<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 16, 1997
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
LECG, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 8742 94-3063119
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
2000 POWELL STREET
EMERYVILLE, CALIFORNIA 94608
(510) 653-9800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
THOMAS M. JORDE
PRESIDENT
LECG, INC.
2000 POWELL STREET
EMERYVILLE, CALIFORNIA 94608
(510) 653-9800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------
COPIES TO:
MICHAEL J. DANAHER HERBERT S. WANDER
SELIM DAY KATTEN MUCHIN & ZAVIS
WILSON SONSINI GOODRICH & ROSATI, 525 WEST MONROE STREET, SUITE 1600
PROFESSIONAL CORPORATION CHICAGO, ILLINOIS 60661
650 PAGE MILL ROAD (312) 902-5200
PALO ALTO, CALIFORNIA 94304-1050
(650) 493-9300
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON
A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF
1933, CHECK THE FOLLOWING BOX. [_]
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING
PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING
BOX AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER
EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING. [_]
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(C)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING. [_]
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par
value................. 5,750,000 shares $13.00 $74,750,000 $22,652
=================================================================================
</TABLE>
(1) Includes 750,000 shares of Common Stock which the Underwriters have the
option to purchase to cover over-allotments.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(a).
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 16, 1997
PROSPECTUS
, 1997
5,000,000 SHARES
LECG, INC.
COMMON STOCK
Of the 5,000,000 Shares of Common Stock offered hereby, 3,400,000 shares are
being sold by LECG, Inc. ("LECG" or the "Company") and 1,600,000 shares are
being sold by the Selling Shareholders. See "Principal and Selling
Shareholders." The Company will not receive any part of the proceeds from the
sale of shares by the Selling Shareholders.
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $11.00 and $13.00 per share. See "Underwriting" for
information relating to the factors to be considered in determining the initial
public offering price.
Application has been made to have the Common Stock approved for listing on
the New York Stock Exchange under the symbol " ," subject to official notice
of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share......................... $ $ $ $
Total(3).......................... $ $ $ $
- --------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for indemnification agreements with the Underwriters.
(2) Before deducting expenses estimated at $700,000, which will be paid by the
Company.
(3) Certain Selling Shareholders have granted to the Underwriters a 30-day
option to purchase up to 750,000 additional shares of Common Stock at the
Price to the Public, less Underwriting Discounts and Commissions, solely to
cover over-allotments, if any. If such option is exercised in full, the
total Price to the Public, Underwriting Discounts and Commissions and
Proceeds to Selling Shareholders will be $ , $ and $ , respectively.
The Company will not receive any of the proceeds of the sale of shares by
the Selling Shareholders pursuant to the Underwriters' over-allotment
option, if exercised. See "Principal and Selling Shareholders" and
"Underwriting."
The shares of Common Stock are being offered by the several Underwriters
when, as and if delivered to and accepted by the Underwriters and subject to
various prior conditions, including their right to reject orders in whole or in
part. It is expected that delivery of share certificates will be made in New
York, New York on or about December , 1997.
DONALDSON, LUFKIN & JENRETTE LEGG MASON WOOD WALKER
SECURITIES CORPORATION INCORPORATED
<PAGE>
------------
This Prospectus contains forward-looking statements that involve substantial
risks and uncertainties. When used in this Prospectus, the words "anticipate,"
"believe," "estimate," "expect" and similar expressions as they relate to the
Company or its management are intended to identify such forward-looking
statements. The Company's actual results, performance or achievements could
differ materially from the results expressed in, or implied by, these forward-
looking statements. Factors that could cause or contribute to such differences
include those discussed in "Risk Factors."
------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. Unless otherwise indicated, the information in this
Prospectus assumes no exercise of the Underwriters' over-allotment option. The
shares of Common Stock offered hereby include a high degree of risk.
Prospective investors should carefully consider the information set forth under
the heading "Risk Factors."
THE COMPANY
LECG, Inc. ("LECG" or the "Company")is a leading economic consulting services
firm that provides sophisticated economic and financial analysis, expert
testimony, litigation support and strategic management consulting to a broad
range of public and private enterprises. The Company's areas of expertise
include antitrust, industry deregulation, damages analyses, economic and
financial modeling, intellectual property valuation, environmental economics
and public policy. Services are provided by renowned academics, recognized
industry leaders and former high-level government officials ("Experts") who are
supported by a highly educated professional staff, most of whom have Ph.D.s or
advanced degrees in economics, finance or related disciplines ("Professional
Staff"). The Experts include those who provide services to the Company on an
exclusive basis ("Principals") and on a non-exclusive basis ("Affiliates"). The
role of the Professional Staff is critical as it enables the Experts to
leverage their expertise allowing the Company to deliver high quality work
product to its clients. The Company believes that its structure enables its
Experts to provide sophisticated economic consulting services efficiently and
effectively to clients throughout the world. In 1996 alone, the Company
performed over 500 assignments for more than 300 clients in eight countries.
The Company provides its clients with insightful and original studies that
are authored, articulated and ultimately defended by independent, leading
Experts, and which are capable of commanding the attention of regulators,
legislators, judges and juries. The studies and related testimony incorporate
in-depth economic analysis on complex issues, such as the competitive effects
of mergers and acquisitions, restructuring of regulated industries, auction
design and implementation, the efficiency properties of complex contracts, the
impact of regulatory structures on technological innovation, the causes of
financial misfortunes and the cost of environmental damages.
The Company is retained by public and private companies, government agencies,
national and state governments and by major law firms on behalf of their
clients. The Company has provided consulting services to a diverse client base
including (i) leading corporations, such as Abbott Laboratories, Chevron Corp.,
Dow Chemical Co., Intel Corporation, Southern Pacific and Time Warner, Inc.,
(ii) large telecommunication and utility companies, such as Ameritech, Bell
Atlantic Corp., New England Power Co., Northern States Power Co., Pacific Gas
and Electric Co. and Potomac Electric Power Co., (iii) leading financial
services firms such as Bankers Trust New York Corp., Kemper Financial Services,
Inc. and Transamerica Life Insurance and Annuity Co., (iv) United States
government and regulatory agencies, such as the Department of Justice, the
Department of Labor, the Federal Communications Commission, the Federal Deposit
Insurance Corporation, the Federal Trade Commission and the Resolution Trust
Corporation and (v) national governments and government agencies, such as the
governments of Argentina, Colombia, El Salvador, Guatemala, Japan, New Zealand
and South Korea.
The Company's Principals include faculty and former faculty from leading
universities including Brigham Young University, Cambridge University, Harvard
University, the London Business School, New York University, Northwestern
University, Princeton University, Stanford University, Tel Aviv University,
Texas A&M University, the University of California at Berkeley, the University
of California at Davis, the University of California at Los Angeles, the
University of Chicago, the University of Illinois, the University of Maryland,
the University of Pennsylvania, the University of Southern California, the
University of Toronto, the University of Virginia, Vanderbilt University and
Yale University. The Experts' relationships with credentialed, internationally
renowned scholars enables the Company to serve as a "switchboard" to access
talent in the world's great universities.
3
<PAGE>
The Company believes that the business environment is favorable to the
continued application of economic analysis to complex business and policy
problems. The Company believes that there are additional growth opportunities
through (i) increasing engagements performed by the Company's current Experts,
(ii) attracting additional Experts, (iii) expanding geographically in the
United States and abroad and (iv) acquiring economic consulting organizations
on a selective basis.
Since its inception in 1988, the Company has expanded its operations from one
office in Berkeley/Emeryville, California to an aggregate of ten offices in
Washington, D.C.; New York, New York; Evanston, Illinois; Salt Lake City, Utah;
College Station, Texas; Sacramento, California; Toronto, Canada; Wellington,
New Zealand; and London, England.
Prior to this offering, the Company was known as The Law and Economics
Consulting Group, Inc. The Company changed its name in October of 1997. The
Company's executive offices are located at 2000 Powell Street, Emeryville,
California 94608 and its telephone number is (510) 653-9800.
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company................ 3,400,000 shares
Common Stock offered by the Selling Shareholders... 1,600,000 shares
Common Stock to be outstanding after the offering.. 13,400,000 shares
Use of proceeds.................................... For general corporate
purposes, including
working capital and
capital expenditures, and
for payment of
undistributed S
corporation earnings. See
"Use of Proceeds."
