-----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, S34fnob9aVul+NE6hkqrn6ReUq+PoFBrYtfUa6gUJTArwFxQdcMfrcEpA4vWgFPG 5+Oo0Mp9kXs8o7+zIN1jww== 0001036050-98-000646.txt : 19980421 0001036050-98-000646.hdr.sgml : 19980421 ACCESSION NUMBER: 0001036050-98-000646 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19980420 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DA CONSULTING GROUP INC CENTRAL INDEX KEY: 0001051209 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 760418488 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-43989 FILM NUMBER: 98597495 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/A 1 AMENDMENT NO. 4 TO FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 20, 1998 REGISTRATION NO. 333-43989 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- AMENDMENT NO. 4 TO 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 (PRIMARY STANDARD (I.R.S. EMPLOYER (STATE OR OTHER INDUSTRIAL IDENTIFICATION JURISDICTION OF CLASSIFICATION CODE NUMBER) 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. [_] --------------- 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 APRIL 20, 1998 PROSPECTUS 2,400,000 SHARES LOGO OF DA CONSULTING GROUP, INC. APPEARS HERE COMMON STOCK Of the 2,400,000 shares of Common Stock offered hereby, 1,700,000 are being sold by DA Consulting Group, Inc. ("DACG" or the "Company") and 700,000 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. The Common Stock has been approved for quotation 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 $1,850,000. (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 360,000 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 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 PASSPORT(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 Combined and 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 568 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 31 in 1993 to 134 in 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 its largest client representing less than 6.0% of the Company's revenue in 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, Mexico, the United Kingdom, France, South Africa, Australia, Singapore, and Venezuela. 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% 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 1997, revenue from clients implementing SAP software represented 87% 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 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 3 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 65 as of December 31, 1993 to 568 as of December 31, 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 believes that it provides its employees with a challenging and fulfilling work environment, a competitive compensation structure, and broad-based equity ownership. Upon completion of this offering, 403 employees (representing approximately 70% of the Company's employees as of December 31, 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 $4.2 million in 1993 to $44.2 million in 1997, representing a compound annual growth rate of 80.3% for the period and a 68.7% increase in 1997. 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............................. 700,000 shares Shares Outstanding Immediately After the Offering................................. 6,508,475 shares (1) Use of Proceeds........................... To repay approximately $4.0 million in debt and for general corporate purposes, including working capital and possible acquisitions Proposed Nasdaq National Market Symbol.... DACG
- -------- (1) Excludes 446,069 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 (none of which are currently exercisable), 399,000 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, and 414,931 shares of Common Stock reserved for future grants under the Company's 1997 Stock Option Plan. See "Management--Executive Compensation" and "Management--Employee Benefit Plans--1997 Stock Option Plan." 4 SUMMARY COMBINED AND CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
YEAR ENDED YEAR ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31, -------------- --------------------------- ---------------------------- JUNE 30, DECEMBER 31, 1993 1994 1995 1995 1995 1996 1997 ------ ------ ----------- --------------- ------------ ------- ------- COMBINED(1) COMBINED(1) CONSOLIDATED(1) PRO FORMA(2) CONSOLIDATED(1) INCOME STATEMENT DATA: Revenue................ $4,179 $7,501 $6,299 $8,319 $14,618 $26,202 $44,204 Cost of revenue........ 2,484 4,028 3,412 4,249 7,661 14,190 24,063 ------ ------ ------ ------ ------- ------- ------- Gross profit........... 1,695 3,473 2,887 4,070 6,957 12,012 20,141 Selling and marketing expense............... 84 450 407 665 1,072 1,953 3,726 Development expense.... -- -- 296 411 707 1,250 1,223 General and administrative expense............... 1,482 2,629 1,657 2,357 4,014 6,597 12,436 Amortization expense(3)............ -- -- -- 230 459 274 54 Employee stock-related charge(4)............. -- -- -- -- -- 1,858 263 ------ ------ ------ ------ ------- ------- ------- Operating income....... 129 394 527 407 705 80 2,439 Other (expense) income, net................... (22) (77) (23) (61) (84) 95 (135) ------ ------ ------ ------ ------- ------- ------- Income before taxes.... 107 317 504 346 621 175 2,304 Provision for income taxes................. 44 119 189 228 250 141 896 ------ ------ ------ ------ ------- ------- ------- Net income............. $ 63 $ 198 $ 315 $ 118 $ 371 $ 34 $ 1,408 ====== ====== ====== ====== ======= ======= ======= Diluted earnings per share(5).............. $ 0.02 $ 0.05 $ 0.08 $ 0.03 $ 0.10 $ 0.01 $ 0.28 Weighted average shares outstanding........... 3,868 3,868 3,868 3,868 3,868 4,462 5,053 OPERATING DATA: Number of employees(6).......... 65 140 257 353 568 Number of clients served................ 31 52 64 98 134 Total offices(6)....... 2 3 8 10 15 Offices outside the U.S.(6)............... 1 2 6 8 11
DECEMBER 31, 1997 ---------------------- ACTUAL AS ADJUSTED(7) ------- -------------- BALANCE SHEET DATA: Cash and cash equivalents............................... $ 3,664 $17,319 Working capital......................................... 4,101 21,726 Total assets............................................ 20,135 33,790 Total debt.............................................. 3,970 -- Shareholders' equity.................................... 7,943 25,568
- ------- (1) Prior to July 1995, the Company's business was operated through four separate companies located in the United States (U.S.), the United Kingdom (U.K.), South Africa, and Australia (the "Predecessor Companies"). All of the Predecessor Companies were under common management. Prior to July 1995, three of the Predecessor Companies were controlled (based upon record ownership) by trusts, the sole beneficiaries of which were the controlling owners of the U.S. company and their children. As a result of a stock exchange transaction (the "Exchange Transaction") on July 1, 1995, the Predecessor Companies became wholly-owned subsidiaries of the Company. For accounting purposes, the acquisition of the U.S. company has been treated as a recapitalization of the U.S. company, and the U.S. company has been treated as the acquiror of the other three entities. As a result, the net assets of the U.S. company were carried forward at historical basis while the net assets of the acquired Predecessor Companies were recorded at fair market value using the purchase method of accounting. The financial data for the years ended December 31, 1993 and 1994 and the six months ended June 30, 1995 represent the combined results of the Predecessor Companies prior to the Exchange Transaction; the financial data for the six months ended December 31, 1995 and the years ended December 31, 1996 and 1997 represent the consolidated results of the Company following the Exchange Transaction. (2) The 1995 pro forma results of operations represent the combined results of the Predecessor Companies for the six months ended June 30, 1995 and the consolidated results of the Company for the six months ended December 31, 1995, which reflect the change in basis for the combined Predecessor Companies and amortization expense assuming the Exchange Transaction had occurred on January 1, 1995. The 1995 pro forma financial data have been presented since all of the entities were under common management and operated as one company for all of the years presented, and such data therefore represent a meaningful comparison with all of the years presented. As a result, the pro forma 1995 results include a full year of amortization expense in 1995 rather than the six months of amoritization expense actually incurred by the Company in 1995. (3) In the Exchange Transaction, as described in note 1, the net assets of the three acquired Predecessor Companies were recorded at fair market value. As a result, the Company recorded $485,000 of goodwill which will be amortized over 25 years beginning July 1, 1995 and $510,000 of other intangible assets which were fully amortized between July 1, 1995 and June 30, 1997. (4) Represents charges for stock awarded to employees and payments in lieu thereof. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." No additional awards will be made by the Company pursuant to such arrangements, which have been terminated. Any future awards are intended to be made in the form of stock options with exercise prices at the fair market value of the underlying stock pursuant to the Company's 1997 Stock Option Plan and any amendments or successors thereto. (5) Basic and diluted earnings per share for 1997 on a pro forma basis would have been $0.30 and $0.29, respectively, to give effect to the assumed sale of Common Stock (at an assumed initial public offering price of $12.00 per share, less underwriting discounts and commissions and estimated offering expenses) to repay indebtedness and the associated reduction in interest expense as if such repayment had occurred on January 1, 1997. Basic earnings per share in the years ended December 31, 1993 and 1994, the six months ended June 30, 1995 and December 31, 1995, the year ended December 31, 1995 (pro forma), and the years ended December 31, 1996 and 1997, respectively, was $0.02, $0.05, $0.09, $0.03, $0.10, $0.01, and $0.29. (6) At period end. (7) 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 87% of the Company's billed consulting revenue during the years ended December 31, 1995, 1996, and 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 nine countries on six 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 particular period. It is difficult to forecast the timing of revenue because project cycles depend on factors such as 6 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 of the non-computer-based training support provided by the Company to its clients. In addition, the growth of 7 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 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 8 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 6,508,475 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. Of the shares to be outstanding upon completion of this offering, 4,108,475 shares are "restricted," as that term is defined in the Securities Act of 1933, as amended (the "Securities Act"). Of these restricted shares, 3,747,170 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 3,911,258 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 $17.1 million ($17.6 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 its approximately $4.0 million of debt presently outstanding. The debt includes approximately $3.2 million outstanding under the Company's $5.0 million revolving line of credit and a note for approximately $762,000 relating to borrowings used for the purchase of furniture and equipment. The line of credit 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), with interest payable monthly, and matures in November 1998. The note bears interest at an annual rate of 9.1%, with interest and principal of $24,000 payable monthly, and matures in November 2000. 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 December 31, 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 Combined and 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."
