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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
COMMISSION FILE NUMBER: 0-28654
CLAREMONT TECHNOLOGY GROUP, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-1004490
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1600 N.W. COMPTON DRIVE, SUITE 210
BEAVERTON, OREGON 97006
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(Address of principal executive offices and zip code)
503-690-4000
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(Registrant's telephone number including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, WITHOUT PAR VALUE
(Title of Class)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant is $145,279,714 as of August 30, 1996 based upon the last sales
price as reported by Nasdaq.
The number of shares outstanding of the Registrant's Common Stock as of
August 30, 1996 was 7,273,404 shares.
The Index to Exhibits appears on page 27 of this document.
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DOCUMENTS INCORPORATED BY REFERENCE
NONE.
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CLAREMONT TECHNOLOGY GROUP, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
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PART I
Item 1. Business 2
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 11
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 17
PART III
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and Management 23
Item 13 Certain Relationships and Related Transactions 24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 26
Signatures 28
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PART I
Item 1. Business
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OVERVIEW
Claremont Technology Group, Inc. ("Claremont" or the "Company"), was organized
in 1989 and provides enterprise-wide information technology ("IT") solutions
that re-engineer mission-critical business processes such as customer service,
order processing, billing and logistics. Claremont delivers its services,
including IT planning, systems integration and development and outsourcing,
through a project management methodology that can employ reusable object
oriented software modules and transferable design frameworks on a fixed-price
basis or a time and materials basis. Claremont provides solutions to large
organizations in select IT intensive, vertical markets, including
communications, financial services and pension/retirement services. Claremont's
clients consist of large corporations and government organizations in the United
States and certain foreign markets including Canada, the United Kingdom, Saudi
Arabia and New Zealand.
Claremont provides its services to organizations within industries where
technology- enabled change and re-engineering of business processes can have a
significant competitive impact. The Company's focus on opportunities within
select vertical markets is facilitated by its expertise with the particular
customer interface within these markets and its dedication to partner with
clients to co-develop large scale business solutions. The Company's clients
include: AT&T and its subsidiaries, Fred Meyer, Inc., Lucent Technologies, Ohio
State Teachers Retirement System and PacifiCorp.
INDUSTRY BACKGROUND
Organizations today face constant pressure to improve the quality of products
and services, reduce cost and time to market and improve operating efficiency
while strengthening customer relationships. To compete effectively,
organizations must improve business processes to empower the end user and must
develop internal decision-making processes and methods of exchanging information
that are more efficient and effective. Such changes mean that IT deployment
decisions are increasingly made at the senior executive level rather than at the
departmental level and are implemented across the entire organization.
Information systems and their rapid development and deployment have become a
source of strategic advantage and are increasingly mission-critical.
As IT systems have evolved to a value-added component of an organization's
strategy, the need has grown to design, develop and deploy business applications
solutions rapidly, flexibly and in a technological framework that supports
today's geographically distributed business environment. Consequently, there has
been a shift in the past few years in the computing platforms favored by large
organizations, from single-vendor legacy mainframe-based systems to open,
multi-vendor client/server computing systems, and most recently to corporate
intranets. However, the benefits of client/server and other advanced
technologies can be difficult to obtain, because designing, developing,
deploying and managing client/server systems is complex, time consuming and
costly. In addition, organizations often lack the range and depth of skills
necessary to develop these systems internally and often cannot effectively
attract and retain personnel with the required technological expertise.
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Organizations increasingly wish to use their information systems to address
these mission-critical business processes faster and more effectively at a lower
cost. Computer information systems now often serve as the primary information
resource through which organizations serve their customers, and increasingly
serve as the organization's primary interface to its customers. Many
organizations have found that among the most compelling applications that employ
client/server technology are solutions that effectively distribute information
directly to the business end-user who services customers, or directly to the
customers themselves. Applications such as customer service, order processing,
billing, distribution and logistics directly influence an organization's ability
to generate customer satisfaction and revenue, and therefore tend to be
priorities for allocation of any organization's capital budgets in both strong
and slow economic climates.
The complexity of current technologies, the lack of sufficient in-house
resources and the competitive pressures requiring rapid implementation of new
mission-critical systems in client/server and distributed technologies, have led
to increasing demand for third-party solution providers. To meet that demand
effectively, providers of applications and systems solutions require global
reach, a full range of technical skill, ability to provide the best available
technologies, in-depth knowledge of the customer interface in particular
industries and the ability to manage complex technological projects to
completion on time and within budget.
CLAREMONT SERVICES
Claremont provides IT applications solutions encompassing IT planning, IT
systems integration and development, and IT outsourcing of IT
maintenance/enhancement services for large corporations and government
organizations in the United States and certain foreign markets including Canada,
the United Kingdom, Saudi Arabia and New Zealand. Through its TISE methodology,
the Company seeks to deliver, in a timely fashion, cost effective systems that
meet the clients' needs and provide the flexibility to meet future application
processing requirements. The Company's TISE methodology for delivering its
services is typically divided into the three phases illustrated below:
The following is a brief description of each phase and task of the TISE
methodology:
PHASE I: IT CONSULTING. Generally, IT Consulting precedes the actual
systems integration project and is completed in a timeframe of one to two
months. IT Consulting typically concludes with a return-on-investment analysis
and a proposal including budgets and anticipated timeframe for implementation of
the proposed solution. The purpose of this phase is to allow executives,
managers and end users from the client work in partnership with Claremont
consultants to develop recommendations for strategic business process changes.
Claremont's preference is to also develop a high-level architectural
infrastructure design in this phase which provides Claremont and the client with
a structural roadmap for approaching Phase II, the Systems
Development/Integration phase.
PHASE II: SYSTEMS DEVELOPMENT/INTEGRATION. Systems Development/Integration
generally results in delivery of a fully implemented solution in three to 12
months. Appropriate application of the TISE methodology during this phase
results in the development of the IT solution, as well as the effective
implementation of that solution and meaningful change in the client's business
processes. Systems Development/Integration involves these stages:
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PROCESS DESIGN. A key to Phase II of the TISE methodology is an
assessment of the operational impact of a new system, and designing
re-engineered business processes for the client to insure that the solution
developed will provide the desired results. This process begins at the
earliest stages of the design of the application itself, and continues
throughout the Systems Development/Integration process. These processes
lead to the generation of a high-level object oriented business model and
the development of an architected system infrastructure, and can often draw
on VALUE SERVER design frameworks already developed by Claremont as central
design elements.
SYSTEM DEVELOPMENT. Once the high-level system
infrastructure is in place, the TISE methodology places an emphasis on
solving detail-level system logic and design problems before coding
begins, and results in sufficiently detailed specifications that
enable Claremont to complete the actual coding and testing of the
application's software objects in a highly controlled, factory-like
manufacturing process. In this process, where appropriate, Claremont
can incorporate previously developed and reusable software modules.
Because Claremont's solutions replace, rather than simply surround,
the client's old and often inflexible legacy code, system development
also includes the development of a significant number of interfaces to
other client systems. Claremont assembles all the code from the
previously completed tasks and conducts a functional test of the new
system.
SYSTEM DEPLOYMENT. Complete implementation of the solution
requires two final steps. The first is developing the new job descriptions
and operational procedures and training people in how to take maximum
advantage of the new system. The second step is to put the entire system
through a complete test from the user's perspective, including testing the
software, as well as the new procedures and the interfaces with existing
systems.
PHASE III: OUTSOURCING. Outsourcing of the ongoing support and enhancement
for the client's new system and/or total system environment is an area of
Claremont's services that has increased over the past three years. The
outsourcing phase of the TISE methodology provides opportunities for the Company
to enhance client partnerships and broaden the scope of its engagements.
While individual Phase I projects are small, typically $25,000 to $100,000,
total client engagements regularly involve multiple projects over several years
and can generate revenue in excess of $20 million. Claremont has been successful
in negotiating resale rights for several of its software solutions.
Claremont provides its services on both a time and materials and fixed-price
basis. Invoices for time and materials work are presented on a bi-weekly or
monthly basis. Invoices for fixed-price engagements are presented in accordance
with achievement of negotiated milestones or dates during the development
process.
TECHNOLOGICAL EXPERTISE
Claremont's Advanced Technology/Internet Practice provides technological
resources across all of Claremont's industry practice areas and seeks to build
and maintain the Company's expertise in leading edge technologies. Advanced
Technology/Internet Practice personnel are located in Montreal, Canada; Basking
Ridge, New Jersey; Columbus and
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Cleveland, Ohio; Beaverton, Oregon; Sacramento, California; Seattle, Washington
and North Sydney, Australia. The Advanced Technology/Internet Practice is
managed on a world-wide basis so that clients, regardless of location, have
access to Claremont's technical expertise.
At present, Claremont focuses its advanced technology skills in four main areas:
object oriented systems development; electronic commerce (internet/intranet and
groupware solutions); client/server enterprise architectures (complex network
management); and on-line analytical processing (executive support systems/data
warehousing). Claremont uses its relationships with hardware and software
providers such as Arbor Software Corporation, Forte Software, Inc., Hewlett
Packard Company, IBM, Netscape Communications Corporation, Oracle
Technology, Inc., Silicon Graphics, Inc., and SyBase, Inc. to help ensure that
it remains current with the latest technology and to serve as a source of new
business opportunities for the Company's industry practice areas.
Claremont has captured its knowledge of certain business transactional processes
in the form of reusable software objects which it refers to as VALUE SERVERS.
These reusable software modules, built upon modern object oriented client/server
software concepts, serve as software engines to provide a mechanism to transfer
code among clients and hence reduce the cost of the software development
process. VALUE SERVERS exist for the communications, retirement and
environmental practices. Each server is designed for flexibility and is
enhanced with each additional client assignment.
MARKETS AND CLIENTS
Claremont focuses its marketing efforts on clients in information-intensive
businesses, including communications, financial services, government services
and retail/commercial services/manufacturing and other. Within these vertical
markets, the Company targets clients for whom enterprise-wide IT solutions can
provide a competitive advantage. The Company intends to continue to pursue
opportunities to provide its services in other industry sectors with similar
needs.
Claremont's most significant clients, in terms of revenue earned in the fiscal
1996, within its industry practice areas are listed below:
COMMUNICATIONS FINANCIAL SERVICES
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AT&T Bank One
Lucent Technologies Colonial Pacific Leasing
Sprint Lloyds Bank
PENSION/RETIREMENT AND RETAIL/COMMERCIAL SERVICES/
OTHER GOVERNMENT SERVICE MANUFACTURING AND OTHER
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California Public Employees Retirement Blue Cross/Blue Shield Oregon
System ("CalPERS") Fred Meyer, Inc.
Mississippi Public Employee Retirement PacifiCorp
System ("Mississippi PERS") Wacker Siltronic Corporation
Ohio State Teachers Retirement
System ("Ohio STRS")
State of Oregon, Department of
Environmental Quality
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The Company has in the past derived, and may in the future derive, a significant
portion of its revenue from a relatively small number of clients. For the fiscal
year ended June 30, 1996, the Company had three clients which each represented
in excess of 10 percent of the Company's revenues: Lucent Technologies, 20
percent, Ohio STRS, 14 percent and Mississippi PERS, 11 percent. For the
fiscal year ended June 30, 1995, the Company had two clients which each
represented in excess of 10 percent of the Company's revenues: Ohio STRS, 38
percent and AT&T Network Systems Group (now Lucent Technologies), 19 percent.
The volume of work performed for specific clients is likely to vary from year to
year, and a major client in one year may not use the Company's services in a
subsequent year. The loss of any large client could have a material adverse
effect on the Company's business, financial condition and results of operations.
Most of the Company's contracts are terminable by the client following limited
notice and without significant penalty to the client. The cancellation of a
large project or a significant reduction in the scope of such a project could
have a material adverse effect on the Company's business, financial condition
and results of operations, and in the past the cancellation of a large project
has had such an effect. Furthermore, a decision by any large client not to
proceed with a project to the stage anticipated by the Company could have a
material adverse effect on the Company's business, financial condition and
results of operations. As a result of the Company's focus in specific industries
the Company's business, financial condition and results of operations are
influenced by economic and other conditions affecting these industries.
The Company's IT consulting services focus on four key industry sectors:
communications, financial services, pension/retirement and other government
services and retail/commercial services/manufacturing and other which
represented approximately 30 percent, 5 percent, 34 percent and 31 percent,
respectively, of the Company's revenue for the fiscal year ended June 30, 1996.
COMMUNICATIONS. During fiscal 1995 and fiscal 1996, the Company performed
a number of engagements, including assisting in developing the business
architecture models for the Saudi Arabian telephone expansion project. AT&T and
Lucent Technology are among the Company's clients and the Company has recently
added Sprint and the New Zealand Telephone Company to its client list. The
communications practice area has developed a VALUE SERVER consisting of a
reusable set of object oriented software modules constructed to support
communications clients in their billing and customer care functions.
Collectively, these modules represent a highly flexible VALUE SERVER to support
these critical billing and customer care business functions. The Company
believes that in suitable applications the reusable software modules will enable
Claremont to offer its clients reduced development time and cost.
FINANCIAL SERVICES. Lloyd's Bank is the anchor account for the financial
services practice area, and is served out of Claremont's London and Montreal
offices. Substantial efforts in this practice area are also underway in Ohio,
where BancOne, Limited Credit Services and Fifth Third Bank are clients of the
Company, and in the Pacific Northwest where Frank Russell and Colonial Pacific
Leasing are clients of the Company.
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PENSION/RETIREMENT AND OTHER GOVERNMENT SERVICES. Claremont began its
pension/retirement systems practice as a result of a strategic partnership with
the Ohio STRS. The relationship has produced a VALUE SERVER consisting of
reusable software modules for the pension/retirement systems industry, which is
being marketed under the name CLARETY. The CLARETY product was created using the
Forte software development client/server tool set. Claremont is currently
implementing CLARETY software for Mississippi PERS, and CLARETY has just been
selected for implementation by the State of New Hampshire. The Company believes
that CLARETY software is the only object oriented client/server product of its
kind being marketed to the pension/retirement systems market.
Claremont is a leading provider of IT consulting and custom software development
services to the State of Oregon, Department of Environmental Quality and the
State of Washington, Department of Ecology. For the Oregon Department of
Environmental Quality, Claremont developed a software product called HWIMSY for
tracking hazardous waste. Claremont now has marketing rights for this software.
Claremont established the health and human services practice area in fiscal 1995
after the recruitment of a team of individuals with in-depth knowledge of the
business processes associated with administering the enforcement of child
support judgments. Claremont has begun work in the health and human services
area for the state governments of Missouri, Oregon and Ohio. The Company has
focused its pension/retirement and other government services practice on state
and local governments. The Company does not currently provide services to the
federal government.
RETAIL/COMMERCIAL SERVICES/MANUFACTURING AND OTHER. The retail/commercial
services/manufacturing and other practice area consists of services to the
manufacturing, retail, public utility and health insurance industries. Claremont
provides IT consulting, custom software development and application maintenance/
enhancement services to clients in all four industries. Projects in these
industries include such applications as systems support for new food
distribution systems; an inventory management system for a retail chain; an
order processing system for a national wood products company and a customer
service system encompassing such functions as meter management, work tracking
and accounts receivable for a major utility.
INTELLECTUAL PROPERTY RIGHTS
The Company's success is dependent upon maintenance and protection of its
intellectual property rights. The Company relies on a combination of copyrights,
trade secrets and trademarks to protect its technology. The Company has
applications pending at the United States Patent and Trademark Office with
respect to the Company's VALUE SERVER, NORTHERN DIAMOND, PREMOST, VALUE
SOFTWARE, TISE AND SPIBOX trademarks. The Company's practice has been to enter
into confidentiality agreements with its employees and signed agreements that
include nondisclosure provisions with its clients.
Despite these activities, no assurance can be given that the steps taken by the
Company will provide adequate protection of its intellectual property rights or
that competitors will not be able to develop similar or functionally equivalent
methodologies or products. Furthermore, effective copyright and trade secret
protection may be unavailable or limited in certain foreign countries. In
addition, litigation may be necessary to enforce the Company's intellectual
property rights, to protect the Company's trade secrets, to
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determine the validity and scope of the intellectual property rights of others
or to defend against claims of infringement. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, financial condition and results of operations.