Proposed New York Stock Exchange Symbol............ " "
</TABLE>
4
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF INCOME DATA:
Revenues............... $14,858 $ 20,317 $ 24,548 $ 24,835 $ 31,392 $ 14,398 $ 20,786
Cost of services....... 10,281 13,614 16,772 16,465 20,881 9,605 13,740
------- -------- -------- -------- -------- -------- --------
Gross profit........... 4,577 6,703 7,776 8,370 10,511 4,793 7,046
General and administra-
tive.................. 2,138 3,537 3,639 4,048 5,258 2,241 3,302
------- -------- -------- -------- -------- -------- --------
Income before income
taxes and extraordi-
nary gain............. 2,439 3,166 4,137 4,322 5,253 2,552 3,744
Income taxes........... 113 183 90 83 189 53 145
------- -------- -------- -------- -------- -------- --------
Income before extraor-
dinary gain........... 2,326 2,983 4,047 4,239 5,064 2,499 3,599
Extraordinary gain..... 0 0 0 0 0 0 818
------- -------- -------- -------- -------- -------- --------
Net income(1).......... $ 2,326 $ 2,983 $ 4,047 $ 4,239 $ 5,064 $ 2,499 $ 4,417
======= ======== ======== ======== ======== ======== ========
Pro forma net in-
come(2)............... $ 3,099 $ 2,209
Pro forma net income
per share(2).......... $ 0.32 $ 0.22
Weighted average shares
outstanding(3)........ 9,801 10,130
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA(4) AS ADJUSTED (5)
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash............................... $ 374 $ 374 $ 37,618
Working capital.................... 5,349 2,369 39,613
Total assets....................... 18,258 18,258 55,502
Total liabilities.................. 10,301 13,281 13,281
Total shareholders' equity......... 7,957 4,977 42,221
Cash distributions declared........ 3,547 3,947 3,947
</TABLE>
- --------------------
(1) The Company is currently taxed under subchapter S of the Internal Revenue
Code. As an S corporation, the Company is not subject to federal and some
state income taxes.
(2) The pro forma consolidated statement of income data for the year ended
December 31, 1996 has been computed by adjusting the Company's net income,
as reported, to record income tax expense assuming an effective tax rate of
41% that would have been recorded had the Company been a C corporation. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Notes 2 and 10 of Notes to Consolidated Financial
Statements. Included in net income for the six months ended June 30, 1997
is an extraordinary gain of $851,862 net of income taxes of $34,084
relating to the expiration of an option to purchase the assets of the
Company by an unrelated third party. The pro forma consolidated statement
of income data for the six months ended June 30, 1997 has been computed by
(i) adjusting the Company's effective tax rate to 41% and (ii) eliminating
the extraordinary gain resulting from the purchase option. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Notes 2, 10, and 11 of Notes to Consolidated Financial
Statements.
(3) See Note 10 of Notes to Consolidated Financial Statements for a description
of the computation of the number of shares used in per share calculations
and net income per share.
(4) Pro forma balance sheet data has been adjusted to reflect (i) an estimated
deferred tax liability of $2,580,000 as of June 30, 1997 which would exist
if the Company were treated as a C corporation and (ii) an estimated
distribution payable of $400,000 based upon actual cash basis earnings
through June 30, 1997 which the Company intends to distribute. The
estimated deferred tax liability will change and may increase based upon
changes between cash and accrual basis income. The estimated distribution
payable will change and will significantly increase based upon actual cash
basis earnings between June 30, 1997 and the date of this Prospectus. See
"Use of Proceeds," "S Corporation Termination" and Notes 2 and 10 of Notes
to Consolidated Financial Statements.
(5) Adjusted to reflect (i) the sale of 3,400,000 shares of Common Stock
offered by the Company hereby (at an assumed initial public offering price
of $12 per share and after deducting the underwriting discount and
estimated offering expenses payable by the Company) and the application of
the estimated net proceeds therefrom and (ii) the pro forma balance sheet
adjustments discussed in (4) above. See "Use of Proceeds" and
"Capitalization."
5
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in the following risk factors
as well as those discussed elsewhere in this Prospectus.
Dependence on Certain Principals. The success of the Company is highly
dependent upon the business generation capabilities of certain of the
Principals who are also directors or officers of the Company. In particular,
Messrs. Gilbert, Harris, Jorde, Rausser and Teece have had general oversight
and responsibility for over 67% of the Professional Staff's billings during
1996. There can be no assurance that these individuals will perform at
previous levels, or that they will remain with the Company. The engagement
agreements between the Company and Principals are terminable at will and, upon
termination, do not restrict the Principals from competing with the Company.
In the event that these individuals do not perform at previous levels or do
not remain with the Company, the Company's business, operating results and
financial condition would be materially and adversely affected.
Dependence on Experts. Although the Company does not derive a significant
portion of its net income from Expert billings, the Company's ability to
retain current business and to attract new business is highly dependent on the
academic and consulting reputation of its Experts and on the quality of their
work performed for the Company. In the event the Company's reputation for
academic excellence is tarnished or the quality of its work product is
diminished, the Company's business, operating results and financial condition
could be materially adversely affected. The ability of the Experts to perform
economic consulting services also is often limited by the policies of
universities with which they are affiliated. Any change in the policies of
these universities, or loss of the services of any of these Experts for any
reason could have a material adverse effect upon the Company's business,
operating results and financial condition, including its ability to secure and
complete engagements. See "Business-Human Resources."
Dependence on Professional Staff. The Company derives its net income almost
exclusively from consulting services performed by its Professional Staff. As
of December 31, 1996 and September 30, 1997, the Company employed 104 and 129
Professional Staff, respectively. The Company's revenues for the year ended
December 31, 1996 and the six months ended June 30, 1997 attributable to
Professional Staff billings was approximately 66% and 69%, respectively. If
existing or new Professional Staff are unable to achieve anticipated billing
rates, engagement quality, utilization levels or other performance measures,
the Company's net income could be materially adversely affected and to the
extent that the fixed costs associated with Professional Staff (including
costs associated with salaries and benefits) exceeds the Professional Staff's
billing rates, the Company's business, operating results and financial
condition could be materially and adversely affected. See "Business-Human
Resources."
Attraction, Retention and Management of Professional Staff and
Administrative Staff. The Company's business involves the delivery of
professional services and is labor-intensive. The Company's future performance
depends in large part upon its ability to attract, develop, motivate and
retain highly-skilled experts, staff economists, associates and administrative
staff, particularly senior academics with superior professional reputations.
Qualified professionals are in great demand and there is significant
competition for staff economists from other consulting and investment banking
firms, research firms, governments and government agencies and other related
enterprises. There can be no assurance that the Company will be able to
attract and retain sufficient numbers of highly skilled economists in the
future. The loss of the services of, or the failure to recruit a significant
number of Experts, staff economists, associates or administrative personnel
could have a material adverse effect on the Company's business, operating
results and financial condition, including its ability to secure and complete
engagements.
Management of Growth. The Company is currently experiencing significant
operational and geographic growth that could strain the Company's managerial
and other resources. The Company's ability to manage the growth of its
operations will require it to continue to improve its operational, financial
and other internal systems
6
<PAGE>
and to attract, develop, motivate and retain its Experts and Professional
Staff. There can be no assurance that the Company's business model can be
successfully scaled up in existing markets or replicated in new geographic
areas. The Company's success will depend in large part on its ability to
maintain high levels of consultant utilization, maintain billing rates,
maintain quality and accurately set and meet schedules. If the Company's
management is unable to manage growth or new employees are unable to achieve
anticipated performance or utilization levels, the Company's business,
operating results and financial condition could be materially and adversely
affected. See "Business-Growth Strategy."
Dependence on Major Practice Areas. Of the several major practice areas,
antitrust (including mergers and acquisitions review) and
regulation/deregulation, each accounted for approximately one-fourth of the
Company's revenue for the year ended December 31, 1996. Changes in the
politics, economics and guiding philosophy with respect to these areas, or any
area in which the Company conducts business, could significantly reduce the
need for economic consulting services in these areas, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Project Risks. Many of the Company's engagements involve projects that could
have a significant financial impact on its clients' businesses. The Company's
failure or inability to meet a client's expectations in the performance of its
services could have a material adverse effect on the Company's reputation,
thereby adversely affecting its business, operating results and financial
condition. Some of the projects for which the Company's services have been
retained may be terminated prior to completion because clients are under no
contractual obligation to continue to use the Company's consulting services.