DECEMBER 31, 1997 ------------------- ACTUAL AS ADJUSTED ------ ----------- (IN THOUSANDS) Short-term debt: Indebtedness for borrowed money.......................... $3,970 $ -- ------ ------- Total short-term debt.................................. $3,970 $ -- ====== ======= 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; 4,808,475 shares outstanding, actual; 6,508,475 shares outstanding, as adjusted(1)............ 48 65 Additional paid-in capital............................... 6,449 23,554 Retained earnings........................................ 2,099 2,099 Treasury stock, at cost; 20,716 shares................... (91) (91) Notes receivable from shareholders....................... (503) -- Cumulative foreign currency translation adjustment....... (59) (59) ------ ------- Total shareholders' equity............................. 7,943 25,568 ------ ------- Total capitalization................................. $7,943 $25,568 ====== =======
- -------- (1) Excludes 446,069 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 (none of which are currently exercisable), 399,000 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 414,931 shares of Common Stock reserved for future grants under the 1997 Stock Option Plan. See "Management--Executive Compensation" and "Management--Employee Benefit Plans--1997 Stock Option Plan." 11 DILUTION At December 31, 1997, the net tangible book value of the Company was approximately $7.5 million, or $1.56 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 December 31, 1997 would have been approximately $25.1 million, or $3.86 per share. This represents an immediate increase in net tangible book value to existing shareholders of $2.30 per share and an immediate dilution to purchasers of Common Stock in the offering of $8.14 per share. The following table illustrates the per share dilution: Assumed initial public offering price........................... $12.00 Net tangible book value before this offering.................... 1.56 Increase attributable to this offering.......................... 2.30 ---- Net tangible book value after this offering..................... 3.86 ------ Dilution per share to new shareholders.......................... $ 8.14 ======
The following table summarizes, as of December 31, 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........ 4,808,475 73.9% $ 6,406,000 23.9% $1.33 New shareholders............. 1,700,000 26.1% 20,400,000 76.1% 12.00 --------- ----- ----------- ----- Total...................... 6,508,475 100.0% $26,806,000 100.0% ========= ===== =========== =====
The foregoing tables assume no exercise of options outstanding as of December 31, 1997 to purchase an additional 446,069 shares of Common Stock at a weighted average exercise price of $5.91 per share (none of which are currently exercisable). 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 700,000 shares by Selling Shareholders in this offering. Such sales will reduce the number of shares held by existing shareholders as of December 31, 1997 to 4,108,475, or approximately 63.1% 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 2,400,000, or 36.9% of the total shares of Common Stock to be outstanding after this offering. See "Principal and Selling Shareholders." 12 SELECTED COMBINED AND CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
YEAR ENDED YEAR ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31, -------------- --------------------------- ----------------------------- JUNE 30, DECEMBER 31, 1993 1994 1995 1995 1995 1996 1997 ------ ------ ----------- --------------- ------------- ------- ------- COMBINED(1) COMBINED(1) CONSOLIDATED(1) PRO FORMA (2) CONSOLIDATED(1) INCOME STATEMENT DATA: Revenue................ $4,179 $7,501 $6,299 $8,319 $14,618 $26,202 $44,204 Cost of revenue........ 2,484 4,028 3,412 4,249 7,661 14,190 24,063 ------ ------ ------ ------ ------- ------- ------- Gross profit........... 1,695 3,473 2,887 4,070 6,957 12,012 20,141 Selling and marketing expense............... 84 450 407 665 1,072 1,953 3,726 Development expense.... -- -- 296 411 707 1,250 1,223 General and administrative expense............... 1,482 2,629 1,657 2,357 4,014 6,597 12,436 Amortization expense(3)............ -- -- -- 230 459 274 54 Employee stock-related charge(4)............. -- -- -- -- -- 1,858 263 ------ ------ ------ ------ ------- ------- ------- Operating income....... 129 394 527 407 705 80 2,439 Other (expense) income, net................... (22) (77) (23) (61) (84) 95 (135) ------ ------ ------ ------ ------- ------- ------- Income before taxes.... 107 317 504 346 621 175 2,304 Provision for income taxes................. 44 119 189 228 250 141 896 ------ ------ ------ ------ ------- ------- ------- Net income............. $ 63 $ 198 $ 315 $ 118 $ 371 $ 34 $ 1,408 ====== ====== ====== ====== ======= ======= ======= Basic earnings per share(5).............. $ 0.02 $ 0.05 $ 0.09 $ 0.03 $ 0.10 $ 0.01 $ 0.29 Weighted average shares outstanding........... 3,623 3,623 3,623 3,623 3,623 4,217 4,808 Diluted earnings per share(5).............. $ 0.02 $ 0.05 $ 0.08 $ 0.03 $ 0.10 $ 0.01 $ 0.28 Weighted average shares outstanding........... 3,868 3,868 3,868 3,868 3,868 4,462 5,053 BALANCE SHEET DATA: Cash and cash equivalents........... $ 366 $ 104 $ 585 $ 592 $ 2,199 $ 3,664 Working capital........ 201 313 315 761 1,629 4,101 Total assets........... 1,667 1,784 3,211 5,440 8,549 20,135 Total debt............. 305 205 445 562 731 3,970 Shareholders' equity... 76 258 573 1,891 3,071 7,943
- ------- (1) Prior to July 1995, the Company's business was operated through four separate Predecessor Companies. All of the Predecessor Companies were under common management. Prior to July 1995, three of the Predecessor Companies were controlled (based upon record ownership) by trusts, the sole beneficiaries of which were the controlling owners of the U.S. company and their children. As a result of the Exchange Transaction on July 1, 1995, the Predecessor Companies became wholly-owned subsidiaries of the Company. For accounting purposes, the acquisition of the U.S. company has been treated as a recapitalization, and the U.S. company has been treated as the acquiror of the other three entities. As a result, the net assets of the U.S. company were carried forward at historical basis while the net assets of the acquired Predecessor Companies were recorded at fair market value using the purchase method of accounting. The financial data for the years ended December 31, 1993 and 1994 and the six months ended June 30, 1995 represent the combined results of the Predecessor Companies prior to the Exchange Transaction; the financial data for the six months ended December 31, 1995 and the years ended December 31, 1996 and 1997 represent the consolidated results of the Company following the Exchange Transaction. (2) The 1995 pro forma results of operations represent the combined results of the Predecessor Companies for the six months ended June 30, 1995 and the consolidated results of the Company for the six months ended December 31, 1995, which reflect the change in basis for the combined Predecessor Companies and amortization expense assuming the Exchange Transaction had occurred on January 1, 1995. As a result, the pro forma 1995 results include a full year of amortization expense in 1995 rather than the six months of amortization expense actually incurred by the Company in 1995. See note 3. The 1995 pro forma financial data have been presented since all of the entities were under common management and operated as one company for all of the years presented, and such data therefore represent a meaningful comparison with all of the years presented. (3) In the Exchange Transaction, as described in note 1, the net assets of the three acquired Predecessor Companies were recorded at fair market value. As a result, the Company recorded $485,000 of goodwill which will be amortized over 25 years beginning July 1, 1995 and $510,000 of other intangible assets which were fully amortized between July 1, 1995 and June 30, 1997. (4) Represents charges for stock awarded to employees and payments in lieu thereof. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." No additional awards will be made by the Company pursuant to such arrangements, which have been terminated. Any future awards are intended to be made in the form of stock options with exercise prices at the fair market value of the underlying stock pursuant to the Company's 1997 Stock Option Plan and any amendments or successors thereto. (5) Basic and diluted earnings per share for 1997 on a pro forma basis would have been $0.30 and $0.29, respectively, to give effect to the assumed sale of Common Stock (at an assumed initial public offering price of $12.00 per share, less underwriting discounts and commissions and estimated offering expenses) to repay indebtedness and the associated reduction in interest expense as if such repayment had occurred on January 1, 1997. 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 $4.2 million in 1993 to $44.2 million in 1997, representing a compound annual growth rate of 80.3% for the period and a 68.7% increase in 1997. 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 1993, 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 nine countries on six 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 1997, the Americas, EMEA, and Asia Pacific Divisions represented 64.8%, 25.7%, and 9.5% of revenue, respectively. The number of clients served by the Company has increased substantially from 31 in 1993 to 134 in 1997. The Company's client base is diversified, with no single client representing more than 6.0% of revenues in 1997. To support its rapid growth, the Company has expanded its staff from 65 as of December 31, 1993 to 568 as of December 31, 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 87% of billed consulting revenue for 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. In the event of such a termination by the client, however, the client remains obligated to pay for the services rendered to the client to the termination date. 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 18% of the Company's total revenue for 1997. Revenue from time and materials engagements as well as revenue from fixed price contracts is recognized as services are performed and the realization of the revenue is assured. 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 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 14 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. Prior to July 1995, the Company's business was operated through the Predecessor Companies. All of the Predecessor Companies were under common management. Prior to July 1995, three of the Predecessor Companies were controlled (based upon record ownership) by trusts, the sole beneficiaries of which were the controlling owners of the U.S. company and their children. As a result of the Exchange Transaction on July 1, 1995, the Predecessor Companies became wholly-owned subsidiaries of the Company. For accounting purposes, the acquisition of the U.S. company has been treated as a recapitalization, and the U.S. company has been treated as the acquiror of the other three entities. As a result, the net assets of the U.S. company were carried forward at historical basis while the net assets of the acquired Predecessor Companies were recorded at fair market value using the purchase method of accounting. In the Exchange Transaction, the net assets of the three acquired Predecessor Companies were recorded at fair market value. As a result, the Company recorded $485,000 of goodwill which will be amortized over 25 years beginning July 1, 1995 and $510,000 of other intangible assets which were fully amortized between July 1, 1995 and June 30, 1997. The 1995 pro forma results of operations represent the combined results of the Predecessor Companies for the six months ended June 30, 1995 and the consolidated results of the Company for the six months ended December 31, 1995, which reflect the change in basis for the combined Predecessor Companies and amortization expense assuming the Exchange Transaction had occurred on January 1, 1995. As a result, the pro forma 1995 results include a full year of amortization expense in 1995 rather than the six months of amortization expense actually incurred by the Company in 1995. The 1995 pro forma results of operations have been presented since all of the entities were under common management and operated as one company for all of the years presented, and such results therefore represent a meaningful comparison with all of the years presented. The Company incurred charges of $1.9 million and $263,000 in 1996 and 1997, respectively, related to stock awarded to employees and payments in lieu thereof. These charges, which had the effect of reducing net income by $1.2 million in 1996 and $163,000 in 1997, arose out of arrangements with employees of the Company providing for the award of stock to such employees without cash consideration. No additional awards will be made by the Company pursuant to such arrangements, which have been terminated. Any future awards are intended to be made in the form of stock options with exercise prices at the fair market value of the underlying stock pursuant to the Company's 1997 Stock Option Plan and any amendments or successors thereto. 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, 1996 and 1997 compared to the prior period. The trends illustrated in the following table are not necessarily indicative of future results.