No assurance can be given that infringement or invalidity claims (or claims for
indemnification resulting from infringement claims against third parties, such
as clients) will not be asserted against the Company or that any such assertions
would not have a material adverse effect on the Company's business, financial
condition or results of operations. If infringement or invalidity claims are
asserted against the Company, litigation may be necessary to defend the Company
against such claims, and in certain circumstances the Company may choose to seek
to obtain a license under the third-party's intellectual property rights. There
can be no assurance that such licenses will be available on terms acceptable to
the Company, if at all.
BUSINESS DEVELOPMENT
Claremont's business development efforts are based primarily upon personal
contacts, the reputations of its senior personnel, industry marketing programs
and attendance at appropriate industry forums. Claremont believes that business
development is an integral part of the responsibility of practice area leaders
and other senior project managers. Claremont also follows a practice of
marketing its services through strategic alliances with a select list of
hardware and software providers.
The Company employs an established selling methodology, the Miller-Heiman
process. The Miller-Heiman process is focused on sales that involve multiple
decision makers at different levels in large organizations. The process provides
an analytical approach to identifying the key decision makers, determining with
the client the value to be provided to the client and managing the sales process
through completion. Claremont maintains a corporate information database
referred to as the Opportunity Center to manage the selling process. The sale of
a new project generally involves a three to six month effort. At any given time,
numerous Claremont professionals are active in the development of new business.
The coordination of their efforts and the tracking of their results is critical
to Claremont's ability to forecast and adequately staff future work. Claremont's
Opportunity Center is a critical management tool to assist the Company's senior
executives in managing this process.
COMPETITION
The markets for the Company's services are highly competitive. The Company
believes that it currently competes principally with the internal information
systems groups of its prospective clients, as well as consulting and software
integration firms including Andersen Consulting, the "Big Six" accounting firms,
ISSC (an affiliate of IBM), Computer Sciences Corporation and with other
hardware and applications software vendors. In addition there are a number of
systems integrators who serve similar markets or provide similar services, such
as Cambridge Technology Partners, Renaissance Solutions, Inc., SHL Systemhouse
(a subsidiary of MCI), Sapient Corporation and Technology Solutions Company,
with whom the Company competes or may compete in the future. Many of these
companies have significantly greater financial, technical and marketing
resources than the Company, generate greater revenue and have greater name
recognition than the Company. In addition, there are relatively low barriers to
entry into the Company's markets and the
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Company has faced and expects to continue to face additional competition from
new entrants into its markets.
The Company believes that the principal competitive factors in its markets
include reputation, project management expertise, industry expertise, speed of
development and implementation, technical expertise and ability to deliver on a
fixed-price as well as a time and materials basis. There can be no assurance
that the Company will be able to compete effectively with current and future
competitors or that competitive pressures faced by the Company will not cause
the Company's revenue or gross margins to decline or otherwise materially
adversely affect its business, financial condition and results of operations.
CLAREMONT PERSONNEL
The success of the Company is based on attracting and retaining talented,
creative and experienced people at all levels. The Company dedicates significant
senior resources to its recruiting effort, primarily recruiting professionals
with both IT consulting and industry experience. All of Claremont's managers and
senior managers have substantial expertise in designing and implementing
large-scale applications solutions, and many of them have relevant industry
experience. As a result, the Company's consultants provide industry knowledge
and line management expertise, in addition to technical expertise, to the
Company's clients. As of June 30, 1996, the Company had a total of 519
employees.
There is significant competition for employees with the skills required to
perform the services offered by the Company. Qualified project managers and
senior technical and professional staff are in great demand and are likely to
remain a limited resource for the foreseeable future. There can be no assurance
that the Company will be successful in attracting a sufficient number of
highly-skilled employees in the future, or that it will be successful in
training, retaining and motivating employees. The Company's inability to
attract, train and retain skilled employees or the Company's employees'
inability to achieve expected levels of performance could impair the Company's
ability to adequately manage and complete its existing projects and to bid for
or obtain new projects.
In order to accommodate typical project development lead time, the Company has
found that it must recruit and hire additional personnel on the basis of
anticipated demand for their services. Although this practice has contributed to
the Company's growth to date, there can be no assurance that demand for the
Company's services will materialize as anticipated, and this practice could
result in under-utilized employees and consequently have a material adverse
effect upon the Company's business, financial condition and results of
operations.
ITEM 2. PROPERTIES
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The Company's headquarters and principal administrative offices are located in
approximately 11,011 square feet of leased space located in Beaverton, Oregon.
In addition, Claremont has invested in three software development centers, which
Claremont refers to as "software factories." These centers are located in
Beaverton, Oregon; Montreal, Canada; and Columbus, Ohio.
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The Company's west coast business development and technical development
personnel operate from the Beaverton, Oregon location. The Company occupies
these premises under a lease expiring in April 1999. In addition, the Company
leases 14,517 square feet in Columbus, Ohio for its retirement system national
practice, central region business development and technical lab. The lease
relating to these premises expires in November 2000. The Company also leases
office space in 11 other locations, including Basking Ridge, New Jersey;
Bellevue, Washington; Cleveland, Ohio; Jackson, Mississippi; Morristown, New
Jersey; Sacramento, California; New York, New York; White Plains, New York;
Montreal, Canada; London, United Kingdom; and North Sydney, Australia, from
which regional project management and business development is conducted. Leases
for these premises range from 2,050 to 4,395 square feet. The Company
anticipates that additional space may be required as the Company's business
operations expand and believes it will be able to obtain suitable space as
needed.
ITEM 3. LEGAL PROCEEDINGS
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As of August 31, 1996, there were no material pending legal proceedings to which
the Company or its subsidiaries are a party. From time to time, the Company
becomes involved in ordinary, routine or regulatory legal proceedings
incidental to the business of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
A Special Meeting of Shareholders was held on May 17, 1996 at which the
following actions were taken:
1. The shareholders elected the five nominees for director to the Board of
Directors of the Company. The five directors elected, along with the
voting results are as follows:
No. of Shares No. of Shares No. of Shares
Name Voting For Voting Against Abstained
---- ---------- -------------- ---------
Paul J. Cosgrave 4,156,609 -- 50
Dennis M. Goett 4,156,609 -- 50
Neil E. Goldschmidt 4,131,708 24,901 50
Phillip W. Seeley 4,115,493 41,116 50
Jerry L. Stone 4,156,609 -- 50
2. The shareholders approved the Company's Second Restated Articles of
Incorporation 4,156,609 shares were voted affirmatively and 50 shares
abstained from voting).
3. The shareholders authorized and approved the Company's 1996 Stock Option
Plan for Nonemployee Directors (4,140,777 shares were voted affirmatively,
15,832 shares were voted negatively and 50 shares abstained from voting).
4. The shareholders ratified and approved an amendment to the Claremont
Technology Group, Inc. 1992 Stock Incentive Plan to increase the authorized
shares thereunder from 4,100,000 to 5,000,000 (4,156,609 shares were voted
affirmatively and 50 shares abstained from voting).
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock commenced trading on the Nasdaq National Market
System on July 19, 1996 with an initial offering price of $15.00 per share. On
July 31, 1996 there were 101 shareholders of record of the Company's Common
Stock. The Company has not paid dividends on its Common Stock in the past and
does not anticipate paying dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data) Year Ended June 30,
------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenue:
Professional fees $44,769 $27,292 15,713 $15,667 $9,368
Resold products and services 2,556 -- -- -- --
------------------------------------------------
Total revenue 47,325 27,292 15,713 15,667 9,368
Costs and expenses:
Project costs and expenses 23,988 13,704 9,106 9,112 6,275
Resold products and services 2,410 -- -- -- --
Selling, general and
administrative 15,485 10,156 4,214 3,781 2,968
------------------------------------------------
Total costs and expenses 41,883 23,860 13,320 12,893 9,243
------------------------------------------------
Income from operations 5,442 3,432 2,393 2,774 125
Other income (expense), net (169) 67 12 21 45
------------------------------------------------
Income before income taxes 5,273 3,499 2,405 2,795 170
Income tax expense 2,250 1,352 953 1,204 68
------------------------------------------------
Net income $3,023 $2,147 $1,452 $1,591 $102
------------------------------------------------
------------------------------------------------
Net income per common share $0.40 $0.31 $0.24 $0.28 $0.02
------------------------------------------------
------------------------------------------------
Weighted average number of
common and common equivalent
shares outstanding 7,612 7,319 6,269 5,796 4,544
------------------------------------------------
------------------------------------------------
As of June 30,
------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Cash and cash equivalents $526 $340 $1,870 $1,818 $513
Working capital (deficit) $3,450 $2,453 $2,045 $1,014 $(434)
Total assets $22,965 $9,578 $5,492 $4,620 $2,798
Long-term debt, excluding
current installments $1,578 $334 $8 $120 $178
Shareholders' equity $8,970 $5,101 $2,883 $1,583 $7
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report on Form 10-K contains certain information and trend statements that
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act, which involve risks and uncertainties. Actual
results may differ materially from the results described in the forward-looking
statements. When used in this document, the words "anticipate," "believe,"
"estimate," "expect," "intend" and other similar expressions, as they relate to
the Company, are intended to identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events and are subject to certain risks, uncertainties and assumptions that
include, but are not limited to, those discussed in Item 1 of this Report and in
the following Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial
data as a percentage of total revenue:
YEAR ENDED JUNE 30,
--------------------------------
1996 1995 1994
---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenue:
Professional fees 95% 100% 100%
Resold products and services 5 -- --
Total revenue 100 100 100
Costs and expenses:
Project costs and expenses 51 50 58
Resold products and services 5 -- --
Selling, general and administrative 33 37 27
Total costs and expenses 89 87 85
Income from operations 11 13 15
Other income (expense), net -- -- --
Income before income taxes 11 13 15
Income tax expense 5 5 6
Net income 6% 8% 9%
FISCAL 1996 COMPARED TO FISCAL 1995
REVENUE. The Company's revenue consists primarily of professional fees
(including license fees for Claremont's reusable software modules), and to a
lesser extent resold hardware and software products and resold contract
services. The Company's professional fees increased 64 percent to $44.8 million
in fiscal 1996 from $27.3 million in fiscal 1995. Professional fees increased
primarily due to an increase in the number of projects performed, both for new
and existing clients. In fiscal 1996, $2.6 million, or 5 percent of revenue,
resulted from resold products and services; there was no similar revenue of a
material nature in fiscal 1995. Resold products and services are offered to
clients on an as needed project basis and are resold with little or no mark-up.
The Company does not
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expect resold products and services to contribute materially to its income from
operations, and generally expects to make little or no profit on such products
and services. The Company expects to provide such products and services only as
an accommodation to the Company's clients as requested for particular projects.
Revenue from foreign operations increased 309 percent to $2.3 million in fiscal
1996 from $562,000 in fiscal 1995. The increase resulted primarily from
operations at the Company's Montreal, Canada software factory, which commenced
operations during the third quarter of fiscal 1995, largely in support of U.S.
domestic clients.
Claremont's revenue has become decreasingly dependent upon its largest clients,
though such concentration remains a characteristic of Claremont's business. The
top five clients accounted for 56 percent of revenue in fiscal 1996, down from
76 percent of revenue in fiscal 1995. In fiscal 1996 and 1995 the largest client
accounted for 20 percent and 38 percent of revenue, respectively. During fiscal
1996, ten clients generated revenue in excess of $1.0 million, compared to seven
clients during fiscal 1995. The cancellation of a large project or a significant
reduction in the scope of such a project could have a material adverse effect on
the Company's business, financial condition and results of operations, and in
the past the cancellation of a large project has had such an effect. No
assurance can be given that such a reduction in concentration will continue or
that client concentration will not leave the Company vulnerable to loss of
projects or clients, or that such a loss would not have a material adverse
impact upon the Company's business, financial condition and results of
operations.
PROJECT COSTS AND EXPENSES. Project costs and expenses consist primarily of
salaries and employee benefits for personnel dedicated to client projects and
associated overhead costs including equipment depreciation and amortization.
Project costs and expenses increased 75 percent to $24.0 million in fiscal 1996
from $13.7 million in fiscal 1995, representing 54 percent and 50 percent of
professional fees in fiscal 1996 and 1995, respectively. The increase in project
costs and expenses was due primarily to the addition of project personnel
necessary to perform the larger number of client projects.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative costs
and expenses consist of costs associated with the Company's executive staff,
finance, facilities and human resources departments (collectively,
"Administrative Personnel"), travel and business development costs. Selling,
general and administrative costs and expenses increased 52 percent to $15.5
million in fiscal 1996 from $10.2 million in fiscal 1995. The increase is
primarily due to increases in professional development and recruiting expenses
associated with the increased professional personnel, increased facility
expenses associated with increased space needs resulting from increased software
development efforts performed at Company facilities rather than at client
locations and increased numbers of Administrative Personnel and expansion into
international markets during the quarter ended March 31, 1996. In addition, the
Company incurred approximately $300,000 in non-recurring charges attributable to
separation agreements with two terminated executives. See "Certain
Transactions." Selling, general and administrative costs and expenses declined
to 35 percent of professional fees in fiscal 1996 from 37 percent of
professional fees in fiscal 1995, due to revenue increases outpacing selling,
general and administrative costs and expenses increases on a percentage basis in
the period.
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OTHER INCOME (EXPENSE), NET. Other income (expense) consists primarily of
interest expense associated with short term borrowings and interest income on
cash and cash equivalents. Other income (expense), net changed to a net expense
of $169,000 in fiscal 1996 from a net income of $67,000 in fiscal 1995. The
change is primarily attributable to interest expense associated with bank
borrowings incurred to finance the Company's acquisition of computer equipment
in fiscal 1996.
INCOME TAX EXPENSE. Income tax expense represents combined federal, state and
foreign taxes at an effective rate of 43 percent for fiscal 1996 compared to 39
percent for fiscal 1995. The increase in the effective tax rate is due to a
change in the mix of jurisdictions in which the Company does business, as well
as changes in certain federal tax laws.
FISCAL 1995 COMPARED TO FISCAL 1994
REVENUE. The Company's revenue, all of which was attributable to professional
fees, increased 74 percent to $27.3 million in fiscal 1995 from $15.7 million in
fiscal 1994. Revenue increased primarily due to an increase in the number of
major projects performed, both for new clients in new markets and industries and
for existing clients. In addition, in fiscal 1995 the Company received
performance bonuses under a client contract of approximately $1.0 million. In
fiscal 1995 the top five clients accounted for 76 percent of revenue; in fiscal
1994 the top five clients accounted for 92 percent of revenue. In fiscal 1995
the largest client accounted for 38 percent of revenue, compared to 72 percent
of revenue in fiscal 1994. In fiscal 1995 seven clients generated revenue of
$1.0 million or more; in fiscal 1994 two clients generated revenue of $1.0
million or more.
PROJECT COSTS AND EXPENSES. Project costs and expenses increased 51 percent to
$13.7 million in fiscal 1995 from $9.1 million in fiscal 1994, but decreased as
a percentage of revenue, representing 50 percent of revenue in fiscal 1995
compared to 58 percent of revenue in fiscal 1994. The increase in project costs
and expenses was attributable to additional project personnel necessary to
perform additional client projects. The decrease in project costs and expenses
as a percentage of revenue was due to increased revenue and stronger utilization
levels for project personnel.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative costs
and expenses increased 141 percent to $10.2 million in fiscal 1995 from $4.2
million in fiscal 1994, and increased to 37 percent of revenue in fiscal 1995
from 27 percent of revenue in fiscal 1994. This increase resulted from the
Company's investments during 1995 in its global infrastructure to sell and
service new clients, to enter new industries and markets and its investment in
the continued development of its professional staff, and growth in
Administrative Personnel. In fiscal 1994 the Company had active practices in two
domestic locations: Portland, Oregon and Columbus, Ohio; in fiscal 1995 the
Company developed active practices in four additional domestic locations:
Basking Ridge, New Jersey; Cleveland, Ohio; Sacramento, California; Seattle,
Washington; and two international sites: Montreal, Canada and London, United
Kingdom. Additionally, the Company developed and implemented career path
programs for its consulting staff and initiated associated training programs.
OTHER INCOME (EXPENSE), NET. Other income (expense), net increased primarily
due to increased interest income associated with higher cash balances.
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<PAGE>
INCOME TAX EXPENSE. Income tax expense increased from $1.0 million in fiscal
1994 to $1.4 million in fiscal 1995 representing an approximate effective tax
rate of 40 percent in both years. The Company changed its method of recognizing
income and expenses for income tax purposes from a cash basis to an accrual
basis effective July 1, 1994.