Other projects could terminate because of the settlement of litigation or the
abandonment of a merger. The premature termination of existing or future
engagements by the Company's clients could have a material adverse effect on
its business, operating results and financial condition. Even when a project
is successfully completed, the Company could incur redeployment expenses in
locating a new project for its Professional Staff. In addition, the Company
could incur substantial costs and expend significant resources correcting
errors if any were found in the Company's work, and could possibly become
liable for damage caused by such errors.
Professional and Other Liability. The Company's services involve risks of
professional and other liability. If the Company were found to have been
negligent or to have breached its obligations to its clients, the Company
could be exposed to significant liabilities and its reputation could be
adversely affected.
Competition. The market for economic consulting services is intensely
competitive, highly fragmented and subject to rapid change. The market
includes a large number of participants from a variety of market segments,
including economic consulting firms, general management consulting firms, the
consulting practices of the "Big Six" accounting firms, technical and economic
advisory firms, regional and specialty consulting firms, small "niche"
consulting companies and individual academics. Many of these companies are
national and international in scope and have significantly greater personnel,
financial, technical and marketing resources than the Company, generate
greater revenues and have greater name recognition than the Company. There are
relatively low barriers to entry into the Company's markets and the Company
has faced and expects to continue to face additional competition from new
entrants into the economic consulting industry. There can be no assurance that
the Company will compete successfully with its existing competitors or with
any new competitors. See "Business--Competition."
Control of Principal Shareholders. After completion of this offering, the
Company's executive officers and certain directors will beneficially own
approximately 51.9% of the Company's outstanding shares of Common Stock.
Messrs. Teece, Jorde, Rausser, Gilbert and Harris will own approximately
17.6%, 9.4%, 9.4%, 7.4% and 7.4% of the Company's stock, respectively. As a
result, these officers and directors will be able to influence the outcome of
matters requiring a shareholder vote, including the election of the members of
the Board of Directors, thereby controlling the affairs and management of the
Company. This control could adversely affect the market price of the Common
Stock or delay or prevent a change in control of the Company. See "Principal
and Selling Shareholders."
7
<PAGE>
Significant Unallocated Net Proceeds. A substantial majority of the
anticipated net proceeds of this offering has not been designated for specific
uses. Therefore, the Board of Directors of the Company will have broad
discretion with respect to the use of the net proceeds of this offering. See
"Use of Proceeds."
Absence of Prior Public Market and Possible Volatility of Stock Price. Prior
to this offering, there has been no public market for the Common Stock and
there can be no assurance that an active trading market will develop or be
sustained. The initial public offering price for Common Stock to be sold by
the Company and the Selling Shareholders will be determined by negotiations
among the Company, the Selling Shareholders and the Underwriters and may bear
no relationship to the price at which the Common Stock will trade after
completion of this offering. See "Underwriting" for factors considered in
determining such offering price. The market price of the Common Stock could be
subject to significant fluctuations in response to quarter to quarter
variations in the Company's anticipated or actual operating results, changes
in estimates of the Company's performance or recommendations by securities
analysts, performance of consulting service firms and other events or factors.
These fluctuations, as well as general economic and market conditions, may
adversely affect the market price of the Common Stock. There can be no
assurance that an active trading market for the Common Stock of the Company
will develop or be sustained after this offering.
Shares Eligible for Future Sale. Sales of a substantial number of shares of
Common Stock in the public market following this offering could adversely
affect the market price for the Common Stock. These sales could also make it
more difficult for the Company to sell its equity or equity-related securities
in the future at a time and price that the Company deems appropriate. Upon
completion of this offering, the Company will have approximately 13,400,000
shares of Common Stock outstanding. The 5,000,000 shares offered hereby will
be immediately tradeable without restriction. As a result of lock-up
agreements between certain shareholders and the Underwriters, shares
will not become available for sale in the public market until 180 days after
the effectiveness of this offering, subject in some cases to the volume and
other restrictions of Rule 144 and Rule 701 under the Securities Act of 1933,
as amended (the "Securities Act"). However, the Underwriters may, in their
sole discretion and at any time without notice, release all or any portion of
the securities subject to lock-up agreements. Shares eligible to be sold by
affiliates pursuant to Rule 144 are subject to volume and other restrictions.
Subsequent to the closing of this offering, the Company intends to register
2,000,000 shares of Common Stock reserved for issuance under the Company's
stock plans. See "Shares Eligible for Future Sale."
Potential Issuance of Undesignated Preferred Stock; Anti-Takeover
Effects. The Company's Board of Directors can, without obtaining shareholder
approval, issue shares of Preferred Stock having rights, preferences,
privileges and restrictions, including voting rights, that could adversely
affect the voting power and other rights of holders of the Common Stock. The
issuance of the Preferred Stock could have the effect of making it more
difficult for a person to acquire a majority of the outstanding voting stock
of the Company, thereby delaying, deferring or preventing a change in control
of the Company. Furthermore, such Preferred Stock may have other rights,
including economic rights, senior to the Common Stock, and, as a result, the
issuance of such stock could have a material adverse effect on the market
value of the Common Stock. The Company has no current plans to issue shares of
Preferred Stock. The Company may in the future adopt other measures that may
have the effect of delaying, deferring or preventing a change in control of
the Company, even though at a premium price or favored by a majority of
unaffiliated shareholders. Certain of such measures may be adopted without any
further vote or action by the shareholders. The Company has no current plans
to adopt any such measures. See "Description of Capital Stock."
Dilution. Purchasers of the Common Stock in this offering will suffer
immediate and substantial dilution of $8.85 per share in the net tangible book
value of the Common Stock from the initial public offering price.
8
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 3,400,000 shares of Common
Stock being offered hereby (after deducting underwriting discounts and
commissions and estimated offering expenses) are estimated to be approximately
$37,244,000 at an estimated initial public offering price of $12 per share.
The principal purposes of this offering are to obtain additional capital,
create a public market for the Common Stock, facilitate future access by the
Company to public equity markets and enhance the Company's ability to use its
equity securities as a means of attracting, retaining and providing incentives
to employees. The Company expects to use the net proceeds from this offering
for general corporate purposes, including working capital, capital
expenditures and payment of cash basis undistributed S Corporation earnings
(estimated to be $4.1 million as of the date of this Prospectus). Pending use
of the net proceeds for the above purposes, the Company intends to invest such
funds in short-term, interest-bearing, investment grade obligations. The
Company will not receive any proceeds from the sale of Common Stock by the
Selling Shareholders. See "Risk Factors--Significant Unallocated Net Proceeds"
and "S Corporation Termination."
S CORPORATION TERMINATION
Since its founding in 1988, the Company has been treated as a subchapter S
Corporation ("S Corporation") for federal income tax purposes under subchapter
S of the Internal Revenue Code of 1986, as amended (the "Code"), and for
certain state income tax purposes. As a result, substantially all of the
income of the Company has been taxed directly to its shareholders rather than
to the Company. Following the completion of this offering, the Company will be
subject to corporate income taxation as a subchapter C corporation ("C
Corporation") under the Code.
The Company has declared an S Corporation distribution to its existing
shareholders in an aggregate amount representing all cash basis undistributed
earnings of the Company taxed or taxable to its shareholders through the date
of this Prospectus (the "S Corporation Distribution"). As of June 30, 1997,
the amount of the S Corporation Distribution was $0.4 million. As of the date
of this Prospectus the amount of the S Corporation Distribution is estimated
to be approximately $4.1 million. The S Corporation Distribution will be paid
on that date. Approximately $0.9 million will be retained by the Company to
reduce the principal of the promissory notes receivable from existing
shareholders. Purchasers of Common Stock in this offering will not receive any
portion of the S Corporation Distribution. See "Certain Transactions--S
Corporation Distribution."
In connection with the termination of the Company's S Corporation status,
the Company has deferred income taxes of approximately $2.6 million as of June
30, 1997 in accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes." This amount is expected to increase
significantly as of the date of this Prospectus. This income tax expense will
be in addition to income tax expense otherwise incurred in such quarter and
will be incurred upon termination of the Company's S Corporation status,
estimated to occur in December 1997. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 2 to Notes to
Consolidated Financial Statements.