PERCENTAGE OF REVENUE -------------------------- YEAR ENDED DECEMBER 31, PERCENTAGE INCREASE (DECREASE) -------------------------- ------------------------------------- 1995(1) 1996 1997 1995 TO 1996 1996 TO 1997 --------- ------- ------- --------------- ---------------- Revenue................. 100.0% 100.0% 100.0% 79.2% 68.7% Cost of revenue......... 52.4 54.2 54.4 85.2 69.6 ------- ------- ------- Gross profit............ 47.6 45.8 45.6 72.7 67.7 Selling and marketing expense................ 7.3 7.5 8.4 82.2 90.8 Development expense..... 4.8 4.8 2.7 76.8 (2.2) General and administrative expense................ 27.5 25.1 28.1 64.3 88.5 Amortization expense.... 3.2 1.0 0.1 (40.3) (80.3) Employee stock-related charge................. -- 7.1 0.6 nmf nmf ------- ------- ------- Operating income(2)..... 4.8 0.3 5.5 (88.7) 2,948.8 Other (expense) income, net.................... (0.6) 0.4 (0.3) 213.1 (242.1) ------- ------- ------- Income before taxes..... 4.2 0.7 5.2 (71.8) 1,216.6 Provision for income taxes.................. 1.7 0.5 2.0 (43.6) 535.5 ------- ------- ------- Net income(2)........... 2.5% 0.2% 3.2% (90.8)% 4,041.2% ======= ======= =======
- -------- (1) Represents, on a pro forma basis, combined results of the Predecessor Companies prior to July 1, 1995 and consolidated results of the Company commencing July 1, 1995, and assumes the Exchange Transaction had occurred on January 1, 1995. (2) Exclusive of employee stock-related charges and amortization expense related to other intangible assets, operating income and net income would have increased 91.5% and 77.7%, respectively, in 1996 compared to 1995, and 24.8% and 11.5%, respectively, in 1997 compared to 1996. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Revenue. Revenue increased by $18.0 million, or 68.7%, from $26.2 million in 1996 to $44.2 million in 1997. The increase was substantially attributable to an increase in volume of services and is to a lesser extent attributable to rate increases. The Company experienced growth in each of its three divisions. Revenues from the Americas Division increased by 84.2% from $15.6 million to $28.7 million; revenue from the EMEA Division increased by 27.3% from $8.9 million to $11.3 million; and revenue from the Asia Pacific Division increased by 142.6% from $1.7 million to $4.2 million. The Company ended the 1997 period with 568 total employees, up from 353 employees at the beginning of the period. In addition, the Company opened five new offices during the period, increasing the total number of offices to 15. Gross profit. Gross profit increased by $8.1 million, or 67.7%, from $12.0 million in 1996 to $20.1 million in 1997, and decreased slightly from 45.8% of revenue in 1996 to 45.6% of revenue in 1997. Selling and marketing expense. Selling and marketing expense increased by $1.8 million, or 90.8%, from $2.0 million in 1996 to $3.7 million in 1997, and increased as a percentage of revenue from 7.5% in 1996 to 8.4% in 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 23 at December 31, 1997. Development expense. Development expense decreased by $27,000, or 2.2%, from $1.3 million in 1996 to $1.2 million in 1997, and decreased as a percentage of revenue from 4.8% in 1996 to 2.7% in 1997. The decreases were primarily attributable to the reduction of certain in-house software development expenses in 1997 16 as a result of the Company's relationship with CBT Systems. This relationship enables the Company to outsource to CBT Systems the primary responsibility for developing SAP-related computer based training software. Payments received for the sale of this software, net of any royalty due CBT Systems, are recorded as product revenue. 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 expand its service offerings. See "Business--Business Strategy." General and administrative expense. General and administrative expense increased by $5.8 million, or 88.5%, from $6.6 million in 1996 to $12.4 million in 1997, and increased as a percentage of revenue from 25.1% in 1996 to 28.1% in 1997. The increases were primarily attributable to substantial expenditures in building the administrative infrastructure of the Company to support future growth. Of these expenditures, approximately 60% related 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) and the balance related to information technology infrastructure investments and increased occupancy costs related to the expansion of existing office space and the establishment of new offices. Amortization expense. Amortization expense decreased by $220,000, or 80.3%, from $274,000 in 1996 to $54,000 in 1997, and decreased as a percentage of revenue from 1.0% in 1996 to 0.1% in 1997. The decrease reflected the completion by June 30, 1997 of the amortization of other intangible assets created as a result of the Exchange Transaction on July 1, 1995. Employee stock-related charge. The Company incurred charges of $1.9 million and $263,000 in 1996 and 1997, respectively, related to stock awarded to employees and payments in lieu thereof. These charges had the effect of reducing net income by $1.2 million in 1996 and $163,000 in 1997. Operating income. Operating income increased by $2.4 million, from $80,000 in 1996 to $2.4 million in 1997. Exclusive of the non-recurring charges for other intangible asset amortization and for compensation charges related to stock awarded to employees and payments in lieu thereof, operating income increased by $544,000, or 24.8%, from $2.2 million in 1996 to $2.7 million in 1997 and decreased as a percentage of revenue from 8.4% in 1996 to 6.2% in 1997. Other income (expense), net. Other income (expense) decreased from income of $95,000 in 1996 to expense of $135,000 in 1997. This change reflects increased borrowings to support the Company's growth in 1997. Provision for income taxes. The Company's effective tax rate decreased from 80.6% in 1996 to 38.9% in 1997, primarily due to the higher level of non- deductible amortization expense in 1996 than in 1997. Exclusive of the non- recurring charges for other intangible asset amortization and for compensation charges related to stock awarded to employees and payments in lieu thereof, the effective tax rates would have been 37.0% in 1996, and 38.3% in 1997. Net income. Net income was $1.4 million in 1997 compared to $34,000 in 1996. Exclusive of the non-recurring charges for other intangible asset amortization and for compensation charges related to stock awarded to employees and payments in lieu thereof, net income would have been $1.6 million in 1997 and $1.4 million in 1996, or $0.32 per share in both 1996 and 1997 on a diluted basis. 17 YEAR ENDED DECEMBER 31, 1996 COMPARED TO PRO FORMA DECEMBER 31, 1995 Revenue. Revenue increased by $11.6 million, or 79.2%, from $14.6 million in 1995 to $26.2 million in 1996. This increase was substantially attributable to an increase in volume of services provided and clients serviced. 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 two new offices during 1996, increasing the total number of offices to 10. Gross profit. Gross profit increased by $5.1 million, or 72.7%, from $7.0 million in 1995 to $12.0 million in 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 in 1995 to $6.6 million in 1996, and decreased as a percentage of revenue from 27.5% in 1995 to 25.1% 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. Amortization expense. Amortization expense decreased by $185,000, or 40.3%, from $459,000 in 1995 to $274,000 in 1996, and decreased as a percentage of revenue from 3.1% in 1995 to 1.0% in 1996. The decrease in amortization expense for 1996 was the result of the completion of amortization of certain of the other intangible assets created as a result of the Exchange Transaction. 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 $625,000, or 88.7%, from $705,000 in 1995 to $80,000 in 1996. Exclusive of the non-recurring charges for other intangible asset amortization and for compensation charges related to stock awarded to employees and payments in lieu thereof, operating income increased by $1.1 million, or 91.5%, from $1.1 million in 1995 to $2.2 million in 1996, and increased as a percentage of revenue from 7.8% in 1995 to 8.4% in 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 non-operational charges such as interest income. Provision for income taxes. The Company's effective tax rate increased from 40.3% in 1995 to 80.6% in 1996, principally due to the effect of non- deductible amortization expense. Exclusive of the non-recurring charges for other intangible asset amortization and for compensation charges related to stock awarded to employees and payments in lieu thereof, the effective tax rate would have been 39.3% in 1995 and 37.0% in 1996. Net income. Net income was $34,000 in 1996 compared to $371,000 in 1995. Exclusive of the non-recurring charges for other intangible asset amortization and for compensation charges related to stock awarded to employees and payments in lieu thereof, net income would have been $1.4 million in 1996 and $644,000 in 1995, or $0.32 per share in 1996 and $0.17 per share in 1995 on a diluted basis. 18 QUARTERLY OPERATING RESULTS The following tables set forth unaudited income statement data for each of the eight quarters in the period beginning January 1, 1996 and ending December 31, 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, DEC. 31, 1996 1996 1996 1996 1997 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 $14,148 Cost of revenue........ 3,218 3,335 3,666 3,971 4,553 5,609 6,540 7,361 ------ ------ ------ ------ ------ ------ ------- ------- Gross profit........... 2,459 3,028 3,333 3,192 3,531 4,288 5,535 6,787 Selling and marketing expense............... 234 501 593 625 724 898 956 1,148 Development expense.... 182 353 391 324 245 250 341 387 General and administrative expense............... 1,331 1,514 1,776 1,976 2,354 2,558 3,450 4,074 Amortization expense... 114 115 22 23 22 22 5 5 Employee stock-related charge................ -- -- 898 960 -- -- -- 263 ------ ------ ------ ------ ------ ------ ------- ------- Operating income (loss)................ 598 545 (347) (716) 186 560 783 910 Other income (expense), net................... (24) 37 51 31 (2) (33) (28) (72) ------ ------ ------ ------ ------ ------ ------- ------- Income (loss) before taxes................. 574 582 (296) (685) 184 527 755 838 Provision (benefit) for income taxes.......... 250 257 (109) (257) 78 209 288 321 ------ ------ ------ ------ ------ ------ ------- ------- Net (loss) income(1)... $ 324 $ 325 $ (187) $ (428) $ 106 $ 318 $ 467 $ 517 ====== ====== ====== ====== ====== ====== ======= ======= Basic earnings (loss) per share............. $ 0.08 $ 0.08 $(0.04) $(0.09) $ 0.02 $ 0.07 $ 0.10 $ 0.11 Weighted average shares outstanding........... 3,859 3,943 4,282 4,787 4,808 4,808 4,808 4,808 Diluted earnings (loss) per share............. $ 0.08 $ 0.08 $(0.04) $(0.09) $ 0.02 $ 0.06 $ 0.09 $ 0.10 Weighted average shares outstanding........... 4,103 4,188 4,527 5,032 5,053 5,053 5,053 5,053 AS A PERCENTAGE OF REVENUE ----------------------------------------------------------------------------- Revenue................ 100.0% 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 52.0 ------ ------ ------ ------ ------ ------ ------- ------- Gross profit........... 43.3 47.6 47.6 44.6 43.7 43.3 45.8 48.0 Selling and marketing expense............... 4.1 7.9 8.5 8.8 9.0 9.1 7.9 8.1 Development expense.... 3.2 5.5 5.6 4.5 3.0 2.5 2.8 2.8 General and administrative expense............... 23.5 23.8 25.4 27.6 29.1 25.9 28.6 28.8 Amortization expense... 2.0 1.8 0.3 0.3 0.3 0.2 0.0 0.0 Employee stock-related charge................ -- -- 12.8 13.4 0.0 0.0 0.0 1.9 ------ ------ ------ ------ ------ ------ ------- ------- Operating income (loss)................ 10.5 8.6 (5.0) (10.0) 2.3 5.6 6.5 6.4 Other income (expense), net................... (0.4) 0.6 0.7 0.5 0.0 (0.3) (0.2) (0.5) ------ ------ ------ ------ ------ ------ ------- ------- Income (loss) before taxes................. 10.1 9.2 (4.3) (9.5) 2.3 5.3 6.3 5.9 Provision (benefit) for income taxes.......... 4.4 4.1 (1.6) (3.5) 1.0 2.1 2.4 2.3 ------ ------ ------ ------ ------ ------ ------- ------- Net income (loss)...... 5.7% 5.1% (2.7)% (6.0)% 1.3% 3.2% 3.9% 3.6% ====== ====== ====== ====== ====== ====== ======= =======