VARIABILITY OF QUARTERLY RESULTS
The Company's quarterly revenue and results of operations have fluctuated
significantly in the past and will likely fluctuate in the future. Factors
causing such fluctuations have included and may include, among other factors,
the number, size and scope of projects in which the Company is engaged, the
contractual terms and degree of completion of such projects, any delays incurred
in connection with a project, employee hiring and utilization rates, the
adequacy of provisions for losses, the accuracy of estimates of resources
required to complete ongoing projects, general economic conditions,
weather-related shut-downs in major markets, vacation days, total business days
in a quarter and the business practices of clients such as deferring commitments
on new projects until after the end of the calendar or the client's fiscal year.
Due to the foregoing factors, among others, it is possible that in some future
quarter the Company's results of operations will be below the expectations of
the securities analysts and investors. In such event, the price of the Company's
Common Stock may be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations and investments in
property and equipment primarily through cash generated from operations, bank
borrowings and capital lease financing. In July 1996, the Company completed its
initial public offering and in August 1996, the Company sold the additional
shares pursuant to the exercise of the underwriters' over-allotment option. Net
proceeds from the offering and over-allotment totaled $27.0 million.
At June 30, 1996, the Company had working capital of $3.5 million, including
$0.5 million of cash and cash equivalents.
Cash increased $186,000 during fiscal 1996 as a result of net cash provided from
financing activities of $7.8 million, offset by $1.7 million used in operations,
$3.6 million for the purchase of property and equipment and $2.1 million for
software development costs.
Accounts receivable increased $2.3 million to $7.8 million at June 30, 1996 from
$5.5 million at June 30, 1995 primarily as a result of growth in revenues. Days
sales outstanding were 64 at June 30, 1996 compared to 74 at June 30, 1995.
Accounts payable increased $0.6 million to $1.5 million at June 30, 1996 from
$0.9 million at June 30, 1995 primarily due to growth of the business and
expenses related to the Company's initial public offering in July 1996.
Accrued expenses increased $1.3 million to $3.4 million at June 30, 1996 from
$2.1 million at June 30, 1995 primarily due to growth of the business and the
timing of payment of accrued payroll taxes.
15
<PAGE>
The Company has a revolving line of credit with Bank of America Oregon, a
subsidiary of BankAmerica Corporation, providing for borrowings of up to $6.0
million. As of June 30, 1996, there were $4.6 million in borrowings against this
line, all of which the Company repayed with a portion of the net proceeds of its
initial public offering which occurred on July 19, 1996. Advances under the
line of credit bear interest at Bank of America's NT&SA Reference Rate, plus one
quarter of one percent; the effective rate at June 30, 1996 was 8.5 percent.
This revolving line of credit expires on August 1, 1997, and borrowings
thereunder are secured by all of the assets of the Company.
The Company has certain term loans with Bank of America Oregon primarily to
finance equipment purchases. As of June 30, 1996 there was $2.5 million of
related debt outstanding against these lines. Debt service under these lines is
payable over 36 months, including principal and interest. There are three
separate borrowings under this facility at interest rates ranging from 7.59
percent to 8.05 percent, and all such borrowings are secured by all of the
assets of the Company.
The Company is a guarantor on a non-revolving line of credit with Bank of
America Oregon which provided for borrowings of up to $2.0 million, for purposes
of facilitating the purchase of Claremont's Common Stock by Company executives
in July 1995. As of June 30, 1996 there was $1.7 million of related debt
outstanding against the line. Advances under the line of credit were made
directly to the Company executive with full recourse and bear interest at Bank
of America's NT&SA Reference Rate, plus one percentage point. Claremont's
guaranty is secured by a pledge of each borrower's shares of the Company's
Common Stock. Advances under the line of credit are for 36 months and include
monthly interest payments, made by each Company executive, with principal
repayment by each Company executive due on or before July 31, 1998.
The various lines of credit with Bank of America Oregon are contained in a
master Business Loan Agreement which includes covenants relating to the
maintenance of certain financial ratios and minimum net worth.
During fiscal 1996, the Company had capital expenditures of $3.7 million
primarily related to furniture and personal computers, and $2.0 million
associated with the capitalization of software development costs. As of June
30, 1996 the Company did not have any material commitments for capital
expenditures.
As a provider of professional services, the Company has few tangible assets
against which to borrow. Therefore, the Company primarily requires equity
capital to finance or leverage its working capital. The Company believes that
the cash provided from operations, borrowings available under its revolving line
of credit and the net proceeds of its initial public offering in July 1996 will
be sufficient to meet the Company's working capital and capital expenditure
requirements for at least the next fiscal year.
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<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
("SFAS 121"), which the Company will adopt for its fiscal year ending June 30,
1997, will require "that long-lived assets and certain identifiable intangibles
to be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable." In the opinion of the Company's management, the adoption of
SFAS 121 will not have any effect on the Company's financial position or results
of operations.
In October 1995, the Financial Accounting Standards Board issued Statement No.
123 ("SFAS 123"), which establishes a fair value based method of accounting for
stock-based compensation plans. The Company will continue to account for
employee stock options under APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES and therefore believes the statement will have no impact on the
Company's financial statements other than expanded footnote disclosure. SFAS 123
will be effective for fiscal years beginning after December 15, 1995.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA
FINANCIAL STATEMENTS
The financial statements required by this item are included as pages F-1 to F-21
of this document.
SUPPLEMENTARY FINANCIAL DATA
(In thousands, except per share amounts) Q1 1995 Q2 1995 Q3 1995 Q4 1995
--------- -------- -------- --------
Net Sales $ 6,044 $ 6,431 $ 6,513 $ 8,304
Gross Profit 3,241 3,362 3,118 3,867
Operating Income 1,288 1,358 144 642
Net Income 795 839 108 405
Net Income Per Share $ 0.11 $ 0.12 $ 0.02 $ 0.06
(In thousands, except per share amounts) Q1 1996 Q2 1996 Q3 1996 Q4 1996
--------- -------- -------- --------
NET SALES $ 8,883 $ 11,907 $ 12,885 $ 13,650
Gross Profit 4,166 5,395 5,449 5,917
Operating Income 936 2,067 876 1,563
Net Income 538 1,172 495 818
Net Income Per Share $ 0.07 $ 0.16 $ 0.07 $ 0.11
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Directors of the Company are elected by the shareholders at the annual meeting
of shareholders and hold office until the next annual meeting of shareholders or
until their successors are duly elected and qualified. There are no family
relationships between any of the executive officers or directors of the Company.
The directors of the Company and their ages as of July 31, 1996 are as follows:
NAME AGE HAS BEEN A DIRECTOR SINCE
- ---- --- -------------------------
Paul J. Cosgrave 46 1994
Dennis M. Goett 47 1996
Neil E. Goldschmidt 56 1993
Phillip W. Seeley 49 1994
Jerry L. Stone 53 1989
PAUL J. COSGRAVE has served as Chairman of the Board of Directors of the
Company since January 1996, and as President, Chief Executive Officer and a
member of the Board of Directors of the Company since July 1994. From
January 1993 through June 1994, he served as Executive Vice President of
Technology Solutions Company. From February 1992 to December 1992, Mr. Cosgrave
served as President and Chief Executive Officer of AGS Computers, a subsidiary
of NYNEX Corporation. Prior to January 1992, he served as a Partner in Andersen
Consulting, the Management Information Systems Consulting Practice of Arthur
Andersen LLP.
DENNIS M. GOETT has served as Chief Financial Officer and Senior Vice
President, Finance of the Company since February 1996 and as a member of the
Board of Directors of the Company since April 1996. Since January 1988 he has
served as President of Gabriel Partners, Inc., a financial consulting firm. In
connection with his financial consulting activities for Gabriel Partners,
Mr. Goett was elected an executive officer of a private confectionery company
that sought bankruptcy protection under Chapter 11 of the United States
Bankruptcy Code in June 1994. The Bankruptcy Court dismissed the company's
bankruptcy petition.
NEIL E. GOLDSCHMIDT has served as a member of the Board of Directors of the
Company since November 1993. Since January 1991, Mr. Goldschmidt has conducted a
private law practice focused primarily on strategic planning for national and
international business clients. From January 1987 to January 1991,
Mr. Goldschmidt served as Governor of the State of Oregon. Prior to his 1986
gubernatorial campaign, Mr. Goldschmidt was an executive of Nike, Inc., serving
as International Vice President from 1981 to 1985 and as President of Nike
Canada from 1986 to 1987. Furthermore, Mr. Goldschmidt served as Secretary of
Transportation in the Carter Administration from 1979 to 1981. Mr. Goldschmidt
also serves as a director of Analogy, Inc. and BDM International, Inc.
PHILLIP W. SEELEY has served as a member of the Board of Directors of the
Company since April 1994. Mr. Seeley has served as Executive Vice President of
Sales
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<PAGE>
and Marketing of CF Motor Freight, Inc. since July 1994. From January 1990
through July 1994, he served as Vice President of Administration and Technology
of Consolidated Freightways, Inc.
JERRY L. STONE has served as a member of the Board of Directors of the
Company since November 1989. Mr. Stone has been active as a private investor
since 1989. From 1986 through January 1989, he served as Chairman and Chief
Executive Officer of Marketing One, Inc.
The Board of Directors maintains an Audit Committee and a Compensation
Committee. The Audit Committee, consisting of Messrs. Goldschmidt and Seeley,
oversees actions taken by the Company's independent auditors and reviews the
Company's internal audit controls. The Compensation Committee, consisting of
Messrs. Stone and Seeley, reviews the compensation levels of the Company's
employees and makes recommendations to the Board regarding changes in
compensation.
EXECUTIVE OFFICERS
Executive officers of the Company are appointed by the Board of Directors and
serve at the discretion of the Board. The executive officers of the Company and
their ages as of July 31, 1996 are as follows:
Name Age Position
- ---- --- --------
Paul J. Cosgrave 46 Chairman of the Board ,President and Chief
Executive Officer
Karen Fast 45 Senior Vice President, Market Development
Edward A. Fullman 34 Senior Vice President, Communications
Dennis M. Goett 47 Chief Financial Officer and Director
Stephen D. Hawley 47 Senior Vice President, Pension and
Retirement
Ross C. Kayuha 38 Senior Vice President, Advanced Technology
For business background on Messrs. Cosgrave and Goett, see "Directors" above.
KAREN FAST has served as Senior Vice President, Market Development of the
Company since April 1994. From April 1993 through April 1994, she served as Vice
President, Portland Practice of the Company. From January 1991 through
April 1993, she served as the Portland, Oregon Manager of the Open Systems
Consulting Group, the Systems Integration Practice of IBM.
EDWARD A. FULLMAN has served as Senior Vice President, Communications of
the Company since July 1994. From April 1992 through July 1994, he served as a
Vice President of NYNEX/DPI Company, a division of NYNEX Corporation. From
June 1989, through April 1992, he served as Vice President of AGS Information
Services, a division of NYNEX Corporation.
STEPHEN D. HAWLEY has served as Senior Vice President, Pension and
Retirement of the Company since February 1993. From September 1988 through
February 1993 he served as a Partner in Andersen Consulting, the Management
Information Systems Consulting Practice of Arthur Andersen LLP.
ROSS C. KAYUHA has served as Senior Vice President, Advanced Technology of
the Company since January 1996. From January 1994 through January 1996, he
served as Senior Vice President, Central Region of the Company. From
January 1993 through
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January 1994, he served as Vice President, Central Region of the Company and
from April 1992 through January 1993, he served as a Director of Project
Management of the Company. From September 1985 through April 1992, he served as
a Senior Manager in Andersen Consulting, the Management Information Systems
Consulting Practice of Arthur Andersen LLP.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the 1934 Act requires the Company's directors and executive
officers and persons who own more than ten percent of the outstanding shares of
the Company's Common Stock ("ten percent shareholders") to file with the SEC
initial reports of beneficial ownership and reports of changes in beneficial
ownership of shares of Common Stock and other equity securities of the Company.
To the Company's knowledge, based solely on review of the copies of such reports
furnished to the Company or otherwise in its files and on written
representations from its directors, executive officers and ten percent
shareholders that no other reports were required, during the fiscal year ended
June 30, 1996, the Company's officers, directors and ten percent shareholders
complied with all applicable Section 16(a) filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides certain summary information concerning compensation
awarded to, earned by or paid to the Company's Chief Executive Officer and each
of the four other most highly compensated executive officers of the Company
determined as of the end of the last fiscal year and any ex-officers for whom
disclosure would have been provided except for the fact that the individual was
not serving as an executive officer at the end of the fiscal year (hereafter
referred to as the "named executive officers") for the fiscal years ended June
30, 1996 and 1995.
Long Term
Compensation
Annual Compensation Awards
---------------------- ------------
Securities All Other
Underlying Compensation
Name and Principal Position Year Salary($) Bonus($) Options(#) ($)
- ---------------------------- ------ --------- --------- ---------- ------------
Paul J. Cosgrave 1996 447,200 150,000 -- (A) 8,750
President and Chief 1995 415,000 100,000 650,000 (A) 8,724
Executive Officer
Stephen D. Hawley 1996 301,600 -- -- (B) 5,655
Senior Vice President, 1995 270,000 -- -- (B) 4,012
Pension and Retirement
Steven L. Darrow (C) 1996 296,000 -- -- (D) 790
Former Chairman of 1995 300,000 -- -- (D) 9,791
the Board
Edward A. Fullman 1996 223,600 -- -- (E) 946
Senior Vice President, 1995 207,500 -- 30,000 (E) 1,030
Communications
Karen Fast 1996 208,000 -- -- (F) 3,940
Senior Vice President, 1995 187,500 -- -- (F) 3,864
Market Development
Ross C. Kayuha 1996 208,000 -- -- (G) 3,660
Senior Vice President 1995 187,500 250,000 -- (G) 1,374
Advanced Technology
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(A) Includes $7,800 and $7,800 attributable to an automobile allowance and $950
and $924 attributable to 401(k) matching payments in fiscal 1996 and 1995,
respectively.
(B) Includes $3,173 and $1,586 attributable to golf club membership dues paid
by the Company, $1,867 and $1,867 attributable to life insurance premiums
paid by the Company and $615 and $559 attributable to 401(k) matching
payments in fiscal 1996 and 1995, respectively.
(C) Mr. Darrow resigned from the Company effective March 15, 1996 and resigned
from the Board of Directors effective April 29, 1996. See "Certain
Transactions" for a description of Mr. Darrow's severance agreement.
(D) In 1996, represents golf club membership dues paid by the Company. In
1995, includes $5,652 attributable to use of an automobile leased by the
Company, $3,215 attributable to golf club membership dues paid by the
Company and $924 attributable to 401(k) matching payments.
(E) Includes 401(k) matching payments of $946 and $1,030 in 1996 and 1995,
respectively.
(F) Includes $2,990 and $2,940 attributable to golf club membership dues paid
by the Company and $950 and $924 attributable to 401(k) matching payments
in fiscal 1996 and 1995, respectively
(G) Includes $2,710 and $450 attributable to golf club membership dues paid by
the Company and $950 and $924 attributable to 401(k) matching payments in
fiscal 1996 and 1995, respectively.
OPTION GRANTS IN LAST FISCAL YEAR
There were no options granted to the named executive officers during fiscal
1996.
AGGREGATED OPTION EXERCISES in Last Fiscal Year and FY-End Option Values
The following table provides information concerning the exercise of options
during fiscal 1996 and unexercised options held as of the end of the fiscal
year, with respect to the named executive officers.
Number of Secur-
ities Underlying
Unexercised Value of Unexercised
Shares Options In-The-Money Options
Acquired Value At FY-End (#) At FY-End ($) (B)
On Exercise Realized Exercisable/ Exercisable/
Name (#) ($) (A) Unexercisable Unexercisable
- ----------------- ---------- -------- ------------------ ---------------------
Paul J. Cosgrave 195,000 446,550 153,592 301,408 2,038,165 3,999,684
Stephen D. Hawley 30,000 180,200 144,045 87,429 2,001,432 1,248,126
Steven L. Darrow -- -- 110,000 -- 1,536,700 --
Edward A. Fullman -- -- 23,608 76,392 311,838 1,000,761
Karen Fast -- -- 75,220 54,780 1,076,823 765,276
Ross C. Kayuha 6,217 23,998 117,032 71,517 1,713,127 1,028,490
(A) Market value of the underlying securities at exercise date, minus exercise
price of the options.