DIVIDEND POLICY
The Company currently anticipates that it will retain all of its future
earnings for use in the expansion and operation of its business and does not
anticipate paying any cash dividends in the foreseeable future. Future cash
dividends, if any, will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, the Company's future
operations and earnings, capital requirements and surplus, general financial
condition, contractual restrictions and such other factors as the Board of
Directors may deem relevant.
9
<PAGE>
CAPITALIZATION
The following table sets forth the borrowings and capitalization of the
Company as of June 30, 1997; (i) on an actual basis, (ii) on a Pro forma basis
terminating the Company's S Corporation status and (iii) on an as adjusted
basis giving effect to the sale and issuance of Common Stock offered hereby.
See "S Corporation Termination", Note 10 to Notes to Consolidated Financial
Statements and "Use of Proceeds." This table should be reviewed in conjunction
with the Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA (2) AS ADJUSTED(3)
(IN THOUSANDS)
<S> <C> <C> <C>
Borrowings under line of credit.......... $ 608 $ 608 $ 608
------- ------ -------
Shareholders' equity:
Common Stock, $.001 par value,
40,000,000 shares authorized,
10,229,220 shares issued and
outstanding, actual and Pro forma ;
13,400,000 shares issued and
outstanding, as adjusted(1)........... 10 10 13
Additional paid-in capital............. 5,663 5,663 42,904
Notes receivable from shareholders..... (2,784) (2,784) (2,784)
Retained earnings...................... 5,068 2,088 2,088
------- ------ -------
Total shareholders' equity........... 7,957 4,977 42,221
------- ------ -------
Total capitalization................. $ 8,565 $5,585 $42,829
======= ====== =======
</TABLE>
- ---------------------
(1) Excludes 2,000,000 shares of Common Stock reserved for future grant under
the Company's stock option plans. See "Management--Employee Benefit Plans"
and Note 12 of Notes to Consolidated Financial Statements.
(2) Pro forma to reflect the declaration of the S Corporation distribution
(which is estimated to be approximately $400,000 as of June 30, 1997) and
the establishment of a deferred tax liability of $2,580,000 upon
termination of the Company's S Corporation status. See "S Corporation
Termination."
(3) Pro forma as adjusted to reflect the sale of 3,400,000 shares of Common
Stock offered by the Company hereby (at an assumed initial public offering
price of $12 per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by the
Company) and the application of the estimated net proceeds therefrom.
10
<PAGE>
DILUTION
The net tangible book value of the Company as of June 30, 1997 was
approximately $8.0 million or approximately $0.78 per share of Common Stock.
Net tangible book value per share represents the Company's total tangible
assets less the Company's total liabilities, divided by the aggregate number
of shares of Common Stock outstanding. After giving effect to (i) the sale by
the Company of the 3,400,000 shares of Common Stock offered hereby (based upon
an assumed initial public offering price of $12 per share and after deducting
estimated underwriting discounts and commissions and estimated offering
expenses payable by the Company) and the application of the estimated net
proceeds therefrom, (ii) the S Corporation Distribution, and (iii) the
recording of deferred income taxes upon termination of the Company's S
Corporation status, the pro forma net tangible book value of the Company at
June 30, 1997 would have been $42.2 million or $3.15 per share. This amount
represents an immediate increase in net tangible book value of $2.37 per share
to existing shareholders and an immediate dilution of $8.85 per share to
purchasers of Common Stock in this offering. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $12.00
Net tangible book value per share as of June 30, 1997........... $0.78
Increase in net tangible book value per share attributable to
new investors.................................................. 2.37
-----
Net tangible book value per share after this offering............. 3.15
------
Dilution per share to new public investors........................ $ 8.85
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1997,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by the
existing shareholders and by the new investors purchasing shares of Common
Stock in this offering based upon an assumed initial public offering price of
$12 per share (before the deduction of the estimated underwriting discounts
and commissions and estimated offering expenses payable by the Company):
<TABLE>
<CAPTION>
TOTAL CONSIDERATION
SHARES PURCHASED (IN 000'S) AVERAGE
----------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
Existing shareholders(1).... 10,000 74.6% $ 5,673 12.2% $ 0.57
New investors(1)............ 3,400 25.4 40,800 87.8 $12.00
-------- ------- ---------- --------
Total..................... 13,400 100.0% $ 46,473 100.0%
======== ======= ========== ========
</TABLE>
- ---------------------
(1) Sales by the Selling Shareholders in this offering will reduce the number
of shares held by existing shareholders of the Company to 8,400,000 shares
or 62.7% of the total number of shares outstanding after this offering
(7,650,000 shares or 57.1% if the Underwriters' over-allotment option is
exercised in full) and will increase the number of shares held by new
investors to 5,000,000 shares or 37.3% of the total number of shares of
Common Stock outstanding after this offering (5,750,000 shares or 42.9% if
the Underwriters' over-allotment option is exercised in full). See
"Principal and Selling Shareholders."
11
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Company's consolidated financial statements and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. The consolidated statements
of income data set forth below with respect to the fiscal years ended December
31, 1994, 1995 and 1996 and the consolidated balance sheet data as of
December 31, 1995 and 1996 are derived from, and are qualified by reference
to, the consolidated financial statements of the Company included elsewhere in
this Prospectus. The Consolidated Statements of Income data with respect to
the fiscal years ended December 31, 1992 and 1993 and the six months ended
June 30, 1996 and 1997 and the consolidated balance sheet data as of December
31, 1992, 1993 and 1994 and June 30, 1997 are derived from the unaudited
financial statements not included herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF INCOME DATA:
Revenues................ $14,858 $20,317 $ 24,548 $24,835 $31,392 $14,398 $20,786
Costs of services....... 10,281 13,614 16,772 16,465 20,881 9,605 13,740
------- ------- -------- ------- ------- ------- -------
Gross profit........... 4,577 6,703 7,776 8,370 10,511 4,793 7,046
General and
Administrative......... 2,138 3,537 3,639 4,048 5,258 2,241 3,302
------- ------- -------- ------- ------- ------- -------
Income before income
taxes and
extraordinary gain.... 2,439 3,166 4,137 4,322 5,253 2,552 3,744
Income taxes............ 113 183 90 83 189 53 145
------- ------- -------- ------- ------- ------- -------
Income before
extraordinary gain.... 2,326 2,983 4,047 4,239 5,064 2,499 3,599
Extraordinary gain:..... 0 0 0 0 0 0 818
------- ------- -------- ------- ------- ------- -------
Net income(1).......... $ 2,326 $ 2,983 $ 4,047 $ 4,239 $ 5,064 $ 2,499 $ 4,417
======= ======= ======== ======= ======= ======= =======
Proforma net income(2).. $ 3,099 $ 2,209
Proforma net income per
share(2)............... $ 0.32 $ 0.22
Weighted average shares
outstanding(3)......... 9,801 10,130
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- -----------------
PRO FORMA
1992 1993 1994 1995 1996 1997 1997(4)
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash................... $ 428 $ 721 $ 407 $ 598 $ 3 $ 374 $ 374
Working capital........ 2,434 3,611 5,319 5,934 4,342 5,349 2,369
Total assets........... 6,095 8,469 11,348 11,566 13,198 18,258 18,258
Total liabilities...... 3,013 4,599 5,808 5,218 6,934 10,301 13,281
Total shareholders'
equity................ 3,082 3,869 5,539 6,348 6,264 7,957 4,977
Cash distributions
declared.............. 1,802 1,842 2,448 3,345 4,902 3,547 3,947
</TABLE>
- -------------------
(1) The Company is currently taxed under subchapter S of the Internal Revenue
Code. As an S corporation, the Company is not subject to federal and some
state income taxes.
(2) The pro forma consolidated statement of income data for the year ended
December 31, 1996 has been computed by adjusting net income, as reported,
to record income tax expense assuming an effective tax rate of 41% that
would have been recorded had the Company been a C corporation. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Notes 2 and 10 of Notes to Consolidated Financial
Statements. Included in net income for the six months ended June 30, 1997
is an extraordinary gain of $851,862, net of income taxes of $34,084,
relating to the expiration of an option to purchase the assets of the
Company by an unrelated third party. The pro forma consolidated statement
of income data for the six months ended June 30, 1997 has been computed by
(i) adjusting the Company's effective tax rate to 41% and (ii) eliminating
the extraordinary gain resulting from the purchase option. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Notes 2, 10 and 11 of Notes to Consolidated Financial
Statements.
(3) See Note 10 of Notes to Consolidated Financial Statements for a
description of the computation of the number of shares used in per share
calculations and net income per share.