- -------- (1) Exclusive of the amortization expense related to other intangible assets and employee stock-related charges, net income for the eight quarters ended December 31, 1997 would have been $433,000, $435,000, $387,000, $186,000, $123,000, $336,000, $467,000 and $680,000, respectively. 19 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 cash equivalents were $592,000 as of December 31, 1995, $2.2 million as of December 31, 1996 and $3.7 million as of December 31, 1997. The Company's working capital was $761,000 as of December 31, 1995, $1.6 million as of December 31, 1996 and $4.1 million as of December 31, 1997. The Company's operating activities used cash of $2.4 million in 1997, compared with providing cash of $1.9 million in 1996. The use of cash from operations in 1997 primarily resulted from an increase in receivables. The increase is primarily attributable to revenue growth in addition to a modest increase in the collection period. The proceeds from the Company's revolving line of credit were used to fund the working capital needs of the Company. The Company's operating activities provided cash of $1.9 million in 1996 compared to $479,000 in 1995. The increase in cash provided by operations in 1996 resulted from higher net income and an increase in the Company's payables. The Company's investing activities used cash of $2.0 million in 1997 compared to $709,000 in 1996 and $264,000 in 1995. 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 $5.9 million for 1997 and $372,000 for 1996. The increase in cash from financing activities in 1997 resulted from private placements of shares of common stock in February and December 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. The cash generated from financing activities resulted from funds borrowed from shareholders, under the revolving line of credit and the issuance of stock. 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% (9.0% as of December 31, 1997) 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 $3.2 million outstanding balance on December 31, 1997. Additionally in 1997, the Company borrowed approximately $762,000 to be used for the purchase of furniture and equipment. This borrowing is evidenced by a note which bears interest at an annual rate of 9.1%, with interest payable monthly. It is anticipated that a portion of the net proceeds of this offering will be used to repay the balance on the debt outstanding 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 1997 were $2.0 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 $141,000 of software development costs relating to computer- based training software development and its commencement of the development of packaged consulting applications during 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. 20 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. OTHER MATTERS The Company is in the process of implementing new financial and reporting computer systems. The first phase of implementation was completed in the first quarter of 1997 for the Company's Americas Division. The remaining divisions of the Company are scheduled for implementation over the next year. The new system will be year 2000 compliant. Additionally, the Company is in the process of identifying any current suppliers who are not prepared to offer assurance that their systems will be year 2000 compliant. The cost of achieving year 2000 compliance is not expected to have a materially adverse effect on the consolidated financial position or results of operations of the Company. 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. Adoption of this statement will not have a material impact on the consolidated financial statements of the Company. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes standards for reporting information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. Adoption is not recognized for interim periods in the initial year of application. Adoption of this statement will not have a material impact on the consolidated financial statements of the Company. 21 BUSINESS The Company is a leading international provider of end-user support solutions to companies which are implementing ERP software systems. Through its 568 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 31 in 1993 to 134 in 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 its largest client representing less than 6.0% of the Company's revenue in 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, Mexico, the United Kingdom, France, South Africa, Australia, Singapore, and Venezuela. 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 1997, revenue from clients implementing SAP software represented 87% 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% 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. 22 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 425 professional staff operating from 15 offices on six 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 1993, when the Company had two offices in the United States and one office in the United Kingdom, the Company has expanded its presence to 15 offices located in nine countries across North America, South 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 175 clients installing SAP, while expanding its range of services to support implementations of several of the other leading ERP applications 23 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 ten) 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 ten largest clients, in the aggregate, accounted for approximately 34% of the Company's revenue in 1997, respectively. The Company's largest client accounted for less than 6.0% of the Company's revenue in 1997. See "-- Clients." Expand Consulting and Sales Organizations. The Company's professional staff has grown from 40 as of December 31, 1993 to over 425 as of December 31, 1997 and its full-time sales staff has grown from two as of December 31, 1993 to 20 as of December 31, 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 will help it achieve this expansion. 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. 24 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. The agreement does not require the Company to provide cash, but does require the Company to provide subject matter experts to assist CBT Systems with the development of SAP-related computer-based training software. As of December 31, 1997, 12 of these titles had been released; the remaining eight are 25 scheduled to be released over the next six months. The Company considers the development of computer-based 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 PASSPORT. DA PASSPORT 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 PASSPORT technology, providing sophisticated support to end-users. A DA PASSPORT 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 PASSPORT 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 PASSPORT 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. 26 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 27 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 1997. Adgas Compaq Computer Corporation Occidental Chemical Corporation AlliedSignal Inc. Dealer Solutions LLC PetroFina SA Amerada Hess Corporation Deere & Company Public Service Electric AMP Inc. Exxon Company & Gas (PSEG) Berlex Laboratories, Hercules, Inc. South Africa Post Office Inc. Hewlett-Packard Service Corporation Bristol-Myers Squibb Company International Company Kimball International Shell Petroleum Inc. Browning-Ferris Industries M/A-COM Solvay America Inc. Cabletron Systems, Inc. Mobil Oil Corporation Swift & Co. Cadbury-Schweppes PLC Montell USA Inc. Tenneco Packaging, Inc. Chiron Diagnostics Woodside Offshore Petroleum The Company's ten largest clients, in the aggregate, accounted for approximately 59%, 53%, and 34% of its revenue in 1995, 1996, and 1997, respectively. No single client of the Company accounted for more than 6.0% of the Company's revenue in 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 seven offices); the EMEA Division, which includes its Europe, Middle East, and Africa operations (comprised of a total of five offices); and the Asia Pacific Division, which includes its Australia, New Zealand and Asia operations (comprised of a total of three offices). Each division is headed by a member of the Company's management and is further divided into regions which are generally headed by a 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 28 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 and Design: Once the change communication, education, and performance 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. 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. 29 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 December 31, 1997, DACG's personnel consisted of 568 employees, 425 of which were professional staff, 23 of which were sales and marketing staff, 23 of which were research and development staff, and 97 of which were 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 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 PASSPORT are also covered. In addition, all consultants are required to attend a DA Cornerstone 30 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. All of the Company's employees are eligible to receive stock options and after the completion of this offering, 403 employees (representing approximately 70% of the Company's employees as of December 31, 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. This division, which consisted of 23 persons as of December 31, 1997, is responsible for developing and maintaining DA PASSPORT, 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 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 six 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 31 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, Melbourne, Sydney, Durban, Johannesburg, Cape Town, Singapore, and Caracas. 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 PASSPORT 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 PASSPORT, 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. 32 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........... 41 Executive Vice President, Human Resources Virginia L. Pierpont....... 56 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 Josolyne, 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 1997, 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. 33 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 Concurrent with 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. 34 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 $205,878 -- $ 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 $ 95,317 8,400 -- Chief Operating Officer 1996 $125,000 $125,000 -- $291,960 1995 $ 78,209 -- -- -- Michael J. Mackey(4)...... 1997 $142,083 $ 35,805 63,000 $ 4,354 Chief Financial Officer, 1996 -- -- -- -- Executive Vice President, 1995 -- -- -- -- Finance and Administration, Treasurer, and Secretary Lisa L. Costello.......... 1997 $113,927 $ 56,000 21,000 $ 7,657 Executive Vice President, 1996 $ 97,200 $ 32,500 -- $ 300 Research and Development 1995 $ 52,731 -- -- $ 2,100 Eric J. Fernette(5)....... 1997 $ 48,159 $ 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 awards, employer 401(k) contributions and Company perquisites. All $291,960 of Mr. Newton's other compensation represents shares of Common Stock awarded to him without cash consideration. (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 35 the employee is terminated without cause, such employee is entitled to severance pay of up to 18 months 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. 36 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 effective February 1, 1997 and amended and restated this plan in March 1998 (as amended and restated, the "Stock Option Plan"). 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 37 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 December 31, 1997, options to purchase an aggregate of 446,069 shares of Common Stock were outstanding under the Stock Option Plan at a weighted average exercise price of $5.91 per share (none of which are currently exercisable), 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 399,000 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 (42,000 shares); Mr. Mackey (42,000 shares); Ms. Costello (21,000 shares); and Mr. Fernette (4,200 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 38 employed on the last day of a plan year. The Company made matching contributions equal to $0.06 in 1995 and $0.50 in 1996 and 1997 for each dollar contributed to the 401(k) Plan, subject to the limits noted above, by employees. 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 $9,000, $92,000, and $224,000 during the years ended December 31, 1995, 1996 and 1997 respectively. Payment of benefits is generally made in the form of a single lump sum or in installments. The Company sponsors similar plans in Canada, South Africa, and the United Kingdom, pursuant to which employees may defer specified percentages of compensation which the Company matches at a rate of 50-100% on the first 3-5% of compensation deferred. The Company made matching contributions of approximately $74,000 in 1997. Deferred Compensation Plan On February 25, 1998, the Company adopted a non-qualified deferred compensation plan (the "Deferred Compensation Plan"), pursuant to which certain executive employees may defer the receipt of compensation on a pre-tax basis. The Company will match such deferrals, at a rate of $0.50 on each dollar deferred, on deferral amounts up to and including 7.5 percent of each participant's compensation, less any match provided under the Company's 401(k) and Profit Sharing Plan. Participants' deferrals and matching contributions will not be segregated from the Company's general assets and will be payable upon any termination of employment. 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 $650,000, $1,258,000, and $1,994,000 for the years ended December 31, 1995, 1996, and 1997, respectively. The Company sponsors a profit sharing plan in the United Kingdom, pursuant to which 9% of net revenues are paid to employees on a partially tax-deferred basis. The Company made payments pursuant to this plan aggregating $98,000 and $93,000 in 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 121,065 shares were purchased pursuant to this plan. No additional shares will be granted or sold under this plan as it has been terminated. 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." 39 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During 1995, 1996, and 1997, the Company paid $160,000, $100,000, and $100,000, respectively, for accounting services provided by Clark Whitehill Josolyne, 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% per year). 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 year 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 151,200 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 determined by the Board of Directors 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 (which shares were cancelled in connection with the Exchange Transaction) in exchange for cash payments of $1, $1, and $998, respectively. In the Exchange Transaction in July 1995, Ms. Pierpont, Mr. Marriner, the two foregoing trusts and a third trust the beneficiaries of which include Ms. Pierpont and members of her family, and Ms. Pierpont's mother acquired 1,816,038, 166,614, 2,216,718, and 630 shares, respectively, of Common Stock of the Company in exchange for shares of the Predecessor Companies which are now 40 subsidiaries of the Company. In January 1996, Mr. Marriner acquired 235,200 shares of Common Stock of the Company in exchange for shares 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." Until December 31, 1997, the Company leased 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 1995, $38,000 for 1996, and $28,000 for 1997, which the Company believes reflected fair market rental rates. 41 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(3).. 27,300 * -- 27,300 * Richard W. Thatcher, Jr..................... 57,120 1.2% -- 57,120 * Virginia L. Pierpont.... 540,821 11.2% 150,004 390,817 6.0% OTHER SHAREHOLDERS Amicable Discretionary Trust(1)(4)(5)(7)...... 956,592 19.9% 154,192 802,400 12.3% Worcester Discretionary Trust(4)(6)(7)......... 631,092 13.1% -- 631,092 9.7% Woodbourne Discretionary Trust(4)(6)(7)......... 629,034 13.1% -- 629,034 9.7% Piero Granelli (1)(4)(8).............. 217,048 4.5% 91,724 125,324 1.9% Alison Smith(1)......... 189,000 3.9% 147,000 42,000 * Cynthia Gibson.......... 176,400 3.7% 96,600 79,800 1.2% Peter Johann van der Westhuizen(1)(9)....... 92,400 1.9% -- 92,400 1.4% All directors and executive officers as a group (9 individuals)........ 1,256,375 26.1% 210,484 1,045,891 16.1%