(B) Market value of the underlying securities at June 30, 1996, $15.00 per
share, minus exercise price of the unexercised options.
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<PAGE>
COMPENSATION OF DIRECTORS
Members of the Board of Directors are reimbursed for out-of-pocket and travel
expenses incurred in attending Board meetings. Non-employee members of the Board
of Directors also receive a stock option grant covering 20,000 shares of the
Company's Common Stock upon election to the Board, which option vests over three
years. Following the first annual meeting of shareholders after the initial
grant is vested, and at every third annual meeting of shareholders thereafter,
such non-employee director will be granted an option covering 15,000 shares of
the Company's Common Stock, which options vest over three years.
The Company retained board member Jerry L. Stone as a consultant through his
consulting firm, Marketing Exchange Corporation, and paid Mr. Stone $72,538 in
fiscal 1996 for such consulting services. The consulting arrangement with
Mr. Stone terminated effective April 26, 1996.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
On July 1, 1994, the Company entered into a three-year employment agreement with
Paul J. Cosgrave, its President and Chief Executive Officer, which provides for
a minimum salary of $400,000 per year and includes, among other things,
provisions for a $150,000 loan, for which Mr. Cosgrave has signed a promissory
note due July 1, 1997, or if bonuses are earned earlier, $60,000 out of fiscal
1995 bonus and $90,000 out of fiscal 1996 bonus, and if Mr. Cosgrave leaves the
Company, out of termination pay due. The fiscal 1995 and 1996 bonuses were
earned and the $60,000 and $90,000 payments were made; there was no remaining
balance outstanding under this loan at July 1, 1996.
On February 1, 1996, the Company entered into an employment agreement with
Dennis M. Goett, its Chief Financial Officer, which provides for a minimum
annual salary of $295,000.
Both Mr. Cosgrave's and Mr. Goett's agreement provides that the executive is
entitled to a car allowance of $650 per month and certain medical benefits. Each
agreement further provides that if the executive's employment is terminated at
Claremont's election for reasons other than cause, the executive's base salary
will continue for the longer of three years from the start date or six months
from the termination date; provided, however, that Mr. Goett's salary
continuation shall cease if he competes with Claremont or solicits Claremont
customers. If termination is for cause or at the executive's choice, each
agreement also contains covenants of noncompetition and nonsolicitation of
clients. Regardless of the reason for termination, each agreement contains
commitments of nonsolicitation of Claremont personnel. In each agreement, the
noncompetition and nonsolicitation of clients and employees covenants continue
until the later of 18 months after termination of employment, or termination of
base salary payments.
All other Named Executive Officers and all other Company personnel have executed
at-will employment agreements providing for protection of proprietary
information and assignment of intellectual property. In addition, these
agreements prohibit competition with the Company with respect to its clients or
active prospects for varying periods following termination.
CHANGE-IN-CONTROL ARRANGEMENTS
None.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of August 30, 1996, certain information
furnished to the Company with respect to ownership of the Company's Common Stock
of (i) each director, (ii) the "named executive officers" (as defined under
"Executive Compensation"), (iii) all persons known by the Company to be
beneficial owners of more than 5 percent of its Common Stock, and (iv) all
executive officers and directors as a group.
COMMON STOCK (A)
---------------------------------------
NUMBER OF PERCENT OF SHARES
SHAREHOLDER SHARES OUTSTANDING
- ---------------------------------- ---------------------------------------
Jerry L. Stone (B) 965,480 13.27%
3024 Key Stone Drive
Cape Girardeau, MO 63701
Steven L. Darrow (C) 556,674 7.65%
20514 127th Avenue, S.E.
Snohomish, WA 98290
Paul J. Cosgrave (D) 504,368 6.77%
DLJ Capital Corporation (E) 400,000 5.21%
3000 Sand Hill Road
Building 4, Suite 270
Menlo Park, CA 94025
Stephen D. Hawley (F) 213,122 2.87%
Ross C. Kayuha (G) 208,048 2.81%
Karen Fast (H) 108,854 1.48%
Edward A. Fullman (I) 52,625 *
Dennis M. Goett (J) 24,341 *
Neil E. Goldschmidt (K) 19,435 *
Phillip W. Seeley (L) 16,670 *
All directors and executive
officers as a group (10 persons) (M) 2,669,617 33.77%
- ---------------------------
*Less than one percent
(A) Applicable percentage of ownership is based on 7,273,404 shares of Common
Stock outstanding as of August 30, 1996 together with applicable options
and warrants for such shareholders. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission, and
includes voting and investment power with respect to shares. Shares of
Common Stock subject to options or warrants currently exercisable or
exercisable within 60 days after August 30, 1996 are deemed outstanding for
computing the percentage ownership of the person holding such options or
warrants, but are not deemed outstanding for computing the percentage of
any other person.
(B) Includes 260,000 shares held by S. A. S. Investment Trust for which Mr.
Stone is the sole trustee.
(C) Includes 150,000 shares held in the Dorinda Darrow Children's Trust for the
benefit of the children of Dorinda Darrow.
(D) Includes 15,000 shares held by Theresa Cosgrave as custodian for Mr.
Cosgrave's three children under the Uniform Gift to Minors Act and 150,000
shares held in trusts for Mr. Cosgrave's three children. Mr. Cosgrave
disclaims any beneficial ownership interest in the shares held in these
trusts. Also includes 172,859 shares subject to stock options.
(E) Includes 400,000 shares subject to warrants.
(F) Includes 158,341 shares subject to stock options.
(G) Includes 132,058 shares subject to stock options.
(H) Includes 82,190 shares subject to stock options.
(I) Includes 27,724 shares subject to stock options.
(J) Includes 23,341 shares subject to stock options.
(K) Includes 18,335 shares subject to stock options.
(L) Includes 16,670 shares subject to stock options.
(M) Includes 631,518 shares subject to stock options.
23
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1994, the Company entered into a separation agreement with Martin
Wright, then a Senior Vice President, under which the vesting of remaining
unvested options held by Mr. Wright were accelerated, Mr. Wright received a loan
for $85,000 at 4 percent interest per year, due originally in June 1994, and
Mr. Wright entered into a two year noncompetition agreement with the Company.
The loan was subsequently extended to July 1995, and repaid in that month.
Mr. Wright subsequently exercised all of his options.
In April 1994, the Company loaned Stephen D. Hawley $35,000 at 4 percent
interest per year, interest is payable quarterly and the principal balance is
due on or before April 15, 1997. In March 1995, the Company loaned Mr. Hawley
an additional $40,000 at 7.01 percent interest per year. The principal balance
is due on or before April 15, 1997, and interest is payable quarterly. Both
loans are secured by a pledge of Mr. Hawley's rights to exercise certain of his
options. Interest payments on both loans are current.
In July 1994, the Company loaned then board member Brian Caldwell $75,000 at 5
percent interest per year. This loan was repaid on July 11, 1995, and while
outstanding was secured by Mr. Caldwell's shares of the Company's Common Stock.
In July 1995, in pursuit of its policy of encouraging employee stock ownership,
the Company guaranteed loans from the Bank of America to 34 of its management
employees to assist them with the purchase of shares of the Company's Common
Stock from Martin Wright, a former officer and employee of the Company, Brian
Caldwell, a director and 10 percent shareholder of the Company, and Steven
Darrow, an officer, director and 10 percent shareholder of the Company, at a
purchase price of $3.55 per share, and to exercise stock options that had become
vested. Claremont's guarantee of these loans can not be called before August
1998. Claremont's guarantee is secured by a pledge of the purchased stock to
Claremont. The employees participating in this program include Joel D. Bucklen,
17,373 shares and a $61,674 loan guaranteed; Paul J. Cosgrave, 49,804 shares and
a $176,804 loan guaranteed; Karen Fast, 23,164 shares and a $82,232 loan
guaranteed; Edward A. Fullman, 24,901 shares and a $88,399 loan guaranteed;
Stephen D. Hawley, 34,781 shares (including 10,000 options) and a $93,073 loan
guaranteed; Ross C. Kayuha, 23,164 shares and an $82,232 loan guaranteed;
Colin B. McKiernan, 24,001 shares and an $85,204 loan guaranteed; and Peter Moe,
28,955 shares and a $102,790 loan guaranteed. In February 1996, Mr. Moe repaid
all outstanding indebtedness under his loan from Bank of America.
In January 1996, the Company entered into a severance agreement with Peter Moe,
then an officer of the Company. Mr. Moe was paid six months salary plus medical
benefits totaling $141,865.
In March 1996, the Company entered into a Retirement and Severance Agreement
with its founder and largest shareholder, Steven L. Darrow. Under that
agreement, in exchange for his commitment not to compete with the Company for
five years, the Company agreed to pay an amount equal to one year's salary
($325,000), provide a continuation of medical benefits during his lifetime,
forgive certain loans by the Company to Mr. Darrow in the aggregate amount of
$410,000 and pay resulting withholding taxes in the amount of
24
<PAGE>
$159,444, accelerate the vesting of stock options for 35,800 shares of the
Company's Common Stock with an exercise price of $1.03 per share, and grant him
and certain trusts and individuals to whom he had transferred stock certain
"piggyback" registration rights. The Company also agreed to guarantee a loan to
Mr. Darrow if the guarantee was required by the lender, provided that the
Company's guarantee was secured by a pledge of the shares of the Company's
Common Stock belonging to Mr. Darrow, and to provide good faith cooperation if
he wished to sell shares of the Company's Common Stock in a transaction prior to
the date of the Company's initial public offering.
In March 1996, Paul J. Cosgrave exercised certain options with an aggregate
exercise price of $337,350 (options for 190,000 shares at $1.73 per share). In
connection with such exercise, Mr. Cosgrave paid the Company an aggregate of
$502,230, including amounts for tax withholding payments the Company was
required to make on nonqualified options, by delivery of a promissory note. The
note bore interest at 5 percent per year, and was payable on demand and in any
event on or before June 30, 1996. Mr. Cosgrave repaid this note on May 22, 1996.
In May 1996, Paul G. Mardesich, then a Senior Vice President, entered into a
separation agreement with the Company to be effective mid-June 1996, which
includes a three-year covenant not to compete in consideration of payment of
$85,000, and a twenty-seven month consulting agreement providing payment in the
aggregate amount of $13,500.
On May 17, 1996, the Company entered into a Stock Purchase Agreement with
certain holders of the Company's Common Stock (including Steven L. Darrow, the
Company's largest shareholder) and certain investors (the "Investors"), pursuant
to which the Investors purchased an aggregate of 910,000 shares of the Company's
Common Stock at an average purchase price of $10.33. Mr. Darrow sold 600,000
shares of the Company's Common Stock to the Investors. Under the terms of the
Stock Purchase Agreement, the Company granted the Investors "piggyback" and
demand registration rights.
On May 20, 1996, the Company issued to DLJ Capital Corporation a five-year
warrant to purchase 400,000 shares of the Company's Common Stock at an exercise
price of $10.33 per share, to settle a dispute between the Company and the
Sprout Group regarding a "Summary Term Sheet" executed by the Company and the
Sprout Group on December 5, 1995. The Summary Term Sheet contemplated the
issuance and sale of 812,500 shares of a newly created series of preferred stock
and other securities. The warrant provides for certain demand and "piggyback"
registration rights.
The Company has entered into employment agreements with Paul J. Cosgrave, its
President and Chief Executive Officer, and Dennis M. Goett, its Chief Financial
Officer. See "Employment Contracts and Termination of Employment Arrangements."
Any future transactions between the Company and its officers, directors and
affiliates will be on terms no less favorable to the Company than can be
obtained from unaffiliated third parties. Such transactions, with such persons,
will be subject to approval by a majority of the Company's outside directors or
will be consistent with policies adopted by such outside directors.
25
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The financial statements included herein are as follows:
DESCRIPTION PAGE
Independent Auditors' Report F-1
Consolidated Balance Sheets, June 30, 1996 and 1995 F-2
Consolidated Statements of Operations, Years Ended June 30,
1996, 1995 and 1994 F-3
Consolidated Statements of Shareholders' Equity, Years Ended
June 30, 1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows, Years Ended June 30,
1996, 1995 and 1994 F-5
Notes to Consolidated Financial Statements F-6
(a) (2) FINANCIAL STATEMENT SCHEDULES
NONE.
26
<PAGE>
(a) (3) EXHIBITS INCLUDED HEREIN:
NUMBER DESCRIPTION
- ------ -----------
3.1 Second Restated Articles of Incorporation of Claremont Technology
Group, Inc. (A)
3.2 Second Amended and Restated Bylaws of Claremont Technology Group, Inc.
(A)
4.1 Retirement and Severance Agreement by and between Claremont Technology
Group, Inc. and Steven L. Darrow dated March 15, 1996 (A)
4.2 Form of Shareholder Agreement under 1992 Stock Incentive Plan (A)
10.1 Form of Indemnity Agreement between Claremont Technology Group, Inc.
and each of its executive officers and directors(A)
10.2 1992 Stock Incentive Plan, as amended (A)
10.3 Form of Stock Option Agreement Under 1992 Stock Incentive Plan (A)
10.4 1996 Stock Option Plan for Nonemployee Directors (A)
10.5 Letter of Agreement by and among Mr. Tony Martins, Ms. Anna Mara,
Ms. Claude Gareau, Mr. Ronald Bastien, Tony Martins & Associ_s., Inc.
and Claremont Technology Group, Inc. dated as of January 23, 1995 (A)
10.6 Employment Agreement by and between Claremont Technology Group, Inc.
and Paul J. Cosgrave dated July 1, 1994 (A)
10.7 Employment Agreement by and between Claremont Consulting Group, Inc.
(k/n/a Claremont Technology Group, Inc.) and Dennis M. Goett dated
February 1, 1996 (A)
10.8 Employment Agreement by and between Claremont Technology Group, Inc.
and Stephen Hawley dated February 5, 1993 (A)
10.9 Lease by and between Amberjack, Ltd. and Claremont Technology
Group, Inc. dated January 13, 1995, as amended (A)
10.10 Lease by and between Birtcher Properties, Inc., Manager for
Amberjack, Ltd., and Claremont Technology Group, Inc. dated
November 27, 1991, as amended (A)
10.11 Lease Agreement by and between TOW Ltd. and Claremont Technology
Group, Inc. dated October 1995 (A)
10.12 Claremont Technology Group, Inc. 401(k) Plan and Trust (A)
10.13 Claremont Technology Group, Inc. Executive Bonus Participation
Agreement (A)
10.14 Claremont Technology Group, Inc. Employee Stock Ownership Plan (A)
10.15 Business Loan Agreement between Bank of America Oregon and Claremont
Technology Group, Inc. dated April 24, 1995, as amended (A)
10.16 Common Stock Purchase Warrant issued by Claremont Technology Group,
Inc. to DLJ Capital Corporation dated May 20, 1996 (A)
10.17 Settlement Agreement and Release dated May 20, 1996 by and between
Claremont Technology Group, Inc. and DLJ Capital Corporation and
associated funds (A)
10.18 Stock Purchase Agreement dated May 17, 1996 by and between Claremont
Technology Group, Inc. (the Company), the shareholders of the Company,
Paul J. Cosgrave and the Investors (B)
11 Computation of Earnings Per Share (B)
21 Subsidiaries of the Registrant (A)
27 Financial Data Schedule (B)
(A) Incorporated by reference to Exhibits to Company's Registration
Statement of Form S-1 as amended, effective July 19, 1996 (Commission
Registration No. 333-04561).
(B) Filed herewith.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed by the Registrant during the
quarter ended June 30, 1996.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: September 18, 1996
CLAREMONT TECHNOLOGY GROUP, INC.
By/S/ PAUL J. COSGRAVE
---------------------
Paul J. Cosgrave
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on September 18, 1996:
Signature Title
- --------- -----
/S/ PAUL J. COSGRAVE Chairman of the Board, President and
- -------------------- Chief Executive Officer
Paul J. Cosgrave (Principal Executive Officer)
/S/ DENNIS M. GOETT Chief Financial Officer and Director
- ------------------- (Principal Financial and Accounting Officer)
Dennis M. Goett
/S/ NEIL E. GOLDSCHMIDT Director
- -----------------------
Neil E. Goldschmidt
/S/ PHILLIP W. SEELEY Director
- ---------------------
Phillip W. Seeley
/S/ JERRY L. STONE Director
- -------------------
Jerry L. Stone
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Claremont Technology Group, Inc.
and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Claremont
Technology Group, Inc. and subsidiaries as of June 30, 1996 and 1995 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended June 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Claremont Technology
Group, Inc. and subsidiaries as of June 30, 1996 and 1995 and the results of
their operations and their cash flows for the each of the years in the three-
year period ended June 30, 1996 in conformity with generally accepted accounting
principles.