(4) Pro forma balance sheet data has been adjusted to reflect (i) an estimated
deferred tax liability of $2,580,000 as of June 30, 1997 which would exist
if the Company were treated as a C corporation and (ii) an estimated
distribution payable of $400,000 based upon actual cash basis earnings
through June 30, 1997 which the Company intends to distribute. The
estimated deferred tax liability will change and may increase based upon
changes between cash and accrual basis income. The estimated distribution
payable will change and will significantly increase based upon actual cash
basis earnings between June 30, 1997 and the date of this Prospectus. See
"Use of Proceeds,""S Corporation Termination" and Notes 2 and 10 of Notes
to Consolidated Financial Statements.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations and other parts of this Prospectus contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those
discussed in "Risk Factors" and "Business," as well as those discussed
elsewhere in this Prospectus.
OVERVIEW
The Company is a leading economic consulting services firm that provides
sophisticated economic and financial analysis, expert testimony, litigation
support and strategic management consulting to a broad range of public and
private enterprises. The Company's areas of expertise include antitrust,
industry deregulation, damages analyses, economic and financial modeling,
intellectual property valuation, environmental economics and public policy.
Services are provided by Experts who are supported by Professional Staff. The
Experts include Principals and Affiliates. The role of the Professional Staff
is critical as it enables the Experts to leverage their expertise allowing the
Company to deliver high quality work product to its clients. The Company
believes that its structure enables its Experts to provide sophisticated
economic consulting services efficiently and effectively to clients throughout
the world. In 1996 alone, the Company performed over 500 assignments for more
than 300 clients in eight countries.
The Company derives revenues almost exclusively from professional service
fees which are billed at standard hourly rates. Projects are generally billed
monthly on a time and expense basis. Professional Staff compensation ranges
from about 70% of billing rates for senior Professional Staff to about 25% for
junior Professional Staff. Professional Staff are compensated on a salary plus
bonus basis or based on an hourly rate plus overtime. Experts are generally
paid 100% of their collected fees and receive project origination fees for
projects they secure or manage. Project origination fees average approximately
15% but can be up to 19.5% of collected revenues on non-Expert professional
fees.
The Company's most significant expense is personnel costs, which consist of
fees paid to Experts and salaries and benefits for Professional Staff and
other employees. The number of professionals assigned to a project will vary
depending on the size and duration of each engagement. Project terminations,
completion and scheduling delays may result in periods where personnel are not
assigned to active projects. The Company manages its personnel costs by
closely monitoring client needs and utilization of the Professional Staff.
Since its organization in 1988, the Company has been treated as an S
Corporation for tax purposes. As an S Corporation, the net income of the
Company is taxable for federal (and some state) income tax purposes directly
to the Company's shareholders. Accordingly, the statements of income presented
do not include a provision for federal or certain state income taxes. All of
the Company's tax basis net income has been (or will be, as described in "S
Corporation Distribution") distributed to its shareholders and included in
their personal taxable income. The Company's S Corporation status will
terminate upon the date of this Prospectus.
During the quarter in which this offering is completed, the Company will
recognize a significant charge against income resulting from the termination
of the Company's S Corporation status. As a result, the Company will record a
one-time charge to operations estimated at $2.6 million based on the deferred
tax liabilities as of June 30, 1997. This amount is expected to increase
between June 30, 1997 and the date of this Prospectus.
13
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
consolidated statements of income data as a percentage of revenues:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ------------------
1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C>
Revenues....................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services............... 68.3 66.3 66.5 66.7 66.1
------- ------- ------- -------- --------
Gross profit................... 31.7 33.7 33.5 33.3 33.9
General and administrative .... 14.8 16.3 16.8 15.6 15.9
------- ------- ------- -------- --------
Income before income taxes and
extraordinary gain............ 16.9 17.4 16.7 17.7 18.0
Income taxes................... 0.4 0.3 0.6 0.4 0.7
------- ------- ------- -------- --------
Income before extraordinary
gain.......................... 16.5 17.1 16.1 17.3 17.3
Extraordinary gain............. -- -- -- -- 3.9
------- ------- ------- -------- --------
Net income .................... 16.5% 17.1% 16.1% 17.3% 21.2%
======= ======= ======= ======== ========
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Revenues. Revenues increased 44.4% to $20.8 million in the six months ended
June 30, 1997, from $14.4 million in the six months ended June 30, 1996. This
growth in revenues was primarily attributable to additional services provided
to existing clients and engagements with new clients. The Company expanded the
number of projects billed from 294 through the first six months of 1996 to 352
through the same period in 1997. Additionally, revenues increased due to an
increased number of senior Professional Staff relative to junior Professional
Staff.
Gross Profit. Gross profit consists of revenues less cost of services, which
includes Expert fees, Professional Staff salaries and benefits, project
origination fees and other direct project expenses. Gross profit increased
47.0% to $7.0 million in the first half of 1997 from $4.8 million in the
comparable period of 1996. Gross profit as a percentage of revenues was 33.9%
in the first six months of 1997 compared to 33.3% in 1996. To service
additional client projects, the Company increased the number of Principals and
employees, including Professional Staff, to 200 at June 30, 1997 from
approximately 155 at June 30, 1996. Increases in utilization rates resulted in
a 11.9% increase in average billings per Professional Staff member in the 1997
period.
General and Administrative. General and administrative includes salaries and
benefits of management and the administrative staff, facilities costs,
supplies, outside professional fees not billed to clients and all other
corporate costs. General and administrative increased 47.3% to $3.3 million in
the six month period ended June 30, 1997 from $2.2 million in the prior year
period. As a percentage of revenues, general and administrative increased to
15.9% in the first six months of 1997 from 15.6% in the first six months of
1996. General and administrative generally increase as the Company's revenues
increase. The Company believes, based on its historical performance, that it
can expand its existing overhead structure while keeping general and
administrative relatively consistent as a percentage of revenues in the
future.
Income before Income Taxes and Extraordinary Gain. Income before income
taxes and extraordinary gain for the six months ended June 30, 1997 was $3.7
million, compared with $2.6 million for the six months ended June 30, 1996.
The improvement is attributable to increased revenues while maintaining profit
margins.
Extraordinary Gain. The Company recognized an extraordinary gain of $851,862
less taxes of $34,084 in the first six months of 1997 related to the
expiration of an option agreement entered into in 1993. The agreement called
for the purchase of all the Company's assets or outstanding Common Stock. The
income recognized represents a $1,000,000 payment for the asset option net of
applicable taxes and expenses to arrange the transaction.
14
<PAGE>
Pro Forma Results. The pro forma presentation in Selected Consolidated
Financial Data for the six months ended June 30, 1997 reflects the elimination
of the extraordinary income of $817,778 that was recorded in the period. The
pro forma tax provision provided assumes the Company had been operating as a C
corporation and reflects an effective tax rate of 41.0%.
1996 COMPARED TO 1995
Revenues. Revenues increased 26.4% to $31.4 million in 1996 from $24.8
million in 1995. The increase in revenues was attributable to increasing the
number of projects billed by 8.6% while increasing the average billings per
project by 16.3%. The Company worked on several large projects for existing
clients.
Gross Profit. Gross profit increased 25.6% to $10.5 million in 1996 from
$8.4 million in 1995. Gross profit as a percentage of revenues decreased
slightly to 33.5% in 1996 from 33.7% in 1995. This decrease is attributable to
increased expenses for project origination fees earned by certain Experts
eligible for a higher percent of such fees. This is offset by an increase in
staff utilization rates of 7% over the prior year.
General and Administrative. General and administrative increased 29.9% to
$5.3 million in 1996 from $4.0 million in 1995. This is attributable to
expenses proportionately increasing in relation to revenues as well as
increased recruiting and business development costs associated with expanding
the Company. General and administrative, as a percentage of revenues,
increased to 16.8% in 1996 from 16.3% in 1995.
1995 COMPARED TO 1994
Revenues. Revenues for 1995 were $24.8 million compared to 1994 revenues of
$24.5 million in 1994. Revenues increased by 1.2%, as the Company's management
focused on establishing a plan for future growth which included hiring a Chief
Operating Officer and increasing recruiting efforts for Experts and
Professional Staff.