- ------- * 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, the Amicable Discretionary Trust, Ms. Smith, Mr. Mackey, a trust of which Mr. Granelli is the sole beneficiary, and a trust of which Mr. van der Westhuizen is a named beneficiary intend to sell 31,814, 109,200, 37,800, 4,200, 88,200, and 46,200 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) Includes 12,600 shares owned by Mr. Fritze's children. (4) 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. (5) 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. As of the date of this Prospectus, no other persons or classes of persons have been so named. (6) 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. As of the date of this Prospectus, no other persons or classes of persons have been so named. (7) 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. (8) Includes 184,800 shares owned by the David Michael Payne Settlement, a trust a named beneficiary of which is Mr. Granelli. (9) Includes 92,400 shares owned by the JVDW Family Trust, a trust of which Mr. van der Westhuizen is a named beneficiary. 42 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 6,508,475 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 43 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 33,491,525 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. 44 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 American Stock Transfer and Trust Company. 45 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have outstanding 6,508,475 shares of Common Stock (6,551,061 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. The 446,069 shares reserved for issuance upon exercise of options outstanding on December 31, 1997, the 399,000 shares to be reserved for issuance upon options expected to be granted upon completion of this offering, and the 414,931 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 3,911,258 shares of Common Stock have agreed not to sell, offer 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 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." 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, 4,108,475 shares are "restricted," as that term is defined in the Securities Act. Of these restricted shares, 3,747,170 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. 46 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............................................................... 2,400,000 =========
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 360,000 additional shares of Common Stock (42,586 from the Company and 317,414 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 3,911,258 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). In considering a request for its consent to a sale or transfer within the 180-day period, William Blair & Company, L.L.C. will take into account various factors, including, but not limited to, the number of shares requested to be sold, the anticipated manner and timing of sale, the potential impact of the sale on the market for the Common Stock, and 47 market conditions generally. 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. 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, 1996 and 1997 and the combined or consolidated statements of income, shareholders' equity, and cash flows for the six months ended June 30, 1995 and December 31, 1995 and for the years ended December 31, 1996 and 1997, included in this Prospectus, have been included 48 herein 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 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 combined or consolidated financial statements of the Company as of December 31, 1996 and 1997 and for the three years in the period ended December 31, 1997 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. 49 DA CONSULTING GROUP, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants......................................... F-2 Consolidated Balance Sheets as of December 31, 1996 and 1997.............. F-3 Combined and Consolidated Statements of Income for the six months ended June 30, 1995 and December 31, 1995 and for the years ended December 31, 1996 and 1997............................................................ F-4 Combined and Consolidated Statement of Shareholders' Equity for the six months ended June 30, 1995 and December 31, 1995 and for the years ended December 31, 1996 and 1997............................................... F-5 Combined and Consolidated Statements of Cash Flows for the six months ended June 30, 1995 and December 31, 1995 and for the years ended December 31, 1996 and 1997............................................... F-6 Notes to Combined and Consolidated Financial Statements................... F-7
F-1 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. (the "Company") as of December 31, 1996 and 1997, and the related combined or consolidated statements of income, shareholders' equity and cash flows for the six months ended June 30, 1995 and December 31, 1995 and for the years ended December 31, 1996 and 1997. 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. As discussed in Notes 1 and 9 to the financial statements, prior to July 1, 1995 the Company's business was operated through four separate companies (the "Predecessor Companies") under common management. On July 1, 1995, the Predecessor Companies became wholly-owned subsidiaries of the Company in a stock exchange transaction (the "Exchange Transaction") accounted for as a purchase. Accordingly, the financial statements of the Company for the six months ended June 30, 1995 and December 31, 1995 are presented on a combined and consolidated basis, respectively, and are not comparable. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 1996 and 1997, and the combined or consolidated results of its operations and its cash flows for the six months ended June 30, 1995 and December 31, 1995, respectively, and for the years ended December 31, 1996 and 1997, in conformity with generally accepted accounting principles. Houston, Texas Coopers & Lybrand L.L.P. February 19, 1998 except for Note 16 as to which the date is April 20, 1998 F-2 DA CONSULTING GROUP, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, --------------- 1996 1997 ------ ------- ASSETS ------ Current assets: Cash and cash equivalents........................................ $2,199 $ 3,664 Accounts receivable: Trade, net..................................................... 4,444 10,934 Other.......................................................... 63 800 Unbilled revenue................................................. -- 645 Prepaid expenses and other current assets........................ 401 250 ------ ------- Total current assets......................................... 7,107 16,293 Property and equipment, net...................................... 951 2,507 Other assets..................................................... -- 898 Intangible assets, net........................................... 491 437 ------ ------- Total assets............................................... $8,549 $20,135 ====== ======= LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Revolving line of credit......................................... $ 375 $ 3,208 Note payable..................................................... -- 762 Notes payable to shareholders.................................... 356 -- Accounts payable................................................. 1,741 1,841 Accrued expenses................................................. 2,534 5,517 Deferred income.................................................. -- 312 Income taxes payable............................................. 261 333 Deferred income taxes............................................ 211 219 ------ ------- Total current liabilities.................................... 5,478 12,192 ------ ------- 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; 4,435,200 and 4,829,191 shares issued and 4,213,650 and 4,808,475 shares outstanding.................................... 44 48 Additional paid-in capital....................................... 2,787 6,449 Retained earnings................................................ 691 2,099 Treasury stock, at cost: 221,550 and 20,716 shares............... (5) (91) Notes receivable from shareholders............................... (413) (503) Cumulative foreign currency translation adjustment............... (33) (59) ------ ------- Total shareholders' equity................................... 3,071 7,943 ------ ------- Total liabilities and shareholders' equity................. $8,549 $20,135 ====== =======
The accompanying notes are an integral part of the combined and consolidated financial statements. F-3 DA CONSULTING GROUP, INC. COMBINED AND CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, --------------------- ---------------- JUNE 30, DECEMBER 31, 1995 1995 1996 1997 -------- ------------ ------- ------- COMBINED CONSOLIDATED CONSOLIDATED Revenue................................ $6,299 $8,319 $26,202 $44,204 Cost of revenue........................ 3,412 4,249 14,190 24,063 ------ ------ ------- ------- Gross profit......................... 2,887 4,070 12,012 20,141 Selling and marketing expense.......... 407 665 1,953 3,726 Development expense.................... 296 411 1,250 1,223 General and administrative expense..... 1,657 2,357 6,597 12,436 Amortization expense................... -- 230 274 54 Employee stock-related charge.......... -- -- 1,858 263 ------ ------ ------- ------- Operating income..................... 527 407 80 2,439 Interest (expense) income, net......... 5 (31) (37) 30 Other (expense) income, net............ (28) (30) 132 (165) ------ ------ ------- ------- Income before taxes.................. 504 346 175 2,304 ------ ------ ------- ------- Provision for income taxes: Current provision.................... 98 119 281 888 Deferred provision (benefit)......... 91 109 (140) 8 ------ ------ ------- ------- Provision for income taxes......... 189 228 141 896 ------ ------ ------- ------- Net income......................... $ 315 $ 118 $ 34 $ 1,408 ====== ====== ======= ======= Basic earnings per share............... $ 0.09 $ 0.03 $ 0.01 $ 0.29 Weighted average shares outstanding.... 3,623 3,623 4,217 4,808 Diluted earnings per share............. $ 0.08 $ 0.03 $ 0.01 $ 0.28 Weighted average shares outstanding.... 3,868 3,868 4,462 5,053
The accompanying notes are an integral part of the combined and consolidated financial statements. F-4 DA CONSULTING GROUP, INC. COMBINED AND 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 DECEMBER 31, 1994--COMBINED..... 2,621 $ 26 -- $ 232 -- -- -- -- $ 258 Net income............. -- -- -- 315 -- -- -- -- 315 ----- ---- ------- ------ ----- ---- ----- ---- ------ BALANCE AS OF JUNE 30, 1995--COMBINED......... 2,621 26 -- 547 -- -- -- -- 573 Shares issued in stock exchange transaction.. 1,579 16 $ 1,269 -- -- -- -- -- 1,285 Net income............. -- -- -- 118 -- -- -- -- 118 Cash dividends paid.... -- -- -- (8) -- -- -- -- (8) Foreign currency translation adjustment............ -- -- -- -- -- -- -- $(77) (77) ----- ---- ------- ------ ----- ---- ----- ---- ------ BALANCE AS OF DECEMBER 31, 1995-- CONSOLIDATED........... 4,200 42 1,269 657 -- -- -- (77) 1,891 Stock contribution..... -- -- 28 -- 1,170 $(28) -- -- -- Issuance of common stock................. 235 2 1,490 -- (949) 23 $(413) -- 1,102 Net income............. -- -- -- 34 -- -- -- -- 34 Foreign currency translation adjustment............ -- -- -- -- -- -- -- 44 44 ----- ---- ------- ------ ----- ---- ----- ---- ------ BALANCE AS OF DECEMBER 31, 1996-- CONSOLIDATED........... 4,435 44 2,787 691 221 (5) (413) (33) 3,071 Issuance of common stock................. 394 4 3,662 -- (218) 5 (90) -- 3,581 Employee stock repurchases........... -- -- -- -- 18 (91) -- -- (91) Net income............. -- -- -- 1,408 -- -- -- -- 1,408 Foreign currency translation adjustment............ -- -- -- -- -- -- -- (26) (26) ----- ---- ------- ------ ----- ---- ----- ---- ------ BALANCE AS OF DECEMBER 31, 1997-- CONSOLIDATED........... 4,829 $ 48 $ 6,449 $2,099 21 $(91) $(503) $(59) $7,943 ===== ==== ======= ====== ===== ==== ===== ==== ======
The accompanying notes are an integral part of the combined and consolidated financial statements. F-5 DA CONSULTING GROUP INC. COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, --------------------- -------------- JUNE 30, DECEMBER 31, 1995 1995 1996 1997 -------- ------------ ------ ------ COMBINED CONSOLIDATED CONSOLIDATED Cash flows from operating activities: Net income............................ $ 315 $ 118 $ 34 $1,408 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization....... 43 276 395 453 Deferred income taxes............... 99 101 (140) 8 Stock awarded to employees.......... -- -- 898 -- Changes in operating assets and liabilities: Increase in accounts receivable and unbilled revenue............. (866) (1,334) (861) (7,872) (Increase) decrease in prepaid expenses and other current assets........................... (12) (16) (328) 151 Increase in other assets.......... -- -- -- (45) Increase in accounts payable and accrued liabilities.............. 614 900 1,919 3,083 Increase in deferred income....... -- -- -- 312 Increase (decrease) in income taxes payable.................... 159 82 (17) 72 ------ ------ ------ ------ Total adjustments............... 37 9 1,866 (3,838) ------ ------ ------ ------ Net cash provided by (used in) operating activities........... 352 127 1,900 (2,430) ------ ------ ------ ------ Cash flows from investing activities: Proceeds from sale of property and equipment............................ -- -- 17 -- Purchases of property and equipment... (111) (153) (726) (1,955) ------ ------ ------ ------ Net cash used in investing activities..................... (111) (153) (709) (1,955) ------ ------ ------ ------ Cash flows from financing activities: Net proceeds from revolving line of credit............................... -- 150 125 2,833 Net proceeds from note payable........ -- -- -- 762 Net proceeds from (repayments of) notes payable to shareholders........ 240 (32) 43 (356) Issuance of stock..................... -- -- 204 3,581 Employee stock repurchases............ -- -- -- (91) Dividends paid........................ -- (8) -- -- Deferred offering costs............... -- -- -- (853) ------ ------ ------ ------ Net cash provided by financing activities..................... 240 110 372 5,876 ------ ------ ------ ------ Effect of changes in foreign currency exchange rate on cash and cash equivalents............................ -- (77) 44 (26) ------ ------ ------ ------ Increase in cash and cash equivalents.................... 481 7 1,607 1,465 Cash and cash equivalents at beginning of period.............................. 104 585 592 2,199 ------ ------ ------ ------ Cash and cash equivalents at end of period................................. $ 585 $ 592 $2,199 $3,664 ====== ====== ====== ======
