulting Group, DA, and the DA logo, for which the Company has filed applications for federal registration in the United States Patent and Trademark Office. Furthermore, the Company claims common law trademark rights in various other marks, including DA Cornerstone, DA PASS, and the slogan Solutions for People and Technology, but has not decided at present to file applications for trademark registration for any of these other marks. The Company holds no patents. The Company has registered the copyright in the computer programs titled "DA Basic Skills Training for SAP R/3" and "DA Basic Skills Training for SAP R/3 v2.0 US." The Company also claims the copyright in numerous other works and may elect to register such copyrights on a case-by- case basis. LEGAL PROCEEDINGS From time to time, the Company is a party to routine litigation in the ordinary course of business. The Company is not currently a party to any material pending legal proceedings. 33 MANAGEMENT The following table sets forth information regarding the executive officers and directors of the Company:
EXECUTIVE OFFICERS AND DIRECTORS: AGE POSITION - --------------------------------- --- -------- Nicholas H. Marriner...... 55 President, Chief Executive Officer, and Director Patrick J. Newton......... 31 Chief Operating Officer Michael J. Mackey......... 40 Chief Financial Officer, Executive Vice President, Finance and Administration, Treasurer, and Secretary Lisa L. Costello.......... 28 Executive Vice President, Research and Development Eric J. Fernette.......... 40 Executive Vice President, Human Resources Virginia L. Pierpont...... 55 Director and Chair of the Board Nigel W.E. Curlet......... 52 Director Gunther E.A. Fritze....... 61 Director Richard W. Thatcher, Jr... 58 Director
EXECUTIVE OFFICERS AND DIRECTORS Nicholas H. Marriner joined the Company in 1991 as its Financial Director and in 1993 became the Company's Chief Executive Officer. Until June 1996, Mr. Marriner was also a partner in Clark Whitehill Joselyn, an accounting firm which until December 1997 provided accounting services to the Company. See "Certain Relationships and Related Transactions." Mr. Marriner attended Leeds University and is a Fellow of the Institute for Chartered Accountants in the United Kingdom. Mr. Marriner is married to Ms. Pierpont. Patrick J. Newton joined DACG in London in 1991 as a consultant. He was promoted to Branch Manager of the Mobile Group in July 1995, to Vice President of the Mobile Group in January 1996, to President of the Americas Division in July 1996, and to Chief Operating Officer in January 1997. As Chief Operating Officer, he is responsible for the worldwide operations of the Company. Mr. Newton received his B.A. from Oxford University. Michael J. Mackey joined the Company in February 1997 as its Chief Financial Officer and is primarily responsible for the finance and administrative functions of the Company. Prior to joining the Company, from 1990 to 1996, Mr. Mackey was employed by Global Software, Inc., a technology company with consulting and products divisions, most recently as its Chief Financial Officer. Mr. Mackey received his B.S. from the University of Florida and his MBA from the University of Central Florida and is a Certified Public Accountant. Lisa L. Costello joined DACG as a consultant in February 1993. She assumed the position of Operations Manager of the Americas Division Mobile Group in January 1996, and in July 1996 she was promoted to Director of Research and Development for DACG's Americas Division. In January 1997, she was promoted to Vice President and, in August 1997, to Executive Vice President, Research and Development, with responsibility for research and development worldwide. Prior to joining the Company, from June 1991 to January 1993, Ms. Costello was a technical writer with Software Interfaces, Inc. Ms. Costello received her B.A. from the University of St. Thomas, Houston. Eric J. Fernette joined the Company as Executive Vice President, Human Resources in July 1997. Prior to joining the Company, from 1987 to 1996, Mr. Fernette was employed by Compaq North America in various capacities, most recently as Director of Human Resources, North America Division. From 1979 to 1987, Mr. Fernette was a Human Resources Manager with ITT. Mr. Fernette received his B.S. from Arizona State University. Virginia L. Pierpont founded DACG as a sole proprietorship in 1984, incorporated the business in 1987, and opened its United Kingdom operation in 1988. Ms. Pierpont was the Chief Executive Officer of the Company from 1984 to 1993 and has been Chair of the Board since December 1996. Ms. Pierpont received her B.A. from Boston University. Ms. Pierpont is married to Mr. Marriner. 34 Nigel W.E. Curlet has served as a director since December 1996. Since 1976, he has been employed in various capacities by Shell Chemical Company and is currently its Manager of Business Process Design. Mr. Curlet's prior management roles at Shell were in its information technology, research and development, and operations and strategic planning departments. He received his B.S. from Birmingham University and his S.C.D. from Massachusetts Institute of Technology. Gunther E.A. Fritze has served as a director since December 1996. Since 1962, he has been employed in various capacities by Bank of Boston and is currently its Manager, Finance Companies. He received his B.A. from Harvard College and his MBA from Harvard Business School. Richard W. Thatcher, Jr. has served as a director since December 1996. Since 1992, he has been Senior Vice President in the investment banking department of Pennsylvania Merchant Group Ltd, one of the Representatives of the Underwriters. He received his B.S. in engineering and his MBA from Cornell University. The Restated Articles provide for the Board of Directors to be divided into three classes serving staggered three-year terms. The term of office of the first class of directors, consisting of Messrs. Curlet and Fritze, will expire at the 1999 annual meeting of shareholders, the term of office of the second class, consisting of Ms. Pierpont and Mr. Thatcher, will expire at the 2000 annual meeting of shareholders, and the term of office of the third class, consisting of Mr. Marriner, will expire at the 2001 annual meeting of shareholders. At each annual meeting of shareholders, the class of directors to be elected at such meeting will be elected for a three-year term, and the directors in the two other classes will continue in office. DIRECTOR COMPENSATION Directors who are not employees of the Company are paid a fee of $1,250 for each board and committee meeting attended in person and all directors are reimbursed for travel expenses as incurred. BOARD COMMITTEES Promptly after the completion of this offering, the Board of Directors will establish an Audit Committee, the initial members of which will be Messrs. Curlet, Fritze, and Thatcher, and a Compensation Committee, the initial members of which will be Ms. Pierpont and Messrs. Curlet and Fritze. The Audit Committee will review the qualifications of the Company's independent auditors, make recommendations to the Board of Directors regarding the selection of independent auditors, review the scope, fees and results of any audit, and review non-audit services and related fees provided by the independent auditors. The Compensation Committee will be responsible for determining compensation for the executive officers of the Company, including bonuses and benefits, and will administer the Company's compensation programs, including the Company's 1997 Stock Option Plan. The Board of Directors does not have a nominating committee. The selection of nominees for the Board of Directors is made by the entire Board of Directors. The Board of Directors may from time to time establish other committees to facilitate the management of the Company. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS Prior to this offering, the Company has had no separate Compensation Committee or other committee performing equivalent functions. As a result, compensation matters were performed by the Board of Directors or senior management of the Company. A majority of the directors expected to serve on the Compensation Committee will be non-employee directors of the Company. No director or executive officer of the Company is a director or executive officer of any other corporation that has a director or executive officer who is also a director of the Company. 35 EXECUTIVE COMPENSATION Summary Compensation The following table sets forth, as to the Chief Executive Officer and the only other executive officers whose annual salary and bonus exceeded $100,000 in 1997 (collectively, the "Named Executive Officers"), information with respect to annual and long-term compensation earned during the last three fiscal years: SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION AWARDS ------------ NUMBER OF ANNUAL COMPENSATION(1) SHARES ----------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY(2) BONUS OPTIONS COMPENSATION(3) - --------------------------- ---- --------- -------- ------------ --------------- Nicholas H. Marriner...... 1997 $270,000 $180,000 -- $ 7,919 President and Chief 1996 $180,000 $129,600 -- $ 9,885 Executive Officer 1995 $149,386 $ 38,820 -- $ 9,772 Patrick J. Newton......... 1997 $210,000 $140,000 8,400 -- Chief Operating Officer 1996 $125,000 $125,000 -- $291,960 1995 $ 78,209 -- -- -- Michael J. Mackey(4)...... 1997 $142,083 $ 40,000 63,000 $ 4,354 Chief Financial Officer, 1996 -- -- -- Executive Vice President, 1995 -- -- -- -- Finance and -- Administration, Treasurer, and Secretary Lisa L. Costello.......... 1997 $136,343 $ 56,000 21,000 $ 7,657 Executive Vice President, 1996 $ 97,200 $ 32,500 -- $ 300 Research and Development 1995 $ 50,630 -- -- $ 2,100 Eric J. Fernette(5)....... 1997 $ 47,917 $ 20,000 25,200 -- Executive Vice President, 1996 -- -- -- -- Human Resources 1995 -- -- -- --
- -------- (1) All figures converted to U.S. dollars based upon the exchange rate at the end of the applicable fiscal year. (2) Salary includes amounts deferred, if any, pursuant to the Company's 401(k) plan. (3) Amounts include compensation expense attributed to employee stock grants, employer 401(k) contributions and Company perquisites. (4) Mr. Mackey became Chief Financial Officer on February 1, 1997 at a base annual salary of $155,000. Options with respect to 63,000 shares of Common Stock were granted to Mr. Mackey on February 1, 1997. (5) Mr. Fernette became Executive Vice President, Human Resources on July 28, 1997 at a base annual salary of $115,000. Options with respect to 25,200 shares of Common Stock were granted to Mr. Fernette on August 1, 1997. Employment Agreements The Company has entered into employment agreements with the Named Executive Officers effective January 1, 1998, the initial terms of which expire on December 31, 1998. The initial base annual salaries under the employment agreements of the Named Executive Officers are $432,000 for Mr. Marriner, $306,000 for Mr. Newton, $169,200 for Mr. Mackey, $144,000 for Ms. Costello, and $144,000 for Mr. Fernette. The base annual salary of each of the Named Executive Officers is subject to increases periodically at the discretion of the Board of Directors, and each Named Executive Officer may receive an annual bonus as determined by the Board of Directors. Each of the employment agreements provides for customary benefits, including life, health and disability insurance and 401(k) plan participation. Each of the employment agreements further provides that if 36 the employee is terminated without cause, such employee is entitled to severance pay of up to one year's base salary, bonus, and benefits. In the event such employee is terminated in connection with a change in control (as defined therein), Mr. Fernette and Ms. Costello would be entitled to receive one year's base salary and benefits and 100% of any bonus paid with respect to the calendar year immediately preceding termination, and Messrs. Mariner, Newton, and Mackey would be entitled to receive two years' base salary and benefits and 200% of any bonus paid with respect to the calendar year immediately preceding termination. Key Man Insurance Messrs. Marriner, Newton, and Mackey are key employees of the Company and the contribution of each of them to the Company has been and will continue to be a significant factor in the Company's future success. The loss of any of them could adversely affect the Company's business and results of operations. The Company maintains, and is the beneficiary of, "key man" life insurance policies on the lives of Messrs. Marriner, Newton, and Mackey each in the face amount of $1.0 million. Option Grants The following table sets forth information regarding options to purchase shares of Common Stock granted to the Named Executive Officers during 1997. OPTION GRANTS DURING 1997
POTENTIAL REALIZED VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR INDIVIDUAL GRANTS OPTION TERM(2) ------------------------------------------------- ------------------- NUMBER OF PERCENT OF SECURITIES TOTAL UNDERLYING OPTIONS OPTIONS GRANTED EXERCISE PRICE EXPIRATION NAME GRANTED TO EMPLOYEES PER SHARE(1) DATE 5% 10% - ---- ---------- ------------ -------------- ---------- -------- ---------- Nicholas H. Marriner.... -- -- -- -- -- -- Patrick J. Newton....... 8,400 1.7% $5.71 1/31/2007 $116,193 $ 213,449 Michael J. Mackey....... 63,000 13.2 5.71 1/31/2007 871,444 1,600,869 Lisa L. Costello........ 21,000 4.4 5.71 1/31/2007 290,481 533,623 Eric J. Fernette........ 25,200 5.2 6.55 7/31/2007 327,578 619,348
- -------- (1) The exercise price equaled the fair market value of a share of Common Stock on the date of grant as determined by the Board of Directors. The exercise price is payable in cash or by delivery of shares of Common Stock having a fair market value equal to the exercise price of the options exercised. All options vest in one-third installments on the second, third, and fourth anniversaries of the date of grant. (2) The assumed annual rates of appreciation of 5% and 10% would result in the price of a share of Common Stock increasing to $19.55 and $31.12, respectively, from the assumed initial public offering price of $12.00 per share, during the 10 year term of the options. The vesting of unvested options may be accelerated at any time by the Company. The 5% and 10% assumed annual rates of stock price appreciation used to calculate potential gains to optionees are mandated by the rules of the Commission. The potential realizable value does not represent the Company's prediction of its stock price performance. There can be no assurance that the stock price will actually appreciate over the 10 year option term at the assumed 5% and 10% levels or at any other level. 37 Option Exercises and Holdings The following table sets forth information concerning the number and value of unexercised options to purchase shares of Common Stock held by the Named Executive Officers as of December 31, 1997. No Named Executive Officer exercised any options to purchase shares of Common Stock during 1997. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED SHARES EXERCISABLE/ IN-THE- ACQUIRED UNEXERCISABLE MONEY UPON VALUE OPTIONS AT OPTIONS AT NAME EXERCISE REALIZED YEAR-END(1) YEAR-END(2) - ---- -------- -------- ------------- ----------- Nicholas H. Marriner................ -- -- -- -- Patrick J. Newton................... -- -- 8,400 $ 52,800 Michael J. Mackey................... -- -- 63,000 396,000 Lisa L. Costello.................... -- -- 21,000 132,000 Eric J. Fernette.................... -- -- 25,200 137,400
- -------- (1) All options were unexercisable on December 31, 1997. (2) Value is based on the $12.00 per share assumed initial public offering price less the per share exercise price. EMPLOYEE BENEFIT PLANS 1997 Stock Option Plan The Company adopted its 1997 Stock Option Plan (the "Stock Option Plan") effective February 1, 1997. The Company believes that the Stock Option Plan will promote the long-term growth and profitability of the Company by providing key people associated with the Company with incentives to improve shareholder value and to contribute to the growth and financial success of the Company. Moreover, the Company believes that the Stock Option Plan will help the Company to attract, retain, and reward the best available persons for positions of substantial responsibility. The Stock Option Plan has been administered by the Board of Directors and will be administered by the Board's Compensation Committee after the completion of this offering. The Board of Directors has exclusive authority: (i) to grant Awards (as defined below) under the Stock Option Plan; (ii) to make all interpretations and determinations affecting the Stock Option Plan; and (iii) to determine the individuals to whom Awards are granted, the amount of such Awards, any applicable vesting schedule, and any other terms of an Award. Participation in the Stock Option Plan is limited to employees and members of the Board of Directors of the Company or any of its subsidiaries, as well as independent contractors and consultants of the Company (the "Participants"). Awards under the Stock Option Plan may be in the form of incentive stock options ("ISOs") that meet the requirements of Section 422 of the Internal Revenue Code or "nonqualified" stock options ("NQSOs") (collectively, "Awards"). ISOs may only be granted to individuals who are employees of the Company at the date of grant. All options vest in one-third installments on the second, third and fourth anniversaries of the date of grant, unless otherwise specified in the terms of an individual Award. Awards under the Stock Option Plan are not transferable by the Participants, except upon death. If any Award issued under the Stock Option Plan expires or becomes unexercisable for any reason without having been exercised in full, or if shares issued pursuant to an Award are subsequently repurchased by the Company, the unpurchased or repurchased shares will again become available for future Awards under the Stock Option Plan. The Stock Option Plan provides for the grant of stock options to purchase up to an aggregate of 1,260,000 shares of Common Stock. In the event of any stock split, reverse stock split, stock dividend, recapitalization, reclassification, merger, consolidation, exchange of shares, offering of rights to purchase shares of Common 38 Stock at a price substantially below fair market value, or other similar event, appropriate proportional adjustments may be made to the number of shares reserved for issuance under the Stock Option Plan and the number, kind, and price of shares covered by outstanding Awards. The Stock Option Plan also provides for the ability of the Board or the Compensation Committee to accelerate the vesting of all unvested options, to accelerate the expiration date of all options, whether or not vested, or to take certain other actions upon the occurrence of a "Change of Control," as such term is defined in the Stock Option Plan. Stock options may not be exercised more than 10 years after the date of grant (five years after the date of grant with respect to an ISO granted to any person who owns stock of the Company possessing 10% or more of the total voting power of all the Company's stock at the time of the grant). The Board has the discretion to award stock options to Participants as either ISOs (employees only) or as NQSOs. Stock options awarded to Participants who are not employees will be NQSOs. The exercise price of an ISO must be not less than the fair market value of the Common Stock on the date the option is granted (110% of fair market value with respect to an ISO granted to any person who owns stock of the Company possessing 10% or more of the total voting power of all the Company's stock at the time of the grant), and is payable upon the exercise of the option. Although the exercise price of an NQSO may be less than the fair market value of the Common Stock on the date the option is granted, the Board does not intend to grant NQSOs at less than fair market value. The number of shares covered by ISOs granted to any optionee is limited such that the aggregate fair market value of stock (determined as of the date of the grant) with respect to which ISOs are exercisable for the first time by such optionee in any calendar year may not exceed $100,000. The excess options, if any, will be treated as NQSOs. If an optionee's service with the Company ceases for any reason other than death, disability, or termination for cause, unless otherwise specified in the terms of an individual option agreement, any option exercisable on the date of such termination generally may be exercised for a period of three months from the date of such termination or until the expiration of the stated term of the option, whichever period is shorter. In the event of termination of service by reason of death or disability, unless otherwise specified in the terms of an individual option agreement, any option exercisable at the date of such termination generally may be exercised for a period of one year from the date of termination or until the expiration of the stated term of the option, whichever period is shorter. If an optionee's service is terminated for cause, any option not exercised prior to the date of such termination shall be forfeited. As of September 30, 1997, options to purchase an aggregate of 448,589 shares of Common Stock were outstanding under the Stock Option Plan at a weighted average exercise price of $5.91 per share, including options to purchase the following number of shares held by the following directors and executive officers: Mr. Newton (8,400 shares); Mr. Mackey (63,000 shares); Ms. Costello (21,000 shares); Mr. Fernette (25,200 shares); Mr. Curlet (12,600 shares); Mr. Fritze (12,600 shares); and Mr. Thatcher (12,600 shares). In addition, the Company expects to grant to employees, as of the date of this Prospectus, options to purchase an aggregate of 210,000 shares of Common Stock under the Stock Option Plan at an exercise price equal to the initial public offering price per share, including options to purchase the following number of shares to the following executive officers: Mr. Newton (10,000 shares); Mr. Mackey (10,000 shares); and Ms. Costello (5,000 shares). 401(k) Plan The Company sponsors a 401(k) profit sharing plan (the "401(k) Plan") which covers substantially all of its U.S. employees. Employees are eligible to participate after completing three months of service. The 401(k) Plan provides for elective contributions by employees up to the maximum limit allowed by the Internal Revenue Code. The Company currently matches 50% of the amount deferred by participants, on deferral amounts up to 7.5% of compensation. Although the Company has not made any profit sharing contributions, the 401(k) Plan permits the Company to make a discretionary profit sharing contribution which, if made, is allocated to the accounts of participants who have been credited with 1,000 hours of service during a plan year and who are employed on the last day of a plan year. The Company made matching contributions equal to $0.06, $0.06, and 39 $0.50 for each dollar contributed to the 401(k) Plan, subject to the limits noted above, by employees during 1994, 1995, and 1996, respectively. An employee is fully vested in the matching contributions after six years of employment, or earlier upon attainment of appropriate retirement age, upon retirement due to disability, or upon death. The Company made contributions to the 401(k) Plan aggregating approximately $2,000, $9,000, and $92,000 during the years ended December 31, 1994, 1995, and 1996, respectively. Payment of benefits is generally made in the form of a single lump sum or in installments. Incentive Compensation and Profit Sharing Policies The Company has implemented incentive compensation and profit sharing policies which cover substantially all salaried employees. Employees in positions at project manager or below, as well as administrative staff, are eligible for discretionary profit sharing payments. Each employee's profit sharing payment is based on a formula and is contingent upon his or her level of salary and length of service. Employees in positions at project manager or above are eligible for incentive compensation payments based on satisfaction of applicable performance criteria. The Company approved and recognized incentive compensation and profit sharing payments aggregating $190,000, $650,000, and $1,258,000 for the years ended December 31, 1994, 1995, and 1996, respectively. Prior Plan and Awards The Company adopted a stock plan in 1996 which allowed certain employees to purchase shares of Common Stock at fair market value on such date. An aggregate of 123,753 shares were purchased pursuant to this plan. No additional shares will be granted or sold under this plan. In addition, the Company awarded 464,848 shares of Common Stock to certain key employees in 1996. No cash consideration was paid for such shares. See "Certain Relationships and Related Transactions." 40 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During 1995, 1996, and the nine months ended September 30, 1997, the Company paid $160,000, $100,000, and $100,000, respectively, for accounting services provided by Clark Whitehill Joselyn, an accounting firm of which Nicholas H. Marriner, the President and Chief Executive Officer of the Company, was a partner until June 1996. In October 1997, the Company entered into a contract with Richard W. Thatcher, Jr., a director of the Company and Senior Vice President in the investment banking department of Pennsylvania Merchant Group Ltd, one of the Representatives of the Underwriters, pursuant to which Mr. Thatcher provides certain financial advisory services to the Company in exchange for a monthly retainer of $5,000 and payment of certain fees in the event of the successful completion of an acquisition or merger. The Company believes that these consulting services, which will continue through December 1998, are being provided by Mr. Thatcher at a fair market rate. As of January 1, 1995, the Company owed Mr. Marriner and Virginia L. Pierpont, Chair of the Board of Directors of the Company, approximately $280,000 in respect of loans and other advances from Mr. Marriner and Ms. Pierpont to the Company. During 1995, additional loans and other advances were made. These amounts were payable on demand and interest was accrued at a discretionary variable rate (approximately 16%). As of December 31, 1995 and 1996, the Company's indebtedness to these principals amounted to $312,000 and $356,000, respectively. Interest expense related to the Company's indebtedness to these principals amounted to $45,000 and $53,000 for the years ended December 31, 1995 and 1996, respectively, In March 1997, the Company repaid the outstanding balance of this indebtedness. In June 1996, the Company loaned Cynthia Gibson, a Selling Shareholder, and a trust for the benefit of Piero Granelli, another Selling Shareholder, an aggregate of $413,000, all of the proceeds of which such Selling Shareholders used in connection with their purchase of 361,200 shares of Common Stock for an aggregate purchase price of $459,000. In July 1997, the Company loaned Michael J. Mackey, the Chief Financial Officer of the Company, $89,640, all of the proceeds of which Mr. Mackey used in connection with his purchase of 17,430 shares of Common Stock for a purchase price of $99,600. Mr. Mackey's loan bears interest at the prime rate of interest plus 0.25% per annum and matures June 30, 2001, subject to mandatory prepayment upon the completion of this offering. In December 1997, Mr. Mackey purchased 7,560 shares of Common Stock for $49,500. All of the foregoing loans will be repaid to the Company upon completion of this offering. In June 1996, Ms. Pierpont contributed 1,170,448 shares of Common Stock to the capital of the Company at cost, a portion of which shares were issued by the Company to employees. In September 1996, the Company awarded 158,760 shares of Common Stock to Patrick J. Newton, Chief Operating Officer of the Company, and in December 1997, Mr. Newton purchased 7,560 shares of Common Stock for $49,500. In January 1997, Mr. Thatcher purchased 42,000 shares of Common Stock of the Company for $240,000, and in December 1997, Mr. Thatcher purchased 15,120 shares of Common Stock for $99,000. In January 1997, Gunther E.A. Fritze, a director of the Company, purchased 6,300 shares of Common Stock for $36,000, and in December, 1997 Mr. Fritze purchased 21,000 shares of Common Stock for $137,500. In December 1997, Eric J. Fernette, the Executive Vice President, Human Resources of the Company, purchased 30,240 shares of Common Stock for $198,000. In January 1997, Margaret Rather Curlet, wife of Nigel W.E. Curlet, a director of the Company, purchased 3,570 shares of Common Stock for $20,400, and on December 1997, Ms. Curlet purchased 7,560 shares of Common Stock for $49,500. The price paid for the above-mentioned purchases represented the fair value of the purchased shares as of the dates of each such purchase. In June 1994, Ms. Pierpont, Mr. Marriner, and two trusts (the beneficiaries of which include Ms. Pierpont and members of her family) purchased 42, 42, and 41,916 shares, respectively, of Common Stock of the Company in exchange for cash payments of $1, $1, and $998, respectively. In July 1995, Ms. Pierpont, Mr. Marriner, the two trusts, and Ms. Pierpont's mother acquired 1,816,038, 166,614, 1,260,126, and 630 shares, respectively, of Common Stock of the Company in exchange for shares (with a weighted average value of $0.95 41 per share) of companies which are now subsidiaries of the Company. In January 1996, Mr. Marriner acquired 235,200 shares of Common Stock of the Company in exchange for shares (valued at $0.01 per share) of a company which is now a subsidiary of the Company. Ms. Pierpont and Mr. Marriner may be considered promoters of the Company. See "Management" and "Principal and Selling Shareholders." The Company leases a facility in Leeds, England from Mr. Marriner, and office space in Johannesburg, South Africa from an entity of which Mr. Marriner and Mr. Granelli are owners. The aggregate rental paid by the Company for these properties was $38,000 for the year ended December 31, 1995, $38,000 for the year ended December 31, 1996, and approximately $28,000 for the nine months ended September 30, 1997, which the Company believes reflect a fair market rental rate. 42 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth information, as of the date of this Prospectus, with respect to the beneficial ownership of the Common Stock (including shares issuable upon the exercise of outstanding options that are exercisable as of the date of this Prospectus or within 60 days hereafter) by: (i) each person who owns beneficially more than 5% of the Common Stock; (ii) each director of the Company; (iii) the Chief Executive Officer and each of the Named Executive Officers of the Company; (iv) all directors and executive officers as a group; and (v) the Selling Shareholders. Unless otherwise indicated, each named person exercises sole voting and investment power.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP OF COMMON STOCK OF COMMON STOCK PRIOR TO THIS OFFERING NUMBER OF AFTER THIS OFFERING -------------------------SHARES BEING ----------------------- NAME OF BENEFICIAL OWNER SHARES PERCENT OFFERED SHARES PERCENT - ------------------------ ------------- ----------------------- ------------ ---------- EXECUTIVE OFFICERS AND DIRECTORS Nicholas H. Marriner(1)............ 401,814 8.4% -- 401,814 6.2% Patrick J. Newton....... 158,760 3.3% 60,480 98,280 1.5% Michael J. Mackey(1).... 24,990 * -- 24,990 * Lisa L. Costello........ 4,200 * -- 4,200 * Eric J. Fernette........ 30,240 * -- 30,240 * Nigel W.E. Curlet(2).... 11,130 * -- 11,130 * Gunther E.A. Fritze..... 27,300 * -- 27,300 * Richard W. Thatcher, Jr..................... 57,120 1.2% -- 57,120 * Virginia L. Pierpont.... 551,321 11.5% 131,321 420,000 6.5% OTHER SHAREHOLDERS Amicable Discretionary Trust(3)(4)(6)......... 956,592 19.9% 133,392 823,200 12.6% Worcester Discretionary Trust(1)(3)(5)(6)...... 631,092 13.1% 132,132 498,960 7.7% Woodbourne Discretionary Trust(1)(3)(5)(6)...... 629,034 13.1% 34,442 594,592 9.1% Piero Granelli (1)(3)(7).............. 217,048 4.5% 80,438 136,610 2.1% Alison Smith(1)......... 189,000 3.9% 147,000 42,000 * Cynthia Gibson.......... 176,400 3.7% 80,795 95,605 1.5% All directors and executive officers as a group (9 individuals)........ 1,266,875 26.3% 191,801 1,075,074 16.5%
- ------- * Less than 1% (1) Does not include shares of Common Stock which may be sold pursuant to the Underwriters' over-allotment option. If the Underwriters' over-allotment option is exercised in full, Mr. Marriner, Worcester Discretionary Trust, Woodbourne Discretionary Trust, Ms. Smith, Mr. Mackey, and a trust of which Mr. Granelli is the sole beneficiary intend to sell 23,814, 43,152, 57,834, 37,800, 4,200, and 88,200 shares of Common Stock, respectively, pursuant thereto. (2) Consists of shares (as to which Mr. Curlet disclaims beneficial ownership) owned by Mr. Curlet's spouse. (3) John Andrew Cowan and Roger Geoffrey Barrs are the co-trustees of each of these trusts. Messrs. Cowan and Barrs are also trustees of the David Michael Payne Settlement (which beneficially owns 184,800 shares of Common Stock), the sole beneficiary of which is Piero Granelli, a former employee of the Company and a Selling Shareholder. (4) The beneficiaries under this trust include Ms. Pierpont, her children and grandchildren, the spouses and children of any of the beneficiaries, and any other persons or class of persons named by the trustees. (5) The beneficiaries under these trusts include Ms. Pierpont, her children, the spouses and children of any of the beneficiaries, and any other persons or class of persons named by the trustees. (6) The trustees of each of these trusts have the authority to appoint all or any part of the capital and income of the trust for one or more of the beneficiaries and in such names and proportions and at such time as such trustees shall determine. (7) Includes 184,800 shares owned by the David Michael Payne Settlement, a trust the sole beneficiary of which is Mr. Granelli. 43 DESCRIPTION OF CAPITAL STOCK As of the date of this Prospectus, the authorized capital stock of the Company consists of 40,000,000 shares of Common Stock, par value $0.01 per share, of which 6,509,378 shares will be outstanding immediately following this offering, and 10,000,000 shares of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), of which no shares will be outstanding immediately following this offering. The following summary of the Company's capital stock is qualified in its entirety by reference to the Company's Amended and Restated Articles of Incorporation (the "Restated Articles") and its Restated Bylaws (the "Bylaws"), each of which is filed as an exhibit to the Registration Statement of which this Prospectus is a part. COMMON STOCK Voting Rights. Holders of Common Stock are entitled to one vote for each share on all matters on which shareholders generally are entitled to vote, including elections of directors. The Restated Articles provide that there shall be no cumulative voting for the election of directors. Holders of Common Stock have no preemptive subscription, redemption, or conversion rights. Dividends. Subject to the preferential rights of any outstanding Preferred Stock that may be created by the Board of Directors under the Restated Articles, dividends may be paid to holders of Common Stock when, as and if declared by the Board of Directors out of funds legally available for such purpose. The declaration and payment of dividends on Common Stock could be restricted by the terms of any Preferred Stock issued or any credit agreements to which the Company may become a party. Under the TBCA, dividends may be paid by the Company out of "surplus" (as defined under Article 1.02 of the TBCA) or, if there is no surplus, out of net profits for the fiscal year in which the dividends are declared and/or the preceding fiscal year. The Company does not intend to pay dividends at the present time. See "Dividend Policy." Liquidation. In the event of the dissolution or winding up of the Company, after payment or provision for payment of debts and other liabilities of the Company and any other series or class of the Company's stock hereafter issued that ranks senior as to liquidation rights to the Common Stock, the holders of Common Stock will be entitled to receive pro rata all remaining assets of the Company available to such holders. All outstanding shares of Common Stock are, and the shares of Common Stock to be sold by the Company in this offering will be, duly and validly issued, fully paid, and nonassessable. PREFERRED STOCK The Board of Directors may from time to time authorize the issuance of one or more classes or series of Preferred Stock without shareholder approval. Subject to the provisions of the Restated Articles and limitations prescribed by law, the Board of Directors is authorized to adopt resolutions to issue the shares, establish the number of shares, change the number of shares constituting any series, and provide or change the voting powers, designations, preferences, and relative, participating, optional or other special rights, qualifications, limitations or restrictions on shares of Preferred Stock, including dividend rights (including whether dividends are cumulative), dividend rates, terms of redemption (including sinking fund provisions), redemption prices, conversion rights, and liquidation preferences, in each case without any action or vote by the shareholders. The Company has no current plans to issue any shares of Preferred Stock of any class or series. One of the effects of undesignated Preferred Stock may be to enable the Board of Directors to discourage an attempt to obtain control of the Company by means of a tender offer, proxy contest, merger or otherwise, and thereby protect the Company's management. The issuance of Preferred Stock pursuant to the Board of Directors' authority described above may adversely affect the rights of the holders of Common Stock. For example, Preferred Stock issued by the Company may rank prior to the Common Stock as to dividend rights, liquidation 44 preference or both, may have full or limited voting rights, and may be convertible into shares of Common Stock. Accordingly, the issuance of shares of Preferred Stock may discourage bids for the Common Stock or may otherwise adversely affect the trading price of the Common Stock. CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK Under the Restated Articles, upon completion of this offering (assuming the Underwriters' over-allotment option is not exercised and excluding an aggregate of 1,260,000 shares reserved for issuance under the Stock Option Plan), there will be 33,490,622 shares of Common Stock and 10,000,000 shares of Preferred Stock available for future issuance without shareholder approval. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital or facilitate acquisitions. The Company does not currently have any plans to issue additional shares of Common Stock or Preferred Stock (other than shares of Common Stock issuable under the Stock Option Plan). SPECIAL PROVISIONS OF THE RESTATED ARTICLES, THE BYLAWS AND TEXAS LAW The Texas Miscellaneous Corporation Laws Act (the "Texas Miscellaneous Laws") authorizes corporations to limit or eliminate the personal liability of directors to corporations and their shareholders for monetary damages for breach of their fiduciary duty as directors except for liability of a director resulting from (i) a breach of such director's duty of loyalty to the corporation or its shareholders, (ii) an act or omission that is not in good faith or that involves intentional misconduct or a knowing violation of laws, (iii) a transaction from which the director received an improper personal benefit, or (iv) an act or omission for which the liability of the director is expressly provided by an applicable statute. The Restated Articles limit the liability of directors of the Company (in their capacity as directors but not in their capacity as officers) to the Company or its shareholders to the fullest extent permitted by the Texas Miscellaneous Laws. The inclusion of this provision in the Restated Articles may reduce the likelihood of derivative litigation against directors and may discourage or deter shareholders from suing directors for breach of their duty of care, even though such an action, if successful, might otherwise benefit the Company and its shareholders. The inclusion of such provisions in the Restated Articles together with a provision requiring the Company to indemnify its directors, officers, and certain other individuals against certain liabilities, is intended to enable the Company to attract qualified persons to serve as directors who might otherwise be reluctant to do so. The Commission has taken the position that personal liability of directors for violations of the federal securities laws cannot be limited and that indemnification by the issuer for such violations is unenforceable. Under the TBCA, the board of directors of a corporation has the power to amend and repeal the corporation's bylaws unless the corporation's articles of incorporation reserve the power exclusively to the shareholders or a particular bylaw expressly provides that the board of directors may not amend or repeal the bylaw. The Restated Articles give the Board of Directors the power to amend and repeal the Company's Bylaws. The Company's Bylaws also provide that the number of directors shall be fixed from time to time by resolution of the Board of Directors. These provisions, in addition to the existence of authorized but unissued capital stock, may have the effect, either alone or in combination with each other, of discouraging an acquisition of the Company deemed undesirable by the Board of Directors. STATUTORY BUSINESS COMBINATION PROVISION The Company is subject to Part 13 of the TBCA ("Part 13") which, with certain exceptions, prohibits a Texas corporation from engaging in a "business combination" (as defined in Part 13) with any shareholder who is a beneficial owner of 20% or more of the corporation's outstanding stock for a period of three years after such shareholder's acquisition of a 20% ownership, unless (i) the board of directors of the corporation approves the transaction or the shareholder's acquisition of shares prior to the acquisition or (ii) two- thirds of the unaffiliated shareholders of the corporation approve the transaction at a shareholders' meeting. Shares that are issuable, but have not yet been issued, pursuant to options, conversion or exchange rights, or other agreements are not considered outstanding for purposes of Part 13. 45 CLASSIFIED BOARD OF DIRECTORS The Restated Articles provide for the Board of Directors to be divided into three classes serving staggered three-year terms. The term of office of the first class of directors will expire at the 1999 annual meeting of shareholders, the term of office of the second class will expire at the 2000 annual meeting of shareholders, and the term of office of the third class will expire at the 2001 annual meeting of shareholders. At each annual meeting of shareholders, the class of directors to be elected at such meeting will be elected for a three-year term, and the directors in the other two classes will continue in office. The staggered terms for directors may affect the shareholders' ability to change control of the Company even if a change of control were in the shareholders' interests. SHAREHOLDER ACTION If provided for in the articles of incorporation, the TBCA permits shareholder action without a meeting, without prior notice, and without a vote, upon the written consent of less than all of the holders of outstanding stock. The Restated Articles allow shareholder action without a meeting in accordance with the TBCA. The Bylaws provide that special meetings of the shareholders may be called only by the President, Chairman of the Board, a majority of the Board of Directors, or the holders of at least 50% of all shares entitled to vote at the proposed meeting. This provision of the Bylaws could have the effect of delaying, deferring, or preventing a change of control of the Company even if a change of control were in the shareholders' interests. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is . 46 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have outstanding 6,509,378 shares of Common Stock (6,629,378 shares if the Underwriters' overallotment option is exercised in full). Sales of a substantial number of shares of Common Stock in the public market following this offering, or the perception that such sales could occur, could adversely affect the market price for the Company's Common Stock. Of the shares to be outstanding upon completion of this offering, shares are subject to the lock-up agreements described below. The 448,589 shares reserved for issuance upon exercise of options outstanding on September 30, 1997, the 210,000 shares to be reserved for issuance upon options expected to be granted upon completion of this offering, and the 601,411 shares reserved for issuance upon exercise of future grants under the Company's Stock Option Plan will be registered under the Securities Act after 90 days from the completion of this offering. Other than shares subject to the lock-up agreements, shares registered under the Securities Act will be freely transferable upon issuance unless acquired by affiliates of the Company. See "Management--Employee Benefit Plans." All directors, executive officers, and principal shareholders, and certain other employees, of the Company who hold in the aggregate shares of Common Stock have agreed not to sell, offer to sell, contract to sell, or otherwise dispose of or transfer any of their shares or options (except in the case of bona fide gifts to immediate family members of such persons who agree to be bound by such restrictions, or to trusts for the benefit thereof, the trustees of which agree to be so bound) for a period of 180 days after the date of this Prospectus without the prior written consent of William Blair & Company, L.L.C. The Company has also agreed not to issue, sell, offer to sell, contract to sell, or otherwise dispose of or transfer any of its shares or grant any options (other than options granted or shares issued in connection with the Stock Option Plan or unregistered shares issued in connection with any acquisition) during such 180 day period. William Blair & Company, L.L.C. may, however, in its sole discretion and at any time without notice, release for public sale all or any portion of these shares subject to such lock-up agreements. See "Underwriting." In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) is entitled to sell restricted shares if at least one year has passed since the later of the time such shares were acquired from the Company or any affiliate of the Company. Rule 144 provides, however, that within any three-month period such person may only sell up to the greater of: (i) 1% of the then outstanding shares of the Common Stock (approximately 65,100 shares immediately following this offering); or (ii) the average weekly reported trading volume in the Common Stock during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Commission. Sales under Rule 144 are also subject to certain manner-of-sale provisions and notice requirements and to the availability of current public information about the Company. All shares held by persons who are deemed to be affiliates of the Company are subject to the volume limitations and other requirements of Rule 144 regardless of how long the shares have been owned or how they were acquired. Restricted shares held by non-affiliates of the Company for more than two years can be sold without limitation under Rule 144. Of the shares to be outstanding upon completion of this offering, 4,009,378 shares are "restricted," as that term is defined in the Securities Act. Of these restricted shares, 3,629,740 have been held for more than one year and, as such, will be salable upon expiration of the lock-up agreements described above, subject to certain volume and manner of sale restrictions under Rule 144 of the Securities Act. Prior to this offering, there was no public market for the Common Stock, and no prediction can be made as to the effect, if any, that future sales of Common Stock or the availability of shares of Common Stock for future sale will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock following this offering, or the perception that such sales could occur, could adversely affect prevailing market prices of the Common Stock as well as impair the Company's ability to raise capital through an offering of its equity securities. 47 UNDERWRITING The several Underwriters named below (the "Underwriters"), for which William Blair & Company, L.L.C., Robert W. Baird & Co. Incorporated, and Pennsylvania Merchant Group Ltd are acting as representatives (the "Representatives"), have severally agreed, subject to the terms and conditions set forth in the Underwriting Agreement by and among the Company and the Underwriters (the "Underwriting Agreement"), to purchase from the Company, and the Company has agreed to sell to each of the Underwriters, the respective number of shares of Common Stock set forth opposite each Underwriter's name in the table below.