Gross Profit. Gross profit increased 7.6% to $8.4 million in 1995 from $7.8
million in 1994. Gross profit as a percentage of revenues increased to 33.7%
in 1995 from 31.7% in 1994. This increase was a result of the Company's
reducing expenses by reducing the percentage paid, on an ongoing basis, for
project origination fees. Experts and Professional Staff increased to 136 at
the end of 1995 from 111 at the end of 1994.
General and Administrative. General and administrative increased 11.2% to
$4.0 million in 1995 from $3.6 million in 1994. As a percentage of revenues,
general and administrative increased to 16.3% in 1995 from 14.8% in 1994. The
increase is attributable to additional facilities charges for opening one new
office and the expansion of two existing offices to accommodate planned
growth.
15
<PAGE>
UNAUDITED QUARTERLY RESULTS AND SEASONALITY
The following table sets forth certain unaudited quarterly operating
information for each of the eight quarters ended June 30, 1997. This
information has been prepared on the same basis as the audited financial
statements contained elsewhere in this Prospectus and include all normal
recurring adjustments necessary for the fair presentation of the information
for the periods presented, when read in conjunction with the Company's
Consolidated Financial Statements and related Notes thereto. Results for any
previous fiscal quarter are not necessarily indicative of results for the full
year or for any future quarter.
<TABLE>
<CAPTION>
QUARTER ENDED (IN THOUSANDS)
-----------------------------------------------------------------------
SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1996 1996 1996 1996 1997 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $6,153 $7,370 $6,617 $7,781 $8,332 $8,662 $9,901 $10,885
Cost of services........ 4,186 4,471 4,397 5,208 5,656 5,620 6,646 7,094
------ ------ ------ ------ ------ ------ ------ -------
Gross profit............ 1,967 2,899 2,220 2,573 2,676 3,042 3,255 3,791
General and
administrative......... 1,130 993 1,013 1,228 1,313 1,704 1,415 1,887
------ ------ ------ ------ ------ ------ ------ -------
Income before income
taxes and extraordinary
gain................... 837 1,906 1,207 1,345 1,363 1,338 1,840 1,904
Income taxes............ (9) 33 25 28 36 100 64 81
------ ------ ------ ------ ------ ------ ------ -------
Income before
extraordinary gain..... 846 1,873 1,182 1,317 1,327 1,238 1,776 1,823
Extraordinary gain...... -- -- -- -- -- -- -- 818
------ ------ ------ ------ ------ ------ ------ -------
Net income.............. $ 846 $1,873 $1,182 $1,317 $1,327 $1,238 $1,776 $ 2,641
</TABLE>
Revenues and operating results fluctuate from quarter to quarter as a result
of a number of factors, such as the significance of client engagements
commenced and completed during a quarter, the number of business days in a
quarter and employee hiring and utilization rates. The timing of revenues
varies from quarter to quarter because of the Company's revenue cycle, the
ability of clients to terminate engagements without penalty, the size and
scope of assignments and general economic conditions. Because a significant
percentage of the Company's expenses are relatively fixed, a variation in the
number of client assignments or the timing of the initiation or the completion
of client assignments can cause significant variations in operating results
from quarter to quarter. Furthermore, the Company has on occasion experienced
a seasonal pattern in its operating results, with a smaller proportion of the
Company's revenues and lower operating income occurring in the third quarter
of the year or a smaller sequential growth rate than in other quarters.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity has been cash flow from
operations, periodically supplemented by borrowings under a bank line of
credit and by loans from shareholders. Operations provided funds of $3.5
million for the six months ended June 30, 1997 as compared to $4.4 million in
the six months ended June 30, 1996. Cash flow from operations amounted to $2.3
million, $4.2 million and $5.6 million for 1994, 1995 and 1996, respectively.
Net income before taxes and net income increased each year during this three
year period.
Investing activities historically have not required significant cash flows.
Cash flow used in financing activities was $2.1 million for the six months
ended June 30, 1997. During this period, the Company paid $3.5 million in S
Corporation Distributions which was partially funded by the Company's line of
credit. The line expires on May 31, 2000 and provides for maximum borrowings
of $3.0 million. The Company is currently negotiating to increase the line to
$10.0 million. Borrowings are limited to working capital requirements and bear
interest at the bank's prime rate (8.5% at June 30, 1997). There was $0.6
million outstanding borrowings under the line of credit as of June 30, 1997.
Borrowings are secured by accounts receivable and fixed assets.
Cash flow used in financing activities amounted to $2.4 million, $3.4
million and $5.1 million for 1994, 1995 and 1996, respectively.
16
<PAGE>
The Company believes the net proceeds from the sale of Common Stock offered
hereby, together with funds generated by operations, will provide adequate
cash to fund its anticipated cash needs, at least through the next twelve
months. Thereafter, the Company anticipates that its cash requirements related
to future operations will be funded with cash generated from operations and
short-term borrowings. Pending such uses, the net proceeds will be invested in
short-term, interest-bearing investment grade securities. The Company
currently anticipates that it will retain all of its earnings for development
of the Company's business and does not anticipate paying any cash dividends in
the foreseeable future.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 128 ("Statement 128"),
issued in February 1997, simplifies the standards for computing and presenting
earnings per share ("EPS"). It replaces the presentation of primary EPS with
basic EPS and requires a reconciliation of the basic EPS computation to the
diluted EPS computation. Basic EPS excludes dilution and is computed by
dividing income available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that would occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Adoption of this statement is effective for financial statements issued for
periods ending after December 15, 1997, and earlier application is not
permitted. The Company does not expect the effects of Statement 128 to be
material.
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BUSINESS
The Company is a leading economic consulting services firm that provides
sophisticated economic and financial analysis, expert testimony, litigation
support and strategic management consulting to a broad range of public and
private enterprises. The Company's areas of expertise include antitrust,
industry deregulation, damages analyses, economic and financial modeling,
intellectual property valuation, environmental economics and public policy.
Services are provided by Experts who are supported by Professional Staff. The
Experts include Principals and Affiliates. The role of the Professional Staff
is critical as it enables the Experts to leverage their expertise allowing the
Company to deliver high quality work product to its clients. The Company
believes that its structure enables its Experts to provide sophisticated
economic consulting services efficiently and effectively to clients throughout
the world. In 1996 alone, the Company performed over 500 assignments for more
than 300 clients in eight countries.
The Company provides its clients with insightful and original studies that
are authored, articulated and ultimately defended by independent, leading
Experts, and which are capable of commanding the attention of regulators,
legislators, judges and juries. The studies and related testimony incorporate
in-depth economic analysis on complex issues, such as the competitive effects
of mergers and acquisitions, restructuring of regulated industries, auction
design and implementation, the efficiency properties of complex contracts, the
impact of regulatory structures on technological innovation, the causes of
financial misfortunes and the cost of environmental damages.
The Company is retained by public and private companies, government
agencies, national and state governments and by major law firms on behalf of
their clients. The Company has provided consulting services to a diverse
client base including (i) leading corporations, such as Abbott Laboratories,
Chevron Corp., Dow Chemical Co., Intel Corporation, Southern Pacific and Time
Warner, Inc., (ii) large telecommunication and utility companies, such as
Ameritech, Bell Atlantic Corp., New England Power Co., Northern States Power
Co., Pacific Gas and Electric and Potomac Electric Power Co., (iii) leading
financial services firms such as Bankers Trust New York Corp., Kemper
Financial Services, Inc. and Transamerica Life Insurance and Annuity Co., (iv)
United States government and regulatory agencies, such as the Department of
Justice, the Department of Labor, the Federal Communications Commission, the
Federal Deposit Insurance Corporation, the Federal Trade Commission and the
Resolution Trust Corporation and (v) national governments and government
agencies, including the governments of Argentina, Colombia, El Salvador,
Guatemala, Japan, New Zealand and South Korea.
The Company's Principals include faculty and former faculty from leading
universities including Brigham Young University, Cambridge University, Harvard
University, the London Business School, New York University, Northwestern
University, Princeton University, Stanford University, Tel Aviv University,
Texas A&M University, the University of California at Berkeley, the University
of California at Davis, the University of California at Los Angeles, the
University of Chicago, the University of Illinois, the University of Maryland,
the University of Pennsylvania, the University of Southern California, the
University of Toronto, the University of Virginia, Vanderbilt University and
Yale University. The Experts' relationships with credentialed, internationally
renowned scholars enables the Company to serve as a "switchboard" to access
talent in the world's great universities.