The accompanying notes are an integral part of the combined and consolidated financial statements. F-6 DA CONSULTING GROUP, INC. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION 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. Prior to July 1995, the Company's business was operated through four separate companies located in the United States (U.S.), the United Kingdom (U.K.), South Africa, and Australia (the "Predecessor Companies"). All of the Predecessor Companies were under common management. Prior to July 1995, three of the Predecessor Companies were controlled (based upon record ownership) by trusts, the sole beneficiaries of which were the controlling owners of the U.S. company and their children. As a result of a stock exchange transaction (the "Exchange Transaction") in July 1995, the Predecessor Companies became wholly-owned subsidiaries of the Company. The Exchange Transaction consisted of the issuance of 4,200,000 shares of common stock of the Company in exchange for the outstanding common stock of the Predecessor Companies. For accounting purposes, the acquisition of the U.S. company has been treated as a recapitalization and the U.S. company has been treated as the acquiror of the other three entities; and, as a result, the net assets of the U.S. company were carried forward at historical basis while the net assets of the acquired Predecessor Companies were recorded at fair market value using the purchase method of accounting (see Note 9). The combined results of the Predecessor Companies are presented for the six months ended June 30, 1995. The consolidated results of the Company for the six months ended December 31, 1995 reflect the change in basis for the Predecessor Companies and amortization since the Exchange Transaction. All material intercompany balances and transactions have been eliminated. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 $141,000 during the year ended December 31, 1997, which have been included in property and equipment, net. Research costs related to software development are expensed as incurred. F-7 DA CONSULTING GROUP, INC. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Deferred Offering Costs Deferred offering costs primarily represent professional fees incurred through December 31, 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 December 31, 1997, $853,000 of deferred offering costs have been included in other assets. Intangible Assets Goodwill represents the cost in excess of fair value of the net assets of the Predecessor Companies deemed to have been acquired in the Exchange Transaction and is being amortized using the straight-line method over 25 years. Other intangible assets arising out of the Exchange Transaction were amortized using the straight-line method over 12 to 24 months. 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 majority of the Company's contracts with clients are based on time and expenses incurred with the remainder of the revenue generated from fixed price contracts. Accordingly, service revenue under both types of contracts is recognized as services are performed and the realization of the revenue is assured. Contract costs F-8 DA CONSULTING GROUP, INC. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) include direct labor costs and reimbursable expenses, and those indirect costs related to contract performance such as indirect labor. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Unbilled revenue represents the revenue earned in excess of amounts billed and deferred income represents billings in excess of revenue earned. Service revenue includes reimbursable expenses directly incurred in providing services to clients. Revenue attributable to reimbursable expenses amounted to $151,000, $192,000, $1,664,000, and $3,680,000 for the six months ended June 30, 1995 and December 31, 1995 and for the years ended December 31, 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 for one client, which in the aggregate accounted for 18% of revenue for the six months ended June 30, 1995 and December 31, 1995. Segment Information The Company operates within one industry segment. Earnings Per Share Basic earnings per share has been computed based on the weighted average number of common shares outstanding during the applicable period. Diluted earnings per share includes 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. 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. Other Matters 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. Adoption of this statement will not have a material impact on the consolidated financial statements of the Company. F-9 DA CONSULTING GROUP, INC. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes standards for reporting information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. Adoption is not recognized for interim periods in the initial year of application. Adoption of this statement will not have material impact on the consolidated financial statements of the Company. Reclassifications Certain amounts previously reported have been reclassified to conform to current period presentation with no effect on the Company's financial position, results of operations, or cash flows. 3. PROPERTY AND EQUIPMENT, NET The components of property and equipment were as follows (in thousands):
DECEMBER 31, -------------- 1996 1997 ------ ------ Computer equipment and software.............................. $1,031 $2,045 Automobiles.................................................. 120 74 Furniture and fixtures....................................... 156 894 Leasehold improvements....................................... -- 108 Development costs............................................ -- 141 ------ ------ Property and equipment..................................... 1,307 3,262 Less accumulated depreciation and amortization............... (356) (755) ------ ------ Property and equipment, net................................ $ 951 $2,507 ====== ======
4. INDEBTEDNESS FOR BORROWED MONEY 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 and $5,000,000, respectively. Interest is payable monthly at prime plus 0.5% per year (9.0% at December 31, 1997). The credit facility matures in June 1998 and is collateralized by the accounts receivable of the Company's North American operations. The balance outstanding on the line of credit at December 31, 1996 and 1997 was $375,000 and $3,208,000, respectively. Note Payable In 1997, the Company borrowed approximately $762,000 for the purchase of furniture and equipment. The borrowing bears an annual interest rate of 9.1%, with interest and principal of approximately $24,000, payable monthly and matures in November 2000. The borrowing is collateralized by the furniture and fixtures. Total interest expense for all indebtedness for each of the six months ended June 30, 1995 and December 31, 1995 amounted to $35,500, and for the years ended December 31, 1996 and 1997 amounted to $78,000 and $196,000, respectively. F-10 DA CONSULTING GROUP, INC. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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% per year). As of December 31, 1996, notes payable to shareholders amounted to $356,000. Interest expense related to these notes amounted to $22,500 for each of the six months ended June 30, 1995 and December 31, 1995 and $56,000 for the year ended December 31, 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, ------------- 1996 1997 ------ ------ Compensation and related expenses............................. $2,204 $2,077 Bonuses....................................................... -- 1,241 Professional fees............................................. 66 1,084 Vacation...................................................... 75 328 Other taxes................................................... -- 272 Other......................................................... 189 515 ------ ------ Accrued expenses............................................ $2,534 $5,517 ====== ======
7. INCOME TAXES The following is a summary of the significant components of the Company's deferred income taxes (in thousands):
DECEMBER 31, --------- 1996 1997 ---- ---- Deferred tax assets: Net operating loss carryforwards................................ $340 $ -- Deferred compensation........................................... 305 305 Accrued expenses................................................ -- 157 Other........................................................... -- 12 ---- ---- Net deferred tax assets....................................... 645 474 ---- ---- Deferred tax liabilities: Cash to accrual timing differences.............................. 728 583 Property, plant and equipment................................... 32 110 Other........................................................... 96 -- ---- ---- Deferred tax liabilities...................................... 856 693 ---- ---- Deferred income taxes......................................... $211 $219 ==== ====
F-11 DA CONSULTING GROUP, INC. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The components of the Company's provision for income taxes were as follows (in thousands):
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, --------------------- -------------- JUNE 30, DECEMBER 31, 1995 1995 1996 1997 -------- ------------ ------ ------ COMBINED CONSOLIDATED U.S. federal and state: Current provision..................... $ 22 $ 24 -- $ 652 Deferred (benefit) provision.......... 109 117 $ (260) 110 ---- ---- ------ ----- 131 141 (260) 762 ---- ---- ------ ----- Foreign: Current provision..................... 68 103 281 236 Deferred (benefit) provision.......... (10) (16) 120 (102) ---- ---- ------ ----- 58 87 401 134 ---- ---- ------ ----- Provision for income taxes.......... $189 $228 $ 141 $ 896 ==== ==== ====== =====
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 DECEMBER SIX MONTHS ENDED 31, --------------------- ---------- JUNE 30, DECEMBER 31, 1995 1995 1996 1997 -------- ------------ ---- ---- COMBINED CONSOLIDATED U.S. statutory rate........................ 34.0% 34.0% 34.0% 34.0% Amortization of intangible assets.......... -- 27.5 49.2 0.9 State and local............................ 3.0 3.0 2.9 3.0 Foreign.................................... 0.3 0.1 (8.5) (1.8) Other...................................... 0.2 1.3 3.0 2.8 ---- ---- ---- ---- Effective tax rate....................... 37.5% 65.9% 80.6% 38.9% ==== ==== ==== ====
Applicable U.S. income taxes have not been provided on $1,618,000 of undistributed earnings of the Company's foreign subsidiaries as of December 31, 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 1, 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. Unless otherwise specified in the terms of an award, all options vest on a graded F-12 DA CONSULTING GROUP, INC. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 the Company's Board of Directors. To date no stock options have been granted to independent contractors and consultants of the Company. To the extent that stock options were granted to these parties the Company would recognize compensation expense equal to the difference between the fair market value of the stock options granted and the consideration given, if any, for such options. The following table sets forth pertinent information regarding stock option transactions and stock option prices during the year ended December 31, 1997:
NUMBER OF SHARES OF WEIGHTED AVERAGE UNDERLYING OPTIONS EXERCISE PRICES ------------------- ---------------- Outstanding as of December 31, 1996....... -- -- Granted................................... 505,646 $5.90 Forfeited................................. 59,577 $5.85 ------- ----- Outstanding as of December 31, 1997....... 446,069 $5.91 ======= ===== Exercisable as of December 31, 1997....... -- -- ======= ===== Weighted average fair value of options granted during the year ended December 31, 1997...................................... $1.54 =====
The fair value of each stock option granted is estimated on the date of grant using the minimum value method of option pricing based on 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 December 31, 1997, 446,069 options were outstanding with a remaining weighted-average contractual term of 9.21 years. Pro Forma Net Income and Earnings 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 December 31, 1997 would approximate the pro forma amounts below (unaudited):
AS REPORTED PRO FORMA -------------------- ------------------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) SFAS No. 123 charge.......... -- $ 178 Net income................... $ 1,408 $ 1,230 Diluted earnings per share... $ 0.28 $ 0.26
The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. F-13 DA CONSULTING GROUP, INC. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 9. SHAREHOLDERS' EQUITY The following table sets forth pertinent information regarding shareholders' equity transactions during the years ended December 31, 1996 and 1997 (in thousands):