NUMBER OF UNDERWRITERS SHARES - ------------ --------- William Blair & Company, L.L.C. ...................................... Robert W. Baird & Co. Incorporated.................................... Pennsylvania Merchant Group Ltd....................................... --------- Total............................................................... 2,500,000 =========
In the Underwriting Agreement, the Underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all of the Common Stock being sold pursuant to the Underwriting Agreement if any of the Common Stock being sold pursuant to the Underwriting Agreement (excluding shares covered by the over-allotment option granted therein) is purchased. In the event of a default by any Underwriter, the Underwriting Agreement provides that, in certain circumstances, the purchase commitments of the non-defaulting Underwriters shall be increased or the Underwriting Agreement may be terminated. The Representatives have advised the Company that the Underwriters propose to offer the Common Stock to the public initially at the public offering price set forth on the cover page of this Prospectus and to selected dealers at such price less a concession of not more than $ per share. The Underwriters may allow, and such dealers may re-allow, a concession not in excess of $ per share to certain other dealers. After commencement of the initial public offering, the public offering price, and other selling terms may be changed by the Representatives. The Company, certain of the Selling Shareholders, and certain other shareholders of the Company have granted to the Underwriters an option, exercisable within 30 days after the date of this Prospectus, to purchase up to an aggregate of 375,000 additional shares of Common Stock (120,000 from the Company and 255,000 from such shareholders), to cover over-allotments, at the same price per share to be paid by the Underwriters for the other shares offered hereby. If the Underwriters purchase any such additional shares pursuant to this option, each of the Underwriters will be committed to purchase such additional shares in approximately the same proportion as set forth in the table above. If less than all of such additional shares are purchased, the Underwriters will purchase such shares from the Company and the shareholders, pro rata. The Underwriters may exercise the option only for the purpose of covering over-allotments, if any, made in connection with the distribution of the shares of Common Stock offered hereby. All directors, executive officers, and principal shareholders, and certain other employees, of the Company who hold in the aggregate shares of Common Stock and the Company have agreed that for a period of 180 days after the date of this Prospectus, without the prior written consent of William Blair & Company, L.L.C., they will not, directly or indirectly, offer, sell, contract to sell, grant any option to purchase, or otherwise dispose of or transfer any Common Stock or securities convertible or exchangeable into, or exercisable for, Common Stock (except in the case of bona fide gifts to immediate family members of such persons who agree to be bound by such restrictions, or to trusts for the benefit thereof, the trustees of which agree to be so bound). However, the Company may grant options and issue Common Stock under the Stock Option Plan and issue unregistered shares in connection with any acquisition during the lock-up period. The Company also has agreed not to file or cause to be filed any registration statement with the Commission related to shares issuable under the Stock Option Plan for a period of 90 days after completion of this offering. 48 The Company and the Selling Shareholders have agreed to indemnify the Underwriters and their controlling persons against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. The Representatives have informed the Company that the Underwriters will not confirm, without client authorization, sales to their client accounts as to which they have discretionary authority. Prior to this offering, there was no public market for the Common Stock of the Company. Consequently, the initial public offering price for the Common Stock was determined by negotiations among the Company and the Representatives. Among the factors which were considered in such negotiations were the prevailing market conditions, the results of operations of the Company in recent periods, the market capitalizations and stages of development, and recent market prices of securities, of other companies which the Company and the Representatives believed to be comparable to the Company, estimates of the business potential of the Company, the present state of the Company's development, the general condition of the securities markets at the time of this offering, and other factors which were deemed relevant. There can be no assurance that an active trading market will develop for the Common Stock or that the Common Stock will trade in the public market subsequent to this offering at or above the initial public offering price. During and after this offering, the Underwriters may purchase and sell the Common Stock in the open market in order to facilitate this offering. Specifically, the Underwriters may over-allot or otherwise create a short position in the Common Stock for their own account by selling more shares of Common Stock than have been sold to them by the Company and the Selling Shareholder pursuant to the Underwriting Agreement. The Underwriters may elect to cover any such short position by purchasing shares of Common Stock in the open market or by exercising the over-allotment option granted to them by the Company and the Selling Shareholders. The Underwriters also may impose a penalty bid, whereby selling concessions allowed to syndicate members or other broker-dealers in respect of shares of Common Stock sold in this offering for their account may be reclaimed by the syndicate if such shares are repurchased by the syndicate in stabilizing or covering transactions. The activities described above may stabilize, maintain, or otherwise affect the market price of the Common Stock and make such price higher than it might otherwise be in the open market. The imposition of a penalty bid may also affect the price of the Common Stock to the extent that it discourages resales thereof. These activities, if commenced, may be discontinued at any time without notice and may be effected on the Nasdaq Stock Market or otherwise. Neither the Company nor any of the Underwriters makes any representation or prediction as to whether the Underwriters will engage in such transactions or choose to discontinue any transactions engaged in or the direction or magnitude of any effect that such transactions may have on the price of the Common Stock. LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Pepper Hamilton LLP. Certain matters will be passed upon for the Underwriters by Bracewell & Patterson, L.L.P. EXPERTS The consolidated balance sheets as of December 31, 1995 and 1996 and the consolidated statements of income, shareholders' equity, and cash flows for each of the three years ended in the period ended December 31, 1996 of the Company, included in this Prospectus, have been included in reliance on the report of Coopers & Lybrand L.L.P. ("Coopers & Lybrand"), independent accountants, given on the authority of that firm as experts in accounting and auditing. Melton & Melton L.L.P. ("Melton & Melton") served as the independent accountants for the Company for the year ended December 31, 1995. The Company elected to engage Coopers & Lybrand to audit the 49 Consolidated Financial Statements of the Company for the year ended December 31, 1996 and, accordingly, effective November 4, 1996 the engagement of Melton & Melton as the independent accounting firm for the Company was discontinued. Neither the report of Melton & Melton on the consolidated financial statements of the Company as of December 31, 1995 and the year then ended nor the report of Coopers & Lybrand on the consolidated financial statements of the Company as of December 31, 1995 and 1996 and for the three years in the period ended December 31, 1996 contained an adverse opinion or a disclaimer of opinion, and neither was qualified or modified as to uncertainty, audit scope or accounting principle. In the Company's opinion, there did not occur, during the year ended December 31, 1995 or any subsequent interim period prior to November 4, 1996, any "reportable events" between the Company and Melton & Melton within the meaning of the rules promulgated by the Commission. In addition, during the years ended December 31, 1995 and 1996 and during any subsequent interim period prior to November 4, 1996, there were no disagreements between the Company and Melton & Melton on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. The Company has received a letter from Melton & Melton stating that it agrees with the statements made by the Company in the second and third paragraphs of this "Experts" section. During the years ended December 31, 1995 and during any subsequent interim period prior to November 4, 1996, Coopers & Lybrand was not consulted by the Company on the application of accounting principles to a specified transaction, either completed or proposed, or on the type of audit opinion that might be rendered on the financial statements of the Company. ADDITIONAL INFORMATION The Company is not currently subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a result of this offering, the Company will be required to file reports and other information with the Commission pursuant to the informational requirements of the Exchange Act. The Company has filed with the Commission, in Washington, D.C., a Registration Statement on Form S-1 (which term encompasses any and all amendments thereto) under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement and the exhibits and schedules filed therewith. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement, and the exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at Seven World Trade Center, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and copies of all or any part of the Registration Statement may be obtained from the Commission upon payment of a prescribed fee. This information is also available from the Commission's Internet web site at http://www.sec.gov. The Registration Statement, including all exhibits thereto and amendments thereof, will be filed with the Commission through EDGAR. 50 DA CONSULTING GROUP, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants......................................... F-2 Consolidated Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997 (unaudited)..................................................... F-3 Consolidated Statements of Income for the years ended December 31, 1994, 1995 and 1996 and the nine months ended September 30, 1996 and 1997 (unaudited).............................................................. F-4 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1994, 1995 and 1996 and the nine months ended September 30, 1997 (unaudited)........................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and the nine months ended September 30, 1996 and 1997 (unaudited).............................................................. F-6 Notes to Consolidated Financial Statements................................ F-7
F-1 After the anticipated stock split discussed in Note 16 to the Financial Statements is effected, we will be in a position to render the following report. COOPERS & LYBRAND L.L.P. Houston, Texas January 8, 1998 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors and Shareholders DA Consulting Group, Inc. We have audited the accompanying consolidated balance sheets of DA Consulting Group, Inc. as of December 31, 1995 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of DA Consulting Group, Inc. as of December 31, 1995 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Houston, Texas March 28, 1997, except with respect to Note 16, as to which the date is January 8, 1998 F-2 DA CONSULTING GROUP, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, -------------- SEPTEMBER 30, 1995 1996 1997 ------ ------ ------------- ASSETS ------ (UNAUDITED) Current assets: Cash and cash equivalents........................... $ 592 $2,199 $ 683 Accounts receivable: Trade............................................. 3,616 4,444 9,299 Other............................................. 30 63 189 Unbilled revenue.................................... -- -- 982 Prepaid expenses and other current assets........... 72 401 415 ------ ------ ------- Total current assets............................ 4,310 7,107 11,568 Property and equipment, net......................... 365 951 2,273 Other assets........................................ -- -- 229 ------ ------ ------- Total assets.................................. $4,675 $8,058 $14,070 ====== ====== ======= LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Revolving line of credit............................ $ 250 $ 375 $ 2,646 Notes payable to shareholders....................... 312 356 -- Accounts payable.................................... 843 1,741 1,624 Accrued expenses.................................... 1,515 2,534 3,907 Deferred income..................................... -- -- 509 Income taxes payable................................ 278 261 260 Deferred income taxes............................... 351 211 522 ------ ------ ------- Total current liabilities....................... 3,549 5,478 9,468 ------ ------ ------- Commitments and contingencies Shareholders' equity: Preferred stock, $0.01 par value: 10,000,000 shares authorized......................................... -- -- -- Common stock, $0.01 par value: 40,000,000 shares authorized; 4,200,000, 4,435,200, and 4,466,973 shares issued and 4,200,000, 4,214,553, and 4,447,170 shares outstanding....................... 42 44 45 Additional paid-in capital.......................... -- 1,518 2,853 Retained earnings................................... 1,161 1,469 2,409 Treasury stock, at cost: zero, 220,647, and 19,803 shares............................................. -- (5) (85) Notes receivable from shareholders.................. -- (413) (503) Cumulative foreign currency translation adjustment.. (77) (33) (117) ------ ------ ------- Total shareholders' equity...................... 1,126 2,580 4,602 ------ ------ ------- Total liabilities and shareholders' equity.... $4,675 $8,058 $14,070 ====== ====== =======
The accompanying notes are an integral part of the consolidated financial statements. F-3 DA CONSULTING GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS YEAR ENDED DECEMBER ENDED SEPTEMBER 31, 30, ------------------------ ---------------- 1994 1995 1996 1996 1997 ------ ------- ------- ------- ------- (UNAUDITED) Revenue........................... $7,501 $14,618 $26,202 $19,039 $30,056 Cost of revenue................... 4,028 7,661 14,190 10,219 16,702 ------ ------- ------- ------- ------- Gross profit.................... 3,473 6,957 12,012 8,820 13,354 Selling and marketing expense..... 450 1,072 1,953 1,328 2,578 Development expense............... -- 707 1,250 926 836 General and administrative expense.......................... 2,629 4,014 6,597 4,621 8,362 Employee stock-related charge..... -- -- 1,858 898 -- ------ ------- ------- ------- ------- Operating income................ 394 1,164 354 1,047 1,578 Interest income (expense) net..... (34) (58) (37) (16) 33 Other income (expense) net........ (43) (26) 132 80 (96) ------ ------- ------- ------- ------- Income before taxes............. 317 1,080 449 1,111 1,515 ------ ------- ------- ------- ------- Provision for income taxes: Current......................... 44 217 281 210 264 Deferred provision (benefit).... 75 200 (140) 188 311 ------ ------- ------- ------- ------- Provision for income taxes.... 119 417 141 398 575 ------ ------- ------- ------- ------- Net income.................... $ 198 $ 663 $ 308 $ 713 $ 940 ====== ======= ======= ======= ======= Net income per share.............. $ 0.05 $ 0.17 $ 0.07 $ 0.17 $ 0.19 Weighted average shares outstanding...................... 3,869 3,869 4,463 4,274 5,054
The accompanying notes are an integral part of the consolidated financial statements. F-4 DA CONSULTING GROUP, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
CUMULATIVE COMMON TREASURY NOTES FOREIGN STOCK ADDITIONAL STOCK RECEIVABLE CURRENCY TOTAL ---------- PAID-IN RETAINED ------------ FROM TRANSLATION SHAREHOLDERS' NUMBER PAR CAPITAL EARNINGS NUMBER COST STOCKHOLDERS ADJUSTMENT EQUITY ------ --- ---------- -------- ------ ---- ------------ ----------- ------------- BALANCE AS OF JANUARY 1, 1994................... 580 $ 4 -- $ 318 -- -- -- $ 3 $ 325 Cash dividends paid.... -- -- -- (10) -- -- -- -- (10) Net income............. -- -- -- 198 -- -- -- -- 198 Foreign currency translation adjustment............ -- -- -- -- -- -- -- (39) (39) ----- --- ------ ------ ----- ---- ----- ----- ------ BALANCE AS OF DECEMBER 31, 1994............... 580 4 -- 506 -- -- -- (36) 474 Initial capitalization of DA International, Inc................... 3,620 38 -- -- -- -- -- -- 38 Cash dividends paid.... -- -- -- (8) -- -- -- -- (8) Net income............. -- -- -- 663 -- -- -- -- 663 Foreign currency translation adjustment............ -- -- -- -- -- -- -- (41) (41) ----- --- ------ ------ ----- ---- ----- ----- ------ BALANCE AS OF DECEMBER 31, 1995............... 4,200 42 -- 1,161 -- -- -- (77) 1,126 Stock contribution..... -- -- $ 28 -- 1,170 $(28) -- -- -- Issuance of common stock................. 235 2 1,490 -- (949) 23 $(413) -- 1,102 Net income............. -- -- -- 308 -- -- -- -- 308 Foreign currency translation adjustment............ -- -- -- -- -- -- -- 44 44 ----- --- ------ ------ ----- ---- ----- ----- ------ BALANCE AS OF DECEMBER 31, 1996............... 4,435 44 1,518 1,469 221 (5) (413) (33) 2,580 Issuance of common stock................. 32 1 1,335 -- (221) 5 (90) -- 1,251 Employee stock repurchases........... -- -- -- -- 20 (85) -- -- (85) Net income............. -- -- -- 940 -- -- -- -- 940 Foreign currency translation adjustment............ -- -- -- -- -- -- -- (84) (84) ----- --- ------ ------ ----- ---- ----- ----- ------ BALANCE AS OF SEPTEMBER 30, 1997 (UNAUDITED)... 4,467 $45 $2,853 $2,409 20 $(85) $(503) $(117) $4,602 ===== === ====== ====== ===== ==== ===== ===== ======
The accompanying notes are an integral part of the consolidated financial statements. F-5 DA CONSULTING GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, -------------------- ----------------- 1994 1995 1996 1996 1997 ---- ------ ------ -------- -------- (UNAUDITED) Cash flows from operating activities: Net income......................... $198 $ 663 $ 308 $ 713 $ 940 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization.... 91 89 121 90 208 Deferred income taxes............ 75 200 (140) 188 311 Stock awarded to employees....... -- -- 898 898 -- Changes in operating assets and liabilities: Increase in accounts receivable.................... (342) (2,200) (861) (821) (5,963) Increase in prepaid expenses and other current assets...... (37) (28) (328) (66) (14) Increase in other assets....... -- -- -- -- (13) Increase (decrease) in accounts payable and accrued liabilities................... (15) 1,478 1,919 511 1,256 Increase in deferred income.... -- -- -- -- 509 Increase (decrease) in income taxes payable................. 19 241 (17) 28 (1) ---- ------ ------ -------- -------- Total adjustments............ (209) (220) 1,592 828 (3,707) ---- ------ ------ -------- -------- Net cash provided by (used in) operating activities.... (11) 443 1,900 1,541 (2,767) ---- ------ ------ -------- -------- Cash flows from investing activities: Proceeds from sale of property and equipment......................... -- -- 17 10 -- Purchases of property and equipment......................... (172) (264) (726) (487) (1,530) ---- ------ ------ -------- -------- Net cash used in investing activities.................. (172) (264) (709) (477) (1,530) ---- ------ ------ -------- -------- Cash flows from financing activities: Net proceeds from (repayments of) revolving line of credit.......... (192) 150 125 (115) 2,271 Net proceeds from (repayments of) notes payable to shareholders..... 105 208 43 57 (356) Issuance of stock.................. -- -- 204 46 1,251 Employee stock repurchases......... -- -- -- -- (85) Dividends paid..................... (10) (8) -- -- -- Deferred offering costs............ -- -- -- -- (216) ---- ------ ------ -------- -------- Net cash provided by (used in) financing activities.... (97) 350 372 (12) 2,865 ---- ------ ------ -------- -------- Effect of changes in foreign currency exchange rate on cash............... (39) (41) 44 64 (84) ---- ------ ------ -------- -------- Increase (decrease) in cash and cash equivalents........ (319) 488 1,607 1,116 (1,516) Cash and cash equivalents at beginning of year................... 423 104 592 592 2,199 ---- ------ ------ -------- -------- Cash and cash equivalents at end of year................................ $104 $ 592 $2,199 $ 1,708 $ 683 ==== ====== ====== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-6 DA CONSULTING GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS DA Consulting Group, Inc. (the "Company") is a leading international provider of end-user support solutions to companies which are implementing enterprise resource planning software systems. In December 1997, the Company's name was changed from DA International, Inc. to DA Consulting Group, Inc. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated. Management Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Property and Equipment Property and equipment are stated at cost. Expenditures for substantial renewals and betterments are capitalized, while repairs and maintenance are charged to expense as incurred. Assets are depreciated or amortized using the straight-line method for financial reporting purposes and accelerated methods for tax purposes over their estimated useful lives ranging from three to seven years. Gains or losses from disposals of property and equipment are reflected in income. Software Development Costs The Company capitalizes software development costs beginning when product technological feasibility is established and concluding when the product is ready for general release. At such time, software development costs are amortized on the straight-line basis over a maximum of three years or the expected life of the product, whichever is less. The Company capitalized software development costs amounting to $238,000 during the nine months ended September 30, 1997, which have been included in property and equipment, net. Research costs related to software development are expensed as incurred. Deferred Offering Costs Deferred offering costs primarily represent professional fees incurred through September 30, 1997 in conjunction with the Company's planned initial public offering ("IPO") of shares of its common stock and, for financial reporting purposes, will be netted against the offering proceeds upon completion of the IPO. As of September 30, 1997, $216,000 of deferred offering costs have been included in other assets. F-7 DA CONSULTING GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Income Taxes The Company recognizes deferred income taxes for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are determined based on the difference between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Prior to January 1, 1997, the Company recognized income for U.S. federal income tax purposes on a cash basis. Foreign Currency Translation For the Company's foreign subsidiaries, the local currency is the functional currency. Assets and liabilities are translated at year-end exchange rates, and related revenue and expenses are translated at the average exchange rates in effect during the period. Resulting translation adjustments are recorded as a separate component in shareholders' equity. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, and trade accounts receivable. The Company maintains cash deposits with several major financial institutions, which from time to time, may exceed federally insured limits. Management periodically assesses the financial condition of the financial institutions and believes that any possible credit risk is minimal. The Company performs ongoing credit evaluations of its clients and generally does not require collateral for services. Bad debts have not been significant in relation to the volume of revenue. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, revolving line of credit, notes payable to shareholders and accounts payable approximate fair values due to the short-term nature of these instruments. The estimated fair values of these instruments have been determined by the Company using available market information. Revenue Recognition The Company recognizes service revenue as services are rendered. The Company's revenue is generated primarily from arrangements with clients based on time and expenses incurred. Service revenue includes reimbursable expenses directly incurred in providing services to clients. Revenue attributable to reimbursable expenses amounted to $327,000, $343,000, $1,664,000, $1,054,000, and $2,401,000 for the years ended December 31, 1994, 1995, 1996 and for the nine months ended September 30, 1996 and 1997, respectively. The Company recognizes product revenue upon shipment of the product to the client. Significant Clients No individual client accounted for more than 10% of consolidated revenue for any period presented, except that one client, for which the Company provided services on multiple projects for numerous client subsidiaries, accounted for 18% of consolidated revenue in 1995. Interim Financial Statements The balance sheet as of September 30, 1997 and the related statements of income, changes in shareholders' equity and cash flows for the nine months ended September 30, 1996 and 1997 are unaudited. In management's opinion, such financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of such financial statements. Interim results are not necessarily indicative of results for a full year. F-8 DA CONSULTING GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Segment Information The Company operates within one industry segment. Per Share Information Per share information has been computed based on the weighted average number of common shares outstanding during the applicable period. Common share equivalents have been included in periods in which their effect is dilutive. Common share equivalents include the number of shares issuable upon exercise of stock options, less the number of shares that could have been repurchased with the exercise proceeds, using the treasury stock method. Additionally, common stock issued within a one-year period prior to the registration statement related to the IPO has been treated as outstanding for all periods presented. Fully diluted net income per share information has not been presented as these are the same as primary net income per share and weighted average shares outstanding. New Accounting Standards In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128"), SFAS No. 128, which is effective for periods ending after December 15, 1997, including interim periods, simplifies the standards for computing earnings per share and replaces the presentation of primary earnings per share with a presentation of basic earnings per share. Initial adoption of this standard is not expected to have a material impact on the Company's earnings per share. Early adoption is not permitted. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS No. 130"), SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. SFAS No. 130 is effective for both interim and annual periods beginning after December 15, 1997. Accounting for Stock Options In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," which sets forth accounting and disclosure requirements for stock option and other stock-based compensation plans. The new statement encourages, but does not require, companies to record stock-based compensation expense using a fair-value method, rather than the intrinsic-value method prescribed by Accounting Principles Board ("APB") Opinion No. 25. The Company has adopted only the disclosure requirements of SFAS No. 123 and has elected to continue to record stock-based compensation expense using the intrinsic- value approach prescribed by APB No. 25. Accordingly, the Company computes compensation cost as the amount by which the fair market price of the Company's common stock exceeds the exercise price on the date of grant. The amount of compensation cost, if any, is charged to income over the vesting period. Reclassifications Certain amounts previously reported have been reclassified to conform to current period presentation with no effect on the Company's financial position or results of operations. F-9 DA CONSULTING GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 3. PROPERTY AND EQUIPMENT, NET The components of property and equipment were as follows (in thousands):
DECEMBER 31, ------------- SEPTEMBER 30, 1995 1996 1997 ----- ------ ------------- (UNAUDITED) Computer equipment and software................... $ 380 $1,031 $1,896 Automobiles....................................... 135 120 115 Furniture and fixtures............................ 92 156 787 Leasehold improvements............................ -- -- 34 ----- ------ ------ Property and equipment.......................... 607 1,307 2,832 Less accumulated depreciation and amortization.... (242) (356) (559) ----- ------ ------ Property and equipment, net..................... $ 365 $ 951 $2,273 ===== ====== ======
4. REVOLVING LINE OF CREDIT During 1996, the Company entered into a credit facility with a financial institution with a maximum credit limit of $1,000,000, which expired in March 1997. In March 1997 and September 1997, the Company amended and renewed the credit facility increasing the available line from $1,000,000 to $3,500,000 (see Note 16). Interest is payable monthly at prime plus 0.5% per year (9.5% as of September 30, 1997). The credit facility matures in June 1998 and is collateralized by accounts receivable of the Company's North American operations. As of December 31, 1995, the Company had $250,000 outstanding on a $500,000 credit facility with a financial institution, which expired in May 1996. Interest expense for the years ended December 31, 1994, 1995, 1996 and the nine months ended September 30, 1996 and 1997 amounted to $17,000, $26,000, $22,000, $17,000 and $99,000, respectively. 5. NOTES PAYABLE TO SHAREHOLDERS During 1995, the Company executed several notes payable agreements with two shareholders of the Company. These notes are payable on demand and interest is accrued at a discretionary variable rate (approximately 16%). As of December 31, 1995 and 1996, notes payable to shareholders amounted to $312,000 and $356,000, respectively. Interest expense related to these notes amounted to $45,000 and $53,000 for the years ended December 31, 1995 and 1996, respectively. In March 1997, the Company repaid the outstanding balances of the notes payable to shareholders. 6. ACCRUED EXPENSES The components of accrued expenses were as follows (in thousands):
DECEMBER 31, ------------- SEPTEMBER 30, 1995 1996 1997 ------ ------ ------------- (UNAUDITED) Compensation and related expenses................... $1,317 $2,204 $2,623 Vacation............................................ 69 75 320 Professional fees................................... 30 66 288 Other taxes......................................... -- -- 257 Other............................................... 99 189 419 ------ ------ ------ Accrued expenses.................................. $1,515 $2,534 $3,907 ====== ====== ======
F-10 DA CONSULTING GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. INCOME TAXES The following is a summary of the significant components of the Company's deferred income taxes (in thousands):
DECEMBER 31, --------- SEPTEMBER 30, 1995 1996 1997 ---- ---- ------------- (UNAUDITED) Deferred tax assets: Net operating loss carryforwards...................... -- $645 -- Other................................................. $ 24 -- $ 51 ---- ---- ---- Net deferred tax assets............................. 24 645 51 ---- ---- ---- Deferred tax liabilities: Cash to accrual timing differences.................... 361 728 357 Foreign liabilities................................... -- 96 125 Property, plant and equipment......................... 14 32 91 ---- ---- ---- Deferred tax liabilities............................ 375 856 573 ---- ---- ---- Deferred income taxes............................... $351 $211 $522 ==== ==== ====
The components of the Company's provision for income taxes were as follows (in thousands):
NINE MONTHS ENDED SEPTEMBER YEAR ENDED DECEMBER 31, 30, ------------------------- ----------- 1994 1995 1996 1996 1997 ------- ------- -------- ----- ----- (UNAUDITED) United States federal and state: Current............................... -- $ 46 -- -- $ 152 Deferred provision (benefit).......... $ 73 226 $ (260) $ 87 282 ------- ------- -------- ----- ----- 73 272 (260) 87 434 ------- ------- -------- ----- ----- Foreign: Current............................... 44 171 281 210 112 Deferred provision (benefit).......... 2 (26) 120 101 29 ------- ------- -------- ----- ----- 46 145 401 311 141 ------- ------- -------- ----- ----- Provision for income taxes.......... $ 119 $ 417 $ 141 $ 398 $ 575 ======= ======= ======== ===== =====
The difference between the effective federal income tax rate reflected in the provision for income taxes, and the federal income tax rate are summarized as follows:
YEAR ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, ---------------- ------------------ 1994 1995 1996 1996 1997 ---- ---- ---- -------- ---- (UNAUDITED) U.S. statutory rate....................... 34.0% 34.0% 34.0% 34.0% 34.0% State and local........................... 3.2 3.0 2.9 4.0 4.0 Foreign................................... (3.5) 0.1 (8.5) (2.6) -- Other..................................... 3.8 1.5 3.0 0.4 -- ---- ---- ---- -------- -------- Effective tax rate...................... 37.5% 38.6% 31.4% 35.8% 38.0% ==== ==== ==== ======== ========
The Company's effective tax rate declined from 38.6% for the year ended December 31, 1995 to 31.4% for the year ended December 31, 1996, due to the decrease in the proportion of U.S.-based income, which is taxed at a higher statutory rate. Such proportion was lower for the year ended December 31, 1996 primarily due to the $1,858,000 employee stock-related charge. F-11 DA CONSULTING GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) As of December 31, 1996, the Company has U.S. net operating loss carryforwards of approximately $1.7 million generated in 1996, which expire in 2010. As of September 30, 1997, such net operating loss carryforwards were fully utilized. Applicable U.S. income taxes have not been provided on $1,189,000 of undistributed earnings of the Company's foreign subsidiaries as of September 30, 1997. The Company considers such earnings to be permanently invested outside the U.S. The earnings could be subject to U.S. income tax if distributed to the Company as dividends or otherwise. The Company anticipates that foreign tax credits would substantially reduce the amount of U.S. income tax payable if these earnings were repatriated. 8. STOCK-BASED COMPENSATION PLANS Stock Options Effective February 1997, the Company adopted its 1997 Stock Option Plan (the "Option Plan"), a stock-based incentive compensation plan which is described below. Under the Option Plan, the Company is authorized to issue 1,260,000 shares of common stock pursuant to "awards" granted in the form of incentive stock options (intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended) and non-qualified stock options not intended to qualify under Section 422. Awards may be granted to selected employees, directors, independent contractors, and consultants of the Company or any subsidiary. Stock options granted have contractual terms of 10 years. All options vest on a graded schedule, 33% per year for 3 years, beginning on the second anniversary of the date of grant. Options granted under the Option Plan are at prices equal to the fair market value of the stock on the date of the grant, as determined by stock sales to outside third parties or independent appraisals. The following table sets forth pertinent information regarding stock option transactions and stock option prices during the nine months ended September 30, 1997 (unaudited).
NUMBER OF SHARES OF WEIGHTED AVERAGE UNDERLYING OPTIONS EXERCISE PRICES ------------------- ---------------- Outstanding as of December 31, 1996...... -- -- Granted.................................. 501,866 $5.90 Forfeited................................ 53,277 5.82 ------- ----- Outstanding as of September 30, 1997..... 448,589 $5.91 ======= ===== Exercisable as of September 30, 1997..... -- -- ======= ===== Weighted average fair value of options granted during the nine months ended September 30, 1997...................... $1.51 =====
The fair value of each stock option granted is estimated on the date of grant using the minimum value method of option pricing with the following weighted-average assumptions: dividend yield of 0%; risk-free interest rates ranging from 6.03% and 6.27%; and expected life of 5 years. In determining the "minimum value" SFAS No. 123 does not require the volatility of the Company's common stock underlying the options to be calculated or considered because the Company is not publicly-traded. As of September 30, 1997, 448,589 options were outstanding with a remaining weighted-average contractual term of 9.46 years. F-12 DA CONSULTING GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Pro Forma Net Income and Net Income Per Share Had the compensation cost for the Company's stock-based compensation plan been determined consistent with SFAS No. 123, the Company's net income and net income per share as of September 30, 1997 would approximate the pro forma amounts below (unaudited):
AS REPORTED PRO FORMA -------------------- ------------------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) SFAS No. 123 charge.......... -- $ 90 Net income................... $ 940 $ 893 Net income per share......... $ 0.19 $ 0.18
The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. 9. SHAREHOLDERS' EQUITY The following table sets forth pertinent information regarding shareholders' equity transactions during the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997 (in thousands):
YEAR ENDED NINE MONTHS DECEMBER 31, ENDED ------------- SEPTEMBER 30, SHARES 1995 1996 1997 ------ ------------- ------------- Initial capitalization of DA International, Inc....................................... 3,620 $38 -- -- Stock contribution to the Company.......... 1,170 -- -- -- Issuance of stock to controlling shareholder............................... 235 -- -- -- Employee stock purchases................... 123 -- $ 158 -- Sale of common stock....................... 361 -- 46 -- Stock awards to employees.................. 465 -- 898 -- Private placement of shares................ 235 -- -- $1,241 Employee stock purchases................... 18 -- -- 10 Employee stock repurchases................. 20 -- -- (85) ---- ------- ------ $38 $1,102 $1,166 ==== ======= ======
Reduction in Par Value and Increase in Number of Authorized Shares On May 16, 1996, the shareholders approved an amendment to the Articles of Incorporation reducing the par value of the Company's common stock from $0.10 per share to $0.01 per share, and increasing the number of authorized shares of common stock from 100,000 to 5,000,000. Simultaneous with the reduction in par value, the shareholders declared a ten-for-one common stock split to shareholders of record at the close of business January 19, 1996. All references in the financial statements to number of shares, per share amounts and stock option data of the Company's common stock have been restated to reflect the stock split and the change in par value of the Company's common stock and the contemplated 4.2-for-one common stock split in connection with the Company's planned IPO. Initial Capitalization of DA International, Inc. In June 1995, the Company issued an aggregate of 4,200,000 shares of common stock in exchange for all of the outstanding shares of affiliated companies which are now subsidiaries of the Company. As the majority owners of the Company were also the majority owners of the affiliated companies, there was no change in control and the net assets were transferred at historical cost. Stock Contribution to the Company In June 1996, one controlling shareholder contributed 1,170,448 shares of common stock to the Company. These shares have been recorded by the Company as treasury stock at the shareholders' original cost of $0.10 per common share. F-13 DA CONSULTING GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Issuance of Stock to Controlling Shareholder In July 1996, the Company issued 235,200 shares of common stock to a controlling shareholder in exchange for all of the outstanding stock of a company which is now a subsidiary of the Company. Employee Stock Purchases In February 1996, the Company established a plan which allowed certain employees to purchase shares of common stock at fair market value on such date. An aggregate of 123,753 shares were purchased pursuant to this plan, at $1.27 per share. No additional shares will be sold under this plan. During the nine months ended September 30, 1997, the Company repurchased 19,803 shares of common stock at fair value from former employees. Sale of Common Stock In June 1996, the Company sold 361,200 shares of common stock to employees, at $1.27 per share, representing the fair value at the date of sale. The Company received consideration of $46,000 and executed note receivable agreements in the amount of $413,000. In February 1997, the Company sold an additional 17,430 shares of common stock to an employee, at the then fair value of $5.71 per share. The Company received consideration of $10,000 and executed a note receivable agreement in the amount $90,000. Stock Awards to Employees The Company awarded 464,848 shares of common stock to certain key employees in September 1996. No cash consideration was paid for such shares. For the year ended December 31, 1996, the Company recognized compensation expense of $898,000 representing the fair market value of these shares on the date awarded and $960,000 of cash payments to a former employee in lieu of the issuance of such shares. Private Placement of Shares In January 1997, the Company sold 234,990 shares of common stock at $5.71 per share, representing the fair value at the date of sale. Proceeds to the Company, net of offering costs, amounted to $1,238,000. 10. RELATED PARTY TRANSACTIONS During the years ended December 31, 1994, 1995 and 1996 and the nine months ended September 30, 1996, the Company paid $27,000, $160,000, $100,000, and $100,000 for accounting services provided by an accountancy practice in which the Company's chief executive officer was a partner until June 30, 1996. The Company leases two properties from its chief executive officer and/or an affiliate of the chief executive officer and paid $38,000 annually in rent expense for the years ended December 31, 1994, 1995 and 1996. Rent expense for the nine months ended September 30, 1996 and 1997 amounted to $28,000. 11. COMMITMENTS AND CONTINGENCIES The Company leases various office facilities under noncancelable operating lease agreements. Rent expense amounted to $51,000, $112,000, $150,000, $145,000 and $321,000 for the years ended December 31, 1994, 1995 and 1996, and the nine months ended September 30, 1996 and 1997, respectively. F-14 DA CONSULTING GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company leases apartments and housing facilities for certain employees, and also leases office facilities in foreign cities. The terms of these leases are less than one year. As of September 30, 1997, future lease payments under noncancelable leases with terms of more than one year are as follows (unaudited): 1998.............................. $ 856,000 1999.............................. 851,000 2000.............................. 717,000 2001.............................. 404,000 2002.............................. 358,000 thereafter........................ 537,000 ---------- $3,723,000 ==========
The Company has employment agreements with certain officers and key members of management of the Company, the terms of which expire on December 31, 1998. The agreements provide for minimum salary levels, incentive bonuses at the discretion of the Company's Board of Directors, customary benefits including insurance coverage. In addition, the employment agreements further provide for severance pay ranging from six months to two year's base salary, bonus, and benefits, depending on the cause of termination and in the event of a change in corporate control. From time to time, the Company is a party to routine litigation in the ordinary course of business. The Company is not currently a party to any material pending legal proceedings. 12. EMPLOYEE BENEFIT PLANS 401(k) Plan The Company sponsors a 401(k) profit sharing plan (the "401(k) Plan") which covers substantially all of its employees. Employees are eligible to participate after completing three months of service. The 401(k) Plan provides for elective contributions by employees up to the maximum limit allowed by the Internal Revenue Code. The Company currently matches 50% of the amount deferred by participants, on deferral amounts up to 7.5% of compensation. Although the Company has not made any profit sharing contributions, the 401(k) Plan permits the Company to make a discretionary profit sharing contribution which, if made, is allocated to the accounts of participants who have been credited with 1,000 hours of service during a plan year and who are employed on the last day of a plan year. The Company made matching contributions equal to $.06, $.06, $.50 for each dollar contributed to the 401(k) Plan, subject to the limits noted above, by employees during 1994, 1995 and 1996, respectively and $.50 and $.50 during the nine months ended September 30, 1996 and 1997. These amounts have been included in general and administrative expenses on the consolidated statements of income. An employee is fully vested in the matching contributions after five years of employment, or earlier upon attainment of appropriate retirement age, upon retirement due to disability, or upon death. The Company made contributions to the 401(k) Plan aggregating approximately $2,000, $9,000, $92,000, $69,000 and $241,000 during the years ended December 31, 1994, 1995 and 1996, and the nine months ended September 30, 1996 and 1997, respectively. Payment of benefits is generally made in the form of a single lump sum or in installments. Incentive Compensation and Profit Sharing Policies The Company has implemented incentive compensation and profit sharing policies which cover substantially all salaried employees. Employees in positions at project manager or below, as well as F-15 DA CONSULTING GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) administrative staff, are eligible for discretionary profit sharing payments. Each employee's profit sharing payment is based on a formula and is contingent upon his or her level of salary and length of service. Employees in positions at project manager or above are eligible for incentive compensation payments based on satisfaction of applicable performance criteria. The Company approved and recognized incentive compensation and profit sharing payments aggregating approximately $190,000, $650,000, $1,258,000, $944,000 and $1,994,000 for the years ended December 31, 1994, 1995 and 1996, and the nine months ended September 30, 1996 and 1997, respectively, which are included in general and administrative expense. 13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest and income taxes (in thousands):
YEAR ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, -------------- ----------------- 1994 1995 1996 1996 1997 ---- ---- ---- -------- --------- (UNAUDITED) Interest................................ $40 $56 $79 $ 59 $ 104 Income taxes............................ 17 210 355 266 400
Non-cash financing activities (in thousands):
YEAR ENDED NINE MONTHS ENDED DECEMBER 31, 1996 SEPTEMBER 30, 1997 ----------------- ------------------ (UNAUDITED) Stock contribution to the Company.. $(28) -- Common stock issued for notes receivable........................ 413 $90 Issuance of stock awards to key employees......................... 898 --
F-16 DA CONSULTING GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 14. GEOGRAPHIC FINANCIAL DATA The following table sets forth certain information with respect to the Company (in thousands):
EUROPE, MIDDLE EAST CORPORATE AMERICAS AND AFRICA ASIA/PACIFIC TOTAL --------- -------- ----------- ------------ ------- NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED): Revenues.............. -- $19,535 $7,849 $2,672 $30,056 Operating income (loss)............... $(1,364) 2,162 503 277 1,578 Total assets.......... 329 9,535 3,176 1,030 14,070 YEAR ENDED DECEMBER 31, 1996: Revenues.............. -- $15,565 $8,906 $1,731 $26,202 Operating income (loss)............... $(1,643)(1) 1,168 519 310 354 Total assets.......... -- 4,307 3,016 735 8,058 NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED): Revenues.............. -- $11,440 $6,368 $1,231 $19,039 Operating income (loss)............... $ (761)(1) 1,052 461 295 1,047 Total assets.......... -- 3,669 2,795 601 7,065 YEAR ENDED DECEMBER 31, 1995: Revenues.............. -- $ 8,926 $5,401 $ 291 $14,618 Operating income (loss)............... $ 87 750 351 (24) 1,164 Total assets.......... -- 2,389 2,164 122 4,675 YEAR ENDED DECEMBER 31, 1994: Revenues.............. -- $ 4,050 $3,451 -- $ 7,501 Operating income (loss)............... $ (90) 192 292 -- 394 Total assets.......... -- 1,130 654 -- 1,784
- -------- (1) Includes a charge for stock awarded to employees and payments in lieu thereof of $1,858,000 in the year ended December 31, 1996 and $898,000 in the nine month period ended September 30, 1996. F-17 DA CONSULTING GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 15. QUARTERLY FINANCIAL DATA Summarized quarterly financial data for the nine months ended September 30, 1997 and the year ended December 31, 1996 is as follows (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED): Revenues................................... $8,084 $9,897 $12,075 -- Operating income........................... 208 582 788 -- Net income................................. 128 340 472 -- Net income per share....................... $ 0.03 $ 0.07 $ 0.09 -- Weighted average shares outstanding........ 5,054 5,054 5,054 -- YEAR ENDED DECEMBER 31, 1996: Revenues................................... $5,677 $6,363 $ 6,999 $7,163 Operating income (loss).................... 712 660 (325) (693) Net income (loss).......................... 438 440 (165) (405) Net income (loss) per share................ $ 0.11 $ 0.11 $ (0.04) $(0.08) Weighted average shares outstanding........ 4,104 4,189 4,528 5,033
16. SUBSEQUENT EVENTS Initial Public Offering The Company is in the process of completing an IPO of shares of its common stock. In connection with the IPO, the Company's Board of Directors approved a 4.2-for-one stock split of the common stock will be effected. Accordingly, all references in the financial statements to number of shares, per share amounts and stock option data of the Company's common stock have been restated to reflect the anticipated stock split. In connection with the stock split, the Company's authorized capital will be increased to 40,000,000 shares of common stock, $0.01 par value per share, and 10,000,000 shares of Preferred Stock, $0.01 par value per share. Private Placement of Shares In December 1997, the Company sold 362,208 shares of common stock at $6.55 per share, representing the fair value at the date of sale. Total proceeds to the Company amounted to approximately $2.4 million. Credit Facility Renewal Subsequent to September 30, 1997, the Company amended its existing credit facility (Note 4) increasing the available line from $3,500,000 to $5,000,000. F-18 A graphic, depicting a Greek-style temple covering the world, appears here with the following language appearing inside such graphic: END-USER SUPPORT CHANGE EDUCATION PERFORMANCE COMMUNICATION SUPPORT Multimedia Distance Learning DA PASS(TM) Videos CBT Intranet Newsletters ILT Documentation DA Cornerstone(TM) DA FOUNDATION(TM) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN- FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDER- WRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITA- TION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OF- FER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PRO- SPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THE IN- FORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. --------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary....................................................... 3 Risk Factors............................................................. 6 Use of Proceeds.......................................................... 10 Dividend Policy.......................................................... 10 Capitalization........................................................... 11 Dilution................................................................. 12 Selected Consolidated Financial Data..................................... 13 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 14 Business................................................................. 23 Management............................................................... 34 Certain Relationships and Related Transactions........................... 41 Principal and Selling Shareholders....................................... 43 Description of Capital Stock............................................. 44 Shares Eligible for Future Sale.......................................... 47 Underwriting............................................................. 48 Legal Matters............................................................ 49 Experts.................................................................. 49 Additional Information................................................... 50 Index to Financial Statements............................................ F-1
--------------- UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPAT- ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 2,500,000 SHARES LOGO [LOGO OF DA CONSULTING GROUP, INC. APPEARS HERE] COMMON STOCK ------------- PROSPECTUS , 1998 ------------- WILLIAM BLAIR & COMPANY ROBERT W. BAIRD & CO. INCORPORATED PENNSYLVANIA MERCHANT GROUP LTD - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth an itemized statement of expenses, other than underwriting discounts and commissions, all of which will be paid by the Company, in connection with the issuance and distribution of the securities being registered. All amounts are estimates except for the fees payable to the Commission and the NASD and the Nasdaq listing fee:
NATURE OF EXPENSE AMOUNT ----------------- ---------- Commission registration fee...................................... $ 11,026 NASD filing fee.................................................. 4,238 Nasdaq National Market listing fee............................... * Printing and engraving expenses.................................. * Legal fees and expenses.......................................... * Accounting fees and expenses..................................... * Blue Sky filing fees and expenses................................ * Transfer agent and registrar fees................................ * Director & Officer liability insurance........................... * Miscellaneous.................................................... * ---------- Total.......................................................... $1,000,000 ==========
- -------- * To be supplied by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Article 2.02-1 of the TBCA generally provides that a corporation may indemnify any director or officer who was, is or is threatened to be made a named defendant or respondent in a proceeding because he is or was a director or officer, provided that the director or officer (i) conducted himself in good faith, (ii) reasonably believed (a) in the case of conduct in his official capacity, that his conduct was in the corporation's best interests or (b) in all other cases, that his conduct was at least not opposed to the corporation's best interests and (iii) in the case of any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. Subject to certain exceptions, a director or officer may not be indemnified if the person is found liable to the corporation or if the person is found liable on the basis that he improperly received a personal benefit. Under the TBCA, reasonable expenses incurred by a director or officer may be paid or reimbursed by the corporation in advance of a final disposition of the proceeding after the corporation receives a written affirmation by the director or officer of his good faith belief that he has met the standard of conduct necessary for indemnification and a written undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined that the director or officer is not entitled to indemnification by the corporation. The TBCA also requires a corporation to indemnify an officer or director against reasonable expenses incurred in connection with the proceeding in which he is named defendant or respondent because he is or was a director or officer if he is wholly successful in defense of the proceeding. The TBCA also permits a corporation to purchase and maintain insurance or another arrangement on behalf of any person who is or was a director or officer against any liability asserted against him and incurred by him in such a capacity or arising out of his status as such a person, whether or not the corporation would have the power to indemnify him against that liability under Article 2.02-1. The Company's Restated Articles and its Bylaws both provide for the indemnification of its officers and directors, and the advancement to them of expenses in connection with proceedings and claims, to the fullest extent permitted by the TBCA. In addition, the Company intends to maintain directors' and officers' liability insurance policies for its directors and officers. In addition, the Company's Restated Articles of Incorporation II-1 provide that a director of the Company will not be liable to the corporation or its shareholders for monetary damages for an act or omission in the director's capacity as a director, except in the case of (i) a breach of the director's duty of loyalty to the corporation or its shareholders, (ii) an act or omission not in good faith that involves intentional misconduct or a knowing violation of the law, (iii) a transaction from which a director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the director's office, (iv) an act or omission for which the liability of the director is expressly provided by statute, or (v) an act related to an unlawful stock repurchase or payment of a dividend. The above discussion of Article 2.02-1 of the TBCA and of the Company's Restated Articles and Bylaws is not intended to be exhaustive and is respectively qualified in its entirety by such statute and the Company's Restated Articles and Bylaws. Reference is made to Item 17 of this Registration Statement for additional information regarding indemnification of directors and officers. The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification by the underwriters of the Company, its directors, and its officers who signed the Registration Statement in the offering of the Common Stock registered hereby, and each person, if any, who controls the Company, for certain liabilities, including liabilities arising under the Securities Act. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. In July 1995, the Company issued 4,200,000 shares of Common Stock to the founder, two trusts for the benefit of the founder's family, a member of the founder's family, an employee and the Chief Executive Officer of the Company in exchange for shares (with a weighted average value of $0.95 per share) of companies which are now subsidiaries of the Company. The foregoing described issuances of securities were, to the extent within the jurisdictional scope of the Securities Act, exempt from registration under the Securities Act by virtue of the exemption provided by Section 4(2) thereof for transactions not involving a public offering. In January 1996, the Company issued 235,200 shares of Common Stock to the CEO of the Company in exchange for shares (valued at $0.01 per share) of a company which is now a subsidiary of the Company. The foregoing described issuance of securities was not within the jurisdictional scope of the Securities Act. In June 1996, the Company sold 438,509 shares of Common Stock to one trust for the benefit of a South African employee, 21 U.S. employees of the Company, nine foreign employees of the Company, and one foreign company owned by a foreign employee for an aggregate consideration of $556,489. The foregoing described issuances of securities were, to the extent within the jurisdictional scope of the Securities Act, exempt from registration under the Securities Act by virtue of the exemption provided by Section 4(2) thereof for transactions not involving any public offering. In July 1996, the Company sold 33,844 shares of Common Stock to 10 foreign employees of the Company for an aggregate consideration of $42,949. The foregoing described issuances of securities were not within the jurisdictional scope of the Securities Act. In September 1996, the Company awarded an aggregate of 464,848 shares of Common Stock to two U.S. employees and two foreign employees of the Company. The foregoing described issuances of securities were, to the extent within the jurisdictional scope of the Securities Act, exempt from registration under the Securities Act by virtue of the exemption provided by Section 4(2) thereof for transactions not involving any public offering. In December 1996, the Company sold 12,600 shares of Common Stock to four U.S. employees for an aggregate consideration of $24,330. The foregoing described issuances of securities were exempt from registration under the Securities Act by virtue of the exemption provided by Section 4(2) thereof for transactions not involving any public offering. II-2 In January 1997, the Company sold 234,990 shares of Common Stock to 10 accredited investors and one foreign investor for an aggregate consideration of $1,342,800. The foregoing described issuances of securities were, to the extent within the jurisdictional scope of the Securities Act, exempt from registration under the Securities Act by virtue of the exemption provided by Section 4(2) thereof for transactions not involving any public offering. In February and August 1997, the Company granted options to employees to purchase an aggregate of 448,589 shares of Common Stock. The foregoing described issuance of securities was exempt from registration under the Securities Act by virtue of the exemption provided by Section 4(2) thereof for transactions not involving any public offering and Rule 701 promulgated under the Securities Act. In July 1997, the Company sold 17,430 shares of Common Stock to one U.S. employee for a consideration of $99,600. The foregoing described issuance of securities was exempt from registration under the Securities Act by virtue of the exemption provided by Section 4(2) thereof for transactions not involving any public offering. In December 1997, the Company sold 362,208 shares of Common Stock to 23 accredited investors and six foreign investors for an aggregate consideration of $2,371,600. The foregoing described issuances of securities were, to the extent within the jurisdictional scope of the Securities Act, exempt from registration under the Securities Act by virtue of the safe harbor exemption provided by Section 4(2) thereof for transactions not involving any public offering. The foregoing described issuances of securities did not involve underwriters. The above information reflects a 10-for-1 split of the shares of Common Stock on January 19, 1996 and a 4.2-for-1 split of the shares of Common Stock to be effected prior to the date of this offering. ITEM 16. EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES. (a) Exhibits:
EXHIBIT NO. DESCRIPTION ------- ----------- 1.1 --Form of Underwriting Agreement by and among the Company, the Underwriters and the Selling Shareholders 3.1 --Form of Amended and Restated Articles of Incorporation of the Company 3.2 --Form of Restated By-Laws of the Company 4.1 --Specimen Stock Certificate* 5.1 --Opinion of Pepper Hamilton LLP* 10.1 --1997 Stock Option Plan (including form of option agreements)* 10.2 --Employment Agreement between the Company and Nick Marriner* 10.3 --Employment Agreement between the Company and Patrick J. Newton* 10.4 --Employment Agreement between the Company and Michael J. Mackey* 10.5 --Employment Agreement between the Company and Lisa L. Costello* 10.6 --Employment Agreement between the Company and Eric J. Fernette* 10.7 --Form of Consulting Agreement dated October 27, 1997, between the Company and Richard W. Thatcher, Jr. 10.8 --Letter Loan Agreement dated March 18, 1996 between Documentation Associates, Inc. (now known as DA Consulting Group (USA), Inc.) and Southwest Bank of Texas, N.A. 10.9 --First Amendment to Letter Loan Agreement, dated November, 1996, between D.A. Consulting Group, Inc. (now known as DA Consulting Group (USA), Inc.) and Southwest Bank of Texas, N.A. 10.10 --Second Amendment to Letter Loan Agreement, dated May 18, 1997, between D.A. Consulting Group, Inc. (now known as DA Consulting Group (USA), Inc.) and Southwest Bank of Texas, N.A. 10.11 --Third Amendment to Letter Loan Agreement, dated effective May 1997, between D.A. Consulting Group, Inc. (now known as DA Consulting Group (USA), Inc.) and Southwest Bank of Texas, N.A.
II-3
EXHIBIT NO. DESCRIPTION ------- ----------- 10.12 --Fourth Amendment to Letter Loan Agreement, dated effective November 26, 1997, between D.A. Consulting Group, Inc. (now known as DA Consulting Group (USA), Inc.) and Southwest Bank of Texas, N.A. 10.13 --Continuing Guaranty, dated May 27, 1997, of DA International, Inc. (now known as DA Consulting Group, Inc.) in favor of Southwest Bank of Texas, N.A. 10.14 --Promissory Note, dated October 7, 1997, of D.A. Consulting Group, Inc. (now known as DA Consulting Group (USA), Inc.) payable to Heller Financial, Inc. 10.15 --Security Agreement, dated October 7, 1997, between D.A. Consulting Group, Inc. (now known as DA Consulting Group (USA), Inc.) and Heller Financial, Inc. 10.16 --Promissory Note dated August 8, 1997 from Michael J. Mackey to the Company in the original principal amount of $89,640 11.1 --Computation of Net Income per Share 16.1 --Letter re change in certifying accountants 21.1 --Subsidiaries 23.1 --Consent of Coopers & Lybrand L.L.P. (included on page II-5 of the Registration Statement) 23.2 --Consent of Pepper Hamilton LLP (included in Exhibit 5.1)* 24 --Power of Attorney (included on Signature Pages) 27 --Financial Data Schedule
- -------- * To be filed by Amendment. (b) Consolidated Financial Statement Schedules: All schedules have been omitted because they are not applicable, not required, or the required information is included in the Financial Statements or the notes thereto. ITEM 17. UNDERTAKINGS. (a) The undersigned registrant hereby undertakes to provide to the Underwriters at the Closing specified in the underwriting agreement, certificates in such denomination and registered in such names or required by the Underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 of our report dated March 28, 1997, except with respect to Note 16, as to which the date is January 8, 1998, on our audits of the consolidated financial statements of DA Consulting Group, Inc. as of December 31, 1995 and 1996 and for each of the three years in the period ended December 31, 1996. We also consent to the reference to our firm under the caption "Experts." Coopers & Lybrand L.L.P. Houston, Texas January 9, 1998 II-5 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT OR AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON, STATE OF TEXAS, ON THE 8TH DAY OF JANUARY, 1998. DA Consulting Group, Inc. /s/ Nicholas H. Marriner By: _________________________________ Nicholas H. Marriner President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Nicholas H. Marriner, Patrick J. Newton, and Michael J. Mackey, and each or any of them, such individual's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Registration Statement and any and all amendments (including post-effective amendments) to this Registration Statement, including for an increase in shares of Common Stock to be registered pursuant to Rule 462, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, 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 such individual might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their, his or her substitutes or substitute, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED: SIGNATURE TITLE DATE /s/ Nicholas H. Marriner Chief Executive January 8, 1998 - ------------------------------------- Officer and NICHOLAS H. MARRINER President (principal executive officer) /s/ Michael J. Mackey Vice President, January 8, 1998 - ------------------------------------- Chief Financial MICHAEL J. MACKEY Officer, (principal financial officer and principal accounting officer) II-6 /s/ Virginia L. Pierpont Director January 8, 1998 - ------------------------------------- VIRGINIA L. PIERPONT /s/ Nigel Curlet Director January 8, 1998 - ------------------------------------- NIGEL CURLET /s/ Gunther Fritze Director January 8, 1998 - ------------------------------------- GUNTHER FRITZE /s/ Richard Thatcher Director January 8, 1998 - ------------------------------------- RICHARD THATCHER II-7 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE ------- ----------- ---- 1.1 --Form of Underwriting Agreement by and among the Company, the Underwriters and the Selling Shareholders..................... 3.1 --Form of Amended and Restated Articles of Incorporation of the Company....................................................... 3.2 --Form of Restated By-Laws of the Company...................... 4.1 --Specimen Stock Certificate*.................................. 5.1 --Opinion of Pepper Hamilton LLP*.............................. 10.1 --1997 Stock Option Plan (including form of option agreements)*.................................................. 10.2 --Employment Agreement between the Company and Nick Marriner*.. 10.3 --Employment Agreement between the Company and Patrick J. Newton*....................................................... 10.4 --Employment Agreement between the Company and Michael J. Mackey*....................................................... 10.5 --Employment Agreement between the Company and Lisa L. Costello*..................................................... 10.6 --Employment Agreement between the Company and Eric J. Fernette*..................................................... 10.7 --Form of Consulting Agreement dated October 27, 1997, between the Company and Richard W. Thatcher, Jr....................... 10.8 --Letter Loan Agreement dated March 18, 1996 between Documentation Associates, Inc. (now known as DA Consulting Group (USA), Inc.) and Southwest Bank of Texas, N.A. ......... 10.9 --First Amendment to Letter Loan Agreement, dated November, 1996, between D.A. Consulting Group, Inc. (now known as DA Consulting Group (USA), Inc.) and Southwest Bank of Texas, N.A........................................................... 10.10 --Second Amendment to Letter Loan Agreement, dated May 18, 1997, between D.A. Consulting Group, Inc. (now known as DA Consulting Group (USA), Inc.) and Southwest Bank of Texas, N.A........................................................... 10.11 --Third Amendment to Letter Loan Agreement, dated effective May 1997, between D.A. Consulting Group, Inc. (now known as DA Consulting Group (USA), Inc.) and Southwest Bank of Texas, N.A........................................................... 10.12 --Fourth Amendment to Letter Loan Agreement, dated effective November 26, 1997, between D.A. Consulting Group, Inc. (now known as DA Consulting Group (USA), Inc.) and Southwest Bank of Texas, N.A................................................. 10.13 --Continuing Guaranty, dated May 27, 1997, of DA International, Inc. (now known as DA Consulting Group, Inc.) in favor of Southwest Bank of Texas, N.A.................................. 10.14 --Promissory Note, dated October 7, 1997, of D.A. Consulting Group, Inc. (now known as DA Consulting Group (USA), Inc.) payable to Heller Financial, Inc. ............................ 10.15 --Security Agreement, dated October 7, 1997, between D.A. Consulting Group, Inc. (now known as DA Consulting Group (USA), Inc.) and Heller Financial, Inc. ...................... 10.16 --Promissory Note dated August 8, 1997 from Michael J. Mackey to the Company in the original principal amount of $89,640.... 11.1 --Computation of Net Income per Share.......................... 16.1 --Letter re change in certifying accountants................... 21.1 --Subsidiaries................................................. 23.1 --Consent of Coopers & Lybrand L.L.P. (included on page II-5 of the Registration Statement)................................... 23.2 --Consent of Pepper Hamilton LLP (included in Exhibit 5.1)*.... 24 --Power of Attorney (included on Signature Pages).............. 27 --Financial Data Schedule......................................
- -------- * To be filed by Amendment. EX-1.1 2 UNDERWRITING AGREEMENT EXHIBIT 1.1 DA CONSULTING GROUP, INC. 2,500,000 SHARES OF COMMON STOCK UNDERWRITING AGREEMENT
TABLE OF CONTENTS Page ---- Section 1. Introductory.............................................................................................. 1 Section 2. Representations and Warranties of the Company............................................................. 2 Section 3. Representations, Warranties and Covenants of the Selling Shareholders..................................... 8 Section 4. Information Supplied by the Underwriters.................................................................. 10 Section 5. Purchase, Sale and Delivery of Shares..................................................................... 11 Section 6. Covenants of the Company.................................................................................. 12 Section 7. Payment of Expenses....................................................................................... 15 Section 8. Conditions of the Obligations of the Underwriters......................................................... 16 Section 9. Reimbursement of Underwriters' Expenses................................................................... 24 Section 10. Effectiveness of Registration Statement................................................................... 24 Section 11. Indemnification........................................................................................... 24 Section 12. Default of Underwriters................................................................................... 28 Section 13. Effective Date............................................................................................ 29 Section 14. Termination............................................................................................... 29 Section 15. Representations and Indemnities to Survive Delivery....................................................... 29 Section 16. Notices................................................................................................... 30 Section 17. Successors................................................................................................ 30 Section 18. Representation of Underwriters............................................................................ 30 Section 19. Partial Unenforceability.................................................................................. 30 Section 20. Counterparts.............................................................................................. 30 Section 21. Applicable Law............................................................................................ 30 Schedule A Schedule B Schedule C Schedule D Exhibit A
-i- DA CONSULTING GROUP, INC. 2,500,000 Shares of Common Stock/1/ UNDERWRITING AGREEMENT _____________, 1998 William Blair & Company, L.L.C. Robert W. Baird & Co. Incorporated Pennsylvania Merchant Group Ltd. As Representatives of the Several Underwriters Named in Schedule A c/o William Blair & Company, L.L.C. 222 West Adams Street Chicago, Illinois 60606 Ladies and Gentlemen: SECTION 1. Introductory. DA Consulting Group, Inc. (the "Company") a Texas corporation, has an authorized capital stock consisting of _____ shares of Preferred Stock, $_____ par value, of which ________ shares were outstanding as of _________, 19___ and __________ shares, $_________ par value, of Common Stock (the "Common Stock"), of which ________ shares were outstanding as of such date. The Company proposes to issue and sell 1,700,000 shares of its authorized but unissued Common Stock, and certain shareholders of the Company (collectively referred to as the "Selling Shareholders" and named in Schedule B) propose to sell 800,000 shares of the Company's issued and outstanding Common Stock to the several underwriters named in Schedule A as it may be amended by the Pricing Agreement hereinafter defined (the "Underwriters"), who are acting severally and not jointly. Collectively, such total of 2,500,000 shares of Common Stock proposed to be sold by the Company and the Selling Shareholders is hereinafter referred to as the "Firm Shares." In addition, the Company and the Selling Shareholders propose to grant to the Underwriters an option to purchase up to 375,000 additional shares of Common Stock (the "Option Shares") as provided in Section 5 hereof. The Firm Shares and, to the extent such option is exercised, the Option Shares, are hereinafter collectively referred to as the "Shares." You have advised the Company and the Selling Shareholders that the Underwriters propose to make a public offering of their respective portions of the Shares as soon as you deem advisable after the registration statement hereinafter referred to becomes effective, if it has not yet become effective, and the Pricing Agreement hereinafter defined has been executed and delivered. Prior to the purchase and public offering of the Shares by the several Underwriters, the Company, the Selling Shareholders and the Representatives, acting on behalf of the several - ------------------- /1/ Plus an option to acquire up to 375,000 additional shares to cover over- allotments. -1- Underwriters, shall enter into an agreement substantially in the form of Exhibit A hereto (the "Pricing Agreement"). The Pricing Agreement may take the form of an exchange of any standard form of written telecommunication between the Company, the Selling Shareholders and the Representatives and shall specify such applicable information as is indicated in Exhibit A hereto. The offering of the Shares will be governed by this Agreement, as supplemented by the Pricing Agreement. From and after the date of the execution and delivery of the Pricing Agreement, this Agreement shall be deemed to incorporate the Pricing Agreement. The Company and each of the Selling Shareholders hereby confirm their agreements with the Underwriters as follows: SECTION 2. Representations and Warranties of the Company. The Company represents and warrants to the several Underwriters that: (a) A registration statement on Form S-1 (File No. 333-_____) and a related preliminary prospectus with respect to the Shares have been prepared and filed with the Securities and Exchange Commission (the "Commission") by the Company in conformity with the requirements of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the "1933 Act;" unless indicated to the contrary, all references herein to specific rules are rules promulgated under the 1933 Act); and the Company has so prepared and has filed such amendments thereto, if any, and such amended preliminary prospectuses as may have been required to the date hereof and will file such additional amendments thereto and such amended prospectuses as may hereafter be required. There have been or will promptly be delivered to you three signed copies of such registration statement and amendments, including signed copies of all consents and certificates of experts, three copies of each exhibit filed therewith, three copies of the registration statement and each amendment thereto as filed pursuant to the Commission's Electronic Data Gathering and Retrieval System ("EDGAR") and the related confirmation of acceptances of filing, and conformed copies of such registration statement and amendments (but without exhibits) and of the related preliminary prospectus or prospectuses and final forms of prospectus for each of the Underwriters. Such registration statement (as amended, if applicable) at the time it becomes effective and the prospectus constituting a part thereof (including the information, if any, deemed to be part thereof pursuant to Rule 430A(b) and/or Rule 434), as from time to time amended or supplemented, are hereinafter referred to as the "Registration Statement," and the "Prospectus," respectively, except that if any revised prospectus shall be provided to the Underwriters by the Company for use in connection with the offering of the Shares which differs from the Prospectus on file at the Commission at the time the Registration Statement became or becomes effective (whether or not such revised prospectus is required to be filed by the Company pursuant to Rule 424(b)), the term Prospectus shall refer to such revised prospectus from and after the time it was provided to the Underwriters for such use. If the Company elects to rely on Rule 434 of the 1933 Act, all references to "Prospectus" shall be deemed to include, without limitation, the form of prospectus and the term sheet, if any, -2- taken together, provided to the Underwriters by the Company in accordance with Rule 434 of the 1933 Act (the "Rule 434 Prospectus"). Any registration statement (including any amendment or supplement thereto or information which is deemed part thereof) filed by the Company under Rule 462(b) (the "Rule 462(b) Registration Statement") shall be deemed to be part of the "Registration Statement" as defined herein, and any prospectus (including any amendment or supplement thereto or information which is deemed part thereof) included in such registration statement shall be deemed to be part of the "Prospectus," as defined herein, as appropriate. The Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder are hereinafter collectively referred to as the "Exchange Act." (b) The Commission has not issued any order preventing or suspending the use of any preliminary prospectus, and each preliminary prospectus has conformed in all material respects with the requirements of the 1933 Act and, as of its date, has not included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein not misleading; and when the Registration Statement became or becomes effective, and at all times subsequent thereto, up to the First Closing Date or the Second Closing Date hereinafter defined, as the case may be, the Registration Statement, including the information deemed to be part of the Registration Statement at the time of effectiveness pursuant to Rule 430A(b), if applicable, and the Prospectus and any amendments or supplements thereto, contained or will contain all statements that are required to be stated therein in accordance with the 1933 Act and in all material respects conformed or will in all material respects conform to the requirements of the 1933 Act, and neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, included or will include any untrue statement of a material fact or omitted or will omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company makes no representation or warranty as to information contained in or omitted from any preliminary prospectus, the Registration Statement, the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter through the Representatives specifically for use in the preparation thereof. (c) The Company and its subsidiaries have been duly incorporated and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation, with corporate power and authority to own their properties and conduct their business as described in the Prospectus; the Company and each of its subsidiaries are duly qualified to do business as foreign corporations under the law of, and are in good standing as such in, each jurisdiction in which they own or lease substantial properties, have an office, or in which substantial business is conducted and such qualification is required except in any such case where the failure to so qualify or be in good standing would not have a material adverse effect upon the Company and its subsidiaries taken as a whole; and no proceeding of which the Company has knowledge has been instituted in any such jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification. -3- (d) The Company owns directly or indirectly 100 percent of the issued and outstanding capital stock of each of its subsidiaries, free and clear of any claims, liens, encumbrances or security interests and all of such capital stock has been duly authorized and validly issued and is fully paid and nonassessable. The only subsidiaries of the Company are the subsidiaries listed on Exhibit 21 to the Registration Statement. Except for the shares of capital stock or other equity interests of each of the subsidiaries owned by the Company and such subsidiaries, neither the Company nor any such subsidiary owns any shares of stock or any other equity securities of any corporation or has any equity interest in any firm, partnership, association or other entity. (e) The information set forth under the caption "Capitalization" in the Prospectus is true and correct. The issued and outstanding shares of capital stock of the Company as set forth in the Prospectus have been duly authorized and validly issued, are fully paid and nonassessable, conform to the description thereof contained in the Prospectus and were not issued in violation of the preemptive or other similar rights of any person or entity or any securityholder of the Company or in violation of any agreement to which the Company or any subsidiary is a party. There is outstanding no security or other instrument that by its terms is convertible into or exchangeable for capital stock of the Company or any of its subsidiaries and there is no commitment, plan or arrangement to issue such a security or instrument. (f) The Shares to be sold by the Company have been duly authorized and when issued, delivered and paid for pursuant to this Agreement, will be validly issued, fully paid and nonassessable, will conform to the description thereof contained in the Prospectus and will not have been issued in violation of the preemptive or other similar rights of any person or entity or any securityholder of the Company or in violation of any agreement to which the Company or any subsidiary is a party. (g) The making and performance by the Company of this Agreement and the Pricing Agreement have been duly authorized by all necessary corporate action and will not violate any provision of the Company's Amended and Restated Articles of Incorporation or bylaws and will not result in the breach, or be in contravention, of any provision of any agreement, franchise, license, indenture, mortgage, deed of trust, or other instrument to which the Company or any subsidiary is a party or by which the Company, any subsidiary or the property of any of them may be bound or affected, or any order, rule or regulation applicable to the Company or any subsidiary of any court, arbitration or other alternative dispute resolution forum, regulatory body, administrative agency or other governmental body, domestic or foreign, having jurisdiction over the Company or any subsidiary or any of their respective properties, or any order of any court or governmental agency or authority entered in any proceeding to which the Company or any subsidiary was or is now a party or by which it is bound. No filing with, or consent, approval, authorization, license or qualification, decree or order of, any court, regulatory body, administrative agency or other governmental body, domestic or foreign, is required for the execution and delivery of this Agreement or the Pricing Agreement or the consummation of the transactions contemplated -4- herein or therein, except for compliance with the 1933 Act and blue sky laws applicable to the public offering of the Shares by the several Underwriters and clearance of such offering with the National Association of Securities Dealers, Inc. ("NASD"). This Agreement (including the Pricing Agreement) has been duly authorized, executed and delivered by the Company. (h) The accountants who have expressed their opinions with respect to certain of the financial statements and schedules included in the Registration Statement are independent accountants as required by the 1933 Act. (i) The consolidated financial statements and schedules of the Company, including the notes thereto, included in the Registration Statement present fairly the consolidated financial position of the Company as of the respective dates of such financial statements, and the consolidated results of operations and cash flows of the Company for the respective periods covered thereby, all in conformity with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed in the Prospectus; and the supporting schedules included in the Registration Statement present fairly the information required to be stated therein. The financial information set forth in the Prospectus under the captions "Summary Financial Data" and "Selected Financial Data" has been compiled on a basis consistent with that of the audited financial statements contained in the Prospectus and presents fairly on the basis stated in the Prospectus, the information set forth therein. The Company has adopted a system of internal accounting controls for the Company and its subsidiaries sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (j) Neither the Company nor any subsidiary is in violation of its charter or in default under any law, statute, ordinance, rule, regulation or consent decree, or in default with respect to any material provision of any lease, loan agreement, franchise, license, permit or other contract obligation to which it is a party; and there does not exist any state of facts which constitutes an event of default as defined in such documents or which, with notice or lapse of time or both, would constitute such an event of default, in each case, except for defaults which neither singly nor in the aggregate are material to the Company and its subsidiaries taken as a whole. (k) There is no domestic or foreign action, suit, proceeding, investigation or inquiry pending, or to the Company's knowledge, threatened, against or affecting the Company or any subsidiary, or of which material property owned or leased by the Company or any subsidiary is or may be the subject, or which is related to environmental or -5- discrimination matters, which are not disclosed in the Prospectus, or which question the validity of this Agreement or the Pricing Agreement or any action taken or to be taken pursuant hereto or thereto; and the aggregate of all such pending proceedings could not have a material adverse effect on the Company and its subsidiaries taken as a whole. (l) There are no holders of securities of the Company having rights to registration thereof except as disclosed in the Prospectus. Holders of registration rights who are not Selling Shareholders have waived such rights with respect to the offering being made by the Prospectus. (m) The Company and each of its subsidiaries have good and marketable title to all the properties and assets, real, personal or mixed, reflected as owned in the financial statements hereinabove described (or elsewhere in the Prospectus), subject to no lien, mortgage, pledge, restriction (consensual or otherwise), charge or encumbrance of any kind except those, if any, reflected in such financial statements (or elsewhere in the Prospectus) or which are not material to the Company and its subsidiaries taken as a whole. The Company and each of its subsidiaries hold their respective leased properties under valid and binding leases. (n) The Company has not taken and will not take, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result, under the Exchange Act or otherwise, in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. (o) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, and except as contemplated by the Prospectus, (i) the Company and its subsidiaries, taken as a whole, have not incurred any material liabilities or obligations, direct or contingent, nor entered into any material transactions not in the ordinary course of business, (ii) there has not been any material adverse change in their condition (financial or otherwise), results of operations or business prospects, nor any material change in their capital stock, short-term debt or long-term debt, (iii) neither the Company nor any of its subsidiaries has received notice (either formally or informally) of the termination or anticipated termination of one or more customer projects or customer or supplier or joint venture relationships currently maintained by the Company or any of its subsidiaries which termination(s) could, individually or in the aggregate, reasonably be expected to have a material adverse effect on the Company and its subsidiaries taken as a whole, and (iv) there has been no dividend or distribution of any kind declared or made with respect to any class of capital stock of the Company. (p) During a period of 180 days from the date of the Pricing Agreement, the Company will not, without the prior written consent of William Blair & Company, L.L.C., directly or indirectly, sell, offer to sell, contract to sell, grant any option for the sale of, or otherwise dispose of or transfer, any Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock or securities substantially similar to -6- Common Stock (except for Common Stock issued pursuant to this Agreement or pursuant to employee benefit plans referred to in the Prospectus), or file any registration statement under the 1933 Act with respect to any of the foregoing. The Company has obtained similar agreements from each of the individuals listed on Schedule B. (q) There is no document of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement which is not described or filed as required. No transaction has occurred between or among the Company and any of its officers or directors or any affiliate or affiliates of any such officer or director that is required to be described in and is not described in the Registration Statement and the Prospectus. (r) The Company together with its subsidiaries owns and possesses all right, title and interest in and to, or has duly licensed from third parties, all patents, patent rights, licenses, trade secrets, inventions, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, trade names, copyrights, service marks and other proprietary rights ("Trade Rights") employed in the business of the Company and each of its subsidiaries. Neither the Company nor any of its subsidiaries has received any notice of or is otherwise aware of any infringement, misappropriation or conflict with asserted rights of any third party as to such Trade Rights or of any facts or circumstances which could render any such Trade Rights invalid or inadequate to protect the interest of the Company and its subsidiaries therein; and neither the Company nor any of its subsidiaries has infringed, misappropriated or otherwise conflicted with Trade Rights of any third parties, which infringement, misappropriation or conflict would have a material adverse effect upon the condition (financial or otherwise) or results of operations of the Company and its subsidiaries taken as a whole. (s) The conduct of the business of the Company and each of its subsidiaries is in compliance in all respects with applicable federal, state, local and foreign laws and regulations, except where the failure to be in compliance would not have a material adverse effect upon the condition (financial or otherwise) or results of operations of the Company and its subsidiaries taken as a whole. (t) All offers and sales of the Company's capital stock prior to the date hereof were at all relevant times exempt from the registration requirements of the 1933 Act and were duly registered with or the subject of an available exemption from the registration requirements of the applicable state securities or blue sky laws. (u) The Company and each of its subsidiaries have filed all necessary federal, state, local and foreign income, franchise, value-added, sales and use and similar tax returns and has paid all taxes shown as due thereon and any related assessments, fines or penalties, and there is no tax deficiency that has been, or to the knowledge of the Company might be, asserted against the Company, its subsidiaries or any of their respective properties or assets that would have a material adverse effect upon the condition (financial or otherwise) or -7- results of operations of the Company and its subsidiaries taken as a whole, and adequate reserves have been provided for in the financial statements referred to in Section 2(i) above for all federal, state, local and foreign taxes for all periods as to which the tax liability of the Company or any of its subsidiaries has not been determined or remains open. (v) The Company and its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as is reasonable for the conduct of their businesses and the value of their properties and as is customary in the businesses in which they are engaged. (w) The Company has filed a registration statement pursuant to Section 12(g) of the Exchange Act to register the Common Stock thereunder, and such registration statement has become effective; and the Company has filed an application to list the Shares on the Nasdaq National Market, and has received notification that the listing has been approved, subject to notice of issuance or sale of the Shares, as the case may be. (x) The Company is not, and upon issuance and sale of the Shares as herein contemplated and the application of the net proceeds therefrom as described in the Prospectus under "Use of Proceeds" will not be, and does not intend to conduct its business in a manner in which it would become, an "investment company" or an entity "controlled by" an "investment company," as such terms are defined in Section 3(a) of the Investment Company Act of 1940, as amended (the "Investment Company Act"). SECTION 3. Representations, Warranties and Covenants of the Selling Shareholders. (a) Each Selling Shareholder severally represents and warrants to, and agrees with, the Company and the Underwriters that: (i) Such Selling Shareholder has, and on the First Closing Date or the Second Closing Date hereinafter defined, as the case may be, will have, valid marketable title to the Shares proposed to be sold by such Selling Shareholder hereunder on such date and full right, power and authority to enter into this Agreement, the Pricing Agreement and the Power of Attorney and Custody Agreement hereinafter referred to, and to sell, assign, transfer and deliver such Shares hereunder, free and clear of all voting trust arrangements, liens, encumbrances, equities, claims and community property rights; and upon delivery of and payment for such Shares hereunder, the Underwriters will acquire valid marketable title thereto, free and clear of all voting trust arrangements, liens, encumbrances, equities, claims and community property rights. (ii) Such Selling Shareholder has not taken and will not take, directly or indirectly, any action designed to or which might be reasonably expected to cause or result, under the Exchange Act or otherwise, in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. -8- (iii) Such Selling Shareholder has executed and delivered a Power of Attorney and Custody Agreement (the "Power of Attorney and Custody Agreement") among the Selling Shareholder, __________, _____________, and ___________ (the "Agents"), naming the Agents as such Selling Shareholder's attorneys-in-fact (and, by the execution by any Agent of this Agreement, such Agent hereby represents and warrants that he has been duly appointed as attorney-in-fact by the Selling Shareholders pursuant to the Power of Attorney and Custody Agreement) for the purpose of entering into and carrying out this Agreement and the Pricing Agreement, and the Power of Attorney and Custody Agreement has been duly executed by such Selling Shareholder and a copy thereof has been delivered to you. (iv) Such Selling Shareholder has deposited in custody, under the Power of Attorney and Custody Agreement with ___________________, as custodian (the "Custodian"), certificates in negotiable form for the Shares to be sold hereunder by such Selling Shareholder, for the purpose of further delivery pursuant to this Agreement. The Shares to be sold by such Selling Shareholder on deposit with the Custodian are subject to the interests of the Company, the Underwriters and the other Selling Shareholders, the arrangements made for such custody, and the appointment of the Agents pursuant to the Power of Attorney and Custody Agreement, are to that extent irrevocable, and the obligations of such Selling Shareholder hereunder and under the Power of Attorney and the Custody Agreement shall not be terminated except as provided in this Agreement, the Power of Attorney or the Custody Agreement by any act of such Selling Shareholder, by operation of law, whether, in the case of an individual Selling Shareholder, by the death or incapacity of such Selling Shareholder or, in the case of a trust or estate, by the death of the trustee or trustees or the executor or executors or the termination of such trust or estate, or, in the case of a partnership or corporation, by the dissolution, winding-up or other event affecting the legal life of such entity, or by the occurrence of any other event. If any individual Selling Shareholder, trustee or executor should die or become incapacitated, or any such trust, estate, partnership or corporation should be terminated, or if any other event should occur before the delivery of the Shares hereunder, the documents evidencing Shares then on deposit with the Custodian shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such death, incapacity, termination or other event had not occurred, regardless of whether or not the Custodian, the Agents or any of them, shall have received notice thereof. Each Agent has been authorized by such Selling Shareholder to execute and deliver this Agreement and the Pricing Agreement and the Custodian has been authorized to receive and acknowledge receipt of the proceeds of sale of the Shares to be sold by such Selling Shareholder against delivery thereof and otherwise act on behalf of such Selling Shareholder. (v) Each preliminary prospectus, insofar as it has related to such Selling Shareholder and, to the knowledge of such Selling Shareholder in all other respects, as of its date, has conformed in all material respects with the requirements of the -9- 1933 Act and, as of its date, has not included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein not misleading; and the Registration Statement at the time of effectiveness, and at all times subsequent thereto, up to the First Closing Date or the Second Closing Date hereinafter defined, as the case may be, (1) such parts of the Registration Statement and the Prospectus and any amendments or supplements thereto as relate to such Selling Shareholder, and the Registration Statement and the Prospectus and any amendments or supplements thereto, to the knowledge of such Selling Shareholder in all other respects, contained or will contain all statements that are required to be stated therein in accordance with the 1933 Act and in all material respects conformed or will in all material respects conform to the requirements of the 1933 Act, and (2) neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, as it relates to such Selling Shareholder, and, to the knowledge of such Selling Shareholder in all other respects, included or will include any untrue statement of a material fact or omitted or will omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; provided that neither clause (1) nor (2) shall have any effect if information has been given by such Selling Shareholder to the Company and the Representatives in writing which would eliminate or remedy any such untrue statement or omission. (vi) Such Selling Shareholder agrees with the Company and the Underwriters not to, directly or indirectly, sell, offer to sell, contract to sell, grant any option with respect to, or otherwise dispose of or transfer any Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock, for a period of 180 days after this Agreement becomes effective without the prior written consent of William Blair & Company, L.L.C. (b) In order to document the Underwriter's compliance with the reporting and withholding provisions of the Internal Revenue Code of 1986, as amended, with respect to the transactions herein contemplated, each of the Selling Shareholders agrees to deliver to you prior to or on the First Closing Date, as hereinafter defined, a properly completed and executed United States Treasury Department Form W-8 or W-9 (or other applicable form of statement specified by Treasury Department regulations in lieu thereof). SECTION 4. Information Supplied by the Underwriters. The Representatives, on behalf of the several Underwriters, hereby advise the Company and the Selling Shareholders that the Representatives have furnished the Company for use in the Prospectus (a) the last paragraph on the cover page of the Prospectus, concerning the terms of the offering by the Underwriters; (b) the last paragraph on page 2 of the Prospectus, concerning over-allotment, stabilization and short covering by the Underwriters; (c) the third paragraph of text under the caption "Underwriting" in the Prospectus, concerning the terms of the offering by the Underwriters; and (d) the seventh paragraph under the caption "Underwriting" in the Prospectus, concerning client accounts, which are the only statements provided to the Company for use therein. -10- SECTION 5. Purchase, Sale and Delivery of Shares. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company and the Selling Shareholders, severally and not jointly, agree to sell to the Underwriters named in Schedule A hereto, and the Underwriters agree, severally and not jointly, to purchase from the Company and the Selling Shareholders, respectively, 1,700,000 Firm Shares from the Company and the respective number of Firm Shares set forth opposite the names of the Selling Shareholders in Schedule B hereto at the price per share set forth in the Pricing Agreement. The obligation of each Underwriter to the Company shall be to purchase from the Company that number of full shares which (as nearly as practicable, as determined by you) bears to 1,700,000, the same proportion as the number of Shares set forth opposite the name of such Underwriter in Schedule A hereto bears to the total number of Firm Shares to be purchased by all Underwriters under this Agreement. The obligation of each Underwriter to each Selling Shareholder shall be to purchase from such Selling Shareholder the number of full shares which (as nearly as practicable, as determined by you) bears to that number of Firm Shares set forth opposite the name of such Selling Shareholder in Schedule B hereto, the same proportion as the number of Shares set forth opposite the name of such Underwriter in Schedule A hereto bears to the total number of Firm Shares to be purchased by all Underwriters under this Agreement. The initial public offering price and the purchase price shall be set forth in the Pricing Agreement. At 9:00 A.M., Chicago Time, on the fourth business day, if permitted under Rule 15c6-1 under the Exchange Act, (or the third business day if required under Rule 15c6-1 under the Exchange Act or unless postponed in accordance with the provisions of Section 12) following the date the Registration Statement becomes effective (or, if the Company has elected to rely upon Rule 430A, the fourth business day, if permitted under Rule 15c6-1 under the Exchange Act, (or the third business day if required under Rule 15c6-1 under the Exchange Act) after execution of the Pricing Agreement), or such other time not later than ten business days after such date as shall be agreed upon by the Representatives and the Company, the Company and the Custodian will deliver to you at the offices of Bracewell & Patterson, L.L.P., counsel for the Underwriters, South Tower Pennzoil Place, 711 Louisiana Street, Houston, Texas 77002, or through the facilities of The Depository Trust Company for the accounts of the several Underwriters, certificates representing the Firm Shares to be sold by them, respectively, against payment of the purchase price therefor by delivery of federal or other immediately available funds, by wire transfer or otherwise, to the Company and the Custodian. Such time of delivery and payment is herein referred to as the "First Closing Date." The certificates for the Firm Shares so to be delivered will be in such denominations and registered in such names as you request by notice to the Company and the Custodian prior to 10:00 A.M., Chicago Time, on the second business day preceding the First Closing Date, and will be made available at the Company's expense for checking and packaging by the Representatives at 10:00 A.M., Chicago Time, on the business day preceding the First Closing Date. Payment for the Firm Shares so to be delivered shall be made at the time and in the manner described above at the offices of counsel for the Underwriters. In addition, on the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company and certain of the Selling Shareholders hereby grant an option to the several Underwriters to purchase, severally and not -11- jointly, up to an aggregate of 375,000 Option Shares, at the same purchase price per share to be paid for the Firm Shares, for use solely in covering any over- allotments made by the Underwriters in the sale and distribution of the Firm Shares. The option granted hereunder may be exercised at any time (but not more than once) within 30 days after the date of the initial public offering upon notice by you to the Company and the Agents setting forth the aggregate number of Option Shares as to which the Underwriters are exercising the option, the names and denominations in which the certificates for such shares are to be registered and the time and place at which such certificates will be delivered. Such time of delivery (which may not be earlier than the First Closing Date), being herein referred to as the "Second Closing Date," shall be determined by you, but if at any time other than the First Closing Date, shall not be earlier than three nor later than 10 full business days after delivery of such notice of exercise. The number of Option Shares to be purchased from the Company and each such Selling Shareholder are set forth in Schedule B hereto. If less than all Option Shares are to be purchased, the number of Option Shares to be purchased from the Company and each Selling Shareholder will be reduced pro rata. The number of Option Shares to be purchased by each Underwriter shall be determined by multiplying the number of Option Shares to be sold by the Company and the Selling Shareholders pursuant to such notice of exercise by a fraction, the numerator of which is the number of Firm Shares to be purchased by such Underwriter as set forth opposite its name in Schedule A and the denominator of which is the total number of Firm Shares (subject to such adjustments to eliminate any fractional share purchases as you in your absolute discretion may make). Certificates for the Option Shares will be made available at the Company's expense for checking and packaging at 10:00 A.M., Chicago Time, on the business day preceding the Second Closing Date. The manner of payment for and delivery of the Option Shares shall be the same as for the Firm Shares as specified in the preceding paragraph. You have advised the Company and the Selling Shareholders that each Underwriter has authorized you to accept delivery of its Shares, to make payment and to receipt therefor. You, individually and not as the Representatives of the Underwriters, may make payment for any Shares to be purchased by any Underwriter whose funds shall not have been received by you by the First Closing Date or the Second Closing Date, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any obligation hereunder. SECTION 6. Covenants of the Company. The Company covenants and agrees that: (a) The Company will advise you and the Selling Shareholders promptly of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the institution of any proceedings for that purpose, or of any notification of the suspension of qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceedings for that purpose, and will also advise you and the Selling Shareholders promptly of any request of the Commission for amendment or supplement of the Registration Statement, of any preliminary prospectus or of the Prospectus, or for additional information. The Company will use every reasonable effort to prevent the issuance of any stop order and, if one is issued, to obtain the lifting thereof at the earliest possible moment. -12- (b) The Company will give you and the Selling Shareholders notice of its intention to file or prepare any amendment to the Registration Statement (including any post-effective amendment) or any Rule 462(b) Registration Statement or any amendment or supplement to the Prospectus (including any revised prospectus which the Company proposes for use by the Underwriters in connection with the offering of the Shares which differs from the prospectus on file at the Commission at the time the Registration Statement became or becomes effective, whether or not such revised prospectus is required to be filed pursuant to Rule 424(b) and any term sheet as contemplated by Rule 434) and will furnish you and the Selling Shareholders with copies of any such amendment or supplement a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file any such amendment or supplement or use any such prospectus to which you or counsel for the Underwriters shall reasonably object. (c) If the Company elects to rely on Rule 434 of the 1933 Act, the Company will prepare a term sheet that complies with the requirements of Rule 434. If the Company elects not to rely on Rule 434, the Company will provide the Underwriters with copies of the form of prospectus, in such numbers as the Underwriters may reasonably request, and file with the Commission such prospectus in accordance with Rule 424(b) of the 1933 Act by the close of business in New York City on the second business day immediately succeeding the date of the Pricing Agreement. If the Company elects to rely on Rule 434, the Company will provide the Underwriters with copies of the form of Rule 434 Prospectus, in such numbers as the Underwriters may reasonably request, by the close of business in New York on the business day immediately succeeding the date of the Pricing Agreement. (d) If at any time when a prospectus relating to the Shares is required to be delivered under the 1933 Act any event occurs as a result of which the Prospectus, including any amendments or supplements, would include an untrue statement of a material fact, or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus, including any amendments or supplements thereto and including any revised prospectus which the Company proposes for use by the Underwriters in connection with the offering of the Shares which differs from the prospectus on file with the Commission at the time of effectiveness of the Registration Statement, whether or not such revised prospectus is required to be filed pursuant to Rule 424(b) to comply with the 1933 Act, the Company, at its expense, promptly will advise you thereof and will promptly prepare and file with the Commission an amendment or supplement (in form and substance satisfactory to counsel for the Underwriters) which will correct such statement or omission or an amendment which will effect such compliance; provided, however, in case any Underwriter is required to deliver a prospectus nine months or more after the effective date of the Registration Statement, the Company upon request, but at the expense of such Underwriter, will prepare promptly such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the 1933 Act. -13- (e) Neither the Company nor any of its subsidiaries will, prior to the earlier of the Second Closing Date or termination or expiration of the related option, incur any liability or obligation, direct or contingent, or enter into any material transaction, other than in the ordinary course of business, except as contemplated by the Prospectus. (f) Neither the Company nor any of its subsidiaries will acquire any capital stock of the Company prior to the earlier of the Second Closing Date or termination or expiration of the related option nor will the Company declare or pay any dividend or make any other distribution upon the Common Stock payable to shareholders of record on a date prior to the earlier of the Second Closing Date or termination or expiration of the related option, except in either case as contemplated by the Prospectus. (g) As soon as practicable, but not later than the Available Date (as defined below) the Company will make generally available to its securityholders an earnings statement (which need not be audited) covering a period of at least 12 months beginning after the effective date of the Registration Statement, which will satisfy the provisions of the last paragraph of Section 11(a) of the 1933 Act. For the purpose of the preceding sentence, "Available Date" means the 45th day after the end of the fourth fiscal quarter following the fiscal quarter that includes the date of this Agreement, except that, if such fourth fiscal quarter is the last quarter of the Company's fiscal year, "Available Date" means the 90th day after the end of such fourth fiscal quarter. (h) During such period as a prospectus is required by law to be delivered in connection with offers and sales of the Shares by an Underwriter or dealer, the Company will furnish to you at its expense, subject to the proviso of subsection (d) hereof, copies of the Registration Statement, the Prospectus, each preliminary prospectus and all amendments and supplements to any such documents in each case as soon as available and in such quantities as you may reasonably request, for the purposes contemplated by the 1933 Act. (i) The Company will cooperate with the Underwriters in qualifying or registering the Shares for sale under the blue sky laws of such jurisdictions as you designate, and will continue such qualifications in effect so long as reasonably required for the distribution of the Shares. The Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process (other than those arising out of the offering or sale of the Shares) in any such jurisdiction where it is not currently qualified or where it would be subject to taxation as a foreign corporation. (j) During the period of five years hereafter, the Company will furnish you and each of the other Underwriters with a copy (i) as soon as practicable after the filing thereof, of each report filed by the Company with the Commission, any securities exchange or the NASD; (ii) as soon as practicable after the release thereof, of each material press release in respect of the Company; and (iii) as soon as available, of each report of the Company mailed to shareholders. -14- (k) The Company will use the net proceeds received by it from the sale of the Shares being sold by it in the manner specified in the Prospectus under the caption "Use of Proceeds." (l) If, at the time of effectiveness of the Registration Statement, any information shall have been omitted therefrom in reliance upon Rule 430A and/or Rule 434, then immediately following the execution of the Pricing Agreement, the Company will prepare, and file or transmit for filing with the Commission in accordance with such Rule 430A, Rule 424(b) and/or Rule 434, copies of an amended Prospectus, or, if required by such Rule 430A and/or Rule 434, a post-effective Amendment to the Registration Statement (including an amended Prospectus), containing all information so omitted. If required, the Company will prepare and file, or transmit for filing, a Rule 462(b) Registration Statement not later than the date of the execution of the Pricing Agreement. If a Rule 462(b) Registration Statement is filed, the Company shall make payment of, or arrange for payment of, the additional registration fee owing to the Commission required by Rule 111. The Company will use all efforts to cause any post- effective amendment to be declared effective as promptly as practical. (m) The Company will list the Common Stock with the Nasdaq National Market and will comply with all registration, filing and reporting requirements of the Exchange Act and the Nasdaq National Market. In its first filing on Form 10-K or Form 10-Q after the date hereof, the Company will report the Use of Proceeds from the sale of the Shares by the Company. SECTION 7. Payment of Expenses. Whether or not the transactions contemplated hereunder are consummated or this Agreement becomes effective as to all of its provisions or is terminated, the Company agrees to pay (i) all costs, fees and expenses (other than legal fees and disbursements of counsel for the Underwriters and the expenses incurred by the Underwriters) incurred in connection with the performance of the Company's obligations hereunder, including without limiting the generality of the foregoing, all fees and expenses of legal counsel for the Company and of the Company's independent accountants and other advisors, all costs and expenses incurred in connection with the preparation, printing, filing and distribution of the Registration Statement, each preliminary prospectus and the Prospectus (including all exhibits and financial statements) and all amendments and supplements provided for herein, this Agreement, the Pricing Agreement and the blue sky memorandum, (ii) all costs, fees and expenses (including reasonable legal fees and disbursements of counsel for the Underwriters) incurred by the Underwriters (A) in connection with qualifying or registering all or any part of the Shares for offer and sale under state securities or blue sky laws, including the preparation of a blue sky memorandum and any supplement thereto relating to the Shares, and (B) incident to the review by the NASD of the terms of the offering and clearance of such offering with the NASD; (iii) all fees and expenses of the Company's transfer agent and registrar, printing of the certificates representing the Common Stock, including the Shares, and all duties and transfer taxes, if any, with respect to the sale and delivery of the Shares to the several Underwriters; and (iv) all fees and expenses incurred in connection with listing the Common Stock and the Shares on the Nasdaq National Market. -15- The provisions of this Section shall not affect any agreement which the Company and the Selling Shareholders may make for the allocation or sharing of such expenses and costs. SECTION 8. Conditions of the Obligations of the Underwriters. The obligations of the several Underwriters to purchase and pay for the Firm Shares on the First Closing Date and the Option Shares on the Second Closing Date shall be subject to the accuracy of the representations and warranties on the part of the Company and the Selling Shareholders herein set forth as of the date hereof and as of the First Closing Date or the Second Closing Date, as the case may be, to the accuracy of the statements of officers of the Company made pursuant to the provisions hereof, to the performance by the Company and the Selling Shareholders of their respective obligations hereunder, and to the following additional conditions: (a) The Registration Statement shall have become effective either prior to the execution of this Agreement or not later than 1:00 P.M., Chicago Time, on the first full business day after the date of this Agreement, or such later time as shall have been consented to by you but in no event later than 1:00 P.M., Chicago Time, on the third full business day following the date hereof; and prior to the First Closing Date or the Second Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or shall be pending or, to the knowledge of the Company, the Selling Shareholders or you, shall be contemplated by the Commission. If the Company has elected to rely upon Rule 430A and/or Rule 434, the information concerning the initial public offering price of the Shares and price-related information shall have been transmitted to the Commission for filing pursuant to Rule 424(b) within the prescribed period and the Company will provide evidence satisfactory to the Representatives of such timely filing (or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rules 430A and 424(b)). If a Rule 462(b) Registration Statement is required, such Registration Statement shall have been transmitted to the Commission for filing and become effective within the prescribed time period and, prior to the First Closing Date, the Company shall have provided evidence of such filing and effectiveness in accordance with Rule 462(b). (b) The Shares shall have been qualified for sale under the state securities or blue sky laws of such states as shall have been specified by the Representatives. (c) The legality and sufficiency of the authorization, issuance and sale or transfer and sale of the Shares hereunder, the validity and form of the certificates representing the Shares, the execution and delivery of this Agreement and the Pricing Agreement, and all corporate proceedings and other legal matters incident thereto, and the form of the Registration Statement and the Prospectus (except financial statements) shall have been approved by counsel for the Underwriters exercising reasonable judgment. (d) You shall not have advised the Company that the Registration Statement or the Prospectus or any amendment or supplement thereto, contains an untrue statement of -16- fact, which, in the opinion of counsel for the Underwriters, is material or omits to state a fact which, in the opinion of such counsel, is material and is required to be stated therein or necessary to make the statements therein not misleading. (e) Subsequent to the execution and delivery of this Agreement, there shall not have occurred any change, or any development involving a prospective change, in or affecting particularly the business or properties of the Company or its subsidiaries, whether or not arising in the ordinary course of business, which, in the judgment of the Representatives, makes it impractical or inadvisable to proceed with the public offering or purchase of the Shares as contemplated hereby. (f) The Shares shall have been approved for listing on the Nasdaq National Market, subject only to official notice of issuance or sale, as the case may be. (g) At the time of execution of this Agreement, the Representatives shall have received agreements substantially in the form of Exhibit B signed by each of the individuals identified on Schedule C hereto. (h) There shall have been furnished to you, as Representatives of the Underwriters, on the First Closing Date or the Second Closing Date, as the case may be, except as otherwise expressly provided below: (i) An opinion of Pepper, Hamilton & Scheetz LLP, counsel for the Company and for the Selling Shareholders, addressed to the Underwriters and dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that: (1) the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Texas, with corporate power and authority to own, lease and operate its properties and conduct its business as described in the Prospectus, and is duly qualified as a foreign corporation to transact business, and is in good standing in, each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property, or the conduct of its business, except where the failure so to qualify or to be in good standing would not have a material adverse effect upon the condition (financial or otherwise) or results of operations of the Company and its subsidiaries taken as a whole; (2) each subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with corporate power and authority to own, lease and operate its properties and conduct its business as described in the Prospectus, and is duly qualified as a foreign corporation to transact business, and is in good standing in, each jurisdiction in which such qualification is -17- required, whether by reason of the ownership or leasing of property or the conduct of its business, except where the failure so to qualify or to be in good standing would not have a material adverse effect on the condition (financial or otherwise) or results of operations of the Company and its subsidiaries taken as a whole; (3) all of the issued and outstanding capital stock of each subsidiary of the Company has been duly authorized, validly issued and is fully paid and nonassessable, and, the Company owns directly or indirectly 100 percent of the outstanding capital stock of each subsidiary, and to the best knowledge of such counsel, such stock is owned free and clear of any claims, liens, encumbrances or security interests; (4) the authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Description of Capital Stock" (except for subsequent issuances, if any, pursuant to stock options or other rights referred to in the Prospectus), conforms as to legal matters in all material respects to the description thereof in the Registration Statement and Prospectus; (5) the shares of issued and outstanding capital stock of the Company have been duly authorized, are validly issued, are fully paid and nonassessable and were not issued in violation of the preemptive or other similar rights of any person or entity or any securityholder of the Company or in violation of any agreement to which the Company or any subsidiary is a party; and except as disclosed in the Prospectus, there are no outstanding options, warrants or other rights requiring the issuance of, and no commitments or obligation to issue, any shares of capital stock of the Company of any of its subsidiaries or any security convertible into or exchangeable for capital stock of the Company or any of its subsidiaries; (6) the certificates for the Shares to be delivered hereunder are in due and proper form, and when delivered to you or upon your order against payment of the agreed consideration therefor in accordance with the provisions of this Agreement and the Pricing Agreement, the Shares represented thereby will be duly authorized and validly issued, fully paid and nonassessable and free of any pledge, lien, encumbrance or claim; the Shares have not been issued in violation of the preemptive or other similar rights of any person or entity or any securityholder of the Company or in violation of any agreement to which the Company or any subsidiary is a party; and no holder of the Shares is subject to personal liability for debts of the Company by reason of being such a holder; -18- (7) the Registration Statement has become effective under the 1933 Act, the Prospectus has been filed pursuant to Rule 424(b) in the manner and within the time period required by Rule 424(b), to the best knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the 1933 Act, and the Registration Statement (including the information deemed to be part of the Registration Statement at the time of effectiveness pursuant to Rule 430A(b) and/or Rule 434, if applicable), the Prospectus and each amendment or supplement thereto (except for the financial statements or financial data included therein as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the 1933 Act; such counsel have no reason to believe that either the Registration Statement (including the information deemed to be part of the Registration Statement at the time of effectiveness pursuant to Rule 430A(b) and/or Rule 434, if applicable) or the Prospectus, or the Registration Statement or the Prospectus as amended or supplemented (except as aforesaid), as of their respective effective or issue dates, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus as amended or supplemented, if applicable, as of the First Closing Date or the Second Closing Date, as the case may be, contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (8) the statements in the Registration Statement and the Prospectus summarizing statutes, rules and regulations are accurate and fairly and correctly present in all material respects the information required to be presented by the 1933 Act and such counsel does not know of any statutes, rules and regulations required to be described or referred to in the Registration Statement or the Prospectus that are not described or referred to therein as required; and such counsel does not know of any contracts or documents of a character required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement which are not described or filed, as required; (9) the statements under the captions "Management--Executive Compensation" and "--Employee Benefit Plans," "Certain Transactions," "Description of Capital Stock" and "Shares Eligible for Future Sale" in the Prospectus, insofar as such statements constitute a summary of documents referred to therein or matters of law, are accurate summaries and fairly and correctly present, in all material respects, the information called for with respect to such documents and matters; -19- (10) this Agreement and the Pricing Agreement and the performance of the Company's obligations hereunder have been duly authorized by all necessary corporate action and this Agreement and the Pricing Agreement have been duly executed and delivered by and on behalf of the Company, and are legal, valid and binding agreements of the Company, except as enforceability of the same may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights and by the exercise of judicial discretion in accordance with general principles applicable to equitable and similar remedies and except as to those provisions relating to indemnities for liabilities arising under the 1933 Act as to which no opinion need be expressed; (11) except as set forth and described as required in the Prospectus to such counsel's knowledge, there is not pending or threatened action, suit or proceeding before any court or governmental agency or body, to which the Company or any of its subsidiaries is a party, which might reasonably be expected to result in a material adverse change in the condition, financial or otherwise, or in the earnings or business affairs of the Company and its subsidiaries taken as a whole or prevent or interfere with the consummation of this Agreement and the Pricing Agreement or the performance of its obligations hereunder or thereunder; (12) no authorization, approval, consent or order of any court or governmental authority or agency (other than under the 1933 Act and the rules of the NASD, which have been obtained, or as may be required under the securities or blue sky laws of the various states, as to which such counsel need express no opinion) is required to be obtained by the Company for the due authorization, execution and delivery of this Agreement and the Pricing Agreement or for the offering, issuance or sale of the Shares to the Underwriters; and the execution, delivery and performance of this Agreement and the Pricing Agreement and the consummation of the transactions contemplated herein and therein and compliance by the Company with its obligations hereunder and thereunder (including the use of the proceeds from the sale of the Shares as described in the prospectus under the caption "Use of Proceeds") will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of any indenture, mortgage, deed of trust, loan or credit agreement, note or guaranty to which the Company or any subsidiary is a party or by which any of their respective property is bound, or to such counsel's knowledge, any other agreement or instrument to which the Company or any subsidiary is a party or by which any of their respective property is bound, nor will such action violate any law, statute, order, rule or regulation of any court, arbitration or other alternative dispute resolution forum, regulatory body or governmental -20- agency, domestic or foreign, having jurisdiction over the Company or any of its subsidiaries of any of their properties, or result in any violation of the provisions of the Amended and Restated Articles of Incorporation or bylaws of the Company; (13) there are no persons with registration or other similar rights to have any securities registered pursuant to the Registration Statement; (14) the Company is not an "investment company" or any entity "controlled" by an "investment company," as such terms are defined in the Investment Company Act; (15) all prior offers and sales of the Company's capital stock were at all relevant times exempt from the registration requirements of the 1933 Act and were duly registered or the subject of an available exemption from the registration requirements of the applicable state securities or blue sky laws; (16) with respect to each Selling Shareholder, this Agreement and the Pricing Agreement have been duly authorized, executed and delivered by or on behalf of each such Selling Shareholder; the Agents and the Custodian for each such Selling Shareholder have been duly and validly authorized to carry out all transactions contemplated herein on behalf of each such Selling Shareholder; and the performance of this Agreement and the Pricing Agreement and the consummation of the transactions herein contemplated by such Selling Shareholders will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any indenture, mortgage, deed of trust, loan or credit agreement, note or guaranty to which any of such Selling Shareholders is a party or by which any are bound or to which any of the property of any such Selling Shareholders is subject, or to such counsel's knowledge, any other agreement or instrument to which any of such Selling Shareholders is a party or by which any are bound or to which any of the property of any such Selling Shareholders is subject, or any order, rule or regulation known to such counsel of any court or governmental agency or body having jurisdiction over any of such Selling Shareholders or any of their properties; and no consent, approval, authorization or order of any court or governmental agency or body is required for the consummation of the transactions contemplated by this Agreement and the Pricing Agreement in connection with the sale of Shares to be sold by such Selling Shareholders hereunder, except such as have been obtained under the 1933 Act and such as may be required under applicable blue sky laws in connection with the purchase and distribution of such Shares by the Underwriters and the clearance of such offering with the NASD; -21- (17) each Selling Shareholder has full right, power and authority to enter into this Agreement and the Pricing Agreement and to sell, transfer and deliver the Shares to be sold on the First Closing Date or the Second Closing Date, as the case may be, by such Selling Shareholder hereunder; and each Selling Shareholder has good and marketable title to such Shares so sold, free and clear of all voting trust arrangements, pledges, liens, encumbrances, equities, claims and community property rights whatsoever, and the Underwriters (who counsel may assume to be bona fide purchasers) have acquired good and marketable and unencumbered title to the Shares purchased by them from the Selling Shareholders hereunder; and (18) this Agreement and the Pricing Agreement are legal, valid and binding agreements of each Selling Shareholder except as enforceability of the same may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights and by the exercise of judicial discretion in accordance with general principles applicable to equitable and similar remedies and except with respect to those provisions relating to indemnities for liabilities arising under the 1933 Act, as to which no opinion need be expressed. Such opinion shall also state that nothing has come to such counsel's attention that would lead them to believe that the Registration Statement (except for financial statements and schedules and other financial data included therein, as to which such counsel need make no statement), at the time it became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein no misleading or that the Prospectus (except for financial statements and schedules and other financial data included therein, as to which such counsel need make no statement), on the date thereof or on the applicable Closing Date, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (ii) Such opinion or opinions of Bracewell & Patterson, L.L.P., counsel for the Underwriters, dated the First Closing Date or the Second Closing Date, as the case may be, with respect to the incorporation of the Company, the validity of the Shares to be sold by the Company, the Registration Statement and the Prospectus and other related matters as you may reasonably require, and the Company shall have furnished to such counsel such documents and shall have exhibited to them such papers and records as they request for the purpose of enabling them to pass upon such matters. (iii) A certificate of the president and chief executive officer and the principal financial officer of the Company, dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that: -22- (1) the representations and warranties of the Company set forth in Section 2 of this Agreement are true and correct as of the date of this Agreement and as of the First Closing Date or the Second Closing Date, as the case may be, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to such Closing Date; and (2) the Commission has not issued an order preventing or suspending the use of the Prospectus or any preliminary prospectus filed as a part of the Registration Statement or any amendment thereto; no stop order suspending the effectiveness of the Registration Statement has been issued; and to the best knowledge of the respective signers, no proceedings for that purpose have been instituted or are pending or contemplated under the 1933 Act. The delivery of the certificate provided for in this subparagraph shall be and constitute a representation and warranty of the Company as to the facts required in the immediately foregoing clauses (1) and (2) of this subparagraph to be set forth in said certificate. (iv) A certificate of each Selling Shareholder dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that the representations and warranties of such Selling Shareholder set forth in Section 3 of this Agreement are true and correct as of such date and the Selling Shareholder has complied with all the agreements and satisfied all the conditions on the part of such Selling Shareholder to be performed or satisfied at or prior to such date. (v) At the time the Pricing Agreement is executed and also on the First Closing Date or the Second Closing Date, as the case may be, there shall be delivered to you a letter addressed to you, as Representatives of the Underwriters, from Coopers & Lybrand L.L.P., independent accountants, the first one to be dated the date of the Pricing Agreement, the second one to be dated the First Closing Date and the third one (in the event of a second closing) to be dated the Second Closing Date, to the effect set forth in Schedule D. There shall not have been any change or decrease specified in the letters referred to in this subparagraph which makes it impractical or inadvisable in the judgment of the Representatives to proceed with the public offering or purchase of the Shares as contemplated hereby. (vi) Such further certificates and documents as you may reasonably request. All such opinions, certificates, letters and documents shall be in compliance with the provisions hereof only if they are satisfactory to you and to Bracewell & Patterson, L.L.P., counsel for the Underwriters, which approval shall not be unreasonably withheld. The Company shall -23- furnish you with such number of manually signed and conformed copies of such opinions, certificates, letters and documents as you request. If any condition to the Underwriters' obligations hereunder to be satisfied prior to or at the First Closing Date is not so satisfied, this Agreement at your election will terminate upon notification to the Company and the Selling Shareholders without liability on the part of any Underwriter or the Company or any Selling Shareholder, except for the expenses to be paid or reimbursed by the Company pursuant to Sections 7 and 9 hereof and except to the extent provided in Section 11 hereof. SECTION 9. Reimbursement of Underwriters' Expenses. If the sale to the Underwriters of the Shares on the First Closing Date is not consummated because any condition of the Underwriters' obligations hereunder is not satisfied or because of any refusal, inability or failure on the part of the Company or the Selling Shareholders to perform any agreement herein or to comply with any provision hereof, unless such failure to satisfy such condition or to comply with any provision hereof is due to the default or omission of any Underwriter, the Company agrees to reimburse you and the other Underwriters upon demand for all out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been reasonably incurred by you and them in connection with the proposed purchase and the sale of the Shares. Any such termination shall be without liability of any party to any other party except that the provisions of this Section, Section 7 and Section 11 shall at all times be effective and shall apply. SECTION 10. Effectiveness of Registration Statement. You, the Company and the Selling Shareholders will use your, its and their best efforts to cause the Registration Statement to become effective, if it has not yet become effective, and to prevent the issuance of any stop order suspending the effectiveness of the Registration Statement and, if such stop order be issued, to obtain as soon as possible the lifting thereof. SECTION 11. Indemnification. (a) The Company and each Selling Shareholder, jointly and severally, agree to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the 1933 Act or the Exchange Act against any losses, claims, damages or liabilities, joint or several, to which such Underwriter or such controlling person may become subject under the 1933 Act, the Exchange Act or other foreign, federal or state statutory law or regulation, at common law or otherwise (including in settlement of any litigation if such settlement is effected with the written consent of the Company and/or such Selling Shareholders, as the case may be), insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, including the information deemed to be part of the Registration Statement at the time of effectiveness pursuant to Rule 430A and/or Rule 434, if applicable, any preliminary prospectus, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be -24- stated therein or necessary to make the statements therein not misleading; and will reimburse each Underwriter and each such controlling person for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that neither the Company nor any Selling Shareholder will be liable in any such case to the extent that (i) any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any preliminary prospectus, the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter through the Representatives, specifically for use therein; or (ii) if such statement or omission was contained or made in any preliminary prospectus and corrected in the Prospectus and (1) any such loss, claim, damage or liability suffered or incurred by any Underwriter (or any person who controls any Underwriter) resulted from an action, claim or suit by any person who purchased Shares which are the subject thereof from such Underwriter in the offering and (2) such Underwriter failed to deliver or provide a copy of the Prospectus to such person at or prior to the confirmation of the sale of such Shares in any case where such delivery is required by the 1933 Act. In addition to their other obligations under this Section 11(a), the Company and the Selling Shareholders agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in this Section 11(a), they will reimburse the Underwriters on a monthly basis for all reasonable legal and other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's and the Selling Shareholders' obligation to reimburse the Underwriters for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. This indemnity agreement will be in addition to any liability which the Company and the Selling Shareholders may otherwise have. Without limiting the full extent of the Company's agreement to indemnify each Underwriter, as herein provided, each Selling Shareholder shall be liable under the indemnity agreements contained in paragraph (a) of this Section only for an amount not exceeding the proceeds received by such Selling Shareholder from the sale of Shares hereunder. (b) Each Underwriter will severally indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement, and each Selling Shareholder and each person, if any, who controls the Company within the meaning of the 1933 Act or the Exchange Act, against any losses, claims, damages or liabilities to which the Company, or any such director, officer, Selling Shareholder or controlling person may become subject under the 1933 Act, the Exchange Act or other foreign, federal or state statutory law or regulation, at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are -25- based upon any untrue or alleged untrue statement of any material fact contained in the Registration Statement, any preliminary prospectus, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any preliminary prospectus, the Prospectus, or any amendment or supplement thereto in reliance upon and in conformity with Section 4 of this Agreement or any other written information furnished to the Company by such Underwriter through the Representatives specifically for use in the preparation thereof; and will reimburse any legal or other expenses reasonably incurred by the Company, or any such director, officer, Selling Shareholder or controlling person in connection with investigating or defending any such loss, claim, damage, liability or action. In addition to their other obligations under this Section 11(b), the Underwriters agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in this Section 11(b), they will reimburse the Company and the Selling Shareholders on a monthly basis for all reasonable legal and other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Underwriters' obligation to reimburse the Company and the Selling Shareholders for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party except to the extent that the indemnifying party was prejudiced by such failure to notify. In case any such action is brought against any indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with all other indemnifying parties similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, or the indemnified and indemnifying parties may have conflicting interests which would make it inappropriate for the same counsel to represent both of them, the indemnified party or parties shall have the right to select separate counsel to assume such legal defense and otherwise to participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of its election so to assume the -26- defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed such counsel in connection with the assumption of legal defense in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel, approved by the Representatives in the case of paragraph (a) representing all indemnified parties not having different or additional defenses or potential conflicting interest among themselves who are parties to such action), (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes any unconditional release of such indemnified party from all liability arising out of such proceeding. (d) If the indemnification provided for in this Section is unavailable to an indemnified party under paragraphs (a) or (b) hereof in respect of any losses, claims, damages or liabilities referred to therein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Shareholders on the one hand and the Underwriters on the other from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Selling Shareholders on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The respective relative benefits received by the Company and the Selling Shareholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds of the offering (before deducting expenses) received by the Company and the Selling Shareholders bear to the total underwriting discount received by the Underwriters. The relative fault of the Company and the Selling Shareholders and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to sate a material fact relates to information supplied by the Company or by the Selling Shareholders or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages and liabilities referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. -27- The Company, the Selling Shareholders and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section are several in proportion to their respective underwriting commitments and not joint. (e) The provisions of this Section shall survive any termination of this Agreement. SECTION 12. Default of Underwriters. It shall be a condition to the agreement and obligation of the Company and the Selling Shareholders to sell and deliver the Shares hereunder, and of each Underwriter to purchase the Shares hereunder, that, except as hereinafter in this paragraph provided, each of the Underwriters shall purchase and pay for all Shares agreed to be purchased by such Underwriter hereunder upon tender to the Representatives of all such Shares in accordance with the terms hereof. If any Underwriter or Underwriters default in their obligations to purchase Shares hereunder on the First Closing Date and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed 10 percent of the total number of Shares which the Underwriters are obligated to purchase on the First Closing Date, the Representatives may make arrangements satisfactory to the Company and the Selling Shareholders for the purchase of such Shares by other persons, including any of the Underwriters, but if no such arrangements are made by such date the nondefaulting Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Shares which such defaulting Underwriters agreed but failed to purchase on such date. If any Underwriter or Underwriters so default and the aggregate number of Shares with respect to which such default or defaults occur is more than the above percentage and arrangements satisfactory to the Representatives and the Company and the Selling Shareholders for the purchase of such Shares by other persons are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any nondefaulting Underwriter or the Company or the Selling Shareholders, except for the expenses to be paid by the Company pursuant to Section 7 hereof and except to the extent provided in Section 11 hereof. In the event that Shares to which a default relates are to be purchased by the nondefaulting Underwriters or by another party or parties, the Representatives or the Company shall have the right to postpone the First Closing Date for not more than seven business days in order that the necessary changes in the Registration Statement, Prospectus and any other documents, as well as any other arrangements, may be effected. As used in this Agreement, the term "Underwriter" includes any -28- person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default. SECTION 13. Effective Date. This Agreement shall become effective immediately as to Sections 7, 9, 11 and 14 and as to all other provisions at 10:00 A.M., Chicago Time, on the day following the date upon which the Pricing Agreement is executed and delivered, unless such a day is a Saturday, Sunday or holiday (and in that event this Agreement shall become effective at such hour on the business day next succeeding such Saturday, Sunday or holiday); but this Agreement shall nevertheless become effective at such earlier time after the Pricing Agreement is executed and delivered as you may determine on and by notice to the Company and the Selling Shareholders or by release of any Shares for sale to the public. For the purposes of this Section, the Shares shall be deemed to have been so released upon the release for publication of any newspaper advertisement relating to the Shares or upon the release by you of telegrams (i) advising Underwriters that the Shares are released for public offering, or (ii) offering the Shares for sale to securities dealers, whichever may occur first. SECTION 14. Termination. Without limiting the right to terminate this Agreement pursuant to any other provision hereof: (a) This Agreement may be terminated by the Company by notice to you and the Selling Shareholders or by you by notice to the Company and the Selling Shareholders at any time prior to the time this Agreement shall become effective as to all its provisions, and any such termination shall be without liability on the part of the Company or the Selling Shareholders to any Underwriter (except for the expenses to be paid or reimbursed pursuant to Section 7 hereof and except to the extent provided in Section 11 hereof) or of any Underwriter to the Company or the Selling Shareholders. (b) This Agreement may also be terminated by you prior to the First Closing Date, and the option referred to in Section 5, if exercised, may be cancelled at any time prior to the Second Closing Date, if (i) trading in securities on the New York Stock Exchange shall have been suspended or minimum prices shall have been established on such exchange, or (ii) a banking moratorium shall have been declared by Illinois, New York, or United States authorities, or (iii) there shall have been any change in financial markets or in national or international political, economic or financial conditions which, in the opinion of the Representatives, either renders it impracticable or inadvisable to proceed with the offering any sale of the Shares on the terms set forth in the Prospectus or materially and adversely affects the market for the Shares, or (iv) there shall have been an outbreak of major armed hostilities or an escalation thereof which in the opinion of the Representatives makes it impractical or inadvisable to offer or sell the Shares, or (v) there has been, since the effective date of this Agreement or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition (financial or otherwise), or in the earnings, business affairs or business prospects of the Company and its subsidiaries taken as a whole, whether or not arising in the ordinary course of business. Any termination pursuant to this paragraph (b) shall be without liability on the part of any Underwriter to the Company or the Selling Shareholders or on the part of the Company to any Underwriter or the Selling Shareholders (except for expenses to be paid or reimbursed pursuant to Section 7 hereof and except to the extent provided in Section 11 hereof). -29- SECTION 15. Representations and Indemnities to Survive Delivery. The respective indemnities, agreements, representations, warranties and other statements of the Company, of its officers, of the Selling Shareholders and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of its or their partners, principals, members, officers or directors or any controlling person, or the Selling Shareholders as the case may be, and will survive delivery of and payment for the Shares sold. SECTION 16. Notices. All communications hereunder will be in writing and, if sent to the Underwriters will be mailed, delivered or telecopied and confirmed to you c/o William Blair & Company, L.L.C., 222 West Adams Street, Chicago, Illinois 60606, Attention: Kelley R. Drake (telecopier number: 312-368- 9418) with a copy to Bracewell & Patterson, L.L.P., South Tower Pennzoil Place, 711 Louisiana Street, Houston, Texas 77002-2781, Attention: Gary W. Orloff (telecopier number: 713-221-1212); if sent to the Company will be mailed, delivered or telecopied and confirmed to the Company at its corporate headquarters, Attention: Patrick J. Newton, Chief Operating Officer (telecopier number: 713-361-3560) with a copy to Pepper, Hamilton & Scheetz LLP, 3000 Two Logan Square, 18th and Arch Street, Philadelphia, Pennsylvania 19103-2799, Attention: Barry M. Abelson (telecopier number: 215-981-4750); and if sent to the Selling Shareholders will be mailed, delivered or telecopied and confirmed to the Agents and the Custodian c/o the Company and the Representatives, with a copy to Pepper, Hamilton & Scheetz LLP, Attention: Barry M. Abelson. SECTION 17. Successors. This Agreement and the Pricing Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors, personal representatives and assigns, and to the benefit of the officers and directors and controlling persons referred to in Section 11, and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Shares as such from any of the Underwriters merely by reason of such purchase. SECTION 18. Representation of Underwriters. You will act as Representative for the several Underwriters in connection with this financing, and any action under or in respect of this Agreement taken by you will be binding upon all the Underwriters. SECTION 19. Partial Unenforceability. If any section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, such determination shall not affect the validity or enforceability of any other section paragraph or provision hereof. SECTION 20. Counterparts. This Agreement and the Pricing Agreement may each be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall together constitute one and the same Agreement and Pricing Agreement, respectively. SECTION 21. Applicable Law. This Agreement and the Pricing Agreement shall be governed by and construed in accordance with the laws of the State of Illinois. If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us the enclosed counterparts hereof, whereupon it will become a binding agreement among -30- the Company, the Selling Shareholders and the several Underwriters including you, all in accordance with its terms. Very truly yours, DA Consulting Group, Inc. By ____________________________________ Name: Title: SELLING SHAREHOLDERS NAMED IN SCHEDULE B By ____________________________________ Agent and Attorney-in-Fact on behalf of each Selling Shareholder named in in Schedule B to this Agreement The foregoing Agreement is hereby confirmed and accepted as of the date first above written. WILLIAM BLAIR & COMPANY, L.L.C. ROBERT W. BAIRD & CO. INCORPORATED PENNSYLVANIA MERCHANT GROUP LTD. Acting as Representatives of the several Underwriters named in Schedule A By: William Blair & Company, L.L.C. By ____________________________ Principal -31- SCHEDULE A Number of Firm Shares Underwriter to be Purchased - ----------- --------------- William Blair & Company, L.L.C. Robert W. Baird & Co. Incorporated Pennsylvania Merchant Group ltd. --------- TOTAL 2,500,000 ========= A-1 SCHEDULE B Number of Number of Firm Shares Option Shares to be Sold to be Sold ---------- ---------- Company 1,700,000 120,000 - ------- Selling Shareholders: Nicholas H. Marriner -0- 23,814 Patrick J. Newton 60,480 -0- Michael J. Mackey -0- 4,200 Virginia L. Pierpont 131,321 -0- Amicable Discretionary Trust 133,392 -0- Worcester Discretionary Trust 132,133 43,152 Woodbourne Discretionary Trust 34,441 57,834 Piero Granelli 80,438 -0- Alison Smith 147,000 37,800 Cynthia Gibson 80,795 -0- David Michael Payne Settlement -0- 88,200 ---------- ---------- TOTAL 2,500,000 375,000 ========== ========== B-1 SCHEDULE C Officers, Directors and Certain Shareholders Executing Lock-Up Agreements Amicable Discretionary Trust Worcester Discretionary Trust Woodbourne Discretionary Trust Virginia L. Pierpont Nicholas H. Marriner Patrick J. Newton Michael J. Mackey Nigel Curlet Gunther Fritze Richard W. Thatcher, Jr. Lisa L. Costello Eric Fernette Joe van der Westhuizen Piero Granelli Alison Smith Cynthia Gibson David Michael Payne Settlement C-1 SCHEDULE D Comfort Letter of Coopers & Lybrand L.L.P. (i) They are independent public accountants with respect to the Company and its subsidiaries within the meaning of the 1933 Act. (ii) In their opinion the consolidated financial statements and schedules of the Company and its subsidiaries included in the Registration Statement and the consolidated financial statements of the Company from which the information presented under the captions "Summary Financial Data" and "Selected Financial Data" has been derived which are stated therein to have been examined by them comply as to form in all material respects with the applicable accounting requirements of the 1933 Act. (iii) On the basis of specified procedures (but not an examination in accordance with generally accepted auditing standards), including inquiries of certain officers of the Company and its subsidiaries responsible for financial and accounting matters as to transactions and events subsequent to _______________, 19__, a reading of minutes of meetings of the shareholders and directors of the Company and its subsidiaries since ______________, 19__, a reading of the latest available interim unaudited consolidated financial statements of the Company and its subsidiaries (with an indication of the date thereof) and other procedures as specified in such letter, nothing can to their attention which caused them to believe that (i) the unaudited consolidated financial statements of the Company and its subsidiaries included in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act or that such unaudited financial statements are not fairly presented in accordance with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statement, and (ii) at a specified date not more than five days prior to the date thereof in the case of the first letter and not more than two business days prior to the date thereof in the case of the second and third letters, there was any change in the capital stock or long-term debt or short-term debt (other than normal payments) of the Company and its subsidiaries on a consolidated basis or any decrease in consolidated net current assets or consolidated shareholders' equity as compared with amounts shown on the latest unaudited balance sheet of the Company included in the Registration Statement or for the period from the date of such balance sheet to a date not more than three days prior to the date thereof in the case of the first letter and not more than two business days prior to the date thereof in the case of the second and third letters, there were any decreases, as compared with the corresponding period of the prior year, in consolidated net sales, consolidated income before income taxes or in the total or per share amounts of consolidated net income except, in all instances, for changes or decreases which the Prospectus discloses have occurred or may occur or which are set forth in such letter. (iv) They have carried out specified procedures, which have been agreed to by the Representatives, with respect to certain information in the Prospectus specified by the Representatives, and on the basis of such procedures, they have found such information to be in agreement with the general accounting records of the Company and its subsidiaries. D-1 EXHIBIT A PRICING AGREEMENT 2,500,000 Shares of Common Stock/1/ ____________,1998 William Blair & Company, L.L.C. Robert W. Baird & Co. Incorporated Pennsylvania Merchant Group Ltd. As Representatives of the Several Underwriters c/o William Blair & Company, L.L.C. 222 West Adams Street Chicago, Illinois 60606 Ladies and Gentlemen: Reference is made to the Underwriting Agreement dated __________, 1998 (the "Underwriting Agreement") relating to the sale by the Company and the Selling Shareholders and the purchase by the several Underwriters for whom William Blair & Company, L.L.C., Robert W. Baird & Co. Incorporated and Pennsylvania Merchant Group Ltd. are acting as representatives (the "Representatives"), of the above Shares. All terms herein shall have the definitions contained in the Underwriting Agreement except as otherwise defined herein. Pursuant to Section 5 of the Underwriting Agreement, the Company and each of the Selling Shareholders agree with the Representatives as follows: 1. The initial public offering price per share for the Shares shall be $__________. 2. The purchase price per share for the Shares to be paid by the several Underwriters shall be $_________, being an amount equal to the initial public offering price set forth above less $_________ per share. Schedule A is amended as follows: If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us the enclosed counterparts hereof, whereupon it will become a binding agreement among the Company, the Selling Shareholders and the several Underwriters, including you, all in accordance with its terms. - ----------------- /1/ Plus an option to acquire up to 375,000 additional shares to cover over- allotments. Very truly yours, DA Consulting Group, Inc. By ______________________________ Name: Title: Selling Shareholders Named in Schedule B to the above-referenced Underwriting Agreement By ______________________________ Agent and Attorney-in-Fact on behalf of each Selling Shareholder named in Schedule B to the above-referenced Underwriting Agreement The foregoing Agreement is hereby confirmed and accepted as of the date first above written. WILLIAM BLAIR & COMPANY, L.L.C. ROBERT W. BAIRD & CO. INCORPORATED PENNSYLVANIA MERCHANT GROUP LTD. Acting as Representatives of the several Underwriters named in Schedule A By William Blair & Company, L.L.C. By__________________________ Principal EXHIBIT B ______________, 1998 William Blair & Company, L.L.C. Robert W. Baird & Co. Incorporated Pennsylvania Merchant Group Ltd. As Representatives of the Several Underwriters Named in Schedule A to the Underwriting Agreement hereinafter referred to c/o William Blair & Company, L.L.C. 222 West Adams Street Chicago, Illinois 60606 Re: Proposed Public Offering by DA Consulting Group, Inc. ----------------------------------------------------- Ladies and Gentlemen: The undersigned, a [shareholder, officer and/or director] of DA Consulting Group, Inc. (the "Company"), understands that William Blair & Company, L.L.C. ("William Blair"), Robert W. Baird & Co. Incorporated and Pennsylvania Merchant Group Ltd. propose to enter into an Underwriting Agreement (the "Underwriting Agreement") with the Company providing for the public offering of shares (the "Shares") of the Company's common stock, par value $.01 per share (the "Common Stock"), and a related Pricing Agreement (the "Pricing Agreement") which will set forth, among other things, the initial public offering price of the Shares. In recognition of the benefit that such an offering will confer upon the undersigned as a [shareholder, officer and/or director] of the Company, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees with each underwriter to be named in the Underwriting Agreement that, during a period of 180 days from the date of the Pricing Agreement, the undersigned will not, without the prior written consent of William Blair, as representative of the several underwriters named in the Underwriting Agreement, directly or indirectly, sell, offer to sell, contract to sell, grant any option for the sale of, or otherwise dispose of or transfer, any shares of the Company's Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, or file any registration statement under the Securities Act of 1933, as amended, with respect to any of the foregoing. Very truly yours, Signature:____________________ Print Name:___________________ EX-3.1 3 ARTICLES OF INCORPORATION EXHIBIT 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF DA CONSULTING GROUP, INC. ARTICLE ONE DA Consulting Group, Inc., a Texas corporation (the "Company"), pursuant to the provisions of Article 4.07 of the Texas Business Corporation Act, hereby adopts these Amended and Restated Articles of Incorporation, which accurately copy the Articles of Incorporation of the Company and all amendments thereto in effect on the date hereof, as further amended by these Amended and Restated Articles of Incorporation as hereinafter set forth, and contain no other change in any provisions thereof. ARTICLE TWO The Articles of Incorporation of the Company are amended by these Amended and Restated Articles of Incorporation as follows: The amendments made by these Amended and Restated Articles of Incorporation (the "Amendments") alter or restate Articles One through Twelve and delete Article Thirteen of the Articles of Incorporation. The full text of each provision altered or added is as set forth in Article Five hereof. ARTICLE THREE The Amendments have been effected in conformity with the provisions of the Texas Business Corporation Act, and the Amended and Restated Articles of Incorporation were duly adopted by a majority of the shareholders of the Company pursuant to a written consent effective _____________ , 1997. ARTICLE FOUR On that date there were ______ shares of Common Stock outstanding, all of which were entitled to vote on the Amendments. ______ shares of Common Stock were voted in favor of the Amendments. ARTICLE FIVE The Articles of Incorporation of the Company filed with the Secretary of State of the State of Texas on November 22, 1993, as amended on May 16, 1996, are hereby superseded by the following Amended and Restated Articles of Incorporation, which accurately copy the entire text thereof as amended hereby: AMENDED AND RESTATED ARTICLES OF INCORPORATION OF DA CONSULTING GROUP, INC. ARTICLE ONE The name of the corporation is DA Consulting Group, Inc. ARTICLE TWO The period of its duration is perpetual. ARTICLE THREE The purpose or purposes for which the corporation is organized is to engage in the transaction of all lawful business for which a corporation may be incorporated under the Texas Business Corporation Act. ARTICLE FOUR The aggregate number of shares that the corporation shall have the authority to issue is 50,000,000 shares, consisting of 40,000,000 shares of common stock, par value $0.01 per share (the "Common Stock"), and 10,000,000 shares of Preferred Stock, par value $0.01 per share (the "Preferred Stock"). The descriptions of the different classes of capital stock of the corporation and the preferences, designations, relative rights, privileges and powers, and the restrictions, limitations and qualifications thereof, are as follows: Division A The shares of Preferred Stock may be divided into and issued in one or more classes or series, the relative rights and preferences of which classes or series may vary in any and all respects. The board of directors of the corporation is hereby vested with the authority to establish classes or series of Preferred Stock by fixing and determining all the preferences, limitations and relative rights of the shares of any class or series so established, to the extent not provided for in these Articles of Incorporation or any amendment hereto, and with the authority to increase or decrease the number of shares within each such series; provided, however, that the board of directors may not decrease the number of shares within a series below the number of shares within such series that is then issued. The authority of the board of directors with respect to each such series shall include, but not be limited to, determination of the following: (1) the distinctive designation and number of shares of that series; (2) the rate of dividend, if any, (or the method of calculation thereof) payable with respect to shares of that series, the dates, terms and other conditions upon which such dividends shall be payable, and the relative rights of priority of such shares of that series to dividends payable on any other class or series of capital stock of the corporation; (3) the nature of the dividend payable, if any, with respect to shares of that series as cumulative, noncumulative or partially cumulative, and if cumulative or partially cumulative, from which date or dates and under what circumstances; (4) whether shares of that series shall be subject to redemption (including sinking fund provisions), and, if made subject to redemption, the times, prices, rates, adjustments and other terms and conditions of such redemption (including the manner of selecting shares of that series for redemption if fewer than all shares of such series are to be redeemed); (5) the rights of the holders of shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the corporation (which rights may be different if such action is voluntary than if it is involuntary), including the relative rights of priority in such event as to the rights of the holders of any other class or series of capital stock of the corporation; (6) the terms, amounts and other conditions of any sinking or similar purchase or other fund provided for the purchase or redemption of shares of that series; (7) whether shares of that series shall be convertible into or exchangeable for shares of capital stock or other securities of the corporation or of any other corporation or entity, and, if provision be made for conversion or exchange, the times, prices, rates, adjustments and other terms and conditions of such conversion or exchange; (8) the extent, if any, to which the holders of shares of that series shall be entitled (in addition to any voting rights provided by law) to vote as a class or otherwise with respect to the election of directors or otherwise; (9) the restrictions and conditions, if any, upon the issue or reissue of any additional Preferred Stock ranking on a parity with or prior to shares of that series as to dividends or upon liquidation, dissolution or winding up; (10) any other repurchase obligations of the corporation, subject to any limitations of applicable law; and (11) notwithstanding their failure to be included in (1) through (10) above, any other designations, preferences, limitations or relative rights of shares of that series. Any of the designations, preferences, limitations or relative rights (including the voting rights) of any series of Preferred Stock may be dependent on facts ascertainable outside these Articles of Incorporation. Shares of any series of Preferred Stock shall have no voting rights except as required by law or as provided in the preferences, limitations and relative rights of such series. Division B 1. Dividends. Dividends may be paid on the Common Stock out of funds legally available for such purpose subject to the rights of all outstanding shares of capital stock ranking senior to the Common Stock in respect of dividends. 2. Distribution of Assets. In the event of any liquidation, dissolution or winding up of the corporation, after there shall have been paid to or set aside for the holders of capital stock ranking senior to the Common Stock in respect of rights upon liquidation, dissolution or winding up the full preferential amounts to which they are respectively entitled, the holders of the Common Stock shall be entitled to receive, pro rata, all of the remaining assets of the corporation available for distribution to its shareholders. 3. Voting Rights. The holders of the Common Stock shall be entitled to one vote per share for all purposes upon which such holders are entitled to vote. Division C 1. No Preemptive Rights. No shareholder of the corporation shall by reason of his holding shares of any class have any preemptive or preferential right to acquire or subscribe for any additional, unissued or treasury shares of any class of the corporation now or hereafter to be authorized, or any notes, debentures, bonds or other securities convertible into or carrying any right, option or warrant to subscribe to or acquire shares of any class now or hereafter to be authorized, whether or not the issuance of any such shares, or such notes, debentures, bonds or other securities, would adversely affect the dividends or voting or other rights of such shareholder, and the board of directors may issue or authorize the issuance of shares of any class, or any notes, debentures, bonds or other securities convertible into or carrying rights, options or warrants to subscribe to or acquire shares of any class, without offering any such shares of any class, either in whole or in part, to the existing shareholders of any class. 2. Share Dividends. Subject to any restrictions in favor of any series of Preferred Stock provided in the relative rights and preferences of such series, the corporation may pay a share dividend in shares of any class or series of capital stock of the corporation to the holders of shares of any class or series of capital stock of the corporation. 3. No Cumulative Voting. Cumulative voting for the election of directors is expressly prohibited as to all shares of any class or series. ARTICLE FIVE The corporation will not commence business until it has received for the issuance of its shares consideration of the value of One Thousand Dollars ($1,000.00), consisting of any tangible or intangible benefit to the corporation, including cash, promissory notes, services performed, contracts for services to be performed or other securities of the corporation. ARTICLE SIX The street address of the corporation's registered office is 5847 San Felipe Rd., Suite 3700, Houston, Texas 77057, and the name of its registered agent at such address is Nicholas H. Marriner. ARTICLE SEVEN 1. Number and Term of Directors. The number of directors shall be fixed by, or in the manner provided by, the bylaws of the corporation. The directors shall be divided into three classes as nearly equal in number as possible and one class shall be elected at each annual meeting of shareholders to hold office for a three-year term. The three classes shall be distinguished as follows: "Class A" directors shall serve for a term to expire at the 2001 annual meeting of shareholders, "Class B" directors shall serve for a term to expire at the 2000 annual meeting of shareholders and "Class C" directors shall serve for a term to expire at the 1999 annual meeting of shareholders. The number of directors constituting the current board of directors is five, and the names, classes of directorships held and addresses of such persons constituting the board of directors, who are to serve until their successors are elected and qualified are as follows: Name Class Address ---- ----- ------- Ms. Virginia Pierpont _____ 5847 San Felipe Plaza, Suite 3700, Houston, TX 77057 Mr. Nigel Curlet _____ 5847 San Felipe Plaza, Suite 3700, Houston, TX 77057 Mr. Gunther Fritze _____ 5847 San Felipe Plaza, Suite 3700, Houston, TX 77057 Name Class Address ---- ----- ------- Mr. Richard Thatcher _____ 5847 San Felipe Plaza, Suite 3700, Houston, TX 77057 Mr. Nicholas H. Marriner _____ 5847 San Felipe Plaza, Suite 3700, Houston, TX 77057 2. Removal of Directors. No director of the Company shall be removed from such office by vote or other action of the shareholders of the Company or otherwise, except by the affirmative vote of holders of at least a majority of the then outstanding Voting Stock (as defined below), voting together as a single class. The term "Voting Stock" shall mean all outstanding shares of all classes and series of capital stock of the Company entitled to vote generally in the election of directors of the Company, considered as one class; and, if the Company shall have shares of Voting Stock entitled to more or less than one vote for any such share, each reference in these Articles of Incorporation to a proportion or percentage of Voting Stock shall refer to that proportion or percentage of the total number of votes entitled to be cast by the holders of the then outstanding Voting Stock. No director of the Company shall be removed from such office, except for cause, which shall be deemed to exist only if: (i) such director has been convicted, or such director is granted immunity to testify where another has been convicted, of a felony by a court of competent jurisdiction (and such conviction is no longer subject to direct appeal); (ii) such director has been found by a court of competent jurisdiction (and such finding is no longer subject to direct appeal) to have been grossly negligent or guilty of willful misconduct in the performance of his duties to the Company in a matter of substantial importance to the Company; (iii) such director has been adjudicated by a court of competent jurisdiction to be mentally incompetent, which mental incompetency directly affects his ability to perform as a director of the Company; or (iv) such director has been found by a court of competent jurisdiction (and such finding is no longer subject to direct appeal) to have breached such director's duty of loyalty to the Company or its shareholders or to have engaged in any transaction with the Company from which such director derived an improper personal benefit. No director of the Company so removed may be nominated, re-elected or reinstated as a director of the Company so long as the cause for removal continues to exist. This paragraph shall be subject to the rights, if any, of holders of any class or series of stock to elect directors and remove directors elected by them. ARTICLE EIGHT A director of the corporation shall not be liable to the corporation or its shareholders for monetary damages for an act or omission in the director's capacity as a director, except that this article does not eliminate or limit the liability of a director for: (1) a breach of a director's duty of loyalty to the corporation or its shareholders; (2) an act or omission not in good faith that constitutes a breach of duty of that director to the corporation or an act or omission that involves intentional misconduct or a knowing violation of the law; (3) a transaction from which a director received an improper personal benefit, whether or not the benefit resulted from an action taken within the scope of the director's office; or (4) an act or omission for which the liability of a director is expressly provided for by an applicable statute. If the Texas Miscellaneous Corporation Laws Act or the Texas Business Corporation Act (the "TBCA") is amended to authorize action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by such statutes, as so amended. Any repeal or modification of this article shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification. ARTICLE NINE All actions of the shareholders must be taken at an annual or special meeting of shareholders; provided, however, that any action by such shareholders may be taken by majority consent in accordance with the Texas Business Corporation Act. ARTICLE TEN The vote of shareholders required for approval of any amendment of these Amended and Restated Articles of Incorporation of the Company for which the TBCA requires a shareholder vote, shall be (in the absence of any greater vote required by the TBCA) the affirmative vote of the holders of a majority of the outstanding Voting Stock entitled to vote thereon, unless any class or series of shares is entitled to vote as a class thereon, in which event the vote required shall be the affirmative vote of the holders of outstanding shares constituting a majority of the votes entitled to be cast within each class or series of shares entitled to vote thereon as a class and at least a majority of the outstanding Voting Stock otherwise entitled to vote thereon. ARTICLE ELEVEN Special meetings of shareholders may be called by the corporation's chairman of the board, the president or a majority of the board of directors. Subject to the provisions of the corporation's bylaws governing special meetings, holders of not less than 50% of the outstanding shares of stock entitled to vote at the proposed special meeting may also call a special meeting of shareholders by furnishing the corporation a written request which states the purpose or purposes of the proposed meeting in the manner set forth in the bylaws. ARTICLE TWELVE Except to the extent such power may be modified or divested by action of shareholders representing a majority of the issued and outstanding Voting Stock of the Company, the power to alter, amend or repeal the Bylaws of the Company shall be vested in the Board of Directors. EXECUTED AND EFFECTIVE this ___ day of ______________, 1997. DA CONSULTING GROUP, INC. By: ____________________________ Mr. Nicholas H. Marriner President EX-3.2 4 BYLAWS EXHIBIT 3.2 DA CONSULTING GROUP, INC. A TEXAS CORPORATION BYLAWS ARTICLE 1 OFFICES Section 1.1. Registered Office. The registered office of the Company within the State of Texas shall be located at either (i) the principal place of business of the Company in the State of Texas or (ii) the office of the corporation or individual acting as the Company's registered agent in Texas. Section 1.2. The Company may, in addition to its registered office in the State of Texas, have such other offices and places of business, both within and without the State of Texas, as the Board of Directors of the Company (the "Board") may from time to time determine or as the business and affairs of the Company may require. ARTICLE 2 SHAREHOLDER MEETINGS Section 2.1. Annual Meetings. Annual meetings of shareholders shall be held at a place and time on any weekday which is not a holiday and which is not more than 120 days after the end of the fiscal year of the Company as shall be designated by the Board and stated in the notice of the meeting, at which the shareholders shall elect the directors of the Company and transact such other business as may properly be brought before the meeting. Section 2.2. Special Meetings. Special meetings of the shareholders, for any purpose or purposes, unless otherwise prescribed by law or by the Articles of Incorporation, (i) may be called by the Chairman of the Board or the President and (ii) shall be called by the President or Secretary at the request in writing of a majority of the Board or shareholders owning capital stock of the Company representing at least fifty percent (50%) of the votes of all capital stock of the Company entitled to vote thereat. Such request of the Board or the shareholders shall state the purpose or purposes of the proposed meeting. Section 2.3. Notices. Written or printed notice of each shareholders' meeting stating the place, date and hour of the meeting shall be given to each shareholder of record entitled to vote thereat by or at the direction of the President, the Secretary or the officer or person calling such meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting. If said notice is for a shareholders' meeting other than an annual meeting, it shall in addition state the purpose or purposes for which said meeting is called, and the business transacted at such meeting shall be limited to the matters so stated in said notice and any matters reasonably related thereto. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to each shareholder at his address as it appears on the stock transfer books of the Company, with postage thereon prepaid. Section 2.4. Quorum. The presence at a shareholders' meeting of the holders, present in person or represented by proxy, of capital stock of the Company representing a majority of the votes of all capital stock of the Company entitled to vote thereat shall constitute a quorum at such meeting for the transaction of business except as otherwise provided by law, the Articles of Incorporation or these Bylaws. If a quorum shall not be present or represented at any meeting of the shareholders, the holders of capital stock of the Company representing a majority of the votes of all capital stock of the Company entitled to vote thereat and present in person or represented by proxy shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At any such reconvened meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the reconvened meeting, a notice of said reconvened meeting shall be given to each shareholder entitled to vote at said meeting. The shareholders present at a duly convened meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. Section 2.5. Voting of Shares. 2.5.1. Voting Lists. The officer or agent who has charge of the stock transfer books of the Company shall prepare, at least ten (10) days before every meeting of shareholders, a complete list of the shareholders entitled to vote thereat arranged in alphabetical order and showing the address and the number of shares registered in the name of each shareholder. Such list shall be open to the examination of any such shareholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held and at the registered office of the Company. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any shareholder who is present. The original stock transfer books shall be prima facie evidence as to who are the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. Failure to comply with the requirements of this Section shall not affect the validity of any action taken at said meeting. 2.5.2. Votes Per Share. Unless otherwise provided by law or in the Articles of Incorporation, each shareholder shall be entitled to one vote, in person or by proxy, on -2- each matter submitted to a vote at a meeting of the shareholders, for each share of capital stock held by such shareholder. 2.5.3. Proxies. Every shareholder entitled to vote at a meeting or to express consent or dissent without a meeting or a shareholder's duly authorized attorney-in-fact may authorize another person or persons to act for him by proxy. Each proxy shall be in writing, executed by the shareholder group, the proxy or by his duly authorized attorney. No proxy shall be voted on or after eleven (11) months from its date, unless the proxy provides for a longer period. Each proxy shall be revocable unless expressly provided therein to be irrevocable and unless otherwise made irrevocable by law. 2.5.4. Required Vote. When a quorum is present at any meeting, the vote of the holders of capital stock of the Company representing a majority of the votes of all capital stock of the Company entitled to vote thereat and present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which, by express provision of law or the Articles of Incorporation or these Bylaws, a different vote is required, in which case such express provision shall govern and control the decision of such question. 2.5.5. Consents in Lieu of Meeting. Any action required to be or which may be taken at any meeting of shareholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holder or holders of shares having not less than the minimum number of votes that would be necessary to take such action at a meeting at which the holders of all shares entitled to vote on the action were present and voted. Such signed consent shall have the same force and effect as a unanimous vote of shareholders and shall be filed with the minutes of proceedings of the shareholders. ARTICLE 3 DIRECTORS Section 3.1. Purpose. The business and affairs of the Company shall be managed by or under the direction of the Board, which may exercise all such powers of the Company and do all such lawful acts and things as are not by law, the Articles of Incorporation or these Bylaws directed or required to be exercised or done by the shareholders. Directors need not be shareholders or residents of the State of Texas. Section 3.2. Number. The number of directors constituting the Board shall never be less than one (1) and shall be determined by resolution of the Board, except for the number of directors constituting the initial Board, which number is fixed by the Articles of Incorporation. -3- Section 3.3. Election. Directors shall be elected by the shareholders by plurality vote at each annual meeting of shareholders, except as hereinafter provided, and each director so elected shall hold office until his successor has been duly elected and qualified. Section 3.4. Vacancies and Newly-Created Directorships. 3.4.1. Vacancies. Any vacancy occurring in the Board may be filled in accordance with subsection 3.4.3 or may be filled by the affirmative vote of a majority of the remaining directors though less than a quorum of the Board. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. 3.4.2. Newly-Created Directorships. A directorship to be filled by reason of an increase in the number of directors may be filled in accordance with subsection 3.4.3 or may be filled by the Board for a term of office continuing only until the next election of one or more directors by the shareholders; provided that the Board may not fill more than two such directorships during the period between any two successive annual meetings of shareholders. 3.4.3. Election by Shareholders. Any vacancy occurring in the Board or any directorship to be filled by reason of an increase in the number of directors may be filled by election at an annual or special meeting of shareholders called for that purpose. Section 3.5. Removal. Any director or the entire Board of Directors may be removed, but only for cause, by the holders of a majority of the shares then entitled to vote at an election of directors. Section 3.6. Compensation. Unless otherwise restricted by the Articles of Incorporation or these Bylaws, the Board shall have the authority to fix the compensation of directors. The directors may be reimbursed for their expenses, if any, of attendance at each meeting of the Board and may be paid either a fixed sum for attendance at each meeting of the Board or a stated salary as director. No such payment shall preclude any director from serving the Company in any other capacity and receiving compensation therefor. Members of committees of the Board may be allowed like compensation for attending committee meetings. ARTICLE 4 BOARD MEETINGS Section 4.1. Annual Meetings. The Board shall meet as soon as practicable after the adjournment of each annual shareholders' meeting at the place of such shareholders' meeting. No notice to the directors shall be necessary to legally convene this meeting, provided a quorum is present. -4- Section 4.2 Regular Meetings. Regularly scheduled, periodic meetings of the Board may be held without notice at such times and places as shall from time to time be determined by resolution of the Board and communicated to all directors. Section 4.3. Special Meetings. Special meetings of the Board (i) may be called by the Chairman of the Board or President and (ii) shall be called by the President or Secretary on the written request of two directors or the sole director, as the case may be. Notice of each special meeting of the Board shall be given, either personally or as hereinafter provided, to each director at least (i) twenty-four (24) hours before the meeting if such notice is delivered personally or by means of telephone, telegram, telex or facsimile transmission delivery; (ii) two days before the meeting if such notice is delivered by a recognized express delivery service; and (iii) three days before the meeting if such notice is delivered through the United States mail. Any and all business may be transacted at a special meeting which may be transacted at a regular meeting of the Board. Except as may be otherwise expressly provided by law, the Articles of Incorporation or these Bylaws, neither the business to be transacted at, nor the purpose of, any special meeting need be specified in the notice or waiver of notice of such meeting. Section 4.4. Quorum, Required Vote. A majority of the directors shall constitute a quorum for the transaction of business at any meeting of the Board, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board, except as may be otherwise specifically provided by law, the Articles of Incorporation or these Bylaws. If a quorum shall not be present at any meeting, a majority of the directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. Section 4.5. Consent In Lieu of Meeting. Unless otherwise restricted by the Articles of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board or any committee thereof may be taken without a meeting, if a consent in writing, setting forth the action so taken, is signed by all the members of the Board or committee, as the case may be. Such signed consent shall have the same force and effect as a unanimous vote at a meeting and shall be filed with the minutes of proceedings of the Board or committee. ARTICLE 5 COMMITTEES OF DIRECTORS Section 5.1. Establishment; Standing Committees. The Board may by resolution establish, name or dissolve one or more committees, each committee to consist of one or more of the directors. Each committee, to the extent provided in such resolution, shall have and may exercise all of the authority of the Board of Directors, except that no such committee shall have the authority of the Board of Directors in reference to amending the Articles of Incorporation, approving a merger or consolidation, recommending to the shareholders the sale, lease or -5- exchange of all or substantially all of the property and assets of the corporation otherwise than in the usual and regular course of business, recommending to the shareholders a voluntary dissolution of the corporation or a revocation thereof, amending, altering, or repealing the bylaws of the corporation or adopting new bylaws for the corporation, filling vacancies in the Board or any such committee, filling any directorship to be filled by reason of an increase in the number of directors, electing or removing officers or members of any such committee, fixing the compensation of any member of such committee or altering or repealing any resolution of the Board which by its term provides that it shall not be so amendable or repealable, and, unless such resolution expressly so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of shares of the corporation. Each committee shall keep regular minutes of its meetings and report the same to the Board when required. 5.1.1. Audit Committee. The Audit Committee shall, from time to time and to the extent it exists, but no less than two times per year, meet to review and monitor the financial and cost accounting practices and procedures of the Company, review the qualifications of the Company's independent auditors, make recommendations to the Board of Directors regarding the selection of independent auditors, review the scope, fees and results of any audit, review non-audit services and related fees provided by the independent auditors, and to report its findings and recommendations to the Board for final action. The Audit Committee shall not be empowered to approve any corporate action, of whatever kind or nature, and the recommendations of the Audit Committee shall not be binding on the Board, except when, pursuant to the provisions of Section 5.2 of these Bylaws, such power and authority have been specifically delegated to such committee by the Board by resolution. In addition to the foregoing, the specific duties of the Audit Committee shall be determined by the Board by resolution. 5.1.2. Compensation Committee. The Compensation Committee shall, from time to time and to the extent it exists, meet to review the various compensation plans, policies and practices of the Company, and to report its findings and recommendations to the Board for final action. The Compensation Committee shall be responsible for the administration of all salary for the executive officers of the Company, including bonuses, and the administration of the Company's compensation programs, including the grant of options under the Company's 1997 Stock Option Plan. The Compensation Committee shall not be empowered to approve any other corporate action, of whatever kind or nature, and any recommendations of the Compensation Committee shall not be binding on the Board, except when, pursuant to the provisions of Section 5.2 of these Bylaws, such power and authority have been specifically delegated to such committee by the Board by resolution. In addition to the foregoing, the specific duties of the Compensation Committee shall be determined by the Board by resolution. Section 5.2. Available Powers. Any committee established pursuant to Section 5.1 of these Bylaws, including the Audit Committee and the Compensation Committee, but only to the extent provided in the resolution of the Board establishing such committee or otherwise delegating specific power and authority to such committee and as limited by law, the Articles of Incorporation and these Bylaws, shall have and may exercise all the powers and authority of the -6- Board in the management of the business and affairs of the Company, and may authorize the seal of the Company to be affixed to all papers which may require it. Section 5.3. Alternate Members. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of such committee. Section 5.4. Procedures. Time, place and notice, if any, of meetings of a committee shall be determined by the members of such committee. At meetings of a committee, a majority of the number of members designated by the Board shall constitute a quorum for the transaction of business. The act of a majority of the members present at any meeting at which a quorum is present shall be the act of the committee, except as otherwise specifically provided by law, the Articles of Incorporation or these Bylaws. If a quorum is not present at a meeting of a committee, the members present may adjourn the meeting from time to time, without notice other than an announcement at the meeting, until a quorum is present. ARTICLE 6 OFFICERS Section 6.1. Elected Officers. The Board shall elect a President and Secretary (collectively, the "Required Officers") having the respective duties enumerated below and may elect such other officers having the titles and duties set forth below which are not reserved for the Required Officers or such other titles and duties as the Board may by resolution from time to time establish: 6.1.1. Chairman of the Board. The Chairman of the Board, or in his absence, the President, shall preside when present at all meetings of the shareholders and the Board. The Chairman of the Board shall advise and counsel the President and other officers and shall exercise such powers and perform such duties as shall be assigned to or required of him from time to time by the Board or these Bylaws. The Chairman of the Board may execute bonds, mortgages and other contracts requiring a seal under the seal of the Company, except where required by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board to some other officer or agent of the Company. The Chairman of the Board may delegate all or any of his powers or duties to the President, if and to the extent deemed by the Chairman of the Board to be desirable or appropriate. 6.1.2. President. The President shall be the Chief Executive Officer of the Company, unless the Board of Directors designates the Chairman of the Board as Chief Executive Officer, and shall have general and active management of the business and affairs of the Company and shall see that all orders and resolutions of the Board are carried into effect. The President may agree upon and execute all leases, contracts, evidences of indebtedness, and -7- other obligations in the name of the corporation and may sign all certificates for shares of capital stock of the corporation; and shall have such other powers and duties as designated in accordance with these Bylaws and as from time to time may be assigned to him by the Board of Directors. In the absence of the Chairman of the Board or in the event of his inability or refusal to act, the President shall perform the duties and exercise the powers of the Chairman of the Board. 6.1.3. Chief Operating Officer. The chief operating officer shall have supervision of the operation of the corporation, subject to the policies and directions of the Board. He shall provide for the proper operation of the corporation and oversee the internal interrelationship amongst any and all departments of the corporation. He shall submit to the chief executive officer and the board of directors timely reports on the operations of the corporation. 6.1.4. Chief Financial Officer. The chief financial officer shall be the chief accounting officer of the corporation and shall arrange for the keeping of adequate records of all assets, liabilities and transactions of the corporation. He shall provide for the establishment of internal controls and see that adequate audits are currently and regularly made. He shall submit to the chief executive officer and the board timely statements of the accounts of the corporation and the financial results of the operations thereof. 6.1.5. Vice Presidents. In the absence of the President or in the event of his inability or refusal to act, the Vice President (or in the event there be more than one Vice President, the Vice Presidents in the order designated by the Board, or in the absence of any designation, then in the order of their election or appointment) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. The Vice Presidents shall perform such other duties and have such other powers as the Board may from time to time prescribe. 6.1.6. Secretary. The Secretary shall attend all meetings of the shareholders, the Board and (as required) committees of the Board and shall record all the proceedings of such meetings in minute books to be kept for that purpose. He shall give, or cause to be given, notice of all meetings of the shareholders and special meetings of the Board and shall perform such other duties as may be prescribed by the Board or the President. He shall have custody of the corporate seal of the Company and he, or an Assistant Secretary, shall have authority to affix the same to any instrument requiring it, and when so affixed, it may be attested by his signature or by the signature of such Assistant Secretary. The Board may give general authority to any other officer to affix the seal of the Company and to attest the affixing thereof by his signature. 6.1.7. Assistant Secretaries. The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order determined by the Board (or if there be no such determination, then in the order of their election or appointment) shall, in the absence of the Secretary or in the event of his inability or refusal to act, perform the duties and exercise the -8- powers of the Secretary and shall perform such other duties and have such other powers as the Board may from time to time prescribe. 6.1.8. Treasurer. The Treasurer shall have the custody of the corporate funds and securities, shall keep full and accurate accounts of receipts and disbursements in books belonging to the Company and shall deposit all moneys and other valuable effects in the name and to the credit of the Company in such depositories as may be designated by the Board. He shall disburse the funds of the Company as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the President and the Board, at its regular meetings, or when the Board so requires, an account of all his transactions as treasurer and of the financial condition of the Company. He may, when necessary or proper, endorse on behalf of the corporation for collection checks, notes and other obligations and shall deposit the same to the credit of the corporation in such banks or depositories as shall be designated in the manner prescribed by the Board of Directors, and he may sign all receipts and vouchers for payments made to the corporation, either along or jointly with such other officer as is designated by the Board of Directors. 6.1.9. Assistant Treasurers. The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board (or if there be no such determination, then in the order of their election or appointment) shall, in the absence of the treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the Board may from time to time prescribe. 6.1.10. Divisional Officers. Each division of the Company, if any, may have a President, Secretary, Treasurer or Controller and one or more Vice Presidents, Assistant Secretaries, Assistant Treasurers and other assistant officers. Any number of such offices may be held by the same person. Such divisional officers will be appointed by, report to and serve at the pleasure of the Board and such other officers that the Board may place in authority over them. The officers of each division shall have such authority with respect to the business and affairs of that division as may be granted from time to time by the Board, and in the regular course of business of such division may sign contracts and other documents in the name of the division where so authorized; provided that in no case and under no circumstances shall an officer of one division have authority to bind any other division of the Company except as necessary in the pursuit of the normal and usual business of the division of which he is an officer. Section 6.2. Election. All elected officers shall serve until their successors are duly elected and qualified or until their earlier death, disqualification, retirement, resignation or removal from office. Section 6.3. Appointed Officers. The Board may also appoint or delegate the power to appoint such other officers, assistant officers and agents, and may also remove such officers and agents or delegate the power to remove same, as it shall from time to time deem -9- necessary, and the titles and duties of such appointed officers may be as described in Section 6.1 for elected officers; provided that the officers and any officer possessing authority over or responsibility for any functions of the Board shall be elected officers. Section 6.4. Multiple Officeholders, Shareholder and Director Officers. Any number of offices may be held by the same person, unless the Articles of Incorporation or these Bylaws otherwise provide. Officers need not be shareholders or residents of the State of Texas. Officers, such as the Chairman of the Board, possessing authority over or responsibility for any function of the Board must be directors. Section 6.5. Compensation, Vacancies. The compensation of elected officers shall be set by the Board. The Board shall also fill any vacancy in an elected office. The compensation of appointed officers and the filling of vacancies in appointed offices may be delegated by the Board to the same extent as permitted by these Bylaws for the initial filling of such offices. Section 6.6. Additional Powers and Duties. In addition to the foregoing especially enumerated powers and duties, the several elected and appointed officers of the Company shall perform such other duties and exercise such further powers as may be provided by law, the Articles of Incorporation or these Bylaws or as the Board may from time to time determine or as may be assigned to them by any competent committee or superior officer. Section 6.7. Removal. Any officer or agent or member of a committee elected or appointed by the Board may be removed by the Board whenever in its judgment the best interest of the Company will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent or member of a committee shall not of itself create contract rights. ARTICLE 7 SHARE CERTIFICATES Section 7.1. Entitlement to Certificates. Every holder of the capital stock of the Company, unless and to the extent the Board by resolution provides that any or all classes or series of stock shall be uncertificated, shall be entitled to have a certificate, in such form as is approved by the Board and conforms with applicable law, certifying the number of shares owned by him. Each certificate representing shares shall state upon the face thereof: (1) that the corporation is organized under the laws of the State of Texas; (2) the name of the person to whom issued; -10- (3) the number and class of shares and the designation of the series, if any, which such certificate represents; and (4) the par value of each share represented by such certificate, or a statement that the shares are without par value. Section 7.2. Multiple Classes of Stock; Preemptive Rights. In the event the Company shall be authorized to issue shares of more than one class, each certificate representing shares issued by the Company (1) shall conspicuously set forth on the face or back of the certificate a full statement of (a) all of the designations, preferences, limitations and relative rights of the shares of each class authorized to be issued and, (b) if the Company is authorized to issue shares of any preferred or special class in series, the variations in the relative rights and preferences of the shares of each such series to the extent they have been fixed and determined and the authority of the Board to fix and determine the relative rights and preferences of subsequent series; or (2) shall conspicuously state on the face or back of the certificate that (a) such a statement is set forth in the Articles of Incorporation on file in the office of the Secretary of State of the State of Texas and (b) the Company will furnish a copy of such statement to the record holder of the certificate without charge on written request to the Company at its principal place of business or registered office. In the event the Company has by its Articles of Incorporation limited or denied the preemptive right of shareholders to acquire unissued or treasury shares of the Company, each certificate representing shares issued by the Company (1) shall conspicuously set forth on the face or back of the certificate a full statement of the limitation or denial of preemptive rights contained in the Articles of Incorporation, or (2) shall conspicuously state on the face or back of the certificate that (a) such a statement is set forth in the Articles of Incorporation on file in the office of the Secretary of State of the State of Texas and (b) the Company will furnish a copy of such statement to the record holder of the certificate without charge on request to the Company at its principal place of business or registered office. Section 7.3. Signatures. Each certificate representing capital stock of the Company shall be signed by or in the name of the Company by (1) the Chairman of the Board, the President or a Vice President; and (2) the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of the Company. The signatures of the officers of the Company may be facsimiles. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to hold such office before such certificate is issued, it may be issued by the Company with the same effect as if he held such office on the date of issue. Section 7.4. Issuance and Payment. Subject to any provision of the Constitution of the State of Texas to the contrary, the Board may authorize shares to be issued for consideration consisting of any tangible or intangible benefit to the Company, including, cash, promissory notes, services performed, contracts for services to be performed, or other securities of the Company. Shares may not be issued until the full amount of the consideration, fixed as provided by law, has been paid. When such consideration shall have been paid to the Company or to a corporation of which all the outstanding shares of each class are owned by the Company, -11- the shares shall be deemed to have been issued and the subscriber or shareholder entitled to receive such issue shall be a shareholder with respect to such shares, and the shares shall be considered fully paid and non-assessable. In the absence of fraud in the transaction, the judgment of the Board or the shareholders, as the case may be, as to the value of the consideration received for shares shall be conclusive. Section 7.5. Lost Certificates. The Board may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Company alleged to have been lost, stolen or destroyed upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the Company a bond in such sum as it may direct as indemnity against any claim that may be made against the Company with respect to the certificate alleged to have been lost, stolen or destroyed. Section 7.6. Transfer of Stock. Upon surrender to the Company or its transfer agent, if any, of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer and of the payment of all taxes applicable to the transfer of said shares, the Company shall be obligated to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books; provided, however, that the Company shall not be so obligated unless such transfer was made in compliance with applicable state and federal securities laws. Section 7.7. Registered Shareholders. The Company shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, vote and be held liable for calls and assessments and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any person other than such registered owner, whether or not it shall have express or other notice thereof, except as otherwise provided by law. ARTICLE 8 INDEMNIFICATION Section 8.1. Definitions. For purposes of this Article VIII: (1) "Corporation" includes any domestic or foreign predecessor entity of the Company in a merger, consolidation, or other transaction in which the liabilities of the predecessor are transferred to the Company by operation of law and in any other transaction in which the -12- Company assumes the liabilities of the predecessor but does not specifically exclude liabilities that are the subject matter of this article; (2) "Director" means any person who is or was a director of the Company and any person who, while a director of the Company, is or was serving at the request of the Company as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise; (3) "Expenses" include, without limitation, court costs and attorneys' fees; (4) "Official capacity" means (i) when used with respect to a Director, the office of Director of the Company, but does not include service for any other foreign or domestic corporation or any partnership, joint venture, sole proprietorship, trust, employee benefit plan, or other enterprise; (ii) when used with respect to a person other than a Director, the elective or appointive office in the Company held by the officer or the employment or agency relationship undertaken by the employee or agent on behalf of the Company, but does not include service for any other foreign or domestic corporation or any partnership, joint venture, sole proprietorship, trust, employee benefit plan, or other enterprise; and (5) "Proceeding" means any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, arbitrative, or investigative, any appeal in such an action, suit, or proceeding, and any inquiry or investigation that could lead to such an action, suit, or proceeding. Section 8.2. Mandatory Indemnification. The Company shall indemnify a person who was, is, or is threatened to be made a named defendant or respondent in a proceeding because the person is or was a Director only if it is determined in accordance with Section 8.6 of this Article 8 that the person: (a) conducted himself in good faith; (b) reasonably believed: (i) in the case of conduct in his official capacity as a Director of the Company, that his conduct was in the Company's best interests; and (ii) in all other cases, that his conduct was at least not opposed to the Company's best interests; and -13- (c) in the case of any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. In the event it is determined in accordance with Section 8.6 of this Article 8 that a person has met the applicable standard of conduct as to some matters but not as to others, amounts to be indemnified may be reasonably prorated. Section 8.3. Prohibited Indemnification. Except to the extent permitted by Section 8.5 of this Article 8, a Director may not be indemnified under Section 8.2 of this Article 8 in respect of a proceeding: (a) in which the person is found liable on the basis that personal benefit was improperly received by him, whether or not the benefit resulted from an action taken in the person's official capacity; or (b) in which the person is found liable to the Company. Section 8.4. Termination of Proceedings. The termination of a proceeding by judgment, order, settlement, or conviction, or on a plea of nolo contendere or its equivalent is not of itself determinative that the person did not meet the requirements set forth in Section 8.2 of this Article 8. A person shall be deemed to have been found liable in respect of any claim, issue or matter only after the person shall have been so adjudged by a court of competent jurisdiction after exhaustion of all appeals therefrom. Section 8.5. Judgments, Expenses, etc. A person may be indemnified under Section 8.2 of this Article 8 against judgments, penalties (including excise and similar taxes), fines, settlements, and reasonable expenses actually incurred by the person in connection with the proceeding; but if the person is found liable to the Company or is found liable on the basis that personal benefit was improperly received by the person, the indemnification (1) is limited to reasonable expenses actually incurred by the person in connection with the proceeding and (2) shall not be made in respect of any proceeding in which the person shall have been found liable for willful or intentional misconduct in the performance of his duty to the Company. Section 8.6. Determination of Indemnification. A determination of indemnification under Section 8.2 of this Article 8 must be made: (a) by a majority vote of a quorum consisting of directors who at the time of the vote are not named defendants or respondents in the proceeding; (b) if such a quorum cannot be obtained, by a majority vote of a committee of the Board, designated to act in the matter by a majority vote of all directors, consisting solely of two or more directors who at the time of the vote are not named defendants or respondents in the proceeding; -14- (c) by special legal counsel selected by the Board or a committee thereof by vote as set forth in subsection (1) or (2) of this Section 8.6, or, if such a quorum cannot be obtained and such a committee cannot be established, by a majority vote of all Directors; or (d) by the shareholders of the Company in a vote that excludes the shares held by Directors who are named defendants or respondents in the proceeding. Section 8.7. Determination of Reasonableness of Expenses. Determination as to reasonableness of expenses must be made in the same manner as the determination that indemnification is permissible, except that if the determination that indemnification is permissible is made by special legal counsel, determination as to reasonableness of expenses must be made in the manner specified by subsection (c) of Section 8.6 of this Article 8 for the selection of special legal counsel. Section 8.8. Indemnification Against Reasonable Expenses. The Company shall indemnify a Director against reasonable expenses incurred by him in connection with a proceeding in which he is a named defendant or respondent because he is or was a Director if he has been wholly successful, on the merits or otherwise, in the defense of the proceeding. Section 8.9. Payments in Advance of Disposition. Reasonable expenses incurred by a Director who was, is, or is threatened to be made a named defendant or respondent in a proceeding shall be paid or reimbursed by the Company, in advance of the final disposition of the proceeding and without any of the determinations specified in Sections 8.6 and 8.7 of this Article 8, after the Company receives a written affirmation by the Director of his good faith belief that he has met the standard of conduct necessary for indemnification under this Article 8 and a written undertaking by or on behalf of the Director to repay the amount paid or reimbursed if it is ultimately determined that he has not met those requirements. Section 8.10. Written Undertaking. The written undertaking required by Section 8.9 of this Article 8 must be an unlimited general obligation of the Director but need not be secured. It may be accepted without reference to financial ability to make repayment. Section 8.11. Consistency with Articles of Incorporation. Any provision for the Company to indemnify or to advance expenses to a Director who was, is, or is threatened to be made a named defendant or respondent in a proceeding, whether contained in the Articles of Incorporation, these Bylaws, a resolution of shareholders or Directors, an agreement, or otherwise, except in accordance with Section 8.16 of this Article 8, is valid only to the extent it is consistent with this Article 8 as limited by the Articles of Incorporation, if such a limitation exists. -15- Section 8.12. Other Expenses. Notwithstanding any other provision of this Article 8, the Company may pay or reimburse expenses incurred by a Director in connection with his appearance as a witness or other participation in a proceeding at a time when he is not a named defendant or respondent in the proceeding. Section 8.13. Officers, Employees and Agents. An officer, employee or agent of the Company shall be indemnified as, and to the same extent, provided by Section 8.8 of this Article 8 for a Director and is entitled to seek indemnification under such Section to the same extent as a Director. The Company shall advance expenses to an officer and may advance expenses to an employee or agent of the Company to the same extent that it shall advance expenses to Directors under this Article 8. Section 8.14. Other Capacities. A corporation may indemnify and advance expenses to persons who are not or were not officers, employees, or agents of the Company, but who are or were serving at the request of the Company as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise to the same extent that it shall indemnify and advance expenses to Directors under this Article 8. Section 8.15. Further Indemnification. The Company may indemnify and advance expenses to an officer, employee, agent, or person identified in Section 8.14 of this Article 8 and who is not a Director to such further extent, consistent with law, as may be provided by the Articles of Incorporation, these Bylaws, general or specific action of the Board, or contract or as permitted or required by common law. Section 8.16. Continuation of Indemnification. The indemnification and advance payment provided by this Article 8 shall continue as to a person who has ceased to hold his position as a director, officer, employee or agent, or other person described in Article 8, Section 8.14, and shall inure to his heirs, executors and administrators. Section 8.17. Insurance. The Company may purchase and maintain insurance or another arrangement on behalf of any person who is or was a Director, officer, employee, or agent of the Company or who is or was serving at the request of the Company as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan, or other enterprise, against any liability asserted against him and incurred by him in such a capacity or arising out of his status as such a person, whether or not the Company would have the power to indemnify him against that liability under this Article 8. If the insurance or other arrangement is with a person or entity that is not regularly engaged in the business of providing insurance coverage, the insurance or arrangement may provide for payment of a liability with respect to which the Company would not have the power to indemnify the person only if including coverage for the additional liability has been approved by the shareholders of -16- the Company. Without limiting the power of the Company to procure or maintain any kind of insurance or other arrangement, the Company may, for the benefit of persons indemnified by the Company, (1) create a trust fund; (2) establish any form of self-insurance; (3) secure its indemnity obligation by grant of a security interest or other lien on the assets of the Company; or (4) establish a letter of credit, guaranty, or surety arrangement. The insurance or other arrangement may be procured, maintained, or established within the Company or with any insurer or other person deemed appropriate by the Board regardless of whether all or part of the stock or other securities of the insurer or other person are owned in whole or part by the Company. In the absence of fraud, the judgment of the Board as to the terms and conditions of the insurance or other arrangement and the identity of the insurer or other person participating in an arrangement shall be conclusive and the insurance or arrangement shall not be voidable and shall not subject the Directors approving the insurance or arrangement to liability, on any ground, regardless of whether Directors participating in the approval are beneficiaries of the insurance or arrangement. Section 8.18. Report To Shareholders. Any indemnification of or advance of expenses to a Director in accordance with this Article 8 shall be reported in writing to the shareholders with or before the notice or waiver of notice of the next shareholders' meeting or with or before the next submission to shareholders of a consent to action without a meeting pursuant to Section A, Article 9.10, of the Texas Business Corporation Act and, in any case, within the 12-month period immediately following the date of the indemnification or advance. Section 8.19. Employee Benefit Plans. For purposes of this Article 8, the Company is deemed to have requested a Director to serve in capacity in connection with an employee benefit plan whenever the performance by him of his duties to the Company also imposes duties on or otherwise involves services by him to the plan or participants or beneficiaries of the plan. Excise taxes assessed on a Director with respect to an employee benefit plan pursuant to applicable law are deemed fines. Action taken or omitted by him with respect to an employee benefit plan in the performance of his duties for a purpose reasonably believed by him to be in the interest of the participants and beneficiaries of the plan is deemed to be for a purpose which is not opposed to the best interests of the Company. Section 8.20. Change in Governing Law. In the event of any amendment or addition to Article 2.02-1 of the Texas Business Corporation Act or the addition of any other section to such law which shall limit indemnification rights thereunder, the Company shall, to the extent permitted by the Texas Business Corporation Act, indemnify to the fullest extent authorized or permitted hereunder, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including an action by or in the right of the Company), by reason of the fact that he is or was a Director, officer, employee or agent of the Company or is or was serving at the request of the Company as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise, -17- against all judgments, penalties (including excise and similar taxes), fines, settlements and reasonable expenses (including attorneys' fees and court costs) actually and reasonably incurred by him in connection with such action, suit or proceeding. Section 8.21. Construction. The indemnification provided by this Article shall be subject to all valid and applicable laws, including, without limitation, Article 2.02-1 of the Texas Business Corporation Act, and, in the event this Article or any of the provisions hereof or the indemnification contemplated hereby are found to be inconsistent with or contrary to any such valid laws, the latter shall be deemed to control and this Article 8 shall be regarded as modified accordingly, and, as so modified, to continue in full force and effect. Section 8.22. Contract Right. The foregoing indemnification and advancement of expenses provisions shall be deemed to be a contract between the corporation and each director and officer who serves in any such capacity at any time while these provisions, as well as the relevant provisions of the Texas Business Corporation Act, are in effect, and any repeal or modification thereof shall not affect any right or obligation then existing with respect to any state of facts then or previously existing or any action, suit, or proceeding previously or thereafter brought or threatened based in whole or in part upon any such state of facts. Such a "contract right" may not be modified retroactively without consent of such director, officer, employee or agent. Notwithstanding this provision and subject to applicable provisions of the Texas Business Corporation Act, the corporation may enter into additional contracts of indemnity with these persons to provide rights provided in these bylaws, or to otherwise modify, amend, increase or decrease these rights, as the Board of Directors may see fit. ` Section 8.23. Effect of Amendment. No amendment, modification or repeal of this Article 8 or any provision hereof shall in any manner terminate, reduce or impair the right of any past, present or future persons to be indemnified by the corporation, nor the obligation of the corporation to indemnify any such persons, under and in accordance with the provisions of this Article as in effect immediately prior to such amendment, modification or repeal, with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted. ARTICLE 9 INTERESTED DIRECTORS, OFFICERS AND SHAREHOLDERS Section 9.1. Validity; Disclosure; Approval. No contract or transaction between the Company and one or more of its directors or officers, or between the Company and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers or have a financial interest, shall be void or voidable solely because the director or officer is present at or participates in the meeting of the Board or -18- committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (1) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or (3) the contract or transaction is fair as to the Company as of the time it is authorized, approved, or ratified by the Board, a committee thereof, or the shareholders. Section 9.2. Quorum. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board or of a committee which authorizes the contract or transaction. Section 9.3. Nonexclusive. This Article 9 shall not be construed to invalidate any contract or transaction which would be valid in the absence of this Article 9. ARTICLE 10 MISCELLANEOUS Section 10.1. Place of Meetings. All shareholders, directors and committee meetings shall be held at such place or places, within or without the State of Texas, as shall be designated from time to time by the Board or such committee and stated in the notices thereof. If no such place is so designated, said meetings shall be held at the principal business office of the Company. Section 10.2. Fixing Record Dates. (a) In order that the Company may determine the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, to receive payment of any dividend or other distribution or allotment of any rights, to exercise any rights in respect of any change, conversion or exchange of stock or to effect any other lawful action, or to make a determination of shareholders for any other proper purpose (other than determining shareholders entitled to consent to action by shareholders proposed to be taken without a meeting of shareholders), the Board may fix, in advance, a record date for any such -19- determination of shareholders, which shall not be more than sixty (60) nor less than ten (10) days prior to the date on which the particular action requiring such determination of shareholders is to be taken. In the absence of any action by the Board, the date on which a notice of meeting is given, or the date the Board adopts the resolution declaring a dividend or other distribution or allotment or approving any change, conversion or exchange, as the case may be, shall be the record date. A record date validly fixed for any meeting of shareholders and the determination of shareholders entitled to vote at such meeting shall be valid for any adjournment of said meeting except where such determination has been made through the closing of stock transfer books and the stated period of closing has expired. (b) In order that the Company may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board. If no record date has been fixed by the Board, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board is otherwise required, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Company by delivery to its registered office in the State of Texas, its principal place of business, or an officer or agent of the Company having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Company's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board and prior action by the Board is required, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board adopts the resolution taking such prior action. Section 10.3. Notice and Waiver of Notice. Whenever any notice is required to be given under law, the Articles of Incorporation or these Bylaws, a written waiver of such notice, signed before or after the date of such meeting by the person or persons entitled to said notice, shall be deemed equivalent to such required notice. All such waivers shall be filed with the corporate records. Attendance at a meeting shall constitute a waiver of notice of such meeting, except where a person attends for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Whenever any notice is required to be given under law, the Articles of Incorporation or these Bylaws, said notice shall be deemed to be sufficient if given by depositing the same in a post office box in a sealed prepaid envelope addressed to the person entitled thereto at his post office address as it appears on the books of the Company and such notice shall be deemed to have been given on the day of such mailing. Section 10.4. Attendance via Communications Equipment. Unless otherwise restricted by law, the Articles of Incorporation or these Bylaws, members of the Board, members of any committee thereof or the shareholders may hold a meeting by means of conference -20- telephone or other communications equipment by means of which all persons participating in the meeting can effectively communicate with each other. Such participation in a meeting shall constitute presence in person at the meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 10.5. Dividends. Dividends on the capital stock of the Company, paid in cash, property, or securities of the Company, or any combination thereof, and as may be limited by applicable law and applicable provisions of the Articles of Incorporation (if any), may be declared by the Board at any regular or special meeting. Section 10.6. Reserves. Before payment of any dividend, there may be set aside out of any funds of the Company available for dividends such sum or sums as the Board from time to time, in its absolute discretion, thinks proper as a reserve or reserves to meet contingencies, for equalizing dividends, for repairing or maintaining any property of the Company, or for such other purpose as the Board shall determine to be in the best interest of the Company; and the Board may modify or abolish any such reserve in the manner in which it was created. Section 10.7. Reports to Shareholders. The Board shall present at each annual meeting of shareholders, and at any special meeting of shareholders when called for by vote of the shareholders, a statement of the business and condition of the Company. Section 10.8. Contracts and Negotiable Instruments. Except as otherwise provided by law or these Bylaws, any contract or other instrument relative to the business of the Company may be executed and delivered in the name of the Company and on its behalf by the Chairman of the Board, the President, its Chief Operating Officer, the Chief Financial Officer or any Vice President; and the Board may authorize any other officer or agent of the Company to enter into any contract or execute and deliver any contract in the name and on behalf of the Company, and such authority may be general or confined to specific instances as the Board may by resolution determine. All bills, notes, checks or other instruments for the payment of money shall be signed or countersigned by such officer, officers, agent or agents and in such manner as are permitted by these Bylaws and/or as, from time to time, may be prescribed by resolution (whether general or special) of the Board. Unless authorized so to do by these Bylaws or by the Board, no officer, agent or employee shall have any power or authority to bind the Company by any contract or engagement, or to pledge its credit, or to render it liable pecuniarily for any purpose or to any amount. Section 10.9. Fiscal Year. The fiscal year of the Company shall be fixed by resolution of the Board. -21- Section 10.10. Seal. The seal of the Company shall be in such form as shall from time to time be adopted by the Board. The seal may be used by causing it or a facsimile thereof to be impressed, affixed or otherwise reproduced. Section 10.11. Books and Records. The Company shall keep correct and complete books and records of account and shall keep minutes of the proceedings of its shareholders, Board and committees and shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of the shares held by each. Section 10.12. Resignation. Any director, committee member, officer or agent may resign by giving written notice to the Chairman of the Board, the President or the Secretary. The resignation shall take effect at the time specified therein, or immediately if no time is specified. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 10.13. Surety Bonds. Such officers and agents of the Company (if any) as the Chairman of the Board, the President or the Board may direct, from time to time, shall be bonded for the faithful performance of their duties and for the restoration to the Company, in case of their death, resignation, retirement, disqualification or removal from office, of all books, papers, vouchers, money and other property of whatever kind in their possession or under their control belonging to the Company, in such amounts and by such surety companies as the Chairman of the Board, the President or the Board may determine. The premiums on such bonds shall be paid by the Company and the bonds so furnished shall be in the custody of the Secretary. Section 10.14. Proxies in Respect of Securities of Other Corporations. The Chairman of the Board, the President, any Vice President or the Secretary may from time to time appoint an attorney or attorneys or an agent or agents for the Company to exercise, in the name and on behalf of the Company, the powers and rights which the Company may have as the holder of stock or other securities in any other corporation to vote or consent in respect of such stock or other securities, and the Chairman of the Board, the President, any Vice President or the Secretary may instruct the person or persons so appointed as to the manner of exercising such powers and rights; and the Chairman of the Board, the President, any Vice President or the Secretary may execute or cause to be executed, in the name and on behalf of the Company and under its corporate seal or otherwise, all such written proxies or other instruments as he may deem necessary or proper in order that the Company may exercise such powers and rights. Section 10.15. Amendments. These Bylaws may be altered, amended, repealed or replaced by the shareholders, or by the Board when such power is conferred upon the Board by the Articles of Incorporation, at any annual shareholders meeting or annual or regular meeting of the Board, or at any special meeting of the shareholders or of the Board if notice of such alteration, amendment, repeal or replacement is contained in the notice of such special meeting. If the power to adopt, amend, repeal or replace these Bylaws is conferred upon the Board by the -22- Articles of Incorporation, the power of the shareholders to so adopt, amend, repeal or replace these Bylaws shall not be divested or limited thereby. -23- EX-10.7 5 CONSULTING AGREEMENT THATCHER EXHIBIT 10.7 October 1, 1997 PRIVATE AND CONFIDENTIAL - ------------------------ Mr. Nicholas H. Marriner, President & CEO DA Consulting Group, Inc. Suite 3700 5842 San Felipe Road Houston, TX 77057 Dear Nick: Based on my recent discussions with you, I am pleased to propose this agreement for DA Consulting Group, Inc. ("the Company") to retain me as its strategic financial advisor. 1. Services to be Rendered The services that I will render to the Company will include but not be limited to, the following: a. stay current on the status of the Company, including assets, financial condition and its prospects, with the assistance of your management team; b. assist in identifying, qualifying and contacting (subject to prior approval) potential acquisition or merger partners; c. advise and assist the Company with respect to structuring the proposed acquisitions; and d. work with the Company in the negotiations to ensure appropriate valuation and proper fit with the Company's objectives; this will include advising the Company regarding the strategy and tactics to be used during the process; f. help the Company prepare for its forthcoming initial public offering; g. work with the Company to help make select investments, including potential acquisitions of (or mergers with) companies and products. 260 PLYMOUTH ROAD . GWYNEDD VALLEY, PA . 19437-0006 TEL:215.643.1622 . FAX: 215.643.1633 DA - page 2 2. Fees As compensation for my advisory and transaction services, the fees shall be: a. retainer of $5,000 per month, plus reimbursement, on a monthly basis, of reasonable out-of-pocket expenses; b. for acquisitions/mergers completed, a transaction success fee ("Success Fee") equal to 5% of the initial $5 million and 1% of the total valuation above $5 million for each transaction successfully completed payable in cash on the Closing Date of the transaction. The total valuation would include all cash, equity securities, contingent payments, non-compete agreements, all debt assumed, acquired, retired or defeased and the face value of any debt securities issued in such a transaction. 100% of the retainer fees paid from June 1, 1997 (the July invoice) and not previously credited, will be credited towards the Success Fees; c. if the transaction includes contingent payments, the Company and I shall mutually attempt to agree on the net present value of such payments. If the Company and I cannot agree on the net present value, then I shall receive the contingent Success Fees as they occur; d. in the event the Company enters into a transaction with a firm that I have contacted on behalf of the Company within 12 months after the termination of this agreement, the Company will pay me the Success Fee. 3. Term of Agreement This Agreement shall commence, subject to necessary approvals, as of October 1, 1997 and shall continue in effect until December 31, 1998 and thereafter until terminated by either the Company or me. Termination shall become effective 30 days after written notice of termination is received by the other party, subject to those provisions of this Agreement which have application subsequent to the termination of this Agreement. 4. Indemnity The Company agrees to indemnify and hold me, and any affiliated companies, and their respective officers, directors, controlling persons and employees and any persons retained in connection with the proposed transactions (whether or not consummated), harmless from and against all claims, (including any legal or other expenses incurred in connection with investigating or defending against any such loss, claim, damage or liability or any action in respect thereof), related to or arising out of our activities. Notwithstanding the foregoing, the Company shall not be liable for indemnity under this agreement in respect of any loss, claim, damage, liability or expense arising from my willful misconduct or gross negligence in performing the services described above. This provision shall survive any termination of my engagement as well as the consummation or abandonment of any transaction. DA - page 3 5. MISCELLANEOUS This is the entire agreement of the parties and may not be amended or modified except in a writing signed by all parties, and shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. This agreement shall be binding upon the parties and their respective successors and assigns. Nick, I look forward to the continuation of our successful relationship. If the foregoing correctly sets forth your understanding, please so indicate by signing and returning to me the enclosed copy of this letter. Sincerely, /s/ Dick - ---------------- Richard W. Thatcher, Jr. DA Consulting Group, Inc. BY: /s/ Nicholas H. Marriner Date: 27th October 1997 ------------------------- ------------------ Nicholas H. Marriner, President. EX-10.8 6 LETTER LOAN AGREEMENT EXHIBIT 10.8 LETTER LOAN AGREEMENT --------------------- March 18, 1996 Southwest Bank of Texas, N.A. P.O. Box 27459 Houston, Texas 77227-7459 Attn: Brooks McGee Gentlemen: The undersigned, DOCUMENTATION ASSOCIATES, INC., a Texas corporation ("Borrower"), duly organized and existing under the laws of the State of Texas, has requested that SOUTHWEST BANK OF TEXAS, N.A. ("Lender") lend to Borrower the sum of $1,000,000.00. Lender has advised Borrower that Lender is willing to lend such funds to Borrower upon the terms and subject to the conditions set forth in this letter loan agreement (the "Agreement"). In consideration for the above premises and the mutual promises and covenants herein contained, Borrower and Lender do hereby agree as follows: 1. Loans. On the terms and subject to the conditions hereinafter set forth, Lender agrees to lend to Borrower the sum of $1,000,000.00 (the "Loan"). The Loan shall be evidenced by (i) a master revolving credit note (the "Note") in a form satisfactory to Lender, duly executed by Borrower in the principal amount of $1,000,000.00 and made payable to the order of Lender. Principal and interest on the Note shall be due and payable in the manner and at the times set forth in the Note with final maturity on March 18, 1997 (the "Maturity Date"). 2. Revolving Credit Advances. Subject to the terms hereof, Borrower may borrow, pay, reborrow and repay under the Note, provided, however, the maximum principal outstanding under the Note shall not exceed the lesser of (i) $1,000,000.00, or (ii) the Borrower's Loan Limit, as such term is defined in Schedule "A" attached hereto and made a part hereof. Borrower's requests for advances under the Note shall specify the aggregate amount of the advance and the date of such advance. Borrower shall furnish to Lender a request for borrowing in a form satisfactory to Lender at least one business day prior to the requested borrowing date. After receiving notice of a requested advance in the manner provided herein, Lender shall make the requested funds available to Borrower on the requested borrowing date at Lender's principal banking office in Houston, Texas. The funds advanced under the Note are to enable Borrower to finance working capital needs and general corporate purposes. If at any time prior to the Maturity Date, the outstanding advances under the Note exceed the Borrower's Loan Limit, Borrower shall prepay on the Note such amount as may be necessary to eliminate such excess. 3. Conditions Precedent. (a) The obligation of Lender to make the initial advance under the Note is subject to the conditions precedent that, as of the date of such advance, (i) Lender shall have received duly executed copies of each document listed on the last page hereof relating to the Loan, in form and substance acceptable to Lender and its legal counsel (all the documents listed on the last page hereof, together with this Agreement and any other security documents relating to the Loan, and any modifications thereof, are hereinafter collectively referred to as the "Loan Documents"), and (ii) Lender's approval of a pre-closing field audit performed by Creekwood Capital. (b) Lender's obligation to make any advances under the Loan shall be subject to the additional conditions precedent that, as of the date of such advance and after giving effect thereto: (i) all representations and warranties made by Borrower to Lender are true and correct, as if made on such date, (ii) all documents and proceedings shall be reasonably satisfactory to legal counsel for Lender, (iii) no condition or event exists which constitutes an Event of Default (as hereinafter defined) or which, with the lapse of time and/or giving of notice, would constitute an Event of Default, and (iv) all conditions precedent set forth in subparagraph (a) above shall have been satisfied. 4. Representations and Warranties. In order to induce Lender to make the Loan, Borrower represents and warrants to Lender that: (a) The Loan Documents are the legal and binding obligations of Borrower, enforceable in accordance with their respective terms, except as limited by bankruptcy, insolvency or other laws of general application relating to the enforcement of creditors' rights; (b) All financial statements delivered by Borrower to Lender prior to the date hereof are true and correct, fairly present the consolidated financial condition of Borrower and its subsidiaries in all material respects and have been prepared in accordance with generally accepted accounting principles, consistently applied; as of the date hereof, there are no obligations, liabilities or indebtedness (including contingent and indirect liabilities) which are material to Borrower or its subsidiaries and not reflected in such financial statements; and no material adverse changes have occurred in the financial condition or business of Borrower or its subsidiaries since the date of the most recent financial statements which Borrower has delivered to Lender; (c) Neither the execution and delivery of this Agreement and the other Loan Documents, nor consummation of any of the transactions herein or therein contemplated, nor compliance with the terms and provisions hereof or thereof, will contravene or conflict in any material respect with any provision of law, statute or regulation to which Borrower is subject or any judgment, license, order or permit applicable to Borrower or any indenture, mortgage, deed of trust or other instrument to which Borrower may be subject; no consent, approval, authorization or order of any court, governmental authority or third party is required in connection with the execution and delivery by Borrower of this Agreement or transactions contemplated herein or therein; (d) No litigation, investigation, or governmental proceeding is pending, or, to the knowledge of any of Borrower's officers, threatened against or affecting Borrower or any of its subsidiaries, which may result in any material adverse change in Borrower's or its subsidiaries' business, properties or operations; (e) There is no specific fact known to Borrower that Borrower has not disclosed to Lender in writing which is likely to result in any material adverse change in Borrower's or its subsidiaries' business, properties or operations; -2- (f) Borrower (or its subsidiaries) owns all of the assets reflected on its most recent balance sheet free and clear of all liens, security interest or other encumbrances, except as previously disclosed in writing to Lender; (g) The principal office, chief executive office and principal place of business of Borrower is in Houston, Texas; (h) All taxes required to be paid by Borrower and its subsidiaries have in fact been paid, except for taxes being contested in good faith by appropriate proceedings for which adequate reserves have been established; (i) Borrower is not in violation of any law, ordinance, governmental rule or regulation to which it is subject, and is not in default beyond any cure period under any material agreement, contract or understanding to which it is a party; and (j) No written certificate or written statement herewith or heretofore delivered by Borrower to Lender in connection herewith, or in connection with any transaction contemplated hereby, contains any untrue statement of a material fact or fails to state any material fact necessary to keep the statements contained therein from being misleading. 5. Affirmative Covenants. Until payment in full of the Note and all other obligations and liabilities of Borrower hereunder, Borrower agrees and covenants that (unless Lender shall otherwise consent in writing): (a) As soon as available, and in any event within thirty (30) days after the close of each calendar month, Borrower shall deliver to Lender an unaudited financial statement showing the financial condition of Borrower and its subsidiaries at the close of each such month and the results of operations during such month, which financial statements shall include, but shall not be limited to, a profit and loss statement, balance sheet, and such other matters as Lender may reasonably request; all such monthly financial statements shall be certified on the face thereof by the chief financial officer of Borrower, or any officer of Borrower acceptable to Lender, and shall be forwarded to Lender with a letter of transmittal from him in which he shall certify that Borrower is in compliance with all of the covenants contained in Paragraph 5 and Paragraph 6 hereof, and further stating that, to Borrower's best knowledge, no Event of Default exists in the performance by Borrower of any of the other terms, conditions and covenants required under this Agreement to be performed by Borrower; (b) As soon as available, and in any event within ninety (90) days after the end of each fiscal year of Borrower, Borrower shall deliver to Lender a copy of the annual audited consolidated financial statement of Borrower prepared in conformity with generally accepted accounting principles by Melton & Melton or independent certified public accountants selected by Borrower and acceptable to Lender, which show the financial condition of Borrower and its subsidiaries at the close of such fiscal year and the results of operations during such fiscal year, and shall include, but not be limited to, a profit and loss statement, balance sheet and such other matters as Lender may reasonably request; (c) As soon as available, and in any event within thirty (30) days after the end of each month, and upon each request for an advance Borrower shall deliver to Lender a (i) -3- Borrowing Base Certificate and Compliance Certificate in the form of Schedule "B" attached hereto together with such other information as may be deemed necessary or appropriate by Lender and (ii) an aging and listing of all accounts receivable, accounts payable and inventory of Borrower in a form acceptable to Lender; (d) Borrower shall furnish to Lender within thirty (30) days after the end of September 1996 and each six month period after September 1996 field audit reports prepared by a company mutually acceptable to Lender and Borrower, in a form acceptable to Lender; (e) As soon as available, and in any event within thirty (30) days after the end of each calendar year, Borrower shall cause the Guarantor (hereinafter defined) to deliver to Lender a copy of the annual financial statement of such Guarantor, which statement shall include, but not be limited to, a balance sheet, an income statement, a cash flow statement, a statement of contingent liabilities, and such other matters as Lender may reasonably request; (f) As soon as available, and in any event no later than April 30 of each year, Borrower shall cause Guarantor to deliver to Lender a copy of her federal income tax return(s) filed for the immediately preceding calendar year (or, in the alternative, should an extension be filed, the extension must be delivered to Lender by April 30 of such year, and the tax return must be delivered to Lender within 15 days after the date it is actually filed); (g) Borrower shall conduct its business in an orderly and efficient manner consistent with good business practices and in accordance with all valid regulations, laws and orders of any governmental authority and will act in accordance with customary industry standards in maintaining and operating its assets, properties and investments; (h) Borrower shall maintain complete and accurate books and records of its transactions in accordance with generally accepted accounting principles, and will give Lender access, after forty-eight hours prior notice, during business hours to all books, records and documents of Borrower and permit Lender to make and take away copies thereof; (i) Borrower shall furnish to Lender, immediately upon becoming aware of the existence of any condition or event constituting an Event of Default or event which, with the lapse of time and/or giving of notice, would constitute an Event of Default, written notice specifying the nature and period of existence thereof and any action which Borrower is taking or proposes to take with respect thereto; (j) Borrower shall promptly notify Lender of (i) any material adverse change in its financial condition or business; (ii) receipt of notice of any default under any material agreement, contract or other instrument to which Borrower is a party or by which any of its properties are bound, or any acceleration of any maturity of any indebtedness owing by Borrower; (iii) any material adverse claim against or affecting Borrower or any of its subsidiaries or properties; and (iv) any litigation, or any claim or controversy which might become the subject of litigation, against Borrower or its subsidiaries affecting any property, if such litigation or potential litigation might, in the event of an unfavorable outcome, have a material adverse effect on Borrower's financial condition or business or might cause an Event of Default; -4- (k) Borrower shall promptly pay all lawful claims, whether for labor, materials or otherwise, which might or could, if unpaid, become a lien or charge on any property or assets of Borrower, unless and to the extent only that the same are permitted hereby or are being contested in good faith by appropriate proceedings and reserves deemed adequate by Lender have been established therefor; (l) Borrower shall maintain or cause to be maintained insurance from responsible and reputable companies in such amounts and covering such risks as is acceptable to Lender, is prudent and is usually carried by companies engaged in businesses similar to that of Borrower; Borrower shall furnish Lender, on request, with certified copies of insurance policies or other appropriate evidence of compliance with the foregoing covenant; (m) Borrower shall preserve and maintain all licenses, privileges, franchises, certificates and the like necessary for the operation of its business; (n) Borrower shall promptly furnish to Lender, at Lender's request, such additional financial or other information concerning assets and liabilities of Borrower as Lender may from time to time reasonably request; and (o) Borrower shall make, execute or endorse, and acknowledge and deliver or file or cause the same to be done, all such vouchers, invoices, notices, certifications and additional security agreements, financing statements with respect to the Collateral and take any and all such other action, as Lender may, from time to time, deem reasonably necessary or proper in connection with any of the Loan Documents, the obligations of Borrower, or for better assuring and confirming unto Lender all or any part of the security for any of such obligations as set forth herein. (p) Borrower shall establish a lock box arrangement with Lender in accordance with its normal practices in connection with the payment and collection of Borrower's accounts receivable. 6. Negative Covenants. Until payment in full of the Note and all other obligations and liabilities of Borrower hereunder, Borrower covenants that it shall not (unless Lender shall otherwise consent in writing): (a) Permit at any time Borrower's Tangible Net Worth to be less than: from the date hereof through June 29, 1996 $800,000.00; from June 30, 1996 through December 30, 1996 $1,050,000.00; and from December 31, 1996 through the Maturity Date $1,300,000.00; as used herein, the term "Tangible Net Worth" shall mean the total assets of Borrower, minus its total liabilities (including contingent liabilities), minus all intangibles, expenses and other items -5- deducted in arriving at tangible net worth as determined by Borrower's regularly employed certified public accountant in a manner consistent with prior practice; (b) Permit, at any time during the periods set forth below, its ratio of total liabilities to Tangible Net Worth to be more than 2.50 to 1.00. (c) Permit, at any time, its ratio of Current Assets to Current Liabilities to be less than 1.25 to 1.00; as used herein, the term "Current Assets" shall mean all assets of Borrower that, in accordance with generally accepted accounting principles, would be included as current assets on a balance sheet as of such date, and the term "Current Liabilities" shall mean all liabilities of Borrower that, in accordance with generally accepted accounting principles, would be included as current liabilities on a balance sheet as of such date; (d) Incur or assume any indebtedness or borrow money without Lender's consent, except for (i) the Loan; (ii) debt incurred in the ordinary course of business; and (iii) debt reflected on Borrower's most recent balance sheet and any renewal, extension or modifications thereof; or sell any of its accounts receivable, with or without recourse; (e) Permit, for any three consecutive months, Borrower's Net Income to be less than zero for each such month during the three month period; as used herein, the term "Net Income" means, for any period, the net earnings (or loss) after taxes of Borrower for such period determined in accordance with GAAP; (f) Endorse, guarantee, or otherwise become liable for the obligations of any person, firm or corporation except for endorsements of negotiable instruments by Borrower in the ordinary course of business; (g) Mortgage, assign, encumber, incur, assume or grant a security interest in or lien upon any of Borrower's assets, except to Lender and as permitted herein (provided, however, that the foregoing shall not apply to an inchoate lien for taxes which are not delinquent or which are being contested in good faith and liens resulting from deposits to secure the payments of worker's compensation or social security or to secure the performance of bids or contracts in the ordinary course of business or others arising by operation of law); (h) Liquidate, dissolve or reorganize; or merge or consolidate with, or acquire all or substantially all of the assets of, any other company, firm or association; or make any other substantial change in its capitalization or its business; (i) Sell any of its assets, except in the ordinary course of business; or sell any of its assets to any other person, firm or corporation with the agreement that such assets shall be leased back to Borrower, unless replaced with assets of equal value; (j) Own, purchase or acquire, directly or indirectly, any promissory notes, stock or securities of any other person, firm or corporation, other than securities guaranteed as to the principal and interest by the United States government; or make any loans or advances to any other person or affiliated entity, in excess of $100,000 in the aggregate; -6- (k) Permit any transfer, pledge or other change in the ownership of controlling interest of the stock of Borrower during the term of the Loan, without the prior written consent of Lender; as used herein, the term "controlling interest" shall mean 51% of the stock of Borrower; and if a shareholder is an individual, the death of such shareholder shall not be deemed to be a change in the ownership of such stock of Borrower. (l) Expend or enter into any commitment to expend any amount for the acquisition or lease of tangible, fixed or capital assets, including repairs, replacements and improvements, which are capitalized under proper accounting practice, and which exceeds, in the aggregate, $100,000. 7. Default. An "Event of Default" shall exist if any one or more of the following events (herein collectively called "Events of Default") shall occur: (a) Borrower shall fail to pay when due any principal of, or interest on, the Note or any other fee or payment due hereunder or under any other indebtedness owing to Lender or any of the Loan Documents; (b) Any representation or warranty made in any of the Loan Documents shall prove to be untrue or inaccurate in any material respect as of the date on which such representation or warranty is made; (c) Default shall occur in the performance of any of the covenants or agreements of Borrower contained herein or in any other documents securing any other indebtedness owing to Lender or in any of the other Loan Documents and with respect to the Affirmative Covenants set forth herein [except subparagraphs 5(h), 5(i), 5(j), 5(n), and 5(o)] and Negative Covenants set forth herein such default shall continue for more than thirty (30) days after Lender's sending written demand therefor; (d) Borrower shall (i) apply for or consent to the appointment of a receiver, custodian, trustee, intervenor or liquidator of it or of all or a substantial part of its assets, (ii) voluntarily become the subject of a bankruptcy, reorganization or insolvency proceeding or be insolvent or admit in writing that it is unable to pay debts as they become due, (iii) make a general assignment for the benefit of creditors, (iv) file a petition or answer seeking reorganization or an arrangement with creditors or to take advantage of any bankruptcy or insolvency laws, (v) file an answer admitting the material allegations of, or consent to, or default in answering, a petition filed against it in any bankruptcy, reorganization or insolvency proceeding, (vi) become the subject of an order for relief under any bankruptcy, reorganization or insolvency proceeding, or (vii) fail to pay any money judgment against it or obtain a supersedeas bond before the expiration of thirty (30) days after such judgment becomes final and no longer subject to appeal; (e) An order, judgment or decree shall be entered by any court of competent jurisdiction or other competent authority approving a petition appointing a receiver, custodian, trustee, intervenor or liquidator of Borrower or of all or substantially all of its assets, and such order, judgment or decree shall continue unstayed and in effect for a period of ninety (90) days; or a complaint or petition shall be filed against Borrower seeking or instituting a bankruptcy, -7- insolvency, reorganization, rehabilitation or receivership proceeding of Borrower, and such petition or complaint shall not have been dismissed within ninety (90) days; or (f) Borrower shall default in the payment of any indebtedness of Borrower to financial institutions or in the performance of any of Borrower's obligations to financial institutions and such default shall continue for more than any applicable period of grace. 8. Remedies Upon Event of Default. If an Event of Default shall have occurred and be continuing, then Lender, at its option, may (i) declare the principal of, and all interest then accrued on, the Note and any other liabilities of Borrower to Lender to be forthwith due and payable, whereupon the same shall forthwith become due and payable without notice, presentment, demand, protest, notice of intention to accelerate, or other notice of any kind, all of which Borrower hereby expressly waives, anything contained herein or in the Note to the contrary notwithstanding, (ii) reduce any claim to judgment, and/or (iii) without further notice of default or demand, pursue and enforce any of Lender's rights and remedies under the Loan Documents or otherwise provided under or pursuant to any applicable law or agreement. 9. Collateral. Payment of the Note and performance of the obligations described herein shall be secured, directly or indirectly, by the following: (a) a first priority perfected security interest in all of Borrower's accounts, and general intangibles; (b) the guaranty of Virginia Pierpont (the "Guarantor"). 10. Miscellaneous. (a) Waiver. No failure to exercise, and no delay in exercising, on the part of Lender, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right. The rights of Lender hereunder and under the other Loan Documents shall be in addition to all other rights provided by law. No notice or demand given in any case shall constitute a waiver of the right to take other action in the same, similar or other instances without such notice or demand. (b) Notices. Any notices or other communications required or permitted to be given by any of the Loan Documents must be given in writing and must be personally delivered, or mailed by prepaid certified or registered mail to the party to whom such notice or communication is directed at the address of such party as follows: (i) Borrower: Documentation Associates, Inc. 12200 Northwest Freeway Houston, Texas 77092 Attention: Alison Smith -8- (iii) Lender: Southwest Bank of Texas P. O. Box 27459 Houston, Texas 77227-7459 Attention: Brooks McGee Any such notice or other communication shall be deemed to have been given (whether actually received or not) on the day it is personally delivered as aforesaid, or, if mailed, on the third day after it is mailed as aforesaid. Any party may change its address for purposes of this Agreement by giving notice of such damage to all other parties pursuant to this Paragraph. (c) Governing Law. This Agreement and the other Loan Documents are being executed and delivered, and are intended to be performed, in the State of Texas, and the substantive laws of Texas shall govern the validity, construction, enforcement and interpretation of this Agreement and all other Loan Documents, except to the extent: (i) otherwise specified therein; (ii) the federal or state laws governing national banking associations expressly supersede and have contrary application; or (iii) federal laws governing maximum interest rates shall provide for rates of interest higher than those permitted under the laws of the State of Texas. (d) Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term of this Agreement, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unforceable provision or by its severance from this Agreement. (e) Maximum Interest Rate. It is the intention of the parties hereto to comply with the usury laws of the State of Texas and the United States; accordingly, it is agreed that notwithstanding any provision to the contrary in the Note, or in any of the documents securing payment hereof or otherwise relating hereto, no such provision shall require the payment or permit the collection of interest in excess of the maximum permitted by applicable state or Federal Law. If any excess of interest in such respect is provided for, or shall be adjudicated to be so provided for, in the Note or in any of the documents securing payment hereof or otherwise relating hereto, or in the event the maturity of the indebtedness evidenced by the Note is accelerated in whole or in part, or in the event that all or part of the principal or interest of the Note shall be prepaid, so that under any of such circumstances the amount of interest contracted for, charged or received under the Note or under any of the instruments securing payment hereof or otherwise relating hereto, on the amount of principal actually outstanding from time to time under the Note shall exceed the maximum amount of interest permitted by the usury laws of the State of Texas and the United States, then, in any such event, (i) the provisions of this paragraph shall govern and control, (ii) neither Borrower nor its legal representatives or assigns or any other party liable for the payment hereof shall be obligated to pay the amount of such interest to the extent that it is in excess of the maximum amount permitted by applicable state or Federal law, (iii) any such excess which may have been collected shall be, at the holder's option (at maturity or in the Event of Default hereunder), either applied as a credit against the then unpaid principal amount hereof or refunded to Borrower, and (iv) the effective rate of interest shall be automatically subject to reduction to the maximum lawful contract rate allowed under the usury laws of the State of Texas or the United States as now or hereafter construed by the courts -9- having jurisdiction. It is further agreed that without limitation of the foregoing, all calculations of the rate of interest contracted for, charged or received under the Note or under such other documents which are made for the purpose of determining whether such rate exceeds the maximum lawful rate of interest, shall be made, to the extent permitted by the laws of the State of Texas and the United States, by amortizing, prorating, allocating and spreading in equal parts during the period of the full stated term of the Loans, all interest at any time contracted for, charged or received from Borrower or otherwise by the holder of the Note in connection with such Loan. (f) Entirety and Amendments. The Loan Documents embody the entire agreement between the parties and supersede all prior agreements and understandings, if any, relating to the subject matter hereof and thereof, and this Agreement and the other Loan Documents may be amended only by an instrument in writing executed by the party, or an authorized officer of the party, against whom such amendment is sought to be enforced. (g) Parties Bound. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns; provided, however, that Borrower may not, without the prior written consent of Lender, assign any rights, powers, duties or obligations hereunder. (h) Headings. Paragraph and section headings are for convenience of reference only and shall in no way affect the interpretation of this Agreement. (i) Financial Terms. As used in this Agreement, all financial and accounting terms not otherwise defined herein shall be defined and calculated in accordance with generally accepted accounting principles consistently applied. (j) Expenses of Lender. Borrower will, on demand, reimburse Lender for all expenses except as otherwise provided herein, including the reasonable fees and expenses of legal counsel for Lender, incurred by Lender in connection with the preparation, administration, amendment, modification or enforcement of this Agreement, the Note and the Loan Documents and the collection or the attempted collection of the Note. (k) Construction and Conflicts. The provisions of this Agreement shall be in addition to those of the Note, the Loan Documents and any guaranty, pledge or security agreement, note or other evidence of liability held by Lender, all of which shall be construed as complementary to each other. Nothing herein contained shall prevent Lender from enforcing the Note, the Loan Documents and any and all other notes, guaranty, pledge or security agreements in accordance with their respective terms. To the extent of any irreconcilable conflict between the terms hereof and the terms of the Note, the Loan Documents or any other document executed in connection herewith, the terms of this Agreement shall control. 11. Agreement for Binding Arbitration. The parties agree to be bound by the terms and provisions of the Arbitration Agreement by and among the parties hereto, which Agreement is incorporated by reference herein, pursuant to which any and all disputes shall be resolved by mandatory binding arbitration upon the request of any party. -10- 12. Multiple Counterparts. This Agreement may be executed in multiple counterparts, and each counterpart executed by any party shall be deemed an original and shall be binding upon the person or entity executing the same, irrespective of whether any other party has executed that or any other counterpart of this Agreement. Production of any counterpart other than the one to be enforced shall not be required. 13. NO ORAL AGREEMENTS. THE WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. If Lender agrees to the foregoing, Lender should execute this Agreement in the space indicated below. "Borrower" DOCUMENTATION ASSOCIATES, INC. By: /s/ Alison Smith ---------------------------- Alison Smith, Vice President "Guarantor" /s/ Virginia Pierpont ------------------------------- VIRGINIA PIERPONT, to evidence Guarantor's agreement to paragraph 11 hereof ACCEPTED: "Lender" SOUTHWEST BANK OF TEXAS, N.A. By /s/ Brooks McGee ----------------------------- Brooks McGee Senior Vice President UNITED KINGDOM ) Great Britain and Northern Ireland ) London, England ) ss Embassy of the United States of America ) THE EMBASSY OF THE UNITED ) STATES OF AMERICA ) BEFORE ME, the undersigned authority, a Vice Consul of the United States of America resident in London, the United Kingdom, duly commissioned and qualified, on this day personally appeared VIRGINIA PIERPONT, known to me or proven to me to be the person whose name is subscribed to the foregoing instrument and acknowledged to me that she executed the same for purposes and consideration therein expressed. GIVEN UNDER MY HAND AND SEAL this Eighteenth day of March, 1996. /s/ Melissa Buchanan Arkley --------------------------------------------- --------------------------------------------- (Typed name of foreign service officer) of the United States of America -------------- (Title) MELISSA BUCHANAN ARKLEY VICE CONSUL OF THE UNITED STATES OF AMERICA LONDON, ENGLAND EX-10.9 7 FIRST AMEND. TO LETTER LOAN AGR. EXHIBIT 10.9 FIRST AMENDMENT TO LETTER LOAN AGREEMENT THIS FIRST AMENDMENT TO LETTER LOAN AGREEMENT ("Amendment") is made and entered into as of November 30, 1996, by and between D.A. CONSULTING GROUP,INC., a Texas corporation, formerly known as Documentation Associates, Inc., a Texas corporation (herein called "Borrower"), and SOUTHWEST BANK OF TEXAS, N.A., a national banking association with offices of Houston, Texas (herein called "Lender"). R E C I T A L S: - - - - - - - - WHEREAS, Documentation Associates, Inc. and Lender entered into a Letter Loan Agreement dated March 18, 1996 (which, as amended, is herein called the "Loan Agreement"; the terms defined therein being used herein as therein defined unless otherwise defined herein); and WHEREAS, Borrower and Lender desire to further amend the Loan Agreement to (i) provide for the issuance of one or more Letters of Credit (hereinafter defined) and (ii) amend certain terms and provisions of the Loan Agreement. A G R E E M E N T: - - - - - - - - - NOW, THEREFORE, in consideration of the mutual promises herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, Borrower and Lender hereby agree to amend the Loan Agreement as hereinafter set forth. 1. AMENDMENTS TO LOAN AGREEMENT. (a) Section 2 of the Loan Agreement is effective the date hereof and subject to the satisfaction of the conditions precedent set forth in Section 2 hereof, hereby amended to include the following provisions: (i) The letter "(a)" is inserted after the term "Revolving Credit Advances" and before the first full paragraph of Section 2; and (ii) "On the terms and subject to the conditions hereinafter set forth, Lender agrees to make Advances to Borrower for the issuance of one or more letters of credit. Each of the letters of credit shall be evidenced by an Application and Agreement for Letter of Credit (the "Application") in a form satisfactory to Lender. Each of these letters of credit and any renewals, extensions and modifications thereof are collectively referred to herein as the "Letter of Credit". Repayment of drafts against the Letter of Credit shall be governed by this Agreement and the Application, and shall be and is secured by the collateral and guaranties provided in this Agreement. Borrower's requests for Advances under the Letter of Credit shall specify the aggregate amount of the Advance an the date of such Advance. Borrower shall furnish to Lender a request for borrowing in a form satisfactory to Lender at least two (2) business days prior to the requested borrowing date. Lender shall make the requested funds or Letter of Credit available to Borrower at Lender's principal banking office in Houston, Texas." (b) Section 5 of the Loan Agreement is effective the date hereof and subject to the satisfaction of the conditions precedent set forth in Section 2 hereof, hereby amended to include the following provision: "(q) Borrower shall pay a letter of credit commission to Lender in respect of each Letter of Credit issued by Lender equal to the lesser of $250 or an amount determined by multiplying (i) one percent (1%) of the face amount of such Letter of Credit by (ii) a fraction, the numerator of which shall be the number of days between the date of such Letter of Credit and the stated expiration date thereof and the denominator of which shall be 360; such commission shall be payable at the time a Letter of Credit is issued and upon any renewal or extension thereof, additionally, Borrower agrees to reimburse Lender for all actual out-of-pocket expenses incurred by Lender, such as advising or confirming bank fees, telex charges and the like and to pay those fees customarily charged by Lender for any amendments to a Letter of Credit." (c) Section 6 of the Loan Agreement is effective as of the date hereof and subject to the satisfaction of the conditions precedent set forth in Section 2 hereof, hereby amended to delete (6)(1) and substitute the following provision therefor: "(l) Expend or enter into any commitment to expend any amount for the acquisition or lease of tangible, fixed or capital assets, including repairs, replacements and improvements, which are capitalized under proper accounting practice, in which exceeds, in the aggregate, $800,000.00." (d) Section 10(b)(i) of the Loan Agreement is deleted and replaced with the following: (i) Borrower: D. A. Consulting Group, Inc. 12200 Northwest Freeway, Suite 200 Houston, Texas 77092 Attention: Alison Smith 2. CONDITIONS OF EFFECTIVENESS. This Amendment shall become effective when, and only when, Lender shall have received the following: (a) counterparts of this Amendment executed by Borrower; (b) Consent of Guarantor from the Guarantor; (c) Corporate Certificate and Resolutions form of Borrower; and (d) any additional documentation or materials reasonably required by Lender. -2- 3. REPRESENTATIONS AND WARRANTIES OF BORROWER. Borrower represents and warrants as follows: (a) Borrower is duly authorized and empowered to execute, deliver and perform this Amendment and all other instruments referred to or mentioned herein to which it is a party, and all action on its part requisite for the due execution, delivery and the performance of this Amendment has been duly and effectively taken. This Amendment, when executed and delivered, will constitute valid and binding obligations of Borrower enforceable in accordance with its terms. This Amendment does not violate any provisions of Borrower's Articles of Incorporation, By-Laws, or any contract, agreement, law or regulation to which Borrower is subject, and does not require the consent or approval of any regulatory authority or governmental body of the United States or any state. (b) The representations and warranties made by Borrower in the Loan Agreement are true and correct as of the date of this Amendment. (c) No event has occurred and is continuing which constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both. 4. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. (a) Upon the effectiveness of Section 1 hereof, on and after the date hereof each reference in the Loan Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import, and each reference in the other Loan Documents, shall mean and be a reference to the Loan Agreement as amended hereby. (b) Except as specifically amended above, the Loan Agreement and the Notes and all other instruments securing or guaranteeing Borrower's obligations to Lender (the "Loan Documents") shall remain in full force and effect and are hereby ratified and confirmed. Without limiting the generality of the foregoing, the Loan Documents and all collateral described therein do and shall continue to secure the payment of all obligations of Borrower under the Loan Agreement and the Notes, as amended hereby, and under the other Loan Documents. (c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of Lender under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents. 5. WAIVER. As additional consideration for the execution, delivery and performance of this Amendment by the parties hereto and to induce Lender to enter into this Amendment, Borrower and Guarantor warrant and represent to Lender that no facts, events, statuses or conditions exist or have existed which, either now or with the passage of time or giving of notice, or both, constitute or will constitute a basis for any claim or cause of action -3- against Lender or any defense to (i) the payment of any obligations and indebtedness under the Notes and/or the Loan Documents or (ii) the performance of any of their obligations with respect to the Notes and/or the Loan Documents, and in the event any such facts, events, statuses or conditions exist or have existed, Borrower and Guarantor unconditionally and irrevocably waive any and all claims and causes of action against Lender and any defense to their payment and performance obligations in respect to the Notes and the Loan Documents. 6. COSTS AND EXPENSES. Borrower agrees to pay on demand all costs and expenses of Lender in connection with the preparation, reproduction, execution and delivery of this Amendment and the other instruments and documents to be delivered hereunder, including the reasonable fees of out-of-pocket expenses of counsel for Lender. In addition, Borrower shall pay any and all fees payable or determined to be payable in connection with the execution and delivery, filing or recording of this Amendment and the other instruments and documents to be delivered hereunder, and agrees to save Lender harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such fees, except such liabilities arising from the gross negligence of Lender. 7. EXECUTION IN COUNTERPARTS. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. 8. GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the laws of the State of Texas. 9. FINAL AGREEMENT. THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be duly executed in multiple counterparts, each of which is an original instrument for all purposes, all as of the day and year first above written. "BORROWER" D.A. CONSULTING GROUP, INC., formerly known as Documentation Associates, Inc. By: /s/ Alison Smith ------------------------------- Name: Alison Smith ----------------------------- Title: Vice President ---------------------------- -4- "LENDER" SOUTHWEST BANK OF TEXAS, N.A. By: /s/ Brooks H. McGee -------------------------------------- Brooks H. McGee, Senior Vice President -5- EX-10.10 8 SECOND AMENDMENT LETTER LOAN AGREEMENT EXHIBIT 10.10 SECOND AMENDMENT TO LETTER LOAN AGREEMENT THIS SECOND AMENDMENT TO LETTER LOAN AGREEMENT ("Amendment") is made and entered into effective as of March 18, 1997, by and between D. A. CONSULTING GROUP, INC., a Texas corporation, formerly known as Documentation Associates, Inc., a Texas corporation (herein called "Borrower"), and SOUTHWEST BANK OF TEXAS, N.A., a national banking association with offices in Houston, Texas (herein called "Lender"). R E C I T A L S: WHEREAS, Documentation Associates, Inc. and Lender entered into a Letter Loan Agreement dated March 18, 1996, as amended by First Amendment to Letter Loan Agreement dated November, 1996 executed by and between Borrower and Lender (which, as amended, is herein called the "Loan Agreement"; the terms defined therein being used herein as therein defined unless otherwise defined herein); and WHEREAS, Borrower and Lender desire to further amend the Loan Agreement to (i) extend the maturity date of the Note, (ii) increase the principal amount of the Note, and (iii) amend certain terms and provisions of the Loan Agreement. A G R E E M E N T: NOW, THEREFORE, in consideration of the mutual promises herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, Borrower and Lender hereby agree to amend the Loan Agreement as hereinafter set forth. 1. AMENDMENTS TO LOAN AGREEMENT. (a) The references to "1,000,000.00" in the opening paragraph, paragraph 1 and paragraph 2 of the Loan Agreement are deleted and replaced with "1,500,000.00". (b) Section 5 of the Loan Agreement is effective the date hereof and subject to the satisfaction of the conditions precedent set forth in Section 2 hereof, hereby amended as follows: (i) Subsection (d) is hereby deleted and replaced with the following: "(d) Borrower shall furnish to Lender within thirty (30) days after the end of June 30, 1997, and each June 30 after June 30, 1997, field audit reports prepared by a company mutually acceptable to Lender and Borrower, in a form acceptable to Lender;" (ii) Subsection (q) is deleted and replaced with the following provision: "(q) Borrower shall pay a letter of credit commission to Lender in respect of each Letter of Credit issued by Lender equal to the greater of $250 or an amount determined by multiplying (i) one percent (1%) of the face amount of such Letter of Credit by (ii) a fraction, the numerator of which shall be the number of days between the date of such Letter of Credit and the stated expiration date thereof and the denominator of which shall be 360; such commission shall be payable at the time a Letter of Credit is issued and upon any renewal or extension thereof; additionally, Borrower agrees to reimburse Lender for all actual out-of-pocket expenses incurred by Lender, such as advising or confirming bank fees, telex charges and the like and to pay those fees customarily charged by Lender for any amendments to a Letter of Credit." (c) Section 6 of the Loan Agreement is effective as of the date hereof and subject to the satisfaction of the conditions precedent set forth in Section 2 hereof, hereby amended as follows: (i) Subsection 6(a) is deleted and replaced with the following: "(a) Permit at any time Borrower's Tangible Net Worth to be less than $1,750,000.00, as used herein, the term "Tangible Net Worth" shall mean the total assets of Borrower, minus its total liabilities (including contingent liabilities), minus all intangibles, expenses and other items deducted in arriving at tangible net worth as determined by Borrower's regularly employed certified public accountant in a manner consistent with prior practice;" (ii) Subsection 6(b) is deleted and replaced with the following: "(b) Permit, at any time during the periods set forth below, its ratio of total liabilities to Tangible Net Worth to be more than 2.00 to 1.00." (iii) Subsection 6(l) is deleted and replaced with the following: "(l) Expend or enter into any commitment to expend any amount for the acquisition or lease of tangible, fixed or capital assets, including repairs, replacements and improvements, which are capitalized under proper accounting practice, in which exceeds, in the aggregate, $1,000,000.00" --See attached page. (d) Section 9(b) of the Loan Agreement is deleted. 2 2. CONDITIONS OF EFFECTIVENESS. This Amendment shall become effective when, and only when, Lender shall have received the following: (a) counterparts of this Amendment executed by Borrower; (b) $1,500,000.00 Renewal Promissory Note (Revolving Credit) executed by Borrower; (c) Corporate Certificate and Resolutions from Borrower; and (d) any additional documentation or materials reasonably required by Lender. 3. REPRESENTATIONS AND WARRANTIES OF BORROWER. Borrower represents and warrants as follows: (a) Borrower is duly authorized and empowered to execute, deliver and perform this Amendment and all other instruments referred to or mentioned herein to which it is a party, and all action on its part requisite for the due execution, delivery and the performance of this Amendment has been duly and effectively taken. This Amendment, when executed and delivered, will constitute valid and binding obligations of Borrower enforceable in accordance with its terms. This Amendment does not violate any provisions of Borrower's Articles of Incorporation, By-Laws, or any contract, agreement, law or regulation to which Borrower is subject, and does not require the consent or approval of any regulatory authority or governmental body of the United States or any state. (b) The representations and warranties made by Borrower in the Loan Agreement are true and correct as of the date of this Amendment. (c) No event has occurred and is continuing which constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be give or time elapse or both. 4. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. (a) Upon the effectiveness of Section 1 hereof, on and after the date hereof each reference in the Loan Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import, and each reference in the other Loan Documents, shall mean and be a reference to the Loan Agreement as amended hereby. (b) Except as specifically amended above, the Loan Agreement and the Note and all other instruments securing or guaranteeing Borrower's obligations to Lender (the "Loan Documents") shall remain in full force and effect and hereby ratified and confirmed. Without limiting the generality of the foregoing, the Loan Documents and all collateral described therein do and shall continue to secure the -3- payment of all obligations of Borrower under the Loan Agreement and the Note, as amended hereby, and under the other Loan Documents. (c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of Lender under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents. 5. WAIVER. As additional consideration for the execution, delivery and performance of this Amendment by the parties hereto and to induce Lender to enter into this Amendment, Borrower warrants and represents to Lender that no facts, events, statuses or conditions exist or have existed which, either now or with the passage of time or giving of notice, or both, constitute or will constitute a basis for any claim or cause of action against Lender or any defense to (i) the payment of any obligations and indebtedness under the Note and/or the Loan Documents or (ii) the performance of any of their obligations with respect to the Note and/or the Loan Documents, and in the event any such facts, events, statuses or conditions exist or have existed, Borrower unconditionally and irrevocably waives any and all claims and causes of action against Lender and any defense to their payment and performance obligations in respect to the Note and the Loan Documents. 6. COSTS AND EXPENSES. Borrower agrees to pay on demand all costs and expenses of Lender in connection with the preparation, reproduction, execution and delivery of this Amendment and the other instruments and documents to be delivered hereunder, including the reasonable fees of out-of-pocket expenses of counsel for Lender. In addition, Borrower shall pay any and all fees payable or determined to be payable in connection with the execution and delivery, filing or recording of this Amendment and the other instruments and documents to be delivered hereunder, and agrees to save Lender harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such fees, except such liabilities arising from the gross negligence of Lender. 7. GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the laws of the State of Texas. 8. FINAL AGREEMENT. THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. -4- IN WITNESS WHEREOF, the parties hereto have caused this instrument to be duly executed in multiple counterparts, each of which is an original instrument for all purposes, all as of the day and year first above written. "BORROWER" D.A. CONSULTING GROUP, INC., formerly known as Documentation Associates, Inc. By: /s/ MICHAEL J. MACKEY _______________________________________ Name: Michael J. Mackey _____________________________________ Title: CFO ____________________________________ "LENDER" SOUTHWEST BANK OF TEXAS, N.A. By: /s/ Brooks H. McGee _______________________________________ Brooks H. McGee, Senior Vice President -5- EX-10.11 9 THIRD AMENDMENT LETTER LOAN AGREEMENT EXHIBIT 10.11 THIRD AMENDMENT TO LETTER LOAN AGREEMENT THIS THIRD AMENDMENT TO LETTER LOAN AGREEMENT ("Amendment") is made and entered into effective as of May 27, 1997, by and between D.A. CONSULTING GROUP, INC., a Texas corporation, formerly known as Documentation Associated, Inc. a Texas corporation (herein called "Borrower"), and SOUTHWEST BANK OF TEXAS, N.A., a national association with offices in Houston, Texas (herein called "Lender"). R E C I T A L S: - - - - - - - - WHEREAS, Documentation Associates, Inc. and Lender entered into a Letter Loan Agreement dated March 18, 1996, as amended by First Amendment to Letter Loan Agreement dated November, 1996 executed by and between Borrower and Lender, and as amended by Second Amendment to Letter Loan Agreement dated effective May 18, 1997 (which, as amended, is herein called the "Loan Agreement"; the terms defined therein being used herein as therein defined unless otherwise defined herein); and WHEREAS, Borrower and Lender desire to further amend the Loan Agreement to (i) increase the principal amount of the Note, and (ii) amend certain terms and provisions of the Loan Agreement. A G R E E M E N T: - - - - - - - - - NOW, THEREFORE, in consideration of the mutual promises herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, Borrower and Lender hereby agree to amend the Loan Agreement as hereinafter set forth. 1. AMENDMENTS TO LOAN AGREEMENT. (a) The references to "1,500,000.00" in the opening paragraph, paragraph 1 and paragraph 2 of the Loan Agreement are deleted and replaced with "3,500,000.00". The reference to the Maturity Date in paragraph 1 of the Loan Agreement is hereby amended to be June 18, 1998. (b) Section 5 of the Loan Agreement is effective as of the date hereof and subject to the satisfaction of the conditions precedent set forth in Section 2 hereof, hereby amended by adding the following subsection thereto: "(r) Pay to Lender a commitment fee calculated at the rate of one-fourth of one percent (1/4%) per annum (determined on a daily basis and for the actual number of days elapsed based on a 365-day year) after the date hereof on the average daily unborrowed amount of the Note, payable, in arrears, quarter-annually commencing on August 31, 1997, (for the period and from the date of this Agreement until such date) and continuing on the same day of each November, February, May and August thereafter, with a final payment on the Maturity Date. Borrower acknowledges and agrees that such commitment fee is in consideration of Lender's holding monies in readiness for Borrower prior to the funding of Borrower's requests for advances and is not intended as additional compensation for Lender." (c) Section 6 of the Loan Agreement is effective as of the date hereof and subject to the satisfaction of the conditions precedent set forth in Section 2 hereof, hereby amended as follows: (i) Subsection 6(a) is deleted and replaced with the following: "(a) Permit at any time Borrower's Tangible Net Worth to be less than the following amounts during the following periods: Period Amount ------ ------ Date hereof through September 30, 1997 $1,750,000 October 1, 1997 through December 31, 1997 $2,000,000 January 1, 1998 through March 31, 1998 $2,250,000 April 1, 1998 through the Maturity Date $2,500,000 As used herein, the term "Tangible Net Worth" shall mean the total assets of Borrower, minus its total liabilities (including contingent liabilities), minus all intangibles, expenses and other items deducted in arriving at tangible net worth as determined by Borrower's regularly employed certified public accountant in a manner consistent with prior practice;" (ii) Subsection 6(b) is deleted and replaced with the following: "(b) Permit, at any time, its ratio of total liabilities to Tangible Net Worth to be more than 2.75 to 1.00;" (d) Section 9(b) of the Loan Agreement is hereby added: "(b) the guaranty of D.A. International, Inc. (the "Guarantor")." 2. CONDITIONS OF EFFECTIVENESS. This Amendment shall become effective when, and only when, Lender shall have received the following: (a) counterparts of this Amendment executed by Borrower; (b) $3,500,000.00 Modification Promissory Note (Revolving Credit) executed by Borrower; -2- (c) Corporate Certificate and Resolutions from Borrower; (d) Continuing Guaranty from Guarantor; (e) Corporate Certificate and Resolutions from Guarantor; and (f) any additional documentation or materials reasonably required by Lender. 3. REPRESENTATIONS AND WARRANTIES OF BORROWER. Borrower represents and warrants as follows: (a) Borrower is duly authorized and empowered to execute, deliver and perform this Amendment and all other instruments referred to or mentioned herein to which it is a party, and all action on its part requisite for the due execution, delivery and the performance of this Amendment has been duly and effectively taken. This Amendment, when executed and delivered, will constitute valid and binding obligations of Borrower enforceable in accordance with its terms. This Amendment does not violate any provisions of Borrower's Articles of Incorporation, By-Laws, or any contract, agreement, law or regulation to which Borrower is subject, and does not require the consent or approval of any regulatory authority or governmental body of the United States or any state. (b) The representations and warranties made by Borrower in the Loan Agreement are true and correct as of the date of this Amendment. (c) No event has occurred and is continuing which constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both. 4. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. (a) Upon the effectiveness of Section 1 hereof, on and after the date hereof each reference in the Loan Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import, and each reference in the other Loan Documents, shall mean and be a reference to the Loan Agreement as amended hereby. (b) Except as specifically amended above, the Loan Agreement and the Note and all other instruments securing or guaranteeing Borrower's obligations to Lender (the "Loan Documents") shall remain in full force and effect and are hereby ratified and confirmed. Without limiting the generality of the foregoing, the Loan Documents and all collateral described therein do and shall continue to secure the payment of all obligations of Borrower under the Loan Agreement and the Note, as amended hereby, and under the other Loan Documents. -3- (c) The execution, delivery and effectiveness of ???????????????????? expressly provided herein, operate as a waiver of any right, power or remedy of Lender under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents. 5. WAIVER. As additional consideration for the execution, delivery and performance of this Amendment by the parties hereto and to induce Lender to enter into this Amendment, Borrower warrants and represents to Lender that no facts, events, statuses or conditions exist or have existed which, either now or with the passage of time or giving of notice, or both, constitute or will constitute a basis for any claim or cause of action against Lender or any defense to (i) the payment of any obligations and indebtedness under the Note and/or the Loan Documents or (ii) the performance of any of their obligations with respect to the Note and/or the Loan Documents, and in the event any such facts, events, statuses or conditions exist or have existed, Borrower unconditionally and irrevocably waives any and all claims and causes of action against Lender and any defense to their payment and performance obligations in respect to the Note and the Loan Documents. 6. COSTS AND EXPENSES. Borrower agrees to pay on demand all costs and expenses of Lender in connection with the preparation, reproduction, execution and delivery of this Amendment and the other instruments and documents to be delivered hereunder, including the reasonable fees of out-of-pocket expenses of counsel for Lender. In addition, Borrower shall pay any and all fees payable or determined to be payable in connection with the execution and delivery, filing or recording of this Amendment and the other instruments and documents to be delivered hereunder, and agrees to save Lender harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such fees, except such liabilities arising from the gross negligence of Lender. 7. GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the laws of the State of Texas. 8. FINAL AGREEMENT. THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. -4- IN WITNESS WHEREOF, the parties hereto have caused this instrument to be duly executed in multiple counterparts, each of which is an original instrument for all purposes, all as of the day and year first above written. "BORROWER" D.A. CONSULTING GROUP, INC. a Texas corporation, formerly known as Documentation Associates, Inc. By:/s/ Michael J. Mackey ---------------------------------- Name: Michael J. Mackey -------------------------------- Title: CFO ------------------------------- "LENDER" SOUTHWEST BANK OF TEXAS, N.A. By: /s/ Brooks H. McGee ------------------------------------ Brooks H. McGee, Senior Vice President -5- EX-10.12 10 FOURTH AMENDENT LETTER LOAN AGREEMENT EXHIBIT 10.12 FOURTH AMENDMENT TO LETTER LOAN AGREEMENT THIS FOURTH AMENDMENT TO LETTER LOAN AGREEMENT ("Amendment") is made and entered into effective as of November 26, 1997, by and between D. A. CONSULTING GROUP, INC., a Texas corporation, formerly known as Documentation Associates, Inc., a Texas corporation (herein called "Borrower"), and SOUTHWEST BANK OF TEXAS, N.A., a national banking association with offices in Houston, Texas (herein called "Lender"). R E C I T A L S: - - - - - - - - WHEREAS, Documentation Associates, Inc. and Lender entered into a Letter Loan Agreement dated March 18, 1996, as amended by First Amendment to Letter Loan Agreement dated November, 1996 executed by and between Borrower and Lender, as amended by Second Amendment to Letter Loan Agreement dated effective May 18, 1997 executed by and between Borrower and Lender, and as amended by Third Amendment to Letter Loan Agreement dated effective May, 1997 executed by and between Borrower and Lender (which, as amended, is herein called the "Loan Agreement"; the terms defined therein being used herein as therein defined unless otherwise defined herein); and WHEREAS, Borrower and Lender desire to further amend the Loan Agreement to (i) increase the principal amount of the Note, and (ii) amend certain terms and provisions of the Loan Agreement. A G R E E M E N T: - - - - - - - - - NOW, THEREFORE, in consideration of the mutual promises herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, Borrower and Lender hereby agree to amend the Loan Agreement as hereinafter set forth. 1. AMENDMENTS TO LOAN AGREEMENT. (a) The references to "3,500,000.00" in the opening paragraph, paragraph 1 and paragraph 2 of the Loan Agreement are deleted and replaced with "5,000,000.00". The reference to the MATURITY DATE is paragraph 1 of the Loan Agreement is hereby amended to be NOVEMBER 18, 1998. (b) Section 6 of the Loan Agreement is effective as of the date hereof and subject to the satisfaction of the conditions precedent set forth in Section 2 hereof, hereby amended as follows: (i) Section (6)(1) is deleted and the following provision is substituted therefor: "(1) Expend or enter into any commitment to expend any amount for the acquisition or lease of tangible, fixed or capital assets, including repairs, replacements and improvements, which are capitalized under proper accounting practice, in which exceeds, in the aggregate, $1,000,000.00." (c) Section 10(b)(i) of the Loan Agreement is deleted and replaced with the following: (i) Borrower: D.A. Consulting Group, Inc. 5847 San Felipe, Suite 3700 Houston, Texas 77057 Attention: Mike Mackey 2. CONDITIONS OF EFFECTIVENESS. This Amendment shall become effective when, and only when, Lender shall have received the following: (a) counterparts of this Amendment executed by Borrower; (b) Consent of Guarantor executed by the Guarantor; (c) $5,000,000.00 Modification Promissory Note (Revolving Credit) executed by Borrower; (d) Supplemental Security Agreement executed by Borrower; (e) Corporate Certificate and Resolutions from Borrower; (f) any additional documentation or materials reasonably required by Lender. 3. REPRESENTATIONS AND WARRANTIES OF BORROWER. Borrower represents and warrants as follows: (a) Borrower is duly authorized and empowered to execute, deliver and perform this Amendment and all other instruments referred to or mentioned herein to which it is a party, and all action on its part requisite for the due execution, delivery and the performance of this Amendment has been duly and effectively taken. This Amendment, when executed and delivered, will constitute valid and binding obligations of Borrower enforceable in accordance with its terms. This Amendment does not violate any provisions of Borrower's Articles of Incorporation, By-Laws, or any contract, agreement, law or regulation to which Borrower is subject, and does not require the consent or approval of any regulatory authority or governmental body of the United States or any state. (b) The representations and warranties made by Borrower in the Loan Agreement are true and correct as of the date of this Amendment. (c) No event has occurred and is continuing which constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both. -2- 4. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. (a) Upon the effectiveness of Section 1 hereof, on and after the date hereof each reference in the Loan Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import, and each reference in the other Loan Documents, shall mean and be a reference to the Loan Agreement as amended hereby. (b) Except as specifically amended above, the Loan Agreement and the Note and all other instruments securing or guaranteeing Borrower's obligations to Lender (the "Loan Documents") shall remain in full force and effect and are hereby ratified and confirmed. Without limiting the generality of the foregoing, the Loan Documents and all collateral described therein do and shall continue to secure the payment of all obligations of Borrower under the Loan Agreement and the Note, as amended hereby, and under the other Loan Documents. (c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of Lender under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents. 5. WAIVER. As additional consideration for the execution, delivery and performance of this Amendment by the parties hereto and to induce Lender to enter into this Amendment, Borrower and Guarantor warrant and represent to Lender that no facts, events, statuses or conditions exist or have existed which, either now or with the passage of time or giving of notice, or both, constitute or will constitute a basis for any claim or cause of action against Lender or any defense to (i) the payment of any obligations and indebtedness under the Note and/or the Loan Documents or (ii) the performance of any of their obligations with respect to the Note and/or the Loan Documents, and in the event any such facts, events, statuses or conditions exist or have existed, Borrower and Guarantor unconditionally an irrevocably waive any and all claims and causes of action against Lender and any defense to their payment and performance obligations in respect to the Note and the Loan Documents. 6. COSTS AND EXPENSES. Borrower agrees to pay on demand all costs and expenses of Lender in connection with the preparation, reproduction, execution and delivery of this Amendment and the other instruments and documents to be delivered hereunder, including the reasonable fees of out-of-pocket expenses of counsel for Lender. In addition, Borrower shall pay any and all fees payable or determined to be payable in connection with the execution and delivery, filing or recording of this Amendment and the other instruments and documents to be delivered hereunder, and agrees to save Lender harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such fees, except such liabilities arising from the gross negligence of Lender. 7. GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the laws of the State of Texas. 8. FINAL AGREEMENT. THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR 3 SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be duly executed in multiple counterparts, each of which is an original instrument for all purposes, all as of the day and year first above written. "BORROWER" D.A. CONSULTING GROUP, INC., a Texas corporation, formerly known as Documentation Associates, Inc. By: /s/ Michael J. Mackey ---------------------------------------- Name: Michael J. Mackey -------------------------------------- Title: CFO, EVP Finance & Administration ------------------------------------- "LENDER" SOUTHWEST BANK OF TEXAS, N.A. By: /s/ Brooks H. McGee ---------------------------------------- Brooks H. McGee, Senior Vice President "GUARANTOR" to evidence its agreement to Section 5 hereof D.A. INTERNATIONAL, INC. By: /s/ Michael J. Mackey ---------------------------------------- Name: Michael J. Mackey -------------------------------------- Title: CFO, EVP Finance & Administration ------------------------------------- 4 EX-10.13 11 CONTINUING GUARANTY EXHIBIT 10.13 CONTINUING GUARANTY (D.A. INTERNATIONAL, INC.) WHEREAS, D.A. CONSULTING GROUP, INC., a Texas corporation, formerly known as DOCUMENTATION ASSOCIATES, INC., hereinafter called "Borrower," may from time to time become indebted to SOUTHWEST BANK OF TEXAS, N.A., a national banking association, hereinafter called "Lender." FOR GOOD AND VALUABLE CONSIDERATION, receipt of which is hereby acknowledged, and to induce Lender, at its option, at any time or from time to time to lend money to Borrower, the undersigned (individually and collectively called "Guarantor") hereby (jointly and severally if more than one) unconditionally guarantees unto Lender the prompt and complete payment of the Guaranteed Indebtedness (as herein defined) when due (whether at its stated maturity, by acceleration or otherwise) in accordance with the terms of the Loan Documents (as herein defined). The term "Guaranteed Indebtedness," as used herein, means all indebtedness of every kind and character, whether now existing or hereafter arising, of Borrower to Lender, whether direct or indirect, primary or secondary, joint or several, fixed or contingent and whether evidenced by note, draft, open account, acceptance, overdraft, line of credit, endorsement, guaranty, security agreement, loan agreement, application for letter of credit or otherwise, and without limit as to amount except that if, but only if, the following blank in this sentence is filled in, the amount of the Guaranteed Indebtedness shall be limited to the aggregate at any one time to the principal sum of $ [unlimited] (but see the last paragraph of this Guaranty) together with interest thereon, and all penalties, costs, fees and expenses (including, but not limited to, attorneys' fees) as provided for under any of the Loan Documents and as incurred by Lender in connection with any of the foregoing indebtedness, including, but not limited to, collecting or attempting to collect any of the foregoing indebtedness from Borrower or incurred by Lender in connection with this Guaranty (including, but not limited to, attorneys' fees and costs of collection). The term "Other Indebtedness," as used herein, means all indebtedness, if any, of Borrower to Lender that is not Guaranteed Indebtedness. "Loan Documents," as used herein, shall include each and every note, draft, line of credit, loan agreement, application for letter of credit, guaranty or other similar document or instrument (if any) at any time and from time to time executed in connection with the Guaranteed Indebtedness, all amendments, modifications, restatements, supplements, endorsements, renewals, extensions and rearrangements thereof and substitutions therefor, and each and every deed of trust, mortgage, security agreement, pledge, assignment or other similar instrument (if any), at any time and from time to time securing, in whole or in part, the Guaranteed Indebtedness. "Collateral Proceeds" shall mean any proceeds, credits or recoveries from any source, including, without limitation, all proceeds, credits and amounts received from the exercise of any Non- Exclusive Remedy. "Non-Exclusive Remedies" shall mean the right, power and privilege of Lender, following the occurrence of a default or an event of default hereunder or under any of the other Loan Documents, (a) to receive and obtain payment of all or a portion of the Guaranteed Indebtedness and (b) to seek and obtain performance of the obligations, covenants and agreements of Borrower and each Guarantor to and with Lender, through pursuit of, among other remedies, rights and privileges, one or more of the following remedies, rights and privileges: Page 1 of 10 Pages (i) foreclosure of any liens and security interests relating to the Loan Documents to the full extent of the value of the collateral securing the Guaranteed Indebtedness; (ii) enforcement of Borrower's monetary obligations to Lender under the Loan Documents; (iii) enforcement of any Guarantor's monetary obligation to Lender under this Guaranty; (iv) enforcement of all other obligations, covenants and agreements of Borrower, any of its joint venturers or partners, and any Guarantor under the Loan Documents, whether through any judicial or non- judicial foreclosure, self-help or other repossession of collateral or security, institution of suit, settlement, compromise, enforcement of specific performance or any other means which Lender may elect in its sole discretion; (v) recovery against Borrower, any of its joint venturers or partners, for appropriation by the Borrower, any of its joint venturers or partners, to its own use of any rents, revenues, insurance proceeds, deposits, distributions or other property of a similar nature after Lender shall have become entitled thereto; and (vi) enforcement of all other rights, remedies, powers and privileges of Lender under the Loan Documents or allowed by law. The foregoing list of Non-Exclusive Remedies is not an exhaustive or exclusive list, but is cumulative of all rights, remedies, powers and privileges of Lender under the Loan Documents and at law. This Guaranty is unconditional and absolute, and if for any reason all or any portion of the Guaranteed Indebtedness shall not be paid promptly when due, Guarantor will immediately (jointly and severally if more than one) pay the same to Lender or any other person or entity entitled thereto, regardless of any defense, right of setoff or counterclaim which Borrower may have or assert, and regardless of whether Lender or any other person or entity shall have taken any steps to enforce any rights against Borrower or any other entity to collect such sum, and regardless of any other condition or contingency. This Guaranty shall also cover interest on the Guaranteed Indebtedness (as provided for in the Loan Documents) and all reasonable expenses incurred by Lender in enforcing any of the Loan Documents, this Guaranty, or both. The obligations, covenants, agreements and duties of each Guarantor under this Guaranty shall in no way be affected or impaired by reason of the happening from time to time of any of the following with respect to the Loan Documents, without the necessity of any notice to, or further consent of any Guarantor: (a) the release or waiver, by operation of law or otherwise, of the performance or observance by Borrower or any co-guarantor, surety, endorser or other obligor of any express or implied agreement, covenant, term or condition in any of the Loan Documents to be performed or observed by such party; (b) the extension of the time for the payment of all or any portion of the Guaranteed Indebtedness or any other sums payable under the Loan Documents or the extension of time for the performance of any other obligation under, arising out of or in connection with the Loan Documents; (c) the supplementing, modification or amendment (whether material or otherwise) of any of the Loan Documents or of the obligations of Borrower, any Guarantor or any surety for Borrower set forth in the Loan Documents or otherwise; (d) any failure, omission, delay or lack of diligence on the part of Lender, or any other person or entity, to enforce, assert or exercise any right, privilege, power or remedy conferred on Lender or any other person or entity in any of the Loan Documents, or any action on the part of Lender or such other person or entity granting indulgence or extension of any kind; (e) the release of any security under any deed of trust, mortgage, security agreement, pledge, assignment or other Loan Document, or the release, Page 2 of 10 Pages modification, waiver or failure to enforce any pledge, security device, insurance agreement, bond or other guaranty, surety or indemnity agreement whatsoever; (f) the release, modification, waiver or failure to enforce any right, benefit, privilege or interest under any contract or agreement, under which the rights of Borrower or any other obligor have been collaterally or absolutely assigned, or in which a security interest has been granted to Lender as direct or indirect security for payment of the Guaranteed Indebtedness or performance of any obligations to Lender; (g) the voluntary or involuntary liquidation, dissolution, sale of any collateral, marshalling of assets and liabilities, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or deficiency readjustment of debt of, or other similar proceedings affecting Borrower or any other surety for Borrower or any of the assets of Borrower; (h) any invalidity of or defect or deficiency in any of the Loan Documents or failure to acquire, perfect or to maintain perfection of any lien on or security interest in any collateral securing payment of the Guaranteed Indebtedness or any portion thereof or performance of Borrower's or any other person's obligations under the Loan Documents or securing this Guaranty; (i) the settlement, compromise or subordination of any obligation guaranteed hereby or hereby incurred; (j) the insanity, minority or other disability or bankruptcy, insolvency, death or corporate dissolution of Borrower (even though the same shall render the Guaranteed Indebtedness void or unenforceable or uncollectible, in whole or in part, as against Borrower); and (k) the receipt of any Collateral Proceeds by Lender from whatever source, each Guarantor hereby expressly agreeing that, unless otherwise agreed to by Lender in writing, Collateral Proceeds shall not be applied to reduce the Guaranteed Indebtedness unless and until Lender has determined, in its sole discretion, that all Other Indebtedness has been fully paid and satisfied and that all obligations, if any, of Lender to advance monies to or on behalf of Borrower pursuant to the Loan Documents have terminated. Each Guarantor hereby WAIVES marshalling of assets and liabilities, sale in inverse order of alienation, notice of acceptance of this Guaranty and of any liability to which it applies or may apply, presentment, demand for payment, protest, notice of non-payment, notice of dishonor, notice of acceleration, notice of intent to accelerate and all other notices and demands, collection suit or taking of any other action by Lender. Further, each Guarantor expressly waives each and every right to which it may be entitled by virtue of the suretyship law of the State of Texas, including, without limitation, any rights it may have pursuant to Rule 31, Texas Rules of Civil Procedure, Chapter 34 of the Texas Business and Commerce Code and Section 17.001, Texas Civil Practice and Remedies Code. This is an absolute guaranty of payment and not of collection, and each Guarantor WAIVES any right to require that any action be brought against Borrower or any other person or entity. Should Lender seek to enforce the obligations of any Guarantor by action in any court, such Guarantor WAIVES any necessity, substantive or procedural, that a judgement previously be rendered against Borrower or any other person or entity or that Borrower or any other person or entity be joined in such cause or that a separate action be brought against Borrower or any other person or entity; the obligations of each Guarantor hereunder are several from those of Borrower or any other person or entity (including any other surety for Borrower), and are primary obligations concerning which each Guarantor is the principal obligor. All waivers herein contained shall be without prejudice to Lender at its option to proceed against Borrower or any other person or entity, whether by separate action or by joinder. Notwithstanding any payment or payments made by any Guarantor hereunder or any setoff or application of funds of any Guarantor by Lender, no Guarantor shall be entitled to be subrogated to any of the rights of Lender against Borrower or any collateral security or rights of offset held by Lender for Page 3 of 10 Pages the payment of the Guaranteed Indebtedness until all of the Guaranteed Indebtedness is paid in full and all obligations (if any) of Lender to extend credit to Borrower in connection with the Loan Documents shall have terminated. This is a continuing guaranty, and all extensions of credit and financial accommodations heretofore, concurrently herewith or hereafter made by Lender to Borrower shall be conclusively presumed to have been made in acceptance of and reliance on this Guaranty. This Guaranty is an absolute and unconditional guaranty of the Guaranteed Indebtedness, is irrevocable (except as stated elsewhere in this paragraph) and shall continue in full force and effect until payment in full of the Guaranteed Indebtedness. In the event of the death of any Guarantor, the obligations of the deceased shall continue in full force and effect as to all indebtedness guaranteed hereby prior to the day five business days after the day on which Lender shall have received notice in writing of the termination of this Guaranty as hereinabove set forth. Each Guarantor shall remain fully liable hereunder in accordance with the terms set forth herein notwithstanding a revocation by, or the death of, or complete or partial release for any cause of, any one or more of the remainder of the undersigned, or of Borrower or of anyone liable in any manner for the liabilities (including those hereunder) incurred directly or indirectly in respect thereof or hereof, and notwithstanding the dissolution, termination or change in personnel of any one or more of the undersigned. Each Guarantor agrees that so long as all or any part of the Guaranteed Indebtedness remains unpaid: (a) Lender may determine in its sole discretion which Non-Exclusive Remedy or Non-Exclusive Remedies to pursue and Lender may pursue any one or more of the Non-Exclusive Remedies without prejudice to the right of Lender to pursue any other Non-Exclusive Remedy (including enforcement and collection of this Guaranty); (b) except as expressly provided herein or agreed to by Lender, the receipt of sums by Lender through pursuit of any one or more Non-Exclusive Remedies shall not prejudice the right of Lender to receive payment of sums through pursuit of any other Non-Exclusive Remedy, and the rights of Lender under the Loan Documents are cumulative; (c) realization upon the collateral security or guaranties and the other obligations provided for in any Loan Documents and application of the proceeds thereof to reduce the Guaranteed Indebtedness shall not affect or impair Lender's right to seek enforcement of any other Loan Documents in accordance with their respective terms; and (d) Lender may apply any sums realized through pursuit of any Non-Exclusive Remedy toward payment of principal, interest and other expenses owing by Borrower, by any Guarantor or by any other obligor or surety in such order of priority and manners as Lender may elect in its sole discretion. Guarantor (jointly and severally if more than one) represents and warrants to Lender that: (a) as to any Guarantor which is a corporation, it is duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, is duly qualified and in good standing in each other jurisdiction in which the conduct of its business or the maintenance of its property so requires, and has full power and authority to carry on its business as presently conducted and to execute, deliver and perform this Guaranty; (b) this Guaranty has been duly authorized, executed and delivered by such Guarantor and constitutes a legal, valid and binding obligation of such Guarantor enforceable in accordance with its terms; (c) the execution, delivery and performance of this Guaranty (i) do not and will not violate any Guarantor's articles of incorporation, certificate of incorporation, bylaws or any other restriction by which any Guarantor or any of its properties may be bound, (ii) do not and will not violate or conflict with any law, governmental rule or regulation or any judgment, writ, order, injunction, award or decree of any court, arbitrator, administrative agency or other governmental authority applicable to any Guarantor or any indenture, mortgage, contract, agreement or other undertaking to which any Page 4 of 10 Pages Guarantor is a party or by which any Guarantor or any of its property may be bound or affected, and (iii) do not and will not require any consent of any other person or any consent, license, permit, authorization or other approval of, registration with, any giving of notice to or any exemption by, any court, arbitrator, administrative agency or other governmental authority; (d) there is no action, suit or proceeding pending or, to the knowledge of Guarantor, threatened against of affecting any Guarantor before any court or administrative agency which might result in any material adverse change in the business or financial condition of any Guarantor; (e) each Guarantor has filed all federal and state tax returns which are required to be filed, and has paid all taxes as shown on said returns and all assessments against the property of such Guarantor to the extent that such taxes and assessments have become due and payable; (f) no Guarantor is a party to any contract or agreement which materially and adversely affects the business, property or assets, or financial condition of such Guarantor; (g) all information supplied and statements made to Lender by or on behalf of any Guarantor prior to, contemporaneously with or subsequent to the execution of this Guaranty are and shall be true, correct, complete, valid and genuine; (h) all financial statements and applications for credit furnished to Lender by or on behalf of any Guarantor fully and accurately present the financial condition of the subject thereof as of the dates thereof and for the periods then ended; (i) no material adverse change has occurred in the financial condition reflected in such financial statements and applications for credit since the respective dates thereof; (j) no Guarantor is in default with respect to any order, writ, injunction, decree or demand of any court or other governmental authority, or in the payment of any indebtedness for borrowed money or under the terms or provisions of any agreement or instrument evidencing or securing any such indebtedness; (k) as to any Guarantor which is a corporation, the execution and delivery of this Guaranty to Lender will benefit directly or indirectly such Guarantor; and (l) no representation or warranty contained in this Guaranty and no statement contained in any certificate, schedule, list, financial statement or other instrument furnished to Lender contains, or will contain, any untrue statement of material fact or omits or will omit, to state a material fact necessary to make the statement contained herein or therein not misleading. Each Guarantor shall furnished to Lender all such financial statements and other information relating to the financial condition, properties and affairs of such Guarantor as Lender may from time to time request. No Guarantor will change its address, name or identity without notifying Lender of such change in writing at least thirty (30) days prior to the effective date of such change. Upon the occurrence of any of the following events: (a) Borrower's failure to pay any Guaranteed Indebtedness when due or any other default or event of default under any terms of the Loan Documents; or (b) any representation or warranty made by or on behalf of any Guarantor herein or in any writing furnished in connection with or pursuant to this Guaranty shall be incorrect, false or misleading on the date as of which made; or (c) any Guarantor shall default in the punctual and complete performance or observance of any agreement, covenant, term or condition contained herein or in any instrument given to secure Guarantor's obligations hereunder; or (d) any Guarantor shall fail to pay at maturity, or within any applicable period of grace, any obligation for borrowed monies or advances in excess of $10,000.00, or fail to observe or perform any term, covenant or agreement contained in any agreement or obligation by which it is bound evidencing or securing borrowed money for such period of time as would accelerate, or would permit the holder thereof, or of any obligation issued thereunder, to accelerate, the maturity thereof, or of any such obligation; or (e) a final judgment or judgments in the aggregate for the payment of money in excess of $100,000.00 shall be rendered Page 5 of 10 Pages against any Guarantor and the same shall remain undischarged for a period of thirty (30) days during which execution shall not effectively be stayed; or (f) any Guarantor shall claim, or any court shall find or rule, that Lender does not have a valid lien on any security which may have been provided by any Guarantor or such other person for the Guaranteed Indebtedness; or (g) any Guarantor shall make a general assignment for the benefit of creditors or shall petition or apply to any tribunal for the appointment of a custodian, liquidator, trustee or receiver of all or any substantial part of the business, estate or assets of any Guarantor or shall commence any proceeding relating to such Guarantor or its property under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect; or (h) any such petition or application shall be filed or any such proceeding shall be commenced against any Guarantor, and such Guarantor by any act or omission shall indicate approval thereof, consent thereto or acquiescence therein, or an order shall be entered appointing any such custodian, liquidator, trustee or receiver of all or any substantial part of the assets of any Guarantor, or granting relief to any Guarantor or approving the petition in any such proceeding, and such order shall remain in effect for more than sixty (60) days; or (i) any Guarantor shall fail generally to pay its debts as they become due, or suffer any writ of attachment or execution or any similar process to be issued or levied against it or any substantial part of its property which is not released, stayed, bonded or vacated within sixty (60) days after its issue or levy; or (j) any Guarantor shall have concealed, removed, or permitted to be concealed or removed, any part of its property, with intent to hinder, delay or defraud its creditors or any of them, or made or suffered a transfer of any of its property which would be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or shall have made any transfer of its property to or for the benefit of a creditor at a time when other creditors similarly situated have not been paid or shall have suffered or permitted, while insolvent, any creditor to obtain a lien upon any of its property through legal proceedings or distraint which is not vacated within sixty (60) days from the date thereof; or (k) as to any Guarantor who is an individual, such Guarantor shall die and his estate or a substantial part of such estate shall be distributed by the executor or administrator thereof to his heirs or in accordance with such Guarantor's will prior to all the distributees of such estate or part thereof (by an instrument approved in form and substance by Lender) either (i) jointly and severally assuming all of such deceased Guarantor's obligation hereunder or (ii) to secure the payment of the Guaranteed Indebtedness effectively pledging, mortgaging or otherwise creating a first lien (but without any personal liability on such distributee's part) on a portion of the assets of such estate valued by a qualified appraiser approved by Lender at not less than the principal amount of the Guaranteed Indebtedness then outstanding; or (l) as to any Guarantor which is a corporation, partnership or joint venture, the dissolution, liquidation or termination of existence of such Guarantor or the sale, conveyance, lease or other disposition of a substantial part of the assets of such Guarantor; or (m) any adverse material change shall occur in the assets, liabilities, financial condition, business operations, affairs or circumstances of any Guarantor, then an event of default under this Guaranty shall have occurred and the holder or holders of the Guaranteed Indebtedness may, at its or their option, declare the unpaid balance of the Guaranteed Indebtedness, together with all interest then accrued thereon, to be immediately due and payable, and thereupon the Guaranteed Indebtedness shall immediately due and payable and thereupon the Guaranteed Indebtedness shall immediately be due and payable without presentation, notice of protest, other notice of dishonor, notice of intent to accelerate, or notice of acceleration, all of which are hereby expressly WAIVED by each Guarantor. If, at any time, there be Other Indebtedness, (a) Lender, without in any manner impairing its rights hereunder, may, at its option, exercise rights of offset by applying first, to the Other Indebtedness, any deposit balances to the credit of Borrower and (b) except as stated in the last sentence of this paragraph, Lender may Page 6 of 10 Pages apply, first, to the Other Indebtedness, all payments by Borrower and all amounts realized by Lender from collateral or security held by Lender for the payment of Borrower's indebtedness. If a particular security instrument expressly requires an application different from that permitted under the preceding sentence, proceeds realized by Lender from such security instrument shall be applied as provided in such instrument. If more than one person executes this Guaranty, their obligations under this Guaranty shall be joint and several. Suit may be brought against such person jointly and severally or against any one or more but less than all of them, without impairing or releasing the rights of Lender against any other such person. No delay on the part of Lender in exercising any right hereunder or failure to exercise the same shall operate as a waiver of such right, nor shall any single or partial exercise of any right, power or privilege bar any further or subsequent exercise of the same or any other right, power or privilege. This Guaranty shall not be changed orally, but shall be changed only by agreement in writing signed by the person against whom enforcement of such chance is sought. Any notice, request or other communication required or permitted to be given hereunder shall be given in writing by delivering the same against receipt therefor or (except as otherwise expressly provided herein) by depositing the same in the United States Postal Service, postage prepaid, registered or certified mail, return receipt requested, addressed to the respective parties at the address shown below or to such other address as the intended recipient may have specified in a prior written notice received by the sender (and if so given, shall be deemed given on the business day following the day on which such communication was mailed). The masculine and neuter genders used herein shall each include the masculine, feminine and neuter genders and the singular number used herein shall include the plural number. The words "person" and "entity" shall include individuals, corporations, partnerships, joint ventures, associations, joint stock companies, trusts, unincorporated organizations, and governments and any agency or political subdivision thereof. This Guaranty shall be binding upon each Guarantor, his heirs, devisees, executors, administrators, personal representatives, trustees, receivers, successors and assigns and shall inure to the benefit of, and be enforceable by, Lender and its successors and assigns and each and every other person who shall from time to time be or become the owner or holder of any of the Guaranteed Indebtedness, and each and every reference herein to "Lender" shall also include each and every successor or holder. No Guarantor shall assign its obligations hereunder without the prior written consent of Lender. This Guaranty may be executed in multiple counterparts, and each counterpart executed by any party shall be deemed an original and shall be binding upon the person or entity executing the same, irrespective of whether any other Guarantor has executed that or any other counterpart of this Guaranty. Production of any counterpart other than the one to be enforced shall not be required. This Guaranty shall be governed by and construed and interpreted in accordance with the laws of the United States of America and the State of Texas. The county in which Lender has its principal place of business in Texas shall be the proper place of venue to enforce payment or performance of this Guaranty. Each Guarantor irrevocably agrees that any legal proceeding arising out of or in connection with this Guaranty shall Page 7 of 10 Pages be brought in the state district courts of the county in which Lender has its principal place of business in Texas, or in the United States District Court for the district in which such county is located. Notwithstanding anything to the contrary herein, with respect to any portion of the Guaranteed Indebtedness which is a "consumer credit obligation" (hereinafter called a "consumer credit obligation") as defined in 12 C.F.R. 227 Regulation AA, promulgated by the Federal Reserve Board (hereinafter called "Regulation AA"), this Guaranty shall be construed as to comply with Regulation AA. In the event any provision hereof, including, without limitation, any waiver provision, shall be found by either Lender or a court of competent jurisdiction to be in violation of Regulation AA, then such provision only shall automatically become a nullity as to such consumer credit obligation and shall have no further force and effect with respect thereto, without, however, rendering such provision unenforceable as to any portion of this Guaranty, unenforceable as to any of the Guaranteed Indebtedness or rendering this entire Guaranty unenforceable and without in any other manner cancelling, amending, discharging or limiting this Guaranty. If any other person or entity shall with respect to any of the Guaranteed Indebtedness at any time execute and deliver any guaranty, or any other agreement or document with substantially the same effect as a guaranty, or grant any collateral security, the obligations of each Guarantor hereunder shall be joint and several with the obligations of such other person or entity pursuant to such agreement or document and the agreement or document granting such collateral security. Nothing herein shall be construed to cancel, amend, discharge or limit any other guaranty or similar obligation executed by any Guarantor in favor of Lender. If (a) any Guarantor shall have previously executed any other guaranty in favor of Lender which has not been cancelled, terminated or revoked and (b) the blank in the third paragraph of this Guaranty has been filled in, then the aggregate amount of the Guaranteed Indebtedness shall (notwithstanding any limit stated in said blank) be limited to the aggregate of the debt guaranteed by all such previous uncancelled, unrevoked and unterminated guaranties plus the amount to which this Guaranty is limited (as stated in that blank). THIS WRITTEN CONTINUING GUARANTY REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. Page 8 of 10 Pages THIS GUARANTY is executed as of the 27th day of May, 1997. GUARANTOR: D.A. INTERNATIONAL, INC. a Texas corporation By: /s/ Michael Mackey ----------------------------- Name: Michael Mackey --------------------------- Title: CFO -------------------------- Address of Guarantor 12200 NW Freeway, Suite 200 Houston, TX 77092 LENDER: SOUTHWEST BANK OF TEXAS, N.A., a national banking association By: /s/ Brooks H. McGee, Sr. Vice President ----------------------------------------- Brooks H. McGee, Senior Vice President Page 9 of 10 Pages THE STATE OF TEXAS ) ) COUNTY OF TEXAS ) This instrument was acknowledged before me on this the _________ day of _____________________________, 1997, by ______________________________________, _________________________________________________ of D. A. INTERNATIONAL, INC., a Texas corporation, on behalf of said corporation. --------------------------------------- Notary Public in and for The State of T E X A S Page 10 of 10 Pages EX-10.14 12 PROMISSORY NOTE EXHIBIT 10.14 Loan No.:______________ PROMISSORY NOTE $762,043.77 October 7, 1997 FOR VALUE RECEIVED, DA CONSULTING GROUP, INC., a Texas corporation ("Maker"), promises to pay to the order of HELLER FINANCIAL, INC., a Delaware corporation (together with any holder of this Note, "Payee"), at its office located at 500 West Monroe Street, Chicago, Illinois 60661, or at such other place as Payee may from time to time designate, the principal sum of Seven Hundred Sixty Two Thousand Forty Three and 77/100 Dollars ($762,043.77), together with interest thereon at a fixed rate equal to Nine and 08/100 percent (9.08%) pre annum. Principal and interest shall be payable in thirty-six (36) consecutive monthly installments commencing November 1, 1997, and continuing on the same day of each consecutive calendar month thereafter until this Note is fully paid, each such installment in the amount of Twenty Four Thousand Two Hundred Thirty and 81/100 Dollars ($24,230.81); provided, however, that in any and all events the final installment payment hereunder shall be in the amount of the entire then outstanding principal balance hereunder, plus all accrued and unpaid interest, charges and other amounts owing hereunder or under the Security Agreement (defined below). All payments shall be applied first to interest and then to principal. Interest shall be computed on the basis of a 360 day year for the actual number of days elapsed during each month, and shall be billed through the end of each month. Notwithstanding the foregoing, if at any time implementation of any provision hereof shall cause the interest contracted for or charged herein or collectable hereunder to exceed the applicable lawful maximum rate, then the interest shall be limited to such applicable lawful maximum. This Note is secured by the collateral described in the Security Agreement dated October 7, 1997, between Maker and Payee (the "Security Agreement;" and together with all related documents and instruments, the "Loan Documents") to which reference is made for a statement of the nature and extent of protection and security afforded, certain rights of Payee and certain rights and obligations of Maker, including Maker's rights, if any, to prepay the principal balance hereof; provided, however, that in addition to any other sum payable hereunder, under the Security Agreement or any of the other Loan Documents, in the event of a prepayment of the principal balance hereunder, whether voluntary, following acceleration or otherwise, Maker shall pay to Payee the greater of (i) a prepayment fee in a sum equal to three percent (3%) of the principal balance prepaid during Loan Year 1, two percent (2%) of the principal balance prepaid during Loan Year 2, and one percent (1%) of the principal balance prepaid during Loan Year 3, or (ii) a Breakage Fee, together with the prepayment fee and amounts payable under Section 3 of the Security Agreement, if any, represent liquidated damages to Payee for the loss of its bargain and not a penalty. As used herein, the term "Breakage Fee" shall mean the amount, if any, by which (A) the present value, in the aggregate, of the then remaining installments of principal and interest due hereunder, absent the prepayment, using a discount rate equal to (i) the yield to maturity as of the date two (2) days prior to the date of the prepayment on United States Treasury securities with a final maturity approximately equal to the remaining term hereof, absent the prepayment, as published in The Wall Street Journal, plus (ii) one percent (1%), exceeds (B) the then outstanding principal balance hereunder, absent the prepayment. The phrase "Loan Year" means each twelve (12) consecutive months commencing on the date of the Note. The prepayment fee and Breakage Fee described in clause (i) above shall also be due upon the acceleration of the maturity date of any Note following the occurrence of any Event of Default. Time is of the essence hereof. If payment of any installment or any other sum due under this Note or the Loan Documents is not paid within 10 days of the date when due, Maker agrees to pay a late charge equal to the lesser of (i) five cents (5c) per dollar on, and in addition to, the amount of each such payment, or (ii) the maximum amount Payee is permitted to charge by law. In the event of the occurrence of an Event of Default (as defined in the Security Agreement), then the entire unpaid principal balance hereof with accrued and unpaid interest thereon, together with all other sums payable under this Note or the Loan Documents, shall, at the option of Payee and without notice or demand, become immediately due and payable, such accelerated balance bearing interest until 1 paid at the rate of two and 00/100 percent (2.0%) per annum above the fixed rate set forth in the first paragraph of this Note. Maker and all endorsers, guarantors or any others who may at any time become liable for the payment hereof hereby consent to any and all extensions of time, renewals, waivers and modifications of, and substitutions or release of security or of any party primarily or secondarily liable on, or with respect to, this Note or any of the Loan Documents or any of the terms and provisions thereof that may be made, granted or consented to by Payee, and agree that suit may be brought and maintained against any one or more of them, at the election of Payee, without joinder of the others as parties thereto, and that Payee shall not be required to first foreclose, proceed against, or exhaust any security herefor, in order to enforce payment of this Note by any one or more of them. Maker and all endorsers, guarantors or any others who may at any time become liable for the payment hereof hereby severally waive presentment, demand for payment, notice of nonpayment, protest, notice of protest, notice of dishonor, and all other notices in connection with this Note, filing of suit and diligence in collecting this Note or enforcing any of the security herefor, and, without limiting any provision of any of the Loan Documents, agree to pay, if permitted by law, all expenses incurred in collection, including reasonable attorneys' fees, and hereby waive all benefits of valuation, appraisement and exemption laws. If there be more than one Maker, all the obligations, promises, agreements and covenants of Maker under this Note are joint and several. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS AND DECISIONS OF THE STATE OF ILLINOIS WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. AT PAYEE'S ELECTION AND WITHOUT LIMITING PAYEE'S RIGHT TO COMMENCE AN ACTION IN ANY OTHER JURISDICTION, MAKER HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION AND VENUE OF ANY COURT (FEDERAL, STATE OR LOCAL) HAVING SITUS WITHIN THE STATE OF ILLINOIS, EXPRESSLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO SERVICE BY CERTIFIED MAIL, POSTAGE PREPAID, DIRECTED TO THE LAST KNOWN ADDRESS OF MAKER, WHICH SERVICE SHALL BE DEEMED COMPLETED WITHIN TEN (10) DAYS AFTER THE DATE OF MAILING THEREOF. MAKER HEREBY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS NOTE. THIS WAIVER IS INFORMED AND FREELY MADE. MAKER ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT PAYEE HAS ALREADY RELIED ON THE WAIVER IN MAKING THE LOAN EVIDENCED BY THIS NOTE, AND THAT PAYEE WILL CONTINUE TO RELY ON THE WAIVER IN ITS RELATED FUTURE DEALINGS. MAKER FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. Witness/Attest: DA CONSULTING GROUP, INC. /s/ Laura Q. Lopez By: /s/ Michael J. Mackey - ------------------ -------------------------- Laura Q. Lopez Name: Michael J. Mackey 5847 San Felipe, Ste. 3700 ------------------------ Houston, TX 77057 Title: CFO & EVP ----------------------- Finance & Administration 2 EX-10.15 13 SECURITY AGREEMENT EXHIBIT 10.15 Loan No.: ______________ SECURITY AGREEMENT THIS SECURITY AGREEMENT ("Agreement") is made this 7th day of October, 1997, by and between DA CONSULTING GROUP,INC., a Texas corporation ("Debtor"), whose business address is 5847 San Felipe, Suite 3700, Houston, Texas 77057 and HELLER FINANCIAL, INC., a Delaware corporation ("Secured Party"), whose address is Commercial Equipment Finance Division, 500 West Monroe Street, Chicago, Illinois 60661. WITNESSETH: 1. Secure Payment. To secure payment of indebtedness in the principal sum of up to One Million and 00/ 100 Dollars ($1,000,000.00), as evidenced by a note or notes executed and delivered by Debtor to Secured Party (the "Notes") and any obligations arising under this Agreement, including all future advances or loans which may be made at the option of Secured Party (all the foregoing hereinafter called the "Indebtedness"), Debtor hereby grants and conveys to Secured Party a first priority continuing lien and security interest in the personal property described on any schedule(s) now or hereafter attached to or made a part hereof by reference hereto (the "Schedules"), all products and proceeds (including insurance proceeds) thereof, if any, and all substitutions, replacements, attachments, additions, and accessions thereto (all of the foregoing hereinafter called the "Collateral.") The Schedules may be supplemented from time to time to evidence the Collateral subject to this Agreement. Debtor shall request in writing each advance of principal under the Notes, which request shall be satisfactory to Secured Party in form and substance. Each advance shall be on and subject to the terms and conditions set forth in this Agreement and shall otherwise be at Secured Party's sole discretion. Each Note shall be in an amount not less than $50,000.00. No principal advance under any Notes shall be made after January 4, 1998, and each advance shall reduce, dollar for dollar, the amount that may be advanced under the Notes in the aggregate. Amounts advanced and repaid may not be reborrowed. 2. Representations, Warranties and Covenants. Except as otherwise provided, each representation and warranty made by Debtor in this Agreement shall be true, correct and complete as of the date of this 1 Agreement and as of the date of each advance of funds under a Note. Debtor hereby represents, warrants and covenants as follows: (a) Perform Obligations. Debtor shall pay as and when due all Indebtedness secured by this Agreement and perform all of the obligations contained in this Agreement according to its terms. Debtor shall use the loan proceeds for business uses and not for personal, family, household, or agricultural uses. (b) Perfection. This Agreement and all necessary Uniform Commercial Code filings together create a valid, perfected and first priority continuing lien and security interest in the Collateral, securing the payment and performance of the Indebtedness, and all filings and other actions necessary or desirable to create, perfect and protect such security interest have been or will be duly taken. (c) Collateral Free and Clear. Except as may be set forth on a Schedule, the Collateral is and shall remain free and clear of all liens, claims, charges, encumbrances and other security interests of any kind (other than the security interest granted hereby). Debtor shall defend the title to the Collateral against all persons and against all claims and demands whatsoever. (d) Possession and Operating Order of the Collateral. Debtor shall retain possession of the Collateral at all times and shall not sell, exchange, assign, loan, deliver, lease, mortgage, or otherwise dispose of the Collateral or any part thereof without the prior written consent of Secured Party. Debtor shall at all times keep the Collateral at the locations specified on the Schedules (except for removals thereof in the usual course of business for temporary periods). At Debtor's sole cost and expense, Debtor shall keep the Collateral in good repair and condition and shall not misuse, abuse, waste or otherwise allow it to deteriorate, except for normal wear and tear. Secured Party may verify any Collateral in any reasonable manner which Secured Party may consider appropriate, and Debtor shall furnish all reasonable assistance and information and perform any acts which Secured Party may reasonably request in connection therewith. (e) Insurance. Debtor shall insure the Collateral against loss by fire (including extended coverage), theft and other hazards, for its full insurable value including replacement costs, with a deductible not to exceed Fifty Thousand and 00/100 Dollars ($50,000.00) per occurrence and without co-insurance. In addition, Debtor shall obtain liability insurance covering liability for bodily injury, including death and property damage, in an amount of at least Five Million and 00/100 Dollars ($5,000,000.00) per 2 occurrence or such greater amount as may comply with general industry standards, or in such other amounts as Secured Party may otherwise require. All policies of insurance required hereunder shall be in such form, amounts, and with such companies as Secured Party may approve; shall provide for at least thirty (30) days prior written notice to Secured Party prior to any modification or cancellation thereof; shall name Secured Party as loss payee or additional insured, as applicable, and shall be payable to Debtor and Secured Party as their interests may appear; shall waive any claim for premium against Secured Party; and shall provide that no breach of warranty or representation or act or omission of Debtor shall terminate, limit or affect the insurers' liability to Secured Party. Certificates of insurance or policies evidencing the insurance required hereunder along with satisfactory proof of the payment of the premiums therefor shall be delivered to Secured Party. Debtor shall give immediate written notice to Secured Party and to insurers of loss or damage to the Collateral and shall promptly file proofs of loss with insurers. Debtor hereby irrevocably appoints Secured Party as Debtor's attorney-in-fact, coupled with an interest, for the purpose of obtaining, adjusting and canceling any such insurance and endorsing settlement drafts. Debtor hereby assigns to Secured Party, as additional security for the Indebtedness, all sums which may become payable under such insurance. In the event Debtor fails to provide Secured Party with evidence of the insurance coverage required by this Agreement, Secured Party may purchase insurance at Debtor's expense to protect Secured Party's interests in the Collateral. This insurance may, but need not, protect Debtor's interests. The coverage purchased by Secured Party may not pay any claim made by Debtor or any claim that is made against Debtor in connection with the Collateral. Debtor may later cancel any insurance purchased by Secured Party, but only after providing Secured Party with evidence that Debtor has obtained insurance as required by this Agreement. If Secured Party purchases insurance for the Collateral, Debtor will be responsible for the costs of that insurance, including interest and other charges imposed by Secured Party in connection with the placement of the insurance, until the effective date of the cancellation or expiration of the insurance. The costs of the insurance may be added to the Indebtedness. The costs of the insurance may be more than the cost of insurance Debtor is able to obtain on its own. (f) If Collateral Attaches to Real Estate. If the Collateral or any part thereof has been attached to or is to be attached to real estate, an accurate description of the real estate and the name and address of the record owner is set forth on the Schedules. Debtor shall, on demand of Secured Party, furnish Secured Party with a disclaimer or waiver of any interest in any such Collateral satisfactory to Secured Party and signed by all persons having an 3 interest in the real estate. Notwithstanding the foregoing, the Collateral shall remain personal property and shall not be affixed to realty without the prior written consent of Secured Party. (g) Financial Statements. Debtor shall furnish to Secured Party, as soon as practicable, and in any event within forty-five (45) days after the end of each fiscal quarter of Debtor and each guarantor of all or any part of the Indebtedness (each, a "Guarantor"), respectively, Debtor's and each Guarantor's unaudited financial statements including in each instance, balance sheets, income statements, and statements of cash flow, on a consolidated and consolidating basis, as appropriate, and separate profit and loss statements as of and for the quarterly period then ended and for the respective person's fiscal year to date, prepared in accordance with generally accepted accounting principles, consistently applied ("GAAP"). Debtor shall also furnish to Secured Party, as soon as practicable, and in any event within one hundred twenty (120) days after the end of each fiscal year of Debtor and each Guarantor, respectively, Debtor's and each Guarantor's annual audited financial statements, including balance sheets, income statements and statements of cash flow for the fiscal year then ended, on a consolidated and consolidating basis, as appropriate, which have been prepared by its independent accountants in accordance with GAAP. Such audited financial statements shall be accompanied by the independent accountant's opinion, which opinion shall be in form generally recognized as "unqualified". In addition, Debtor shall furnish to Secured Party, as soon as practicable, and in any event within forty-five (45) days after the end of each fiscal quarter of Debtor other than the last fiscal quarter of each fiscal year, and within one hundred twenty (120) days after the last fiscal quarter of each fiscal year of Debtor, a compliance certificate in form and substance satisfactory to Secured Party. (h) Authorization. Debtor is now, and so long as the Indebtedness is outstanding, will at all times remain, duly licensed, qualified to do business and in good standing in every jurisdiction where failure to be so licensed or qualified and in good standing would have a material adverse effect on its business, properties or assets. The execution and delivery of this Agreement, the Notes and any other documents and instruments executed contemporaneously with or delivered pursuant to this Agreement and the Notes, all as amended from time to time (collectively the "Loan Documents"), have been duly authorized by Debtor and constitute legal, valid, and binding obligations of Debtor, enforceable against Debtor in accordance with their respective terms. So long as the Indebtedness is outstanding, Debtor shall preserve and maintain its existence and shall not wind up its affairs or otherwise dissolve. Debtor shall not, without thirty (30) days prior written notice to Secured Party, (1) change its name or so change its structure such 4 that any financing statement or other record notice becomes misleading or (2) change its principal place of business or chief executive or accounting offices from the address stated herein. (i) Litigation. Except as disclosed by Debtor on a Schedule, there are no judgments outstanding against or affecting Debtor, its officers, directors or affiliates or any part of the Collateral and there ar no actions, charges, claims, demands, suits, proceedings, or investigations pending or, to Debtor's knowledge, threatened against Debtor or otherwise affecting any part of the Collateral ("Litigation"). Debtor shall furnish to Secured Party all information regarding any material Litigation as Secured Party shall reasonably request and in any event shall promptly notify Secured Party in writing of any Litigation against it which if decided against it would materially and adversely affect the finances or operations of Debtor. For the purposes of this subsection 2(i), Five Hundred Thousand and 00/100 Dollars ($500,000.00) shall be deemed material. (j) No Conflicts. Debtor is not in violation of any material term or provision of its by-laws, or of any material agreement or instrument, decree, order, or any statute, rule, or governmental regulation applicable to it. The execution, delivery, and performance of the Loan Documents do not and will not violate, constitute a default under, or otherwise conflict with any such term or provision or result in the creation of any security interest, lien, charge, or encumbrance upon any of the properties or assets of Debtor, except for the security interest created hereunder. (k) Compliance with Laws. Debtor shall use and maintain the Collateral in accordance with all applicable laws, regulations, ordinances, and codes and shall otherwise comply in all material respects with all applicable laws, rules, and regulations and duly observe and be in compliance in all material respects with all valid requirements of all governmental authorities, and all statutes, rules and regulations relating to its business as in effect from time to time during the term of this Agreement. (l) Taxes. Debtor has timely filed all tax returns (federal, state, local, and foreign) required to be filed by it and has paid or established reserves for all taxes, assessments, fees, and other governmental charges in respect of its properties, assets, income and franchises. Debtor shall promptly file, pay and discharge all taxes, assessments, license fees (related to the Collateral) and other governmental charges prior to the date on which penalties are attached thereto, establish adequate reserves for the payments of such taxes, assessments, and other governmental charges and make all required withholding and other tax deposits, and, upon request, provide Secured Party with receipts or other proof that any or all of such taxes, assessments, license 5 fees or governmental charges have been paid in a timely fashion; provided, however, that nothing contained herein shall require the payment of any tax, assessment, or other governmental charge so long as its validity is being diligently contested in good faith and by appropriate proceedings diligently conducted and Debtor has established cash reserves therefor in accordance with GAAP. Should any stamp, excise, or other tax, including mortgage, conveyance, deed, intangible, or recording taxes become payable in connection with or respect of any of the Loan Documents, Debtor shall pay the same (including interest and penalties, if any) and shall hold Secured Party harmless with respect thereto. (m) Environmental Laws/Compliance. Except as disclosed by Debtor on a Schedule, Debtor (1) has not received any claim, summons, complaint, order, or other notice that it is not in compliance with, or that any public authority is investigating its compliance with, any federal, state, and local laws, rules, regulations, orders, and decrees relating to pollution, hazardous substances, waste, disposal or the protection of human health or safety, plant life or animal life, natural resources or the environment, all as amended from time to time (collectively, "Environmental Laws"), (2) has no knowledge of any material violation of any Environmental Laws on or about its assets or property, and (3) is not under any current clean up or other remediation program or order. Debtor has obtained all environmental, health and safety permits necessary for the operation of Debtor's business. Debtor is and shall remain in compliance, in all respects, with the terms and conditions of all permits and with all applicable Environmental Laws. Debtor shall provide Secured Party, promptly following receipt, copies of any correspondence, notice, complaint, order, or other document that it receives asserting or alleging a circumstance or condition which requires or may require a cleanup, removal, remedial action or other response by or on the part of Debtor under any Environmental Laws, or which seeks damages or civil, criminal or punitive penalties from Debtor for an alleged violation of any Environmental Laws. Debtor will promptly notify Secured Party of any release, spill or material change in the nature or extent of any hazardous substances or contaminants used, transported or stored by Debtor or any subsidiary of Debtor, and allow no material change in the use thereof or of Debtor's operations that would increase in any material amount the risk of violation of any Environmental Laws without the express prior written approval of Secured Party. (n) Regulations. No proceeds of the loans or any other financial accommodation hereunder will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security, as that term is defined in Regulations G, T, U, X of the Board of Governors of the Federal Reserve System. 6 (o) Books and Records. Debtor shall maintain, at all times, true and complete books and records in accordance with GAAP and consistent with those applied in the preparation of Debtor's financial statements. At all reasonable times, upon reasonable notice, and during normal business hours, Debtor shall permit Secured Party or its agents to audit, examine and make extracts from or copies of any of its books, ledgers, reports, correspondence, and other records relating to the Collateral. (p) Setoff. Without limiting any other right of Secured Party, whenever Secured Party has the right to declare any Indebtedness to be immediately due and payable (whether or not it has so declared), Secured Party is hereby authorized at any time and from time to time to the fullest extent permitted by law, but shall not be obligated to, set off and apply against any and all Indebtedness, any and all monies then or thereafter owed to Debtor by Secured Party, whether or not the obligation to pay such monies owed by Secured Party is then due. An election by Secured Party to exercise its right of setoff shall be effective immediately upon such election even though any charge therefor is made or entered on Secured Party's records subsequent thereto. (q) Standard of Care; Notice of Claims. Debtor acknowledges and agrees that Secured Party shall not be liable for any acts or omissions nor for any error of judgment or mistake of fact or law other than as a sole and direct result of Secured Party's gross negligence or willful misconduct. Debtor shall give Secured Party written notice of any action or inaction by Secured Party or any agent or attorney of Secured Party that may give rise to a claim against Secured Party or any agent or attorney of Secured Party or that may be a defense to payment of the Indebtedness or performance hereunder for any reason, including commission of a tort (subject, in any event, to the first sentence of this paragraph) or violation of any contractual duty or duty implied by law. (r) Indemnity. Debtor shall indemnify, defend and hold Secured Party, its parent, affiliates, officers, directors, agents, employees, consultants, persons engaged by Secured Party to evaluate or monitor the Collateral, auditors and attorneys harmless from and against any loss, cost, expense (including reasonable attorneys' fees and costs and any consultants' or other experts' fees and expenses), damage, penalty, fine, claim, lien, suit, judgment or liability of every kind and nature arising directly or indirectly out of (i) any Loan Document, (ii) the ownership, possession, lease, operation, use, condition, sale, return, or other disposition of the Collateral, (iii) any Environmental Laws, and (iv) the enforcement by Secured Party of its rights or remedies hereunder, except to the extent the loss, expense, damage or 7 liability arises solely and directly from Secured Party's gross negligence or willful misconduct. Any payments required to be made hereunder shall be due and payable on demand. (s) Payments Set Aside. If any payment is made to Secured Party or Secured Party enforces its security interest or exercises its right of set off, and such payment or part, or any proceeds of such enforcement or set off are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then to the extent of such recovery, the Indebtedness or part thereof originally intended to be satisfied, and all liens, security interests, rights and remedies therefor, shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or set off had not occurred. (t) Expenses and Attorneys' Fees. Debtor shall be liable for all charges, costs, expenses and reasonable attorneys' fees incurred by Secured Party (including, following the occurrence of an Event of Default, allocated costs of internal counsel): (i) in perfecting, defending, protecting or terminating its security interest in the Collateral, or any part thereof; (ii) in the negotiation, execution, delivery, administration, amendment or enforcement of the Loan Documents or the collection of any amounts due under any Note or other Loan Document; (iii) in any lawsuit or other legal proceeding in any way connected with any of the Loan Documents, including any contract or tort or other actions, any arbitration or other alternative dispute resolution proceeding, all appeals and judgement enforcement actions and any bankruptcy proceeding (including any relief from stay and/or adequate protection motions, cash collateral disputes, assumption/rejection motions and disputes or objections to any proposed disclosure statement or reorganization plan). (u) Complete Information. No representation or warranty made by Debtor in any Loan Document and no other document or statement now or hereafter furnished to Secured Party by or on behalf of Debtor contains or will contain any misstatement of a material fact or omit to state any material fact which would make the statements contained therein misleading as of the date made. Except as expressly set forth in the Schedules, there is no fact known to Debtor that has or is reasonably likely to have a materially adverse affect on the business, operation, condition (financial or otherwise), performance, properties or prospects of Debtor or Debtor's ability to timely pay all of the Indebtedness and perform all of its other obligations contained in or secured by this Agreement. 8 (v) Collateral Documentation. Debtor shall deliver to Secured Party prior to any advance, satisfactory documentation regarding the Collateral to be financed, including such invoices, canceled checks evidencing payments, or other documentation as may be reasonably requested by Secured Party. Additionally, Debtor shall satisfy Secured Party that Debtor's business and financial information is as has been represented and there has been no material change in Debtor's business, financial condition, or operations. (w) Dividend Restriction. Restricted Payments. If any Event of Default exists (or would exist as a result of any payment described in this subsection (w)), Debtor will not and will not permit any of its subsidiaries directly or indirectly to declare, order, pay, make or set apart any sum for (i) any dividend or other distribution, direct or indirect, on account of any shares of any class of stock of Debtor or any of its subsidiaries now or hereafter outstanding, except (A) a dividend payable solely in shares of that class of stock to the holders of that class; or (B) subsidiaries of Debtor may make payments with respect to their stock provided that such stock is 100% owned by Debtor; (ii) any redemption, conversion, exchange, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of stock of Debtor or any of its subsidiaries now or hereafter outstanding; and (iii) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of stock of Borrower or any of its subsidiaries now or hereafter outstanding; provided Debtor's wholly-owned subsidiaries may make payments and distributions to Debtor. (x) Tangible Net Worth. Debtor shall maintain at all times, on a consolidated basis, Tangible Net Worth of at least $1,750,000. As used herein, "Tangible Net Worth" means total assets of Debtor minus its total liabilities (including contingent liabilities), minus all intangibles, expenses and other items deducted in arriving at tangible net worth as determined by Debtor's regular employed certified public accountant in a manner consistent with past practice. 3. Prepayment. Upon forty-five (45) days prior written notice to Secured Party, Debtor may prepay in whole, but not in part, the then entire unpaid principal balance of any Note, together with all accrued and unpaid interest thereon to the date of such prepayment, provided that in addition to such prepayment, Debtor shall pay (i) any and all other sums then due under any of the Loan Documents, and (ii) the prepayment fee and breakage fee as liquidated damages and not as a penalty set forth in any Note. The prepayment fee described in clause (ii) above shall also be due upon the acceleration of the maturity date of any Note following the occurrence of any Event of Default. 9 4. Events of Default. If any one of the following events (each of which is herein called an "Event of Default") shall occur: (a) Debtor fails to pay any part of the Indebtedness within ten (10) calendar days of its due date, or (b) any warranty or representation of Debtor in any Loan Document is materially untrue, misleading or inaccurate, or (c) Debtor or any Guarantor breaches or defaults in the performance of any other agreement or covenant under any Loan Document other than those contained in subsections 2(b) and 2(e) hereof and such breaches or defaults are not cured within thirty (30) days after Debtor knew or should have known of the occurrence (provided that the thirty (30) day cure period shall not apply to the extent any breach or default is not curable in Secured Party's opinion), or (d) Debtor or any Guarantor breaches or defaults in the performance of any covenant contained in subsections 2(b) and 2(e) hereof, or (e) Debtor or any Guarantor breaches or defaults in the payment or performance of any debt or other obligation owed by it to Secured Party or any affiliate of Secured Party, and Secured Party has (without being obligated to do so) declared such event, an Event of Default hereunder, or (f) Debtor breaches or defaults in the payment or performance of any debt or other obligation, whether now or hereafter existing, with an outstanding principal balance in excess of One Million and 00/100 Dollars ($1,000,000.00), and the same is subsequently accelerated, or (g) there shall be a change in the beneficial ownership and control, directly or indirectly, of the majority of the outstanding voting securities or other interests entitled (without regard to the occurrence of any contingency) to elect or appoint members of the board of directors or other managing body of Debtor or any Guarantor ( a "change of control"), or there is any merger, consolidation, dissolution, liquidation, winding up or sale or other transfer of all or substantially all of the assets of Debtor or any Guarantor pursuant to which there is a change of control or cessation of Debtor or the Guarantor or the business of either without the prior written consent of Secured Party, or (h) any money judgement is entered or filed against Debtor or any Guarantor in excess of One Million and 00/100 Dollars ($1,000,000.00) execution against which is not stayed, bonded or insured pending appeal in a manner reasonably satisfactory to Secured Party, or (i) Debtor or any Guarantor shall file a voluntary petition in bankruptcy, shall apply for or permit the appointment by consent or acquiescence of a receiver, conservator, administrator, custodian or trustee for itself or all or a substantial part of its property, shall make an assignment for the benefit of creditors or shall be unable, fail or admit in writing its inability to pay its debts generally as such debts become due, or (j) there shall have been filed against Debtor or any Guarantor an involuntary petition in bankruptcy or Debtor or any Guarantor shall suffer or permit the involuntary appointment of a receiver, conservator, administrator, custodian or trustee for all or a substantial part of its property or the issuance of a warrant of attachment, diligence, execution or similar process against all or any substantial part of its property; unless, in each case, such petition, appointment or process is fully bonded against, vacated or dismissed within sixty (60) days from its effective date, but no later than ten (10) days prior to any proposed disposition of any assets pursuant to any such proceeding, or (k) if there is a material adverse change in the business or financial condition or prospects of Debtor, or any Guarantor, which affects the net worth (as determined in accordance with GAAP) of either such party, in Secured Party's opinion, in an amount equal to or greater than $500,000 then, and in any such event, Secured Party shall have the right to exercise any one or more of the remedies hereinafter provided. 5. Remedies. Upon the occurrence of an Event of Default, in addition to all rights and remedies of a secured party under the Uniform Commercial Code, Secured Party may, at its option, at any time (a) declare the Indebtedness to be immediately due and payable; (b) without demand or legal process, enter the premises where the Collateral may be found and take possession of and remove the Collateral, all without charge to or liability on the part of Secured Party; or (c) require Debtor to assemble the Collateral, render it unusable, and crate, pack, ship, and deliver the Collateral to Secured Party in such manner and at such place as Secured Party may require, all at Debtor's sole cost and expense. DEBTOR HEREBY EXPRESSLY WAIVES ITS RIGHTS, IF ANY TO (1) PRIOR NOTICE OF REPOSSESSION AND (2) A JUDICIAL OR ADMINISTRATIVE HEARING PRIOR TO SUCH REPOSSESSION. Secured Party may, at its option, ship, store and repair the Collateral so removed and sell any or all of the Collateral at a public or private sale or sales. Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, Secured Party will give Debtor reasonable notice of the time and place of any public sale thereof or of the time after which any private sale or any other intended disposition thereof is to be made, it being understood and agreed that Secured Party may be a buyer at any such sale and Debtor may not, either directly or indirectly, be a buyer at any such sale. The requirements, if any, for reasonable notice will be met if such notice is mailed postage prepaid to Debtor at its address shown above, at least five (5) days before the time of sale or disposition. After any such sale or disposition, Debtor shall be liable for any deficiency of the Indebtedness remaining unpaid, with interest thereon at the rate set forth in the related Notes. 6. Cumulative Remedies/Marshaling. All remedies of Secured Party hereunder are cumulative, are in addition to any other remedies provided for by law or in equity, or under any other provision of any of the Loan Documents, or under the provisions of any other document, instrument or other writing executed by Debtor or any third party in favor of Secured Party, all of which may, to the extent permitted by law, be exercised 11 concurrently or separately, and the exercise of any one remedy shall not be deemed an election of such remedy or to preclude the exercise of any other remedy. No failure on the part of Secured Party to exercise, and no delay in exercising any right or remedy, shall operate as a waiver thereof or in any way modify or be deemed to modify the terms of this Agreement or any other Loan Document or the Indebtedness, nor shall any single or partial exercise by Secured Party of any right or remedy preclude any other or further exercise of the same or any other right or remedy. Secured Party shall not be under any obligation to marshal any assets in favor of Debtor, any Guarantor or any other person or against or in payment of any or all of the Indebtedness. 7. Assignment. Secured Party may transfer or assign all or any part of the Indebtedness and the Loan Documents without releasing Debtor or the Collateral, and upon such transfer or assignment the assignee or holder shall be entitled to all the rights, powers, privileges and remedies of Secured Party to the extent assigned or transferred. The obligations of Debtor shall not be subject, as against any such assignee or transferee, to any defense, set-off, or counter-claim available to Debtor against Secured Party and any such defense, set-off, or counter-claim may be asserted only against Secured Party. 8. Time is of the Essence. Time and manner of performance by Debtor of its duties and obligations under the Loan Documents is of the essence. If Debtor shall fail to comply with any provision of any of the Loan Documents, Secured Party shall have the right, but shall not be obligated, to take action to address such non-compliance, in whole or in part, and all moneys spent and expenses and obligations incurred or assumed by Secured Party shall be paid by Debtor upon demand and shall be added to the Indebtedness. Any such action by Secured Party shall not constitute a waiver of Debtor's default. 9. ENFORCEMENT. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS AND DECISIONS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. AT SECURED PARTY'S ELECTION AND WITHOUT LIMITING SECURED PARTY'S RIGHT TO COMMENCE AN ACTION IN ANY OTHER JURISDICTION, DEBTOR HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION AND VENUE OF ANY COURT (FEDERAL, STATE OR LOCAL) HAVING SITUS WITHIN THE STATE OF ILLINOIS, EXPRESSLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO SERVICE BY CERTIFIED MAIL, POSTAGE PREPAID, DIRECTED TO THE LAST KNOWN ADDRESS OF DEBTOR, WHICH SERVICE SHALL BE DEEMED COMPLETED WITHIN TEN (10) DAYS AFTER THE DATE OF MAILING THEREOF. 12 10. Further Assurance; Notice. Debtor shall, at its expense, execute and deliver such documents and do such further acts as Secured Party may from time to time reasonably require to assure and confirm the rights created or intended to be created hereunder, to carry out the intention or facilitate the performance of the terms of the Loan Documents or to assure the validity, perfection, priority or enforceability of any security interest created hereunder. Debtor agrees to execute any instrument or instruments necessary or expedient for filing, recording, perfecting, notifying, foreclosing, and/or liquidating of Secured Party's interest in the Collateral upon reasonable request of, and as determined by, Secured Party, and Debtor hereby specifically authorizes Secured Party to prepare and file Uniform Commercial Code financing statements and other documents and to execute same for and on behalf of Debtor as Debtor's attorney-in-fact, irrevocably and coupled with an interest, for such purposes. All notices required or otherwise given by either party shall be in writing and shall be delivered by hand, by registered or certified first class United States mail, return receipt requested, or by overnight courier to the other party at its address stated herein or at such other address as the other party may from time to time designate by written notice. All notices shall be deemed given when received, when delivery is refused or when returned for failure to be called for. Each provision of this Agreement shall remain in full force and effect until all of the Indebtedness is fully, finally and indefeasibly satisfied and, notwithstanding anything in this Agreement or implied by law to the contrary, the agreements of Debtor and Secured Party set forth in Sections 2(p), 2(r), 2(s), 2(t), 9 and 12 shall survive the full, final and indefeasible satisfaction of the Indebtedness. 11. Joint and Several Obligation. If this Agreement is executed by more than one person as Debtor, each such Debtor hereby acknowledges it is jointly and severally liable for and unconditionally guarantees the prompt and full payment and performance of all obligations of each other Debtor hereunder and under the other Loan Documents. 12. WAIVER OF JURY TRIAL. DEBTOR AND SECURED PARTY HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING IN CONNECTION WITH ANY OF THE LOAN DOCUMENTS. DEBTOR AND SECURED PARTY ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THE LOAN DOCUMENTS, AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. DEBTOR AND SECURED PARTY FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. 13 13. Complete Agreement. The Loan Documents embody the entire agreement among the parties hereto superseding all prior commitments, agreements, representations, and understandings, whether written or oral relating to the subject matter hereof, and may not be contradicted or varied by evidence of prior, contemporaneous, or subsequent oral agreements or discussions of the parties hereto. The Loan Documents may not be altered, modified or terminated in any manner except by a writing duly signed by the parties thereto. Debtor and Secured Party intend the Loan Documents to be valid and binding and no provisions hereof and thereof which may be deemed unenforceable shall in any way invalidate any other provisions of the Loan Documents, all of which shall remain in full force and effect. The Loan Documents shall be binding upon the respective successors, legal representatives, and assigns of the parties. The Schedules are incorporated herein by this reference and made a part hereof. IN WITNESS WHEREOF, Secured Party and Debtor have each signed this Agreement as of the day and year first above written. HELLER FINANCIAL, INC. DA CONSULTING GROUP, INC. a Delaware corporation a Texas corporation By: /s/ DAVID G. ROEDER By: /s/ MICHAEL J. MACKEY ------------------------------ ------------------------------ Name: David G. Roeder Name: Michael J. Mackey ---------------------------- ---------------------------- Title: Vice President Title: CFO, EVP Finance & Administration --------------------------- --------------------------- 14 EX-10.16 14 NON-NEGOTIABLE PROMISSORY NOTE EXHIBIT 10.16 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER ANY APPLICABLE STATE OR FEDERAL SECURITIES LAW. NO OFFER, SALE, TRANSFER, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION OF THIS NOTE MAY BE MADE WITHOUT THE PRIOR WRITTEN CONSENT OF THE MAKER OF THIS NOTE, AND, IF SUCH CONSENT IS GIVEN, UNLESS THE NOTE IS REGISTERED UNDER THE ACT AND ANY OTHER APPLICABLE SECURITIES LAW,OR AN EXEMPTION FROM ANY SUCH REGISTRATION REQUIREMENTS IS APPLICABLE TO SUCH TRANSACTION. THE PAYMENTS TO BE MADE UNDER THIS NOTE ARE SUBJECT TO ANY COUNTERCLAIM, ANY RIGHT OF SET-OFF, ANY RIGHT OF RECOUPMENT OR ANY OTHER CLAIM THAT THE MAKER OF THIS NOTE MAY HAVE AGAINST ANY HOLDER OR ANY PRIOR HOLDER OF THIS NOTE, WHENEVER ARISING. NON-NEGOTIABLE PROMISSORY NOTE Amount: $89,640 Date: August 8, 1997 1. General. FOR VALUE RECEIVED, Michael J. Mackey ("Maker") promises to pay to the order of DA INTERNATIONAL, INC. ("Payee"), at 12200 N.W. Freeway, Suite 200 Houston, Texas 77092, or at such other place as may be designated in writing by Payee, the principal sum of Eighty Nine Thousand Six Hundred Forty Dollars ($89,640) (the "Principal Amount") in a single payment on the earlier to occur of (a) the closing of a public offering of the Payee's shares of common stock, (b) the closing of a transaction for the sale of substantially all of Payee's assets to an independent third party, or (c) June 30, 2001. Interest on the outstanding Principal Amount shall accrue at a rate per annum equal to the Prime Rate (as defined below) plus 0.25%, in arrears, and shall be payable on or before the first day of each calendar quarter beginning on October 1, 1997. As used in this Note, "Prime Rate" shall mean, for each calendar quarter, the prime rate of interest as listed in The Wall Street Journal for the first business day of such calendar quarter. Notwithstanding anything to the contrary contained in this Note, the effective rate of interest under this Note shall not exceed the lesser of ten percent (10%) or the maximum rate of interest permitted from time to time by applicable law or regulation. Amounts received by Payee in excess of such highest rate of interest shall be considered reductions to principal to the extent of such excess. 2. Prepayment. This Note may be prepaid in full or in part without premium or penalty. Any such prepayments shall first be applied against accrued interest and thereafter against any unpaid Principal Amount. 3. Default. In the event of a default in payment of principal or interest under this Note, the entire outstanding principal amount of this Note, plus interest thereon, will become immediately due and payable upon written demand by Payee. A "default in payment" is defined as any payment required to be made under this Note that is not made within fifteen (15) days of the due date, which payment remains unpaid for fifteen (15) days after Maker's receipt of written notice from Payee thereof. Maker hereby waives presentment, protest, notice of protest, and notice of dishonor. 4. Binding Effect. This Note shall be binding upon and inure to the benefit of each of the parties to this Note and their respective heirs, personal representatives, and successors and permitted assigns; provided, that Payee may not assign or otherwise negotiate this Note without Maker's prior written consent, which consent shall not be unreasonably withheld. This Note shall be governed by the laws of the State of Texas without giving effect to the choice of law rules of Texas or any other jurisdiction. IN WITNESS WHEREOF, Maker has caused this Note to be executed on the date first above written. By: /s/ Michael J. Mackey --------------------------- Michael J. Mackey 2 EX-11.1 15 COMPUTATION OF NET INCOME PER SHARE EXHIBIT 11.1 DA CONSULTING GROUP, INC. COMPUTATION OF NET INCOME PER SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, -------------------------- ------------------ 1994 1995 1996 1996 1997 ------- ------- -------- -------- -------- (UNAUDITED) Computation of net income per share(1): Net income................... $ 198 $ 663 $ 308 $ 713 $ 940 ======= ======= ======== ======== ======== Weighted average shares outstanding(2).............. 3,624 3,624 4,218 4,029 4,809 Common shares issuable under outstanding stock options... 449 449 449 449 449 Less shares assumed repurchased with proceeds from exercise of stock options..................... (204) (204) (204) (204) (204) ------- ------- -------- -------- -------- 3,869 3,869 4,463 4,274 5,054 ======= ======= ======== ======== ======== Net income per share......... $ 0.05 $ 0.17 $ 0.07 $ 0.17 $ 0.19 ======= ======= ======== ======== ========
- -------- (1) Fully diluted net income per share and weighted average shares outstanding have not been presented as these are the same as primary net income per share and weighted average shares outstanding. (2) Common stock issued within a one-year period prior to the registration statement related to the IPO has been treated as outstanding for all periods presented. EX-16.1 16 LETTER RE CHANGE IN CERTIFYING ACCOUNTANTS EXHIBIT 16.1 January 9, 1997 Securities and Exchange Commission 450 5th Street, N.W. Washington, D.C. 20549 Ladies and Gentlemen: We have read the statements made by DA Consulting Group, Inc., formerly DA International, Inc., (copy attached), which we understand will be filed with the Securities and Exchange Commission, as Exhibit 16.1 to the Company's Registration Statement on Form S-1. We only agree with the statements concerning our Firm contained in the Prospectus included in the Registration Statement under the caption "Experts." Melton & Melton, L.L.P. reissued the 1995 audit report. Very Truly Yours, /s/ Melton & Melton, L.L.P. ------------------------------------- Melton & Melton, L.L.P. EX-21.1 17 SUBSIDIARIES EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT
STATE OR JURISDICTION OF COMPANY INCORPORATION ------- -------------- DA Consulting Group (USA) Inc. Texas DA Consulting Services Limited United Kingdom DA Consulting (Proprietary) Limited South Africa Documentation Software Distributors (PTY) Ltd. South Africa DA Consulting Group (Canada), Ltd. Canada DA Consulting Group Pty Limited Australia Documentation Associates (NZ) Ltd. New Zealand DA Consulting Group Ltd. Isle of Man DA Consultores de Mexico, S. de R.L. Mexico
EX-27 18 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS OF DA CONSULTING GROUP, INC. AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND FOR THE YEAR ENDED DECEMBER 31, 1996. 1,000 YEAR 9-MOS DEC-31-1996 DEC-31-1997 JAN-01-1996 JAN-01-1997 DEC-31-1996 SEP-30-1997 2,199 683 0 0 4,507 9,488 0 (79) 0 0 7,107 11,568 1,307 2,832 (356) (559) 8,058 14,070 5,478 9,468 0 0 0 0 0 0 44 45 2,536 4,557 8,058 14,070 26,202 30,056 26,202 30,056 14,190 16,702 25,848 28,478 (132) 96 0 0 37 (33) 449 1,515 141 575 308 940 0 0 0 0 0 0 308 940 .07 .19 .07 .19
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