The Company believes that the business environment is favorable to the
continued application of economic analysis to complex business and policy
problems. The Company believes that there are additional growth opportunities
through (i) increasing engagements performed by the Company's current Experts,
(ii) attracting additional Experts, (iii) expanding geographically in the
United States and abroad and (iv) acquiring economic consulting organizations
on a selective basis.
Since its inception in 1988, the Company has expanded its operations from
one office in Berkeley/Emeryville, California to an aggregate of ten offices
in Washington, D.C.; New York, New York; Evanston, Illinois; Salt Lake City,
Utah; College Station, Texas; Sacramento, California; Toronto, Canada;
Wellington, New Zealand; and London, England.
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BUSINESS ENVIRONMENT FOR COMPLEX ECONOMIC ANALYSIS
Micro-economic thinking and modeling have gained wide acceptance. The
application of advanced micro-economic analysis to complex decision-making has
been made increasingly possible by the development of economic models and
model estimation techniques, the advent of low cost computing capacity and the
development of large public and private databases, which enable statistical
relationships to be explored and modeled. The increased use of economic
analysis is reflected in the frequency with which government agencies in the
United States and abroad are engaging economists to assist in evaluating
mergers and acquisitions, establishing deregulatory principles, designing
complex auctions and implementing transfer pricing rules. In turn, affected
private sector parties are compelled to commission similar economic studies to
represent their interests in the shaping of regulatory and deregulatory
processes, privatization outcomes and legislative changes. In addition,
economic analysis is increasingly used to help determine liability and damages
in private litigation or alternative dispute resolution forums.
The Company believes that micro-economic analysis directed by leading
experts is especially useful where there is considerable complexity or
contention as a result of profound change due to technological innovation or
major legal or policy shifts. This complexity and contention have affected
organizations (i) in those industries undergoing fundamental transition, (ii)
directly affected by competition policy and antitrust laws, (iii) confronted
with complex valuation problems, (iv) requiring damage analysis and (v)
formulating corporate strategy.
Industries in Fundamental Transition. Regulatory initiatives typically lead
governments and affected parties to engage consultants to perform economic
analyses. Cost benefit, comparative cost, cost allocation and price impact
studies are frequently commissioned and can yield important findings which can
shape policy. Economic analysis is especially important where governments or
regulators are endeavoring to deregulate industries. Deregulation begets
further regulations as governments increasingly rely on competition policy
rather than price, entry and rates of return regulation.
Recent deregulation in the telecommunications, electric and gas utility and
agribusiness industries as well as the legislative and market turmoil
affecting the United States healthcare system have led to greater use and
application of economic analyses in those industries.
. Telecommunications. The telecommunications industries are undergoing
fundamental restructuring as they move from public control to more
market based methods of governance or control. These developments are
already substantially accomplished in New Zealand and Chile, in progress
in the United States, the United Kingdom and Australia and being
initiated or contemplated in many other countries including continental
European countries. Greater reliance on competition rather than
regulation requires detailed market, cost and financial analyses by the
major industry participants as well as by potential new entrants.
. Electric and Gas Utilities. Deregulation and industry consolidation
often requires sophisticated economic analysis. Where vertical
divestiture has occurred, pricing issues are especially important with
respect to intermediate "products" including wholesale electricity and
transmission/pipeline services, particularly if control of the basic
infrastructure (e.g., transmission/pipelines) remains concentrated.
Also, when integrated providers compete with new entrants that are not
integrated, complex competition policy issues arise with respect to the
terms and conditions under which the integrated provider can self
supply. Organizational design and access issues frequently need to be
analyzed from an economic perspective.
. Agribusiness. With deregulation and the phased reduction of government
subsidies occurring in industrialized countries as a result of the GATT
Uruguay round, and the forthcoming negotiation rounds under the auspices
of the World Trade Organization, greater flexibility and market
sensitivity are being introduced to the agricultural sectors of many
countries. Moreover, environmental issues, water rights and
technological innovation in agricultural machinery, hybrid seeds,
engineered plants and species raise important policy issues requiring
economic analyses.
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. Healthcare. Policy issues arise in many contexts, including hospital
mergers, physician/hospital relations and pharmaceutical pricing.
Because the sale of pharmaceutical products and medical devices are
often heavily regulated, and involve significant levels of intellectual
property, they too involve complex issues which frequently require
economic analysis. Furthermore, pharmaceutical and medical products are
frequently supplied on a global basis, raising important intercountry
pricing issues.
Competition Policy and Antitrust Analysis. Competition policy issues
frequently involve detailed analysis of markets, market entry conditions and
the market positions of incumbents. Such analyses are required not only in
mature markets, but also in the new high technology sectors where the role of
innovation, network externalities, installed base effects and standards are of
great importance. The role of pricing policies and licensing strategies must
frequently be assessed. Antitrust analysis is frequently required before
merging firms can achieve clearance from antitrust and other regulatory bodies
in the United States, Europe and elsewhere. In addition, private antitrust
litigation frequently requires analysis of markets, firm behavior and damages.
Complex Valuation Problems. The growth and expansion of markets has led to
increases in the variety of assets which are traded and the frequency with
which restructuring occurs. In many cases, there may not be organized markets
where the prices of certain assets are readily ascertained. Yet there is often
a need for value to be determined or for asset sales to be organized. Economic
analysis and advanced statistics and econometrics can assist in valuation,
including:
. Financial Securities. Valuation engines and sophisticated mathematical
modeling are frequently needed to value complex derivatives and exotic
securities. These advanced techniques are employed in litigation, as
well as by companies assessing their exposure to risk and seeking to
value their portfolios.
. Intellectual Property and Intangible Assets. Many firms recognize the
need to build and protect brand equity, intangible assets and
intellectual property. Patents, trade secrets, copyrights and trademarks
frequently need to be valued for managerial, licensing, transfer pricing
and litigation purposes. Economic and market analysis is frequently
fundamental to such valuations.
. Auction of Public Assets and Stranded Assets. Governments have recently
auctioned assets in the electromagnetic spectrum, railroad, oil and gas,
forestry and mineral industries. Private parties wishing to sell large
fixed investments have likewise been attracted to the notion of
designing complex auctions. The architecture of market design principles
depends heavily on modern game theory, which is an important analytical
tool in modern micro-economic analysis.
. Contract Rights. Complex contract rights are often analyzed and valued
in the context of litigation, insurance coverage, mergers and
acquisitions and joint ventures.
Damages Analysis. Damages analysis often requires, or benefits from, the
analysis of large data sets and the construction of economic models. Damages
analysis frequently forms the foundation for understandable expert testimony
for litigation and alternative dispute resolution.
. Environmental Damages. Sophisticated economic analysis is frequently
required to quantify damages from hazardous waste contamination,
including estimation of loss of prospective economic gain, diminution in
property value and residual price risk attached to remediated
properties. Economics also is used to analyze hedonic and economic
damages resulting from loss of life.
. Intellectual Property Damages. Intellectual property is increasing in
value, in part because of the new patent regime caused by the
centralization of the Court of Appeals in Washington, D.C. Accordingly,
the stakes involved in patent disputes have also increased. Infringement
damages frequently require the exploration of the cost of non-infringing
alternatives or "invent around" opportunities as well as future market
and alternative technologies calculations.
. Mass Torts. The United States has witnessed a growing number of class
action product liability cases, including cases involving silicone
breast implants, cigarettes, dangerous chemicals and pharmaceuticals
producing unintended side effects. Both plaintiffs and defendants
increasingly rely on sophisticated economic analysis to quantify
exposure, adverse health effects and damages and to allocate damages
among defendants.
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. Securities Fraud. Securities products have become increasingly complex
with the growth of sophisticated derivative products. As securities
products have become more complex, the calculation of damages in
securities fraud cases has also become more complex, often requiring
sophisticated computer modeling and analysis of extensive data sets.
Corporate Strategy. Economic analytic techniques are also used to examine
the interplay between asset structure, organizational structure and processes
and competitive advantage. Areas where economic analysis is useful include the
analysis of difficult to replicate intangible assets used in supporting
competitive advantage, the choice of organizational structure, decisions
regarding outsourcing, transfer pricing and technology acquisitions.