YEAR ENDED DECEMBER 31, ------------- SHARES 1996 1997 ------ ------ ------ Purchase of Predecessor Companies......................... 1,579 -- -- Stock contribution to the Company......................... 1,170 -- -- Issuance of stock in connection with acquisition.......... 235 -- -- Employee stock purchases.................................. 121 $ 158 -- Sale of common stock...................................... 361 46 -- Stock awards to employees................................. 465 898 -- Private placement of shares............................... 597 -- $3,571 Employee stock purchases.................................. 15 -- 10 Employee stock repurchases................................ 18 -- (91) ------ ------ $1,102 $3,490 ====== ======
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. Stock Exchange Transaction As discussed in Note 1, prior to July 1, 1995, the Company's business was operated through the Predecessor Companies. All of the Predecessor Companies were under common management. As a result of the Exchange Transaction in July 1995, the Predecessor Companies became wholly-owned subsidiaries of the Company. The Exchange Transaction consisted of the issuance of 4,200,000 shares of common stock of the Company in exchange for the outstanding common stock of the Predecessor Companies. For accounting purposes, the acquisition of the U.S. company has been treated as a recapitalization, and the U.S. company has been treated as the acquiror of the other three entities. Accordingly, the net assets of the U.S. company were carried forward at historical basis while the net assets of the acquired Predecessor Companies were recorded at fair market value utilizing the purchase method of accounting. For accounting purposes, the fair value of the acquired Predecessor Companies was approximately $1.3 million and the acquired Predecessor Companies were deemed to have been acquired through the issuance of 1,578,843 shares of the Company's common stock to the stockholders of the acquired Predecessor Companies. The purchase price was allocated as follows (in thousands):
TANGIBLE ASSET VALUE GOODWILL OTHER INTANGIBLES TOTAL COST -------- -------- ----------------- ---------- United Kingdom............. $206 $313 $248 $ 767 South Africa............... 123 172 232 527 Australia.................. (29) -- 30 1 ---- ---- ---- ------ $300 $485 $510 $1,295 ==== ==== ==== ======
F-14 DA CONSULTING GROUP, INC. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Stock Contribution to the Company In June 1996, one 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. Issuance of Stock in Connection with Acquisition In July 1996, the Company issued 235,200 shares of common stock to a shareholder in exchange for all of the outstanding stock of a company which is now a subsidiary of the Company. The Exchange Transaction was accounted for at fair value utilizing the purchase method of accounting which was not materially different from historical cost at the date of the transaction. 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 121,065 shares were purchased pursuant to this plan, at $1.27 per share. No additional shares will be sold under this plan as it has been terminated. During the year ended December 31, 1997, the Company repurchased 18,375 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 of $90,000. Stock Awards to Employees In September 1996, the Company awarded 464,848 shares of common stock to certain key employees. 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. In December 1997, the Company recognized compensation expense of $263,000 relating to cash payments to a former employee in lieu of an award of shares of common stock. 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 $1.2 million. 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, including 43,680 shares (for an aggregate of approximately $286,000) to directors of the Company, and 52,920 shares (for an aggregate of approximately $347,000) to officers and employees of the Company. Total proceeds to the Company amounted to approximately $2.4 million. F-15 DA CONSULTING GROUP, INC. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Earnings Per Share The following table summarizes the Company's computation of earnings per share for the six months ended June 30, 1995 and December 31, 1995 and the years ended December 31, 1996 and 1997 (in thousands, except per share amounts):
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, --------------------- -------------- JUNE 30, DECEMBER 31, 1995 1995 1996 1997 -------- ------------ ------ ------ Basic earnings per share................. $0.09 $0.03 $ 0.01 $ 0.29 ===== ===== ====== ====== Net income (numerator)................... $ 315 $ 118 $ 34 $1,408 ===== ===== ====== ====== Weighted average shares outstanding (de- nominator).............................. 3,623 3,623 4,217 4,808 Computation of diluted earnings per share: Common shares issuable under outstand- ing stock options..................... 449 449 449 449 Less shares assumed repurchased with proceeds from exercise of stock options............................... (204) (204) (204) (204) ----- ----- ------ ------ Adjusted weighted average shares out- standing (denominator)................ 3,868 3,868 4,462 5,053 ===== ===== ====== ====== Diluted earnings per share............. $0.08 $0.03 $ 0.01 $ 0.28 ===== ===== ====== ======
10. RELATED PARTY TRANSACTIONS During the six months ended June 30, 1995 and December 31, 1995 and the years ended December 31, 1996 and 1997, the Company paid $97,000, $63,000, $100,000, and $100,000, respectively, for accounting services provided by an accountancy practice in which the Company's chief executive officer was a partner until June 30, 1996. Until December 31, 1997, the Company leased two properties from its chief executive officer and from an affiliate of the chief executive officer. The Company paid $19,000 for each of the six months ended June 30, 1995 and December 31, 1995 and $38,000 and $28,000 for the years ended December 31, 1996 and 1997, respectively, in rent related to these two properties in both 1995 and 1996 and $28,000 in 1997. 11. COMMITMENTS AND CONTINGENCIES The Company leases various office facilities under noncancelable operating lease agreements. Rent expense amounted to $56,000 for each of the six months ended June 30, 1995 and December 31, 1995 and $150,000 and $575,000 for the years ended December 31, 1996 and 1997, respectively. 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 December 31, 1997, future lease payments under noncancelable leases with terms of more than one year are as follows: 1998.................................. $ 816 1999.................................. 789 2000.................................. 697 2001.................................. 387 2002.................................. 358 Thereafter............................ 537 ------ $3,584 ======
F-16 DA CONSULTING GROUP, INC. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 does not believe that such litigation will have a material impact on the financial statements. 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 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 for each of the six months ended June 30, 1995 and December 31, 1995 and $0.50 for the years ended December 31, 1996 and 1997 for each dollar contributed to the 401(k) Plan, subject to the limits noted above, by employees. These amounts have been included in general and administrative expenses on the statements of income. 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 $4,200, $4,800, $92,000 and $224,000 during the six months ended June 30, 1995 and December 31, 1995 and the years ended December 31, 1996 and 1997, respectively. Payment of benefits is generally made in the form of a single lump sum or in installments. The Company sponsors similar plans in Canada, South Africa and the United Kingdom, pursuant to which employees may defer specified percentages of compensation which the Company matches at a rate of 50-100% on the first 3-5% of compensation deferred. The Company made matching contributions of approximately $74,000 in 1997. 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 approximately $304,000, $346,000, $1,258,000 and $1,994,000 for the six months ended June 30, 1995 and December 31, 1995 and for the years ended December 31, 1996 and 1997, respectively, which are included in general and administrative expense. The Company sponsors a profit sharing plan in the United Kingdom, pursuant to which 9% of net revenues are paid to employees on a partially tax-deferred basis. The Company made payments pursuant to this plan aggregating approximately $98,000 and $93,000 in 1995 and 1996 respectively. F-17 DA CONSULTING GROUP, INC. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, --------------------- ------------- JUNE 30, DECEMBER 31, 1995 1995 1996 1997 -------- ------------ ------ ------ COMBINED CONSOLIDATED Cash paid for interest and income taxes amounted to (in thousands): Interest........................... $ 31 $ 25 $ 79 $ 80 Income taxes....................... 210 210 355 816
YEAR ENDED DECEMBER 31, --------------- 1996 1997 Non-cash activities were (in thousands): ------- ------ Stock contribution to the Company...................... $ (28) -- Common stock issued for notes receivable............... 413 $90 Issuance of stock awards to key employees.............. 898 --
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 --------- -------- ----------- ------------ ------- YEAR ENDED DECEMBER 31, 1997: Revenues.............. -- $28,663 $11,341 $4,200 $44,204 Operating income (loss)............... $ (317)(1) 2,221 284 251 2,439 Total assets.......... -- 15,676 3,223 1,236 20,135 YEAR ENDED DECEMBER 31, 1996: Revenues.............. -- $15,565 $ 8,906 $1,731 $26,202 Operating income (loss)............... $(2,132)(1) 1,296 592 324 80 Total assets.......... -- 4,798 3,016 735 8,549 SIX MONTHS ENDED DECEMBER 31, 1995: Revenues.............. -- $ 5,113 $ 2,939 $ 267 $ 8,319 Operating income (loss)............... (230)(1) 419 213 5 406 Total assets.......... -- 3,154 2,164 122 5,440 SIX MONTHS ENDED JUNE 30, 1995: Revenues.............. $ -- $ 3,813 $ 2,462 $ 24 $ 6,299 Operating income (loss)............... -- 384 171 (27) 528 Total assets.......... -- 1,711 1,485 15 3,211
- -------- (1) Represents charges, for the year ended December 31, 1996, for stock awarded to employees, without cash consideration, and payments in lieu thereof, and, for the year ended December 31, 1997, for payments to an employee in lieu of a stock award; and for the six months ended December 31, 1995 and for the years ended December 31, 1996 and 1997, amortization expense related to goodwill and other intangible assets which were recorded as a result of the Exchange Transaction. F-18 DA CONSULTING GROUP, INC. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 15. QUARTERLY FINANCIAL DATA Summarized quarterly financial data for the years ended December 31, 1997 and 1996 is as follows (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- YEAR ENDED DECEMBER 31, 1997: Revenues................................... $8,084 $9,897 $12,075 $14,148 Operating income........................... 186 560 783 910 Net income................................. 106 318 467 517 Basic earnings per share................... $ 0.02 $ 0.07 $ 0.10 $ 0.11 Weighted average shares outstanding........ 4,808 4,808 4,808 4,808 Diluted earnings per share................. $ 0.02 $ 0.06 $ 0.09 $ 0.10 Weighted average shares outstanding........ 5,053 5,053 5,053 5,053 YEAR ENDED DECEMBER 31, 1996: Revenues................................... $5,677 $6,363 $ 6,999 $ 7,163 Operating income (loss).................... 598 545 (347) (716) Net income (loss).......................... 324 325 (187) (428) Basic earnings (loss) per share............ $ 0.08 $ 0.08 $ (0.04) $ (0.09) Weighted average shares outstanding........ 3,859 3,943 4,282 4,787 Diluted earnings (loss) per share.......... $ 0.08 $ 0.08 $ (0.04) $ (0.09) Weighted average shares outstanding........ 4,103 4,188 4,527 5,032
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 effected, on April 20, 1998, a 4.2-for-one stock split of the common stock. 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. F-19 LOGO [CHART APPEARS HERE] END-USER SUPPORT Change Communication Education Performance Support Multimedia Distance Learning DA PASSPORT(TM) Videos CBT Intranet Newsletters ILT Documentation DA Cornerstone(TM) DA Foundation(R) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 Combined and Consolidated Financial Data........................ 13 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 14 Business................................................................. 22 Management............................................................... 33 Certain Relationships and Related Transactions........................... 40 Principal and Selling Shareholders....................................... 42 Description of Capital Stock............................................. 43 Shares Eligible for Future Sale.......................................... 46 Underwriting............................................................. 47 Legal Matters............................................................ 48 Experts.................................................................. 48 Additional Information................................................... 49 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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 2,400,000 SHARES 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............................... 66,000 Printing and engraving expenses.................................. 210,000 Legal fees and expenses.......................................... 350,000 Accounting fees and expenses..................................... 585,000 Blue Sky filing fees and expenses................................ 15,000 Transfer agent and registrar fees................................ 10,000 Director & Officer liability insurance........................... 200,000 Miscellaneous.................................................... 398,736 ---------- Total.......................................................... $1,850,000 ==========
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, three trusts for the benefit of the founder's family, a member of the founder's family and the Chief Executive Officer of the Company in exchange for shares 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 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 --Amended and Restated Articles of Incorporation of the Company 3.2 --Restated By-Laws of the Company 4.1 --Specimen Stock Certificate 5.1 --Opinion of Pepper Hamilton LLP dated March 20, 1998* 5.2 --Opinion of Pepper Hamilton LLP dated April 16, 1998 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* 10.17 --Amended and Restated Employment Agreement between the Company and Lisa Costello* 10.18 --DA Consulting Group, Inc. Deferred Compensation Plan* 10.19 --Amended and Restated 1997 Stock Option Plan* 11.1 --Computation of Net Income Per Share dated January 9, 1998* 11.2 --Computation of Pro Forma Earnings per Share dated March 2, 1998* 11.3 --Computation of Pro Forma Earnings per Share dated March 31, 1998 16.1 --Letter re change in certifying accountants dated January 9, 1998* 16.2 --Letter re change in certifying accountants dated March 30, 1998* 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 5.2) 24 --Power of Attorney (included on Signature Pages)* 27 --Financial Data Schedule*
- -------- * Previously filed. ** To be filed by amendment. (b) 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 (file no. 333-43989) of our report dated February 19, 1998, except Note for 16, as to which the date is April 20, 1998, on our audits of the combined and consolidated financial statements of DA Consulting Group, Inc. as of December 31, 1996 and 1997 and for the six months ended June 30, 1995 and December 31, 1995 and for the years ended December 31, 1996 and 1997. We also consent to the reference to our firm under the caption "Experts." Coopers & Lybrand L.L.P. Houston, Texas April 20, 1998 II-5 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS Amendment No. 4 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, State of Texas, on the 20th day of April, 1998. DA Consulting Group, Inc. /s/ Nicholas H. Marriner By: _________________________________ Nicholas H. Marriner President and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT NO. 4 TO 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 - ------------------------------------- Officer and April 20, 1998 NICHOLAS H. MARRINER President (principal executive officer) /s/ Michael J. Mackey Vice President, - ------------------------------------- Chief Financial April 20, 1998 MICHAEL J. MACKEY Officer, (principal financial officer and principal accounting officer) * Director - ------------------------------------- April 20, 1998 VIRGINIA L. PIERPONT * Director - ------------------------------------- April 20, 1998 NIGEL W.E. CURLET * Director - ------------------------------------- April 20, 1998 GUNTHER E.A. FRITZE * Director - ------------------------------------- April 20, 1998 RICHARD W. THATCHER JR. /s/ Nicholas H. Marriner *By__________________________________ Nicholas H. Marriner Attorney-in-fact II-6 EX-3.1 2 AMENDED & RESTATED ARTICLES OF INCORPORATION EXHIBIT 3.1 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"). 1. 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: (a) the distinctive designation and number of shares of that series; (b) 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; (c) 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; (d) 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); (e) 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; (f) 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; (g) 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; (h) 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; (i) 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; (j) any other repurchase obligations of the corporation, subject to any limitations of applicable law; and (k) 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. 2. 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. 3. 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. 4. 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. 5. 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. 6. 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. 7. 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 1999 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 2001 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 B 5847 San Felipe Plaza, Suite 3700, Houston, TX 77057 Mr. Nigel Curlet A 5847 San Felipe Plaza, Suite 3700, Houston, TX 77057 Mr. Gunther Fritze A 5847 San Felipe Plaza, Suite 3700, Houston, TX 77057 Name Class Address ---- ----- ------- Mr. Richard Thatcher B 5847 San Felipe Plaza, Suite 3700, Houston, TX 77057 Mr. Nicholas H. Marriner C 5847 San Felipe Plaza, Suite 3700, Houston, TX 77057 2. Removal of Directors. 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. In the event that cause shall be found to exist with respect to a director of the Company, then in such event, such director shall not 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 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 Any action required to be taken at any annual or special meeting of shareholders or any action which may be taken at any annual or special meeting of shareholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents 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. 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 20th day of April, 1998. DA CONSULTING GROUP, INC. By: /s/ Nicholas H. Marriner ---------------------------- Mr. Nicholas H. Marriner President EX-3.2 3 RESTATED BY-LAWS OF THE COMPANY 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 Chief Executive Officer, 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-4.1 4 FORM OF STOCK CERTIFICATE DA CONSULTING GROUP, INC. COMMON STOCK DA COMMON STOCK INCORPORATED UNDER THE LAWS OF THE STATE OF TEXAS SEE REVERSE FOR CERTAIN DEFINITIONS AND LEGENDS CUSIP 233027 10 1 THIS CERTIFIES THAT IS THE OWNER OF FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF $.01 PAR VALUE EACH OF transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned by the Transfer Agent and registered by the Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: DA CONSULTING GROUP, INC. SECRETARY PRESIDENT COUNTERSIGNED AND REGISTERED: AMERICAN STOCK TRANSFER & TRUST COMPANY (NEW YORK, N.Y.) TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE THE AMENDED AND RESTATED ARTICLES OF INCORPORATION OF THE CORPORATION PROVIDES, IN PART, THAT 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 TO ANY ADDITIONAL, UNISSUED OR TREASURY SHARES OF ANY CLASS OF THE CORPORATION NOW OR HEREAFTER TO BE AUTHORIZED. A FULL STATEMENT OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL, OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF WHICH THE CORPORATION IS AUTHORIZED TO ISSUE AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS IS SET FORTH IN THE AMENDED AND RESTATED ARTICLES OF INCORPORATION OF THE CORPORATION ON FILE IN THE OFFICE OF THE SECRETARY OF STATE OF THE STATE OF TEXAS, AND THE CORPORATION WILL FURNISH A COPY OF SUCH STATEMENT TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE ON REQUEST TO THE CORPORATION AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT-- Custodian (Cust) (Minor) under Uniform Gifts to Minors Act (State) For value received, hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OR ASSIGNEE) Shares of the Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint Attorney to transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises. Dated NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. SIGNATURE(S) GUARANTEED THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM) PURSUANT TO S.E.C. RULE 17Ad-15. KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE. EX-5.2 5 OPINION OF PEPPER HAMILTON [LETTERHEAD OF PEPPER HAMILTON LLP APPEARS HERE] April 16, 1998 DA Consulting Group, Inc. 5847 San Felipe Road Suite 3700 Houston, Texas 77057 Re: Registration Statement ---------------------- Ladies and Gentlemen: We have acted as counsel to DA Consulting Group, Inc., a Texas corporation (the "Company"), in connection with the preparation and filing with the Securities and Exchange Commission (the "Commission") of a registration statement (the "Registration Statement") of the Company on Form S-1 (No. 333- 43989) under the Securities Act of 1933, as amended (the "Act"). The Registration Statement relates to the proposed issuance and sale of up to 2,400,000 shares of the Company's common stock, $0.01 par value per share ("Common Stock") to the public (collectively, the "Firm Securities"), as well as the issuance and sale to the public of up to an additional 360,000 shares of the Company's Common Stock (the "Option Securities"), to cover over-allotments. Of such amount, 1,742,586 shares are being offered by the Company (the "Company Shares") and 1,017,414 are being offered by certain shareholders of the Company (the "Selling Shareholder Shares" and together with the Company Shares, the "Shares"). The opinion is delivered in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Act. We have examined originals or copies, certified or otherwise identified to our satisfaction, of (i) the Registration Statement; (ii) the form of underwriting agreement, filed as Exhibit 1.1 to the Registration Statement (the "Underwriting Agreement"), to be entered into by and among the Company, William Blair & Company, L.L.C., Robert W. Baird & Co. [ADDRESS LOGO OF PEPPER HAMILTON LLP APPEARS HERE] [LOGO OF PEPPER HAMILTON LLP APPEARS HERE] DA Consulting Group, Inc. Page 2 April 16, 1998 Incorporated and Pennsylvania Merchant Group Ltd and the Selling Shareholders (as defined in the Registration Statement); (iii) the Articles of Incorporation and Bylaws of the Company, as in effect on the date hereof; (iv) the form of the Amended and Restated Articles of Incorporation and Restated Bylaws of the Company, to become effective prior to the Registration Statement being declared effective by the Commission; (v) certain resolutions of the Board of Directors of the Company relating to, among other things, the issuance of the Shares; (vi) a specimen certificate representing the shares of Common Stock; and (vii) such other documents relating to the Company and the issuance of the Shares as we have deemed necessary or appropriate as a basis for the opinions set forth below. In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as certified or photostatic copies and the authenticity of the originals of such latter documents. As to any facts material to the opinions expressed herein which were not independently established or verified, we have relied upon statements and representations of officers and other representatives of the Company and others. In addition, we have assumed the conformity of the certificates representing the Shares to the form of the specimen thereof examined by us and the due execution and delivery of such certificates. Based upon and subject to the foregoing, we are of the opinion that: 1. The Selling Shareholder Shares are legally issued, fully paid and non- assessable. 2. The Company Shares, when issued and delivered against payment therefor in accordance with the terms of the Underwriting Agreement, will be legally issued, fully paid and non-assessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this firm under the caption "Legal Matters" in the prospectus filed as part of the Registration Statement. However, we do not admit that we [LOGO OF PEPPER HAMILTON LLP APPEARS HERE] DA Consulting Group, Inc. Page 3 April 16, 1998 come within the categories of person whose consent is required under Section 7 of the Act or the rules and regulations of the Commission promulgated thereunder. This opinion is furnished by us, as your counsel, in connection with the filing of the Registration Statement and, except as provided in the immediately preceding paragraph, is not to be used, circulated, quoted or otherwise referred to for any other purpose without our express written permission or relied upon by any other person. Very truly yours, PEPPER HAMILTON LLP /s/ BARRY M. ABELSON By:_______________________ A Partner EX-11.3 6 COMPUTATION OF PRO FORMA EARNING PER SHARE EXHIBIT 11.3 COMPUTATION OF PRO FORMA EARNINGS PER SHARE (In thousands, except per share amounts) For the Year Ended December 31, 1997 ------------ Computation of pro forma basic earnings per share: Net income..................................................... $1,408 Reduction in interest expense upon repayment of debt, net of federal and state income taxes(1)..................... 122 ------ Adjusted net income (numerator)................................ $1,530 ====== Weighted average shares outstanding............................ 4,808 Add shares assumed sold to repay debt(2)....................... 214 ------ Adjusted weighted average shares outstanding (denominator). 5,024 ====== Earnings per share................................................ $ 0.30 ====== Computation of pro forma diluted earnings per share: Net income..................................................... $1,408 Reduction in interest expense upon repayment of debt, net of federal and state income taxes(1)............................ 122 ------ Adjusted net income (numerator)................................ $1,530 ====== Weighted average shares outstanding............................ 4,808 Common shares issuable under outstanding stock options......... 449 Add shares assumed sold to repay debt(2)....................... 214 Less shares assumed repurchased with proceeds from exercise of stock options............................................. (204) ------ Adjusted weighted average shares outstanding (denominator). 5,267 ====== Earnings per share................................................ $ 0.29 ====== - ---------- (1) Based upon actual interest costs incurred in 1997, tax effected using a 38% tax rate. (2) The shares assumed to be sold to repay the debt were calculated based on the average debt outstanding during 1997 dividend by an initial public offering price of $12.00 per share, less underwriting discounts and commissions and estimated offering expenses. -----END PRIVACY-ENHANCED MESSAGE-----