Portland, Oregon
August 16, 1996
F-1
<PAGE>
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30,
-----------------------
1996 1995
--------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 526 $ 340
Receivables:
Accounts receivable, net 7,811 5,546
Revenue earned in excess of billings 5,653 265
Other 78 40
Prepaid expenses and other current assets 683 73
Deferred income taxes 266 219
Notes receivable 75 85
--------- --------
Total Current Assets 15,092 6,568
Property and equipment, net 4,069 1,522
Long-term notes receivable - 710
Other non-current assets, net 3,804 778
--------- --------
Total Assets $ 22,965 $ 9,578
--------- --------
--------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,464 $ 882
Line of credit 4,600 200
Current installments of long-term debt 944 290
Current installments of obligations under
capital leases - 3
Accrued expenses 3,354 2,068
Income taxes payable 619 419
Deferred revenue 661 253
--------- --------
Total Current Liabilities 11,642 4,115
Long-term debt, excluding current installments 1,578 334
Deferred income taxes 775 28
--------- --------
Total Liabilities 13,995 4,477
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, no par value. Authorized 10,000
shares; no shares issued or outstanding - -
Common stock, no par value. Authorized 25,000 shares;
issued 5,000 shares; 4,832 and 4,233 shares
outstanding at 1996 and 1995, respectively 1,331 202
Retained earnings 7,649 4,898
Cumulative translation adjustment (10) 1
--------- --------
Total Shareholders' Equity 8,970 5,101
--------- --------
Total Liabilities and Shareholders' Equity $ 22,965 $ 9,578
--------- --------
--------- --------
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Revenue:
Professional fees $ 44,769 $ 27,292 $ 15,713
Resold products and services 2,556 - -
--------- --------- ---------
Total revenue 47,325 27,292 15,713
--------- --------- ---------
--------- --------- ---------
Costs and expenses:
Project costs and expenses 23,988 13,704 9,106
Resold products and services 2,410 - -
Selling, general and administrative 15,485 10,156 4,214
--------- --------- ---------
Total costs and expenses 41,883 23,860 13,320
--------- --------- ---------
Income from operations 5,442 3,432 2,393
--------- --------- ---------
Other income (expense):
Interest income 49 83 44
Interest expense (182) (31) (30)
Other, net (36) 15 (2)
--------- --------- ---------
Total other income (expense) (169) 67 12
--------- --------- ---------
Income before income taxes 5,273 3,499 2,405
Income tax expense 2,250 1,352 953
--------- --------- ---------
Net income $ 3,023 $ 2,147 $ 1,452
--------- --------- ---------
--------- --------- ---------
Net income per common share $ 0.40 $ 0.31 $ 0.24
--------- --------- ---------
--------- --------- ---------
Weighted average number of common and
common equivalent shares outstanding 7,612 7,319 6,269
--------- --------- ---------
--------- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Cumulative Total
Common Stock Retained Translation Shareholders'
----------------------
Shares Amount Earnings Adjustment Equity
------- ------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1993 3,941 $ 40 $ 1,543 $ - $ 1,583
-
Net income - - 1,452 - 1,452
Stock options exercised 142 33 - - 33
Purchase of common stock (134) (26) (159) - (185)
--------- --------- --------- --------- ---------
Balance at June 30, 1994 3,949 47 2,836 - 2,883
Net income - - 2,147 - 2,147
Tax benefit of stock options exercised - 83 - - 83
Stock options exercised 339 102 - - 102
Purchase of common stock (55) (30) (85) - (115)
Foreign currency translation adjustment - - - 1 1
--------- --------- --------- --------- ---------
Balance at June 30, 1995 4,233 202 4,898 1 5,101
Net income - - 3,023 - 3,023
Tax benefit of stock options exercised - 525 - - 525
Stock options exercised 668 500 - - 500
Stock compensation recognized - 107 - - 107
Purchase of common stock (69) (3) (272) - (275)
Foreign currency translation adjustment - - - (11) (11)
--------- --------- --------- --------- ---------
Balance at June 30, 1996 4,832 $ 1,331 $ 7,649 $ (10) $ 8,970
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended June 30,
1996 1995 1994
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 3,023 $ 2,147 $ 1,452
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,376 467 227
Loss from sale of fixed assets - - 2
Deferred income taxes 699 (423) 321
Non-cash stock compensation recognized 107 - -
Changes in assets and liabilities:
Receivables (7,625) (3,565) 137
Prepaid expenses and other current assets (688) 5 4
Other non-current assets (1,030) (90) (49)
Accounts payable and accrued expenses 1,858 1,451 (196)
Deferred revenue 366 (3) (777)
Income taxes payable 201 242 (391)
--------- --------- ---------
Net cash provided (used) by operating activities (1,713) 231 730
--------- --------- ---------
Cash flows from investing activities:
Acquisition, net of cash acquired (130) (204) -
Proceeds from sale of long-term certificate of deposit - - 32
Purchase of property and equipment (3,663) (1,498) (247)
Proceeds from sale of property and equipment - - 8
Capitalized software development costs (2,077) (122) -
--------- --------- ---------
Net cash used by investing activities (5,870) (1,824) (207)
--------- --------- ---------
Cash flows from financing activities:
Payments on line of credit (12,025) (4,200) -
Proceeds from line of credit 16,425 4,400 -
Payments of long-term debt (671) (39) (29)
Proceeds from issuance of long-term debt 2,570 500 -
Payments of obligations under capital leases (3) (83) (70)
Purchase of common stock (275) (115) (185)
Proceeds from exercise of stock options 1,025 185 33
Payments (issuance) of notes receivable, net 720 (575) (220)
--------- --------- ---------
--------- --------- ---------
Net cash provided (used) by financing activities 7,766 73 (471)
--------- --------- ---------
Effect of exchange rate changes on cash 3 (10) -
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 186 (1,530) 52
Cash and cash equivalents at beginning of year 340 1,870 1,818
--------- --------- ---------
Cash and cash equivalents at end of year $ 526 $ 340 $ 1,870
--------- --------- ---------
--------- --------- ---------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 144 $ 31 $ 30
Cash paid for taxes $ 804 $ 1,319 $ 1,034
Supplemental disclosure of non-cash investing and
financing activities:
Net liabilities assumed in merger $ 57 $ 151 $ -
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
(In thousands)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Claremont Technology Group, Inc. (the Company) provides enterprise-wide
information technology (IT) solutions that reengineer mission-critical
business processes such as customer service, order processing, billing and
logistics. Claremont services include IT planning, systems integration and
development and outsourcing, through a project management methodology that
employs reusable object oriented software modules and transferable design
frameworks.
Claremont provides solutions to large organizations in select IT intensive
vertical markets including communications, financial services and
pension/retirement services. Claremont's clients consist of large
corporations and government organizations in the United States and certain
foreign markets.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
Claremont Technology Group, Inc. and its wholly owned subsidiaries,
Claremont Retirement Technologies, Inc. (CRTI), Gunford Limited (Claremont
Technology Group (Ireland) Ltd.) and Claremont Technology Group Canada,
Inc. (CTGCI). All significant intercompany balances and transactions have
been eliminated in consolidation.
CASH EQUIVALENTS
Cash equivalents consist of investments in highly liquid investment
instruments with original maturities of three months or less.
INVESTMENT IN PARTNERSHIP
Claremont Retirement Solutions, Ltd. is a limited partnership for which
CRTI is the general partner. The investment in the partnership is
accounted for by the cost method.
F-6
<PAGE>
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(In thousands)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents, trade receivables, trade
payables and short-term borrowings approximate fair value because
of the short-term nature of these instruments. The fair value of
long-term debt was estimated by discounting the future cash flows
using market interest rates and does not differ significantly
from that reflected in the financial statements.
Fair value estimates are made at a specific point in time, based
on relevant market information about the financial instrument.
These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore,
cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
REVENUE AND COST RECOGNITION
Revenues from fixed-price contracts are recognized on the
percentage-of-completion method, measured by the percentage of
cost incurred to date to the estimated total cost at completion.
This method is used because management considers accumulated
costs to be the best available measure of progress on these
contracts. The cumulative impact of any revision in estimates
of the percent complete is reflected in the year in which the
changes become known. Losses on projects in progress are
recognized when known. Revenue earned in excess of billings is
comprised of earnings on certain contracts in excess of
contractual billings on such contracts. Billings in excess of
earnings are classified as deferred revenues.
Revenues from time and materials contracts are recognized during
the period in which the services are provided.
ACCOUNTS RECEIVABLE
Accounts receivable are shown net of allowance for doubtful
accounts of $110 and $98 at June 30, 1996 and 1995, respectively.
F-7
<PAGE>
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(In thousands)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment under
capital leases is stated at the present value of future minimum
lease payments at the inception of the lease.
Depreciation of property and equipment is calculated on the
straight-line method over the estimated useful lives of the
assets ranging from three to five years. Equipment held under
capital leases and leasehold improvements are amortized
straight-line over the shorter of the lease term or estimated
useful lives of the assets.
INCOME TAXES
Effective July 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes". Statement 109 requires a change from the deferred method
of accounting for income taxes of APB Opinion 11 to the asset and
liability method of accounting for income taxes. Under the asset
and liability method of Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date.
FOREIGN CURRENCY TRANSLATION
The local currency is the functional currency in the Company's
foreign subsidiaries. Assets and liabilities of the foreign
subsidiaries are translated to U.S. dollars at current rates
of exchange, and revenues and expenses are translated using
weighted average rates, in accordance with Statement of
Financial Accounting Standards No. 52, "Foreign Currency
Translation." Gains and losses from foreign currency translation
are included as a separate component of shareholders' equity.
Foreign currency transaction gains and losses are included as a
component of other income and expense.
F-8
<PAGE>
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(In thousands)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INTANGIBLE ASSETS
Software development costs incurred subsequent to establishing a
product's technological feasibility are capitalized until such
product is available for general release to customers in
accordance with Statement of Financial Accounting Standards No.
86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed". Capitalized software costs are
amortized on a product-by-product basis. Amortization is
recorded based on the greater of (a) the estimated economic life
of the software (generally three years or less) or (b) the ratio
of current gross revenues for each product to the total of
current and anticipated gross revenues for each product,
commencing when such product is available for general release.
Other intangibles include purchased technology and a covenant not
to compete, which are amortized over periods ranging from two to
five years using the straight-line method.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 revenue and expenses during the
reporting period. Actual results could differ from those
estimates.
COMPUTATION OF NET INCOME PER SHARE
Net income per share is computed using the weighted average
number of shares of common and common equivalent shares
outstanding. Common equivalent shares from stock options
and warrants are excluded from the computation if their
effect is antidilutive, except that pursuant to the Securities
and Exchange Staff Accounting Bulletins, common and common
equivalents shares issued at prices below the public offering
price during the twelve months immediately preceding the initial
filing date have been included in the calculation as if they
were outstanding for all periods presented using the treasury
stock method and the initial public offering price.
F-9
<PAGE>
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(In thousands)
(2) ACQUISITIONS
In January 1995 the Company formed CTGCI by paying $5 in
consideration for 5 shares of CTGCI common stock. Subsequently,
under the terms of a Letter of Agreement which was effective in
January 1995, CTGCI purchased 100 percent of the outstanding
stock of Tony Martins & Associ_s, Inc. (TMAI) for $421. The
agreement provided for $290 to be delivered upon closing and
a loan payable in the amount of $131 due on January 31, 1996.
The acquisition was accounted for under the purchase method of
accounting with CTGCI acquiring the net assets of TMAI.
Financial results subsequent to the acquisition date have
been included in the consolidated statements of operations
and cash flows.
The fair value of assets and liabilities acquired at the date of
acquisition are presented below:
Cash $ 86
Accounts receivable 156
Furniture and computer equipment 4
Purchased technology 326
Accounts payable and accrued expenses (151)
------
Net assets acquired $ 421
------
------
In January 1996, the Company purchased certain assets of The Node
Connection (TNC) for $130. The acquisition has been accounted for as a
purchase, and the financial results of TNC have been included in the
accompanying consolidated financial statements since the date of
acquisition. The cost of the acquisition has been allocated on the basis
of the estimated fair value of the assets acquired and the liabilities
assumed.
The fair value of assets and liabilities acquired at the date of
acquisition are presented below:
Accounts receivable $ 3
Fixed assets 65
Identifiable intangible assets 119
Accounts payable (15)
Deferred revenue (42)
------
Net assets acquired $ 130
------
------
The separate operational results of these acquisitions were not material
and accordingly pro-forma financial results have been omitted.
F-10
<PAGE>
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(In thousands)
(3) BALANCE SHEET COMPONENTS
PROPERTY AND EQUIPMENT
Property and equipment consist of the following: June 30,
---------------------
1996 1995
-------- -------
Furniture and equipment $ 1,147 $ 452
Computer equipment and software 4,759 1,788
Leased equipment 216 216
Leasehold improvements 108 49
-------- -------
6,230 2,505
Less accumulated depreciation and amortization (2,161) (983)
-------- -------
Property and equipment, net $ 4,069 $ 1,522
-------- -------
-------- -------
Depreciation expense for the years ended June 30, 1996, 1995 and 1994 was
$1,178, $469 and $224, respectively.
ACCRUED EXPENSES
The Company's accrued expenses consist of the following:
June 30,
--------------------
1996 1995
-------- --------
Accrued payroll $ 787 $ 805
Accrued vacation 1,105 828
Accrued payroll taxes 710 18
Accrued profit sharing 682 392
Accrued other 70 25
-------- -------
$ 3,354 $ 2,068
-------- -------
-------- -------
OTHER NONCURRENT ASSETS
Other noncurrent assets consist of the following:
June 30,
--------------------
1996 1995
-------- -------
Software development costs $ 2,146 $ 122
Purchased technology 221 334
Covenant not to complete 994 --
Other 443 322
-------- -------
$ 3,804 $ 778
-------- -------
-------- -------
F-11
<PAGE>
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(In thousands)
(4) INVESTMENT IN PARTNERSHIP
Claremont Retirement Solutions, Ltd. (the Partnership) was formed with one
of the Company's major customers to receive royalties from CRTI for future
sales of a pension/retirement system template to other public and private
pension funds. CRTI has obtained licensing rights from the Partnership to
remarket the template. CRTI's initial equity contribution to the
Partnership represents approximately 1 percent of the Partnership's total
capital.
(5) LEASES
The Company was obligated under various capital leasing arrangements for
certain of its computer equipment and office furniture. The leases had
expired by June 30, 1996.
The Company also leases certain of its office space through noncancelable
operating lease arrangements. The leases expire April 30, 1997 through
January 5, 2001, and are net leases with the Company paying all executory
costs, including insurance, utilities, and maintenance. Rental expense for
operating leases during the years ended June 30, 1996, 1995 and 1994 was
approximately $820, $404 and $102, respectively.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) are as follows:
Year Ending June 30,
1997 $ 662
1998 515
1999 433
2000 238
2001 92
-------
Total minimum lease payments $ 1,940
-------
-------
F-12
<PAGE>
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(In thousands)
(6) LONG-TERM DEBT
Long-term debt consists of the following:
June 30,
-------------------
1996 1995
------- ------
7.6 percent installment loan payable in monthly
installments of $61, including interest, with
final payment due April 1999, secured by certain
furniture and equipment $1,799 $ --
7.59 percent installment loan payable in monthly
installments of $14 with final payment due
November 1998, secured by certain furniture
and equipment 334 --
8.05 percent installment loan payable in monthly
installments of $16, including interest, with final
payment due May 1998, secured by certain
furniture and equipment 389 488
Non-interest bearing loan payable to former
shareholders of acquired companies, due in 1996 -- 131
Installment loans payable in monthly installments -- 5
------- ------
2,522 624
------- ------
Less current installment of long-term debt (944) (290)
------- ------
Long-term debt, excluding current installments $ 1,578 $ 334
------- ------
------- ------
The aggregate maturities of long-term debt for years subsequent to
June 30, 1996 are as follows:
Year Ending June 30,
1997 $ 944
1998 1,007
1999 571
--------
Total payments on long-term debt $ 2,522
--------
--------
F-13
<PAGE>
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(In thousands)
(6) LONG-TERM DEBT (CONTINUED)
During 1995, the Company entered into a $2 million line of credit with a
bank which was subsequently increased to $6 million in June 1996, with an
interest rate of .25 percentage points above the bank's reference rate (8.5
percent at June 30, 1996), available through August 1, 1997. This line of
credit is secured by furniture, equipment, and accounts receivable. At
June 30, 1996, $4,600 was outstanding on this line of credit.
The Company is a guarantor on a nonrevolving line of credit with a bank
which provided for borrowings of up to $2 million for purposes of
facilitating the purchase of Company common stock by Company executives.
As of June 30, 1996, there was $1,684 of related debt outstanding against
the line. Advances under the line of credit were made directly to the
Company executive with full recourse and bear interest. Advances under the
line of credit were for 36 months and include monthly interest payments,
made by each Company executive, with principal repayment by each Company
executive on or before July 31, 1998.
The various lines of credit with Bank of America Oregon are contained in a
master Business Loan Agreement which includes covenants relating to the
maintenance of certain financial ratios and minimum net worth. The Company
was in compliance with these covenants at June 30, 1996.
The Company has available a standby letter of credit for up to $125. As of
June 30, 1996, there were no amounts outstanding under the line of credit.
(7) INCOME TAXES
The components of income tax expense are as follows:
Year Ended June 30,
-------------------------------
1996 1995 1994
-------- -------- ------
Current:
Federal $ 1,232 $ 1,351 $ 468
State and local 319 398 164
Foreign -- 26 --
-------- -------- ------
1,551 1,775 632
Deferred:
Federal 552 (314) 253
State and local 147 (109) 68
-------- -------- ------
699 (423) 321
-------- -------- ------
$ 2,250 $ 1,352 $ 953
-------- -------- ------
-------- -------- ------
F-14
<PAGE>
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(In thousands)
(7) INCOME TAXES (CONTINUED)
The actual income tax expense differs from the expected tax expense
(computed by applying the U.S. federal and corporate income tax rate of 34
percent to net income before income taxes) as follows:
Year Ended June 30,
-------------------------------
1996 1995 1994
-------- ------- ------
Computed expected income tax expense $ 1,793 $ 1,190 $ 818
Increase (reduction) in income tax
expense resulting from:
State income tax expense 292 214 147
Other 165 (52) (12)
-------- ------- ------
Income tax expense $ 2,250 $ 1,352 $ 953
-------- ------- ------
-------- ------- ------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below:
June 30,
------------------
1996 1995
------- ------
Deferred tax assets:
Accrued expenses $ 215 $ 176
Expenses deductible in future periods 42 --
Other 61 43
------- ------
Total gross deferred tax assets 318 219
Deferred tax liability:
Capitalized software development costs (812) (27)
Property and equipment, due to differences
in depreciation (15) (1)
------- ------
Total gross deferred tax liabilities (827) (28)
------- ------
Net deferred tax assets (liabilities) $ (509) $ 191
------- ------
------- ------
The Company reported income and expense items on the cash basis for income tax
purposes and the accrual method for financial reporting purposes during the year
ended June 30, 1994.
F-15
<PAGE>
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(In thousands)
(8) STOCK INCENTIVE PLANS
During fiscal 1992, the Company adopted, and the Board of Directors
approved, a stock incentive plan for eligible employees, directors and
outside consultants of the Company (the 1992 Plan). Either non-qualified
or incentive stock options may be issued under this plan and are
exercisable for a period of up to ten years from the date of grant.
Certain of these options are subject to acceleration clauses. As of
June 30, 1996, the Company had authorized issuance of such options to
purchase up to an aggregate of 5,000 shares of its common stock. The
options vest and are exercisable over various periods from the initial
grant date.
During fiscal 1996, the Company also adopted and the Board of Directors
approved the 1996 Stock Option Plan for Nonemployee Directors (the 1996
Nonemployee Director Plan). Under the terms of the 1996 Nonemployee
Director Plan, directors of the Company who are not employees of the
Company or any subsidiary of the Company are eligible to receive
nonqualified options to purchase shares of common stock. A total of 200
shares of common stock have been reserved for issuance upon exercise of
stock options granted under the 1996 Nonemployee Director Plan. Upon
election to the Board of Directors, each director is granted an option to
purchase 20 shares, which option will vest over a three-year period (each a
"Recruitment Grant"). Following the first annual meeting of shareholders
after a Recruitment Grant is fully vested, the nonemployee director holding
such fully-vested Recruitment Grant will receive an option to purchase an
additional 15 shares of common stock, which option will vest over a
three-year period (a "First Renewal Grant"). Furthermore, following the
first annual meeting of shareholders after a nonemployee director's First
Renewal Grant is fully vested, and following every third annual meeting of
shareholders thereafter, such nonemployee director will be granted an
option to purchase an additional 15 shares of common stock, which option
will vest over a three-year period. The exercise price of options granted
under the 1996 Nonemployee Director Plan may not be less than the fair
market value of a share of common stock on the date of the grant of the
option.
F-16
<PAGE>
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(In thousands)
(8) STOCK INCENTIVE PLANS (CONTINUED)
The following table summarizes stock option activity through June 30, 1996:
Shares Price Range
------ ------------
Outstanding options at June 30, 1993 2,230 $ .136 - 1.03
Granted 1,334 1.030 - 1.73
Exercised (142) .160 - 1.43
Canceled (270) .160 - 1.73
------- --------------
Outstanding options at June 30, 1994 3,152 .136 - 1.73
Granted 665 1.730 - 3.55
Exercised (339) .136 - 2.21
Canceled (107) .160 - 3.55
------- --------------
Outstanding options at June 30, 1995 3,371 .136 - 3.55
Granted 552 3.550 - 8.00
Exercised (668) 3.550 - 8.00
Canceled (153) .160 - 4.02
------- --------------
Outstanding options at June 30, 1996 3,102 $ .136 - 8.00
------- --------------
------- --------------
At June 30, 1996, 1,507 of the outstanding options were exercisable.
(9) PROFIT SHARING PLAN
In January 1990, the Company adopted a qualified profit sharing plan
pursuant to Section 401(k) of the Internal Revenue Code. The plan requires
participants to be at least 21 years of age and have completed at least one
hour of service. Employees can make voluntary contributions up to
limitations prescribed by the Internal Revenue Code. Company matching
contributions are discretionary. For the years ended June 30, 1996, 1995
and 1994, the Company recognized discretionary matching contributions of
$129, $75 and $45, respectively.
F-17
<PAGE>
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(In thousands)
(10) EMPLOYEE STOCK OWNERSHIP PLAN
In June 1995, the Company established an Employee Stock Ownership Plan
(ESOP) for all non-union U.S. employees. The ESOP is designed to invest
primarily in common stock of the Company. Each nonunion employee of the
Company or any affiliated company automatically participates in the ESOP on
the January 1 or July 1 following such employee's date of hire.
The general assets of the ESOP are held in trust under a Trust Agreement.
The Company has appointed the Hawaiian Trust Company, Ltd. as the trustee
("Trustee"). The Trustee holds legal title to all assets of the ESOP and
subject to applicable laws and the terms of the ESOP has the discretionary
power to buy common stock and to sell common stock held by the ESOP.
The voting rights with respect to common stock held by the ESOP are
exercised by the Trustee, as directed by the ESOP committee. In the case
of a transaction such as a reorganization, recapitalization, merger, sale
of substantially all assets, liquidation, dissolution or similar
transaction which must be approved by the shareholders, the participants
may direct the Trustee how to vote the common stock allocated to their
Company stock accounts.
A participant's account becomes fully vested and nonforfeitable after seven
years of service with the Company, or earlier if the participant attains
age 65, becomes totally disabled or dies. The participant's account vests
at the rate of 10 percent per year for the first four years of employment,
and at the rate of 20 percent per year for each year thereafter, until
fully vested. The Company pays all administrative costs of the ESOP.
The Company makes all contributions to the ESOP, which may be made in
either cash or shares of common stock. The contributions to the ESOP for
the years ending June 30, 1996 and 1995 consisted of cash of $448 and $300,
respectively. Future contributions to the ESOP will be made at the
Company's discretion.
(11) STOCK WARRANT
On May 20, 1996, the Company issued a five-year warrant to purchase 400
shares of common stock at an exercise price of $10.33 per share. The
warrant is subject to certain antidilution rights.
F-18
<PAGE>
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(In thousands)
(12) BUSINESS AND CREDIT CONCENTRATION
Revenues from certain of the Company's largest customers individually
exceeded 10 percent of revenues as follows:
Year Ended June 30,
-----------------------------
1996 1995 1994
------- ------ ------
Ohio State Teachers Retirement System 14% 38% 72%
AT&T Network Systems 5% -- --
Lucent Technologies 20% 19% --
Mississippi Public Employee Retirement System 11% -- --
At June 30, 1996 and 1995, the trade accounts receivable and revenue in
excess of billings balances from these customers were $5,882 and $2,063,
respectively.
(13) RELATED PARTY TRANSACTIONS
The Company issued notes receivable to its majority shareholder during
fiscal years ended June 30, 1995 and 1994. The notes were forgiven during
1996. There were no amounts due under these notes at June 30, 1996. The
amount of the notes and related interest receivable at June 30, 1995 were
$410 and $13, respectively.
The Company also issued notes receivable totaling $514 and $385 to certain
employees during the fiscal years ended June 30, 1996 and 1995,
respectively. The notes are due at varying dates through July 31, 1997 and
bear interest at rates ranging from 4 percent to 7.1 percent. Interest
receivable on these notes was $3 and $6 at June 30, 1996 and 1995,
respectively. During fiscal 1995, a note receivable totaling $85 was
extended to July 1995 and paid in full at that time.
The Company has entered into a retirement and severance agreement with its
founder, Steven L. Darrow, and (as of the date of the agreement, March 15,
1996) largest shareholder. Under that agreement, in exchange for his
commitment not to complete with the Company for five years, the Company
agreed to pay an amount equal to one year's salary, provide a continuation
of medical benefits during his lifetime, forgive certain loans from the
Company and pay resulting withholding taxes, and grant him and certain
trusts and individuals to whom he had transferred stock certain "piggyback"
registration rights. With respect to this agreement, the Company recorded
$966 as a covenant not to compete and classified such amount under "other
noncurrent assets". Additionally, the agreement provided for the
acceleration of the exercisability of otherwise not yet exercisable stock
options for the 35.8 shares of the Company's
F-19
<PAGE>
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(In thousands)
(13) RELATED PARTY TRANSACTIONS (CONTINUED)
common stock with an exercise price of $1.03 each, resulting in noncash
compensation expense of $107. The Company also agreed to guarantee a loan
for him if the guarantee was required by the lender, provided that the
Company's guarantee was secured by a pledge of Company stock belonging to
the founder, and to provide good faith cooperation if he wished to sell
some of his stock in a transaction before the date of the Company's initial
public offering.
The Company retained a board member as a consultant through his consulting
firm, and also directly as a part-time employee, for payments aggregating
$73 in fiscal year 1996, $113 in fiscal year 1995 and $113 in fiscal 1994.
The consulting and employment arrangement with the board member ended
effective April 26, 1996.
(14) COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
The Company has approximately $500 of performance bonds outstanding as of
June 30, 1996.
The Company has entered into three-year employment agreements with its
president and chief financial officer. These agreements became effective
upon retaining these individuals and provide for an initial base salary of
$400 and $295, respectively. Each agreement states that if the executive's
employment is terminated by the Company for reasons other than cause, the
executive's base salary will continue for the longer of three years from
the start date or six months from the termination date. Regardless of the
reason for termination, each agreement contains commitments of
noncompetition and nonsolicitation of the Company's personnel. These
commitments last the longer of 18 months after departure from the Company,
or for as long as base salary continues to be paid.
F-20
<PAGE>
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(In thousands, except per share data)
(15) BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates primarily in one business segment, providing systems
integration services. The Company's subsidiary in Canada accounted for
$2,321 of total revenue and $13 of net income for the fiscal year 1996.
Identifiable assets of this subsidiary were $391 at June 30, 1996.
Revenue by geographical area is provided below:
Year Ended June 30,
--------------------------------
1996 1995 1994
--------- --------- ---------
United States $ 45,004 $ 26,730 $ 15,713
Canada 2,321 562 --
--------- --------- ---------
Total $ 47,325 $ 27,292 $ 15,713
--------- --------- ---------
--------- --------- ---------
(16) SUBSEQUENT EVENT
On July 19, 1996, the Company sold 1,750 shares in its initial public
offering and on August 16, 1996, the Company sold 262.5 shares in its
over-allotment. Net proceeds from the offering and the over-allotment
totaled $27,024.
F-21
<PAGE>
EXHIBIT 10.18
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (the "Agreement") is made effective as of
this 17th day of May, 1996, by and among Claremont Technology Group, Inc. (the
"Company"), the shareholders of the Company set forth on the Schedule of Selling
Shareholders attached hereto as Exhibit A (the "Shareholders"), Paul J.
Cosgrave, and the investors listed on the Schedule of Investors attached hereto
as Exhibit B (the "Investors").
1. PURCHASE AND SALE OF THE SHARES. Each Shareholder sells, conveys,
transfers and delivers to the Investors all of the Shareholder's right, title,
and interest in and to the number of Shares (collectively, the "Shares") set
forth opposite each Shareholder's name on the Schedule of Stock Purchases
attached hereto as Exhibit C for the price per share so indicated on the
Schedule of Stock Purchases, and each Investor hereby purchases and accepts the
number of Shares set forth opposite each Investor's name on the Schedule of
Stock Purchases. In consideration of the transfer and sale of the Shares to
each Investor, such Investor shall pay to the Shareholders the amounts set forth
next to each Investor's name on the Schedule of Stock Purchases (the "Costs").
2. PAYMENT FOR SHARES. Each Investor shall pay the Costs for the Shares
to the trust account established for the benefit of the Shareholders, pursuant
to the trust agreement attached hereto as Exhibit D (the "Trust Agreement") via
wire transfer upon execution of this Agreement and receipt by the Trustee under
the Trust Agreement (the "Trustee") of certificates representing at least the
number of Shares sold by such Shareholders to the Investors hereby (the
"Certificates"). The Trustee will distribute to each Investor certificates
representing the aggregate number of shares purchased by each Investor
hereunder, and will distribute to each Shareholder checks or wire transfers
representing the proceeds from the aggregate number of shares sold by each
Shareholder hereunder, as provided in the Trust Agreement.
3. TRANSFER OF SHARES. Upon execution of this Agreement, each
Shareholder shall deliver to the Trustee Certificates, along with such further
instructions, consents, or instruments as the Company or its transfer agent may
require to record the transfer of Shares to each Investor in the amounts
purchased hereby, as reflected on the Schedule of Stock Purchases, on the books
of the Company and to issue new certificates to each Investor evidencing such
shares.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Except as set forth on
the Schedule of Exceptions, attached hereto as Exhibit E, which has been
delivered to each Investor prior to Investor's execution hereof, the Company
hereby represents and warrants to each Investor as follows:
4.1 ORGANIZATION AND STANDING; ARTICLES AND BYLAWS. The Company is a
corporation duly organized and active under the laws of the State of Oregon.
The Company has requisite corporate power and authority to own and operate its
properties and assets, and to carry on its business as presently conducted and
as proposed to be conducted. The Company is duly qualified to do business as a
foreign corporation in each jurisdiction in which the conduct of its business
requires such qualification, except where the failure to so qualify would not
have a material adverse
<PAGE>
effect on the Company's business. The Company has furnished counsel to the
Investors with true, correct and complete copies of its Articles of
Incorporation and Bylaws, as presently in effect.
4.2 CORPORATE POWER. The Company has or will have at the Closing (as
defined in Section 4.5 herein) all require corporate power to execute and
deliver this Agreement and to carry out and perform its obligations under the
terms of this Agreement.
4.3 SUBSIDIARIES. The Company has no subsidiaries and does not own
of record or beneficially any capital stock or equity interest or investment in
any corporation, association or business entity.
4.4 CAPITALIZATION. Immediately prior to the Closing, the Company's
authorized capital stock will consist of (a) 25,000,000 shares of Common Stock
(the "Common Stock"), of which 4,799,498 shares are issued and outstanding and
(b) 10,000,000 shares of Preferred Stock (the "Preferred Stock"), of which no
shares will be issued and outstanding. All the aforesaid issued and authorized
shares are duly authorized, validly issued, fully paid and nonassessable and
have been issued by the Company in compliance with applicable federal and state
securities laws. The Company has authorized and reserved 5,200,000 shares of As
Common Stock for issuance pursuant to its 1992 Stock Incentive Plan and its 1996
Stock Option Plan for Nonemployee Directors, including 3,159,010 shares subject
to currently outstanding options.
Other than as described in this Section 4.4 there are no other
currently outstanding preemptive or conversion rights, options, warrants or
agreements granted or issued by or binding upon the Company for the purchase or
acquisition from the Company of any shares of its capital stock. To the best of
the Company's knowledge, no shareholder has granted a third party any option or
other right to purchase any shares of Common Stock from such shareholder.
4.5 AUTHORIZATION. All corporate action on the part of the Company,
its directors and shareholders necessary for the authorization, execution,
delivery and performance by the Company of this Agreement has been taken or will
be taken prior to the date the purchase and sale of Common Stock contemplated by
this Agreement is consummated (the "Closing").
4.6 LITIGATION. There are no actions, suits, proceedings or
investigations pending, or to the Company's knowledge, claims asserted (or any
basis therefor or threat thereof), to which the Company is a party or its
property is subject, which might result in any material adverse change in the
business or financial condition of the Company or any of its properties or
assets, or in any material impairment of the right or ability of the Company to
carry on its business as now conducted, or in any material liability on the part
of the Company, and none which questions the validity of this Agreement or any
action taken or to be taken in connection herewith.
4.7 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in
violation of any term of its Articles or Bylaws nor, to the best of its
knowledge, any material term of any mortgage, indenture, contract, agreement,
instrument, judgment, decree, order, statute, rule or regulation to
-2-
<PAGE>
which the Company is subject and a violation of which would have a material
adverse effect on the condition, financial or otherwise, or operations of the
Company.
4.8 REGISTRATION RIGHTS. At the Closing, except as provided for in
the Retirement and Severance Agreement by and between the Company and Steve
Darrow dated March 15, 1996, and as provided in Section 7 of this Agreement, the
Company will not be under any obligation to register (as defined in Section 7 of
this Agreement) any of its currently outstanding securities or any of its
securities which may hereafter be issued.
4.9 DISCLOSURE. To the best of the Company's knowledge, the
Agreement (including the exhibits hereto), when taken as a whole, does not
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements contained herein not misleading in
light of the circumstances under which they were made.
4.10 AFFILIATE STATUS. Based on the Shareholder's representations
herein and the best of the Company's knowledge, the Company will not treat the
Shareholders, except for Steven L. Darrow and Jerry L. Stone, as having been
Affiliates as of the date of this Agreement, as Affiliate is defined under the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder (an "Affiliate") with respect to the transfer of Shares.
5. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS. Each Shareholder
separately represents and warrants to each Investor and the Company as follows:
5.1 OWNERSHIP; POWER TO TRANSFER.
(a) To the best of Shareholder's knowledge, the Shares sold by
the Shareholder pursuant to this Agreement have been validly issued by the
Company and are fully paid and nonassessable.
(b) The Shareholder has the absolute and unrestricted right,
power and authority to sell, transfer and assign the Shares to the Investors
pursuant to this Agreement.
(c) The delivery of the Shares to Investors as contemplated by
this Agreement will transfer to Investors good, valid and absolute title to the
Shares, free and clear of all liens and encumbrances whatsoever, except those
that may be created by the Investors themselves. There are no agreements
relating to or restricting the voting, ownership or disposition of the Shares.
5.2 AFFILIATE STATUS. Each Shareholder, except Steven L. Darrow and
Jerry L. Stone, represents that he or she (i) is not an Affiliate and (ii)
received his or her Shares from Steven L. Darrow on January 16, 1995.
5.3 GENERAL SOLICITATION. Each Shareholder, including any persons
acting on his or her behalf, has not offered to sell the Shares by any form of
general solicitation or general advertising as those terms are defined in the
Securities Act of 1933, as amended.
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5.4 DISCLOSURE. Each Shareholder is not aware of any facts existing
as of the date hereof pertaining to the Company which have not been disclosed to
the Investors in writing which, either individually or in the aggregate, could
reasonably be expected to have a material adverse effect on the condition
(financial or other), results of operations, assets, liabilities, prospects or
business of the Company as a whole.
6. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each Investor
separately represents and warrants to each Shareholder and the Company as
follows:
6.1 INVESTMENT INTENT. Each Investor is acquiring the Shares
purchased by him pursuant to this Agreement for his own account for investment
purposes and without a view toward resale thereof in connection with any
distribution within the meaning of the Securities Act, and will not transfer the
Shares in violation of the Securities Act or the rules and regulations
thereunder or applicable state securities laws. Each Investor understands and
acknowledges that (i) none of the Shares has been registered under the
Securities Act, or the laws of any state; (ii) there is not now, and there is no
guarantee that there ever will be a public market in the Company's Common Stock
or other securities; and (iii) the certificates representing Shares will bear,
among other legends required by agreement or law, a restrictive legend
prohibiting the transfer of the such shares except in compliance with applicable
Federal and state securities laws.
6.2 SOPHISTICATION. Each Investor is an "accredited investor" within
the meaning of Regulation D of the Securities Act of 1933, as amended. Each
Investor is capable of evaluating the merits and risks of the investment in the
Shares, has the capacity to protect its own interests, and is financially able
to bear the risk of loss of its entire investment in the Shares.
6.3 ACCESS TO INFORMATION; ACKNOWLEDGMENT OF RISKS. Each Investor
has had adequate access to information concerning the Company, its financial
condition and business operation and has had the opportunity to make inquiries
into matters it deemed important in arriving at its decision to invest in the
Shares. Each Investor acknowledges that the purchase of the Shares constitutes
a risky and highly speculative investment.
6.4 NOT AN AFFILIATE OF THE COMPANY. Each Investor is not now, and
has not been in the last three months, an Affiliate of the Company. Each
Investor is acting independently and not in concert with respect to ownership of
the Shares.
6.5 GENERAL SOLICITATION. Each Investor, including any persons
acting on his or her behalf, has not offered to buy the Shares by any form of
general solicitation or general advertising as those terms are defined in the
Securities Act of 1933, as amended.
6.6 AUTHORIZATION. All action on the part of each Investor necessary
for the authorization, execution, delivery and performance by such Investor of
this Agreement has been taken or will be taken prior to the Closing.
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7. REGISTRATION RIGHTS.
7.1 "REGISTER," "REGISTERED," AND "REGISTRATION" means a registration
effected by preparing and filing a registration statement in compliance with the
Securities Act and the declaration or ordering of effectiveness of such
registration statement.
7.2 "REGISTRATION EXPENSES" means all expenses incurred by the
Company in complying with Section 7 of this Agreement, including without
limitation all registration and filing fees, printing expenses, fees and
disbursements of counsel Or the Company, and blue sky fees and expenses.
7.3 "SECURITIES ACT" means the Securities Act of 1933, as amended
from time to time, and all rules and regulations promulgated thereunder, or any
act, rules or regulations which replace the Securities Act or any such rules and
regulations.
7.4 "SELLING EXPENSES" means all underwriting discounts and selling
commissions applicable to the sale of securities of a holder and all fees and
disbursements of counsel for such holder.
7.5 "SHARES" means, in this Section 7, Shares as defined in Section 1
hereto, and any Common Stock of the Company issued as a dividend or other
distribution with respect to, or in exchange for, or in replacement of, such
Shares.
7.6 COMPANY REGISTRATIONS.
7.6.1 BEST EFFORTS CO-REGISTRATION RIGHTS. If at any time
the Company determines to register any of its common stock for sale to the
general public solely for cash on a form that would also permit sale of some or
all of the Shares, the Company will (i) promptly give each holder of Shares
written notice thereof and (ii) use its best efforts to include in such
registrations and in any related underwriting all Shares specified in a written
request by any Investor (which request shall state the intended method of
distribution of the securities), received by the Company within 15 business days
after receipt of such written notice from the Company by any Investor, except as
set forth in subsection 7.6.2 below.
7.6.2 UNDERWRITTEN OFFERINGS. If the registration of which
the Company gives notice under this Section in 7.6 is for a registered public
offering involving an underwriting, the Company will so advise the Investor as a
part of the written notice given to such Investor pursuant to subsection 7.6.1
above. In such event the right of any Investor to registration pursuant to this
Section 7 will be conditioned on such Investor's participation in such
underwriting and the inclusion of such Investor's Shares in the underwriting to
the extent provided herein. All Investors proposing to distribute Shares
through such underwriting will (together with the Company and the other holders
distributing their securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by the Company. Notwithstanding any other
provision of this Section 7, if the underwriter of the offering determines
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that marketing factors require a limitation on the number of Shares to be sold
for the account of Investors, the Company will be required to include in the
relevant offering and registration under this Section 7 only so many of such
shares in addition to any shares of common stock to be offered by the Company as
the underwriter believes in good faith would not adversely affect the
distribution of the securities to be offered and registered (the shares so
included to be apportioned pro rata among all participating security holders,
including participating Investors, according to their respective holdings of
shares).
7.7 EXPENSES.
7.7.1 INCREMENTAL EXPENSES. All incremental Registration
Expenses incurred as a result of any Shares being included in a registration
pursuant to Section 7.6 shall be borne by the Investors on a pro rata basis
according to the number of Shares included in such registration.
7.7.2 SELLING EXPENSES. All Selling Expenses shall be borne
by the holder of the securities so registered.
7.7.3 COMPLIANCE WITH LAW. Notwithstanding any other
provision of this Section 7.7, the provisions of this Section 7.7 shall be
deemed amended to incorporate and comply with the provisions of any applicable
state securities laws, regulations, and administrative policies.
7.8 PROCEDURES. Whenever required under Section 7.6 of this
Agreement to use its best efforts to effect the registration of any of the
Company's securities, the Company will, as expeditiously as reasonably possible:
7.8.1 REGISTRATION STATEMENT. Prepare and file with the
Securities and Exchange Commission (the "Commission") a registration statement
with respect to such securities and use its earnest and diligent efforts to
cause such registration statement to become and remain effective;
7.8.2 AMENDMENTS AND SUPPLEMENTS. Prepare and file with the
Commission such amendments and supplements to such registration statement and
the prospectus used in connection therewith as may be necessary to comply with
the provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement;
7.8.3 FURNISH PROSPECTUS. Furnish to each Investor with
respect to whom securities are included in such registration statement a
prospectus and such other documents as the Investor reasonably may require to
facilitate the disposition of such securities;
7.8.4 LOCAL JURISDICTIONS COMPLIANCE. Use its earnest and
diligent efforts to register and qualify the securities covered by such
registration statement under such other securities or blue sky laws of such
jurisdictions as reasonably are appropriate for the distribution of the
securities covered by such registration statement; provided, however, that the
Company will not be required in connection therewith or as a condition thereto
to qualify to do business or to file a general
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consent to service of process in any state or jurisdiction unless the Company is
already subject to service in such jurisdiction and provided further that in
connection with any proposed registration, the Company will in no event be
obligated to cause any such registration to remain effective for more than 180
days;
7.8.5 NOTICE OF EFFECTIVENESS. Notify each Investor with
respect to whom securities are included in such registration statement, promptly
after it shall receive notice thereof, of the time when such registration
statement has become effective or a supplement to any prospectus forming a part
of such registration statement has been filed;
7.8.6 NOTICE OF COMMISSION REQUEST. Notify each Investor
with respect to whom securities are included in such registration statement of
any request by the Securities and Exchange Commission for the amending or
supplementing of such registration statement or prospectus or for additional
information; and
7.8.7 ADVICE OF STOP ORDERS. Advise each Investor with
respect to whom securities are included in such registration statement, promptly
after it shall receive notice or obtain knowledge thereof, of the issuance of
any stop order by the Commission suspending the effectiveness of such
registration statement, or the initiation or threatening of any proceeding for
such purpose and promptly use its earnest and diligent efforts to prevent the
issuance of any stop order or to obtain its withdrawal if such stop order should
be issued.
7.9 INFORMATION FROM INVESTOR. Each Investor whose Shares are
included in any registration under Section 7.6 of this Agreement will promptly
furnish in writing to the Company such information regarding such Investor and
the distribution proposed by such Investor as the Company may request in writing
and as may be required in connection with any registration, qualification, or
compliance referred to in Section 7.6 and to execute such documents in
connection with such registration as the Company may reasonably request. Each
Investor shall furnish any information required by this section 7.9 within 15
business days of the Company's written request therefor.
7.10 STAND-OFF AGREEMENT. Each Investor hereby agrees that, if
requested by the Company and an underwriter of securities of the Company, such
Investor will not directly or indirectly sell, offer to sell, contract to sell,
grant any option to purchase or otherwise transfer or dispose of any securities
of the Company held by such Investor other than pursuant to the registration
statement during the period required by the Underwriters following and including
the effective date of a registration statement for the Company's initial
underwritten public offering, which period shall not, absent the subsequent
approval of the Investor concerned, exceed 180 days, provided, however, that
such Investor's agreement in this Section 7.10 will only apply with respect to
the Company's initial underwritten public offering and will only apply if all
officers and directors of the Company enter into similar agreements in writing
in a form satisfactory to the Company and such underwriter covering shams of the
common stock (or other securities) owned by them, and for the same post-
effective period. Notwithstanding the foregoing, the stand off agreement
contemplated by this Section 7.10 will not include shares purchased in the
initial public offering or in the public market thereafter. The
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Company may impose stop transfer instructions with respect to the securities
subject to the restriction in this Section 7.10 until the end of the stand-off
period.
7.11 INDEMNIFICATION IN CONNECTION WITH REGISTRATION.
7.11.1. COMPANY'S INDEMNIFICATION OBLIGATION. If any of the
Shares are registered, to the extent permitted by law, the Company will
indemnify and hold harmless each selling Investor, any person who controls any
selling Investor within the meaning of the Securities Act, any underwriter for a
selling Investor and any person who controls such underwriter within the meaning
of the Securities Act (collectively with the underwriter, a "Participating
Underwriter") against any losses, claims, damages, or liabilities, joint or
several, to which any Investor, controlling person, or Participating Underwriter
may be subject under the Securities Act or otherwise; and it will reimburse each
Investor, each controlling person, and each Participating Underwriter for any
legal or other expenses reasonably incurred by the Investor, controlling person,
or Participating Underwriter in connection with investigating or defending any
such loss, claim, damage, liability, or action, insofar as such losses, claims,
damages, or liabilities, joint or several (or actions in respect thereof), arise
out of or are based upon any of the following statements, omissions or
violations (collectively or separately, a "Violation"): (i) any untrue statement
or alleged untrue statement of any material fact contained, on the effective
date thereof, in any such registration statement or any preliminary prospectus
or final prospectus, or any amendment or supplement thereto, (ii) the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading or (iii) any
violation or alleged violation by the Company of the Securities Act, the
Securities Exchange Act of 1934, as amended (the "1934 Act") any sate securities
law, or any rule or regulation promulgated under the Securities Act, the 1934
Act or any state securities law; provided, however, that the Company will not be
liable in any case to the extent that any loss, claim, damage, or liability
arises out of or is based upon any untrue statement or alleged untrue statement
or omission or alleged omission made in any registration statement, preliminary
prospectus, final prospectus, or any amendment or supplement thereto, in
reliance upon and in conformity with written information furnished by an
Investor for use in the preparation thereof and provided further, that if any
losses, claims, damages or liabilities arise out of or are based upon any untrue
statement, alleged untrue statement, omission or alleged omission contained in
any preliminary prospectus which did not appear in the final prospectus, the
Company shall not have any liability with respect thereto to (i) the selling
Investor or any person who controls such selling Investor within the meaning of
the Securities Act, if the selling Investor delivered a copy of the preliminary
prospectus to the person alleging such losses, claims, damages or liabilities
and failed to deliver a copy of the final prospectus, as amended or supplemented
if it has been amended or supplemented, to such person at or prior to the
written confirmation of the sale to such person or (ii) any Participating
Underwriter, if such Participating Underwriter delivered a copy of the
preliminary prospectus to the person alleging such losses, claims, damages or
liabilities and failed to deliver a copy of the final prospectus, as amended or
supplemented if it has been amended or supplemented to such person at or prior
to the written confirmation of the sale to such person. The indemnity agreement
contained in this subparagraph 7.11.1 shall not apply to amounts paid to any
claimant in settlement of any suit or claim unless such payment is first
approved by the Company, such approval not to be unreasonably withheld.
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7.11.2 INVESTOR'S INDEMNIFICATION OBLIGATION. Each selling
Investor, to the extent permitted by law and as a condition of the Company's
registration obligation, will indemnify and hold harmless the Company, each of
the Company's directors, each of the Company's officers who have signed any
registration statement or other filing or any amendment or supplement thereto,
any person who controls the Company within the meaning of the Securities Act,
each other Selling Investor or any other person participating as a selling
shareholder in the registration (collectively, a "Selling Shareholder"), any
person who controls any such Selling Shareholder within the meaning of the
Securities Act, and any Participating Underwriter against any losses, claims,
damages, or liabilities to which the Company or any such director, officer,
Selling Shareholder, Participating Underwriter or controlling person may become
subject under the Securities Act or otherwise, and will reimburse any legal or
other expenses reasonably incurred by the Company or any such director, officer,
Selling Shareholder, Participating Underwriter, or controlling person in
connection with investigating or defending any such loss, claim, damage,
liability, or action, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereof) arise out of or are based upon any Violation but
only to the extent that such Violation was made in said registration statement,
preliminary or final prospectus, or other filing, or amendment or supplement, in
reliance upon and in conformity with written information furnished by such
Investor for use in the preparation thereof; provided, however, that the
indemnity agreement contained in this subparagraph 7.11.2 shall not apply to
amounts paid to any claimant in settlement of any suit or claim unless such
payment is first approved by the Investor, such approval not to be unreasonably
withheld.
7.11.3 NOTICE. Promptly after receipt by an indemnified party under
subparagraphs 7.11.1 or 7.11.2 above of written notice of the commencement of
any action, such indemnified party will, if a claim in respect thereof is to be
made against an indemnifying party, deliver to the indemnifying party written
notice of the commencement thereof. The failure to notify an indemnifying party
promptly of the commencement of any such action, if prejudicial to the ability
of the indemnifying party to defend the action, shall relieve the indemnifying
party of any liability to the indemnified party pursuant to this Section 7.11
but the omission to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under
subparagraphs 7.11.1 or 7.11.2.
7.11.4 PARTICIPATION IN DEFENSE. If any such action is brought
against any indemnified party and it notifies in writing an indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate in, and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party; and after notice from the
indemnifying party to such indemnified party of its election to assume the
defense thereof, the indemnifying party will not be liable to such indemnified
party for any legal or other expenses subsequently incurred by such indemnified
party in connection with the defense thereof other than reasonable costs of
investigation.
7.12 LIMITS ON REGISTRATIONS. The rights of all Investors to cause
the Company to register their Shares under this Section 7 shall expire following
the third offering for which the Company has provided the opportunity as
specified in Section 7.7.1. The Investors hereby agree and acknowledge that they
have been notified of the Company's currently proposed registration and have
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elected not to have any shares held by such Investor in the registration,
provided that such registration must become effective and the offering
contemplated thereby must close no later than September 15, 1996.
7.13 DEMAND REGISTRATION RIGHTS. In addition to the Company
registration rights provided for herein; the Company covenants that it will
grant Investors two demand registration rights with respect to their Shares,
which demand registration rights are the same as the demand registration rights
to be granted to the Sprout Group, with the principal terms as described in
Section 4.8 to the Schedule of Exceptions (Exhibit E hereto) (except that the
minimum numbers of Shares required for the Investors to exercise the Investors'
demand registration rights shall be 227,500 Shares) and with such other terms
with respect to such demand registration rights as may be contained in the final
written agreement between the Company and the Sprout Group.
8. INFORMATION AND INSPECTION RIGHTS. The Company hereby covenants and
agrees, so long as each Investor owns any Shares or any shares of Common Stock
issued upon conversion of the Shares, as follows:
8.1 BASIC FINANCIAL INFORMATION. The Company will furnish to each
Investor as soon as practicable after the end of each fiscal year of the
Company, and in any event within ninety (90) days thereafter, a consolidated
balance sheet of the Company and its subsidiaries, if any, as at the end of such
fiscal year, and consolidated statements of income and sources and applications
of funds of the Company and its subsidiaries, if any, for such year, prepared in
accordance with generally accepted accounting principles consistently applied
and setting forth in each case in comparative form the figures for the previous
fiscal year, all in reasonable detail and certified by an independent public
accountant of recognized national standing selected by the Company.
8.2 ADDITIONAL INFORMATION. The Company will permit any Investor to
visit, at such Investor's expense, and inspect any of the properties of the
Company, including its books of account and to discuss its affairs, finances and
accounts with the Company's officers and its independent public accountants, all
at such reasonable times and as often as any such Investor may reasonably
request. In addition, the Company will deliver the reports described below in
this Section 8.2 to each such Investor:
(a) As soon as practicable after the end of each month and in
any event within thirty (30) days thereafter, a consolidated balance sheet of
the Company and its subsidiaries, if any, as at the end of such month, and
consolidated statements of income and of sources and applications of funds of
the Company and its subsidiaries, for each month and for the current fiscal year
of the Company to date, prepared in accordance with generally accepted
accounting principles consistently applied, excluding changes resulting from
year-end audit adjustments and footnotes, certified by the principal financial
or accounting officer of the Company;
(b) An soon as available (but in any event within sixty (60)
days after the commencement of its fiscal year) a summary of the financial plan
of the Company for the fiscal Year as contained in its operating plan approved
by the Company's Board of Directors, and any material
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changes in such financial plan shall be submitted as promptly as practicable
after such changes have been approved by the Board of Directors; and
(c) With reasonable promptness, such other information and data
with respect to the Company and its subsidiaries as any such person may from
time to time reasonably request.
Each Investor agrees that any information obtained by such Investor pursuant to
this Section 8 which is identified by the Company as being proprietary to the
Company or otherwise confidential will not be disclosed without the prior
written consent of the Company. Each Investor further acknowledges and
understands that any information so obtained which may be considered "inside"
non-public information will not be utilized by such Investor in connection with
purchases and/or sales of the Company's securities except in compliance with
applicable state and federal anti-fraud statutes. The provisions of this
Section 8.2 shall not be in limitation of any rights which such Investor may
have with respect to the books and records of the Company, or to inspect its
properties or discuss its affairs, finances and accounts, under the laws of the
jurisdictions in which it is incorporated.
8.3 TERMINATION OF COVENANTS. The covenants of the Company set forth
in this Section 8 shall terminate in all respects on the date of the closing of
an initial firm commitment underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, covering
the offer and sale of the Company's Common Stock.
9. CONDITIONS TO CLOSING.
9.1 REPRESENTATIONS AND WARRANTIES. All representations and
warranties contained in this Agreement shall be true and correct in all respects
when made and shall be true and correct in all respects on the Closing Date.
9.2 OPINION OF COMPANY'S COUNSEL. The Investors shall have received
from the Company's counsel an opinion addressed to the Investors, dated the
Closing Date and in substantially the form attached hereto as Exhibit F.
9.3 CERTIFICATES. The Company shall deliver to the Trustee stock
certificates in such denominations and registered in such Investor's name as se
forth on the Schedule of Investors.
9.4 OPINION OF INVESTORS' COUNSEL. The Company shall have received
from Wilson Sonsini Goodrich & Rosati, counsel to the Investors, an opinion
addressed to the Company, dated the Closing Date and in substantially the form
attached hereto as Exhibit G.
10. GENERAL PROVISIONS.
10.1 This Agreement shall be governed by the internal laws of the
State of Oregon.
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10.2 This Agreement represents the entire agreement among the parties
with respect to the purchase and sale of the Shares and may only be modified or
amended in writing signed by all parties. The rights and obligations of the
parties under this Agreement may not be assigned except as expressly provided
for herein.
10.3 Any party's failure to enforce any provision or provisions of
this Agreement shall not in any way be construed as a waiver of any such
provision or provisions, nor prevent that party thereafter from enforcing each
and every other provision of this Agreement, The rights granted the parties
herein are cumulative and shall not constitute a waiver of any party's right to
assert all other legal remedies available to him under the circumstances.
10.4 The parties agree upon request to execute any further documents
or instruments necessary or desirable to carry out the purposes or intent of
this Agreement.
10.5 This Agreement may be executed in any number of counterparts,
each of which shall be an original, but all of which together shall constitute
one instrument.
10.6 Steven L. Darrow, Jerry L. Stone and Paul J. Cosgrave hereby
agree to terminate the Voting and Co-Sale Agreement dated May 4, 1994, and that
such agreement shall have no further force and effect on or after the date
hereof.
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EXHIBIT A
---------
SCHEDULE OF SELLING SHAREHOLDERS
NUMBER OF
SHARES SOLD AT A NUMBER OF SHARES
PRICE OF SOLD AT A PRICE OF TOTAL NUMBER OF
NAME OF SHARE HOLDERS $9.50 PER SHARE $12.00 PER SHARE SHARES SOLD
- --------------------- ---------------- ------------------ ---------------
1. Steven L. Darrow 400,000 200,000 600,000
2. Dawn C. Darrow 66,667 33,333 l00,000
3. Brett H. Darrow 66,667 33,333 100,000
4. Jerry L. Stone 70,000 - 70,000
5. Judy L. Smith 30,000 10,000 40,000
Total 633,334 276,666 910,000
<PAGE>
EXHIBIT B
---------
SCHEDULE OF INVESTORS
Name of Investor Total Amount Invested
- ---------------- ---------------------
Technology Crossover Ventures, L.P. $2,721,163.00
Technology Crossover Ventures, C.V. $215,503.00
101 Eisenhower Parkway
Roseland, NJ 07068
Attention: Robert C. Bensky
Phone: (201) 228-2234
Fax (201) 228-2206
with a copy to:
Technology Crossover Ventures
575 High Street, Suite 400
Palo Alto, CA 94301
Attention: Richard H. Kimball
Phone: (415) 614-8220
Fax: (415) 614-8222
Henry L. Hillman, C. G. Grefenstette & Elsie Hilliard $750,000.50
Hillman Trustees of the Henry L. Hillman Trust
U/A/T dtd. 11/18/85
C.G. Grefenstette and Thomas G. Bigley $249,999.50
Trustees U/A/T dated 12/30/76 for the
Children of Audrey Hillman Fisher
C.G. Grefenstette and Thomas G. Bigley $249,999.50
Trustees U/A/T dated 12/30/76 for the
Children of Henry Lea Hillman, Jr.
C.G. Grefenstette and Thomas G. Bigley $249,999.50
Trustees U/A/T dated 12/30/76 for the
Children of William Talbott Hillman
C.G. Grefenstette and Thomas G. Bigley $249,999.50
Trustees U/A/T dated 12/30/76 for the
Children of Juliet Lea Hillman Simonds
Howard B. Hillman, Tatnall L. Hillman and $375,005.00
Joseph J. Hill, Trustees U/A/T Dora B. Hillman
Dated 8/25/68 F/B/O Howard B. Hillman
<PAGE>
Name of Investor Total Amount Invested
- ---------------- ------------------------
Howard B. Hillman, Tatnall L. Hillman and $375,005.00
Joseph J. Hill, Trustees U/A/T Dora B. Hillman
Dated 8/25/68 F/B/O Tatnall L. Hillman
c/o The Hillman Company
2000 Grant Building
Pittsburgh, PA 15219
Attention: Harry J. Harrison
Phone: (412) 338-3494
Fax: (412) 338-3520
Accel V L.P. $2,014,996.50
Accel Internet/Strategic Technology Fund L.P. $270,004.50
Accel Keiretsu V L.P. $40,003.00
Ellmore C. Patterson Partners $55,002.00
Accel Investors 96 L.P. $119,999.50
c/o Accel Partners
One Palmer Square
Princeton, NJ 08542
Attention: G. Carter Sednaoui
Phone: (609) 683-4500
Fax: (609) 683-0384
with a copy to:
Accel Partners
One Embarcadero Center, Suite 3820
San Francisco, CA 94111
Attention: James W. Breyer
Phone: (415) 989-5656
Fax: (415) 989-5554
Gibraltar Trust $750,003.00
c/o Rho Management Company, Inc.
767 Fifth Avenue, 43rd Floor
New York, NY 10153
Attention: Habib Kairouz
Phone: (212) 751-6677
Fax: (212) 751-3613
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Name of Investor Total Amount Invested
- ---------------- ---------------------
KME Venture III, L.P. $150,000.00
c/o KME Management Services, Inc.
1440 Chapin Avenue, Suite 335
Burlingame, CA 94010
Attention: Wahab Al-Qatami
Phone: (415) 373-4640
Fax: (415) 373-4641
David A. Duffield Trust Dated 7/14/88 $119,999.50
c/o PeopleSoft Inc.
4440 Rosewood Drive
Pleasanton, CA 94588
Phone: (510) 225-3338
Fax: (510) 227-3685
Margaret L. Taylor $79,999.00
c/o PeopleSoft Inc.
4440 Rosewood Drive
Pleasanton, CA 94588
Phone: (510) 225-3249
Fax: (510) 227-3685
Vincent B. Murphy, Jr. $99,994.50
461 Spook Hollow Road
Far Hills, NJ 07931
Phone: (609) 951-2219
Fax: (609) 520-1702
The Hamilton Companies $99,994.50
1560 Broadway, Suite 2200
Denver, CO 80202
Attention: Frederic C. Hamilton
Phone: (303) 863-301 1
Fax: (303) 832-2058
Ultima Partners Limited $99,994.50
c/o Captiva Corporation ----------
1700 Lincoln Street, Suite 5000
Denver, CO 80203
Attention: Frederick R. Mayer
Phone: (303) 832-3131
Fax: (303) 894-9088
Total $9,336,665.00
-------------
-3-
<PAGE>
EXHIBIT C
---------
SCHEDULE OF STOCK PURCHASES
<PAGE>
EXHIBIT 11
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
CALCULATIONS OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
----------------------- ----------------------- -----------------------
Primary Fully Diluted Primary Fully Diluted Primary Fully Diluted
----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted Average Shares
Outstanding for the Period 4,597 4,597 4,117 4,117 3,940 3,940
Dilutive Common Stock
Options Using the Treasury
Stock Method 2,549 2,432 2,736 2,736 1,863 1,863
Shares added pursuant to
SAB 83 466 466 466 466 466 466
----------------------- ----------------------- -----------------------
Total Shares Used for Per
Share Calculations 7,612 7,495 7,319 7,319 6,269 6,269
----------------------- ----------------------- -----------------------
----------------------- ----------------------- -----------------------
Net Income $3,023 $3,023 $2,147 $2,147 $1,452 $1,452
Adjustment to Income to
Give Effect for 20% Treasury
Stock Limitation 47 36 103 103 38 38
----------------------- ----------------------- -----------------------
Net Income as Adjusted $3,070 $3,059 $2,250 $2,250 $1,490 $1,490
----------------------- ----------------------- -----------------------
----------------------- ----------------------- -----------------------
Net Income Per Share $ 0.40 $ 0.41 $ 0.31 $ 0.31 $ 0.24 $ 0.24
----------------------- ----------------------- -----------------------
----------------------- ----------------------- -----------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 526
<SECURITIES> 0
<RECEIVABLES> 13,542
<ALLOWANCES> 110
<INVENTORY> 0
<CURRENT-ASSETS> 15,092
<PP&E> 4,069
<DEPRECIATION> 2,161
<TOTAL-ASSETS> 22,965
<CURRENT-LIABILITIES> 11,642
<BONDS> 7,122
0
0
<COMMON> 1,331
<OTHER-SE> 7,639
<TOTAL-LIABILITY-AND-EQUITY> 22,965
<SALES> 2,556
<TOTAL-REVENUES> 47,325
<CGS> 2,410
<TOTAL-COSTS> 41,883
<OTHER-EXPENSES> (36)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (182)
<INCOME-PRETAX> 5,273
<INCOME-TAX> 2,250
<INCOME-CONTINUING> 3,023
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,023
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.41
</TABLE>