THE LECG BUSINESS MODEL
The Company's business model attracts and motivates renowned experts who
provide high quality economic analyses and testimony on behalf of companies
and government agencies. The Company believes that several factors distinguish
it from other industry participants. These factors include the following:
Renowned Experts. The Company has the ability to access and productively
utilize renowned scholars and experts from government and the private sector
able to conduct, present and defend authoritative studies. The Experts who
perform these services include nationally recognized and highly credentialed
faculty and former faculty from many top universities. Many of these Experts
have valuable hands-on industry experience or experience in working in or with
government agencies such as the Department of Justice, the Federal Trade
Commission and the Federal Communications Commission. The Experts and
Professional Staff are major contributors to the academic and professional
literature in economics and finance, public policy and intellectual capital
management.
Highly Educated Professional Staff. The Company employs a staff of highly
credentialed and experienced economists and other analysts to support the
Experts. Over one-half of the Company's 129 Professional Staff have advanced
degrees in economics, finance or related disciplines. The Company believes
that its highly educated Professional Staff enables the Experts to leverage
their expertise allowing the Company to deliver high quality work product to
its clients. In addition, many of the Professional Staff have become experts
in their own right, testifying, authoring studies and designing sophisticated
models.
Attractive Support Infrastructure. The Company believes that Experts desire
to associate with the Company in part because of its support infrastructure
which (i) relieves the Experts of administrative tasks and enables them to
focus on their analytic work, (ii) allows them to retain their autonomy and
intellectual freedom and (iii) provides a collegial environment that advances
creativity and cooperation. The Company has designed its infrastructure to
maximize Expert efficiency. As part of this strategy, the Company opens
offices in proximity to the universities at which its Experts are faculty in
order to provide convenient support. Marketing, contract negotiation,
accounting, billing and collecting receivables are handled at the Company's
executive offices. This support infrastructure ensures the Expert focuses on
analysis rather than project administration.
Focused Project Management. The Company treats each client engagement as a
separate project, assigning one or more Experts and a Professional Staff team
consisting of one or more senior economists and analysts. Once assembled,
these teams become virtual organizations using inside and outside resources to
achieve performance in exacting time frames. The Company makes extensive use
of advanced computer hardware and software in executing its projects.
Authoritative Studies. The Company is committed to providing the most
sophisticated and authoritative studies and expert testimony based upon
advanced economic and statistical analysis. The Experts' credentials command
the attention of decision makers, thereby enabling analytical and
authoritative approaches to problems to receive proper recognition.
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Investment in Databases, Models and Methodologies. The Company has developed
proprietary data bases consisting of economic data and studies. In addition,
the Company has developed proprietary computer models used in cost modeling,
auctions and the valuation of complex derivatives. The Company's Experts and
Professional Staff are further aided by access to the Company's network of
contacts and affiliations, internal databases and prior non-confidential
studies.
AREAS OF EXPERTISE
The Company offers its clients leading economic expertise in a number of
industries across a variety of service areas including the following:
<TABLE>
<S> <C>
Agribusiness Electric Utilities
. Merger analysis . Rate design and cost of service
. "Fair" pricing of agricultural . Market-based rates and contracts
products . Promotional practices
. Intellectual property . Transmission rates and access
. Valuation of biotechnology . Performance-based regulation
. Strategy and complementary asset . Retail wheeling/industry
ownership vs. control assessments restructuring
. Market surveys . Competitive strategies/stranded
. Price forecasting investment
. Application of information . Qualified facility
technology bidding/contract renegotiation
Antitrust
. Market definition Financial Industries
. Analysis of market power . Insurance
. Assessment of business practices . Banking/savings and loan
. Mergers and acquisitions . Real estate
. Cooperative activities . Financial networks
Auctions Futures Markets
. Auction design . CFTC regulations
. Auction execution/software . Futures contracts and markets
implementation . Computerized hedging models
. Bidding strategies . Decision support systems
. Statistical analysis of trading
Environmental and Natural and investment strategies
Resource Economics
. CERCLA and state superfund Health Care
. Cost allocation modeling and . Antitrust analysis
dispute resolution . Cost benefit analysis
. Natural resource damages and . Merger analysis
diminution of value . Damages analysis
. Air and water quality . Intellectual property
. Toxic substances and pesticides . Market surveys
. Land and water use
. Forestry, mining and public lands Intellectual Property
. Deregulation and water market . Patent and copyright infringement
pricing . Trade secrets and trademarks
. Management of technology
Damages Analysis . Patent misuse
. Compensatory and punitive . Licensing
theories . Competitive analysis of high
. Lost profits and unjust technology industry
enrichment
. Patent and copyright infringement
. Valuation
. Breach of contract/fiduciary duty
. Product liability
. Business torts
</TABLE>
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International Strategy and Policy Railroads
. Negotiations . Merger analysis and competitive
. Country studies conditions
. Industry studies . Maximum rate reasonableness
. European community regulations . Shipper contract negotiations
. Asian market analysis . Train derailments and health risk
. Eastern Europe and NIS market hazards
analysis
. NAFTA and World Trade Risk Management
Organization dispute settlement . Derivatives
panels . Portfolio valuation
International Trade Securities Fraud
. International Trade Commission . Class actions
injury and causation analysis . Limited partnerships
. Commerce Department margins . Valuation
analysis . Damage estimation
. Trade pricing
. Trade policy Strategic Management
. Customs valuations . Management of technology and
. Export controls intellectual property
. Environmental regulation trade . Corporate strategy and structure
effects . Defense reconversion
. National security issues
Taxation
. International transfer pricing
Legal and Regulatory Infrastructure . Advanced pricing agreements
. Design of property rights . Economics of transaction costs
. Judicial reform . Depreciation policy
. Regulatory policies . Optimal organization of
. Anti-monopolization policies multinational enterprises
. Tax, trade and foreign investment . Public policy analysis
policies
. Sequencing of reforms Telecommunications
. Telephone, cellular, CATV, and
Natural Gas and Oil broadcast
. Market-based rates . State and federal rate design and
. Bypass issues price regulation
. Pipeline expansion pricing . Interconnection and competition
. Performance-based regulation policy
. Take or pay contracts . Pricing of new services
. Pricing and energy modeling . Cost allocation
. Refinery economics . International privatization and
. Oil product supply and demand liberalization
. Mergers and acquisitions . R&D and technology policy and
management
Privatization
. Government strategy
. Benefits/cost analysis
. Deregulation
. Decentralized process design
. Investment feasibility studies
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PRINCIPAL CLIENTS AND REPRESENTATIVE ENGAGEMENTS
Since its inception in 1988, the Company has advised over 900 clients and
conducted more than 1,400 engagements in 13 countries. In 1996, the Company
performed over 500 assignments for more than 300 clients in eight countries.
No single client has represented more than ten percent of the Company's
revenues in any year, and the ten largest clients typically represent
approximately one-third of the Company's revenues in any year. Although in
many cases the Company's work for a client must be kept confidential, set
forth below is a partial list of those clients for whom the Company's
engagement was publicly disclosed:
Agribusiness Pharmaceuticals
. Conagra, Inc. . Abbott Laboratories
. Dow Chemical Co. . Ciba-Geigy Corp.
. E.I. DuPont de Nemours . Glaxo Wellcome P.L.C.
. E&J Gallo Winery, Inc. . Johnson & Johnson
. Georgia-Pacific Corp. . Merck & Co., Inc.
. H. J. Heinz Co. . Pfizer Inc.
. Kraft General Foods, Inc. . Rhone-Poulenc Rorer Inc.
. Monsanto Company . Sandoz Corp.
. Tri-Valley Corp. . SmithKline Beecham Corp.
. Well-Pict. Inc.
Technology
Financial Services and Insurance . Advanced Fiber Communications
. Bankers Trust New York Corp. . Advanced Micro Devices, Inc.
. Commercial Union Insurance Co. . Analog Devices, Inc.
. Kemper Financial Services, Inc. . Apple Computer, Inc.
. Steinhardt Management Co. . Ascend Communications
. Transamerica Life Insurance & . Atari Corp. (acquired by JTS
Annuity Co. Corp.)
. DSC Communications Corp.
Government Related . IBM
. Department of Justice . Intel Corporation
. Federal Communications Commission . Northern Telecom Ltd.
. Federal Deposit Insurance . Novell, Inc.
Corporation . Packard Bell NEC, Inc.
. Federal Trade Commission . Texas Instruments, Inc.
. Resolution Trust Corporation . W. L. Gore & Associates, Inc.
. Governments of Argentina, Colombia,
El Salvador, Guatemala, Japan, South Telecommunications
Korea, New Zealand . Ameritech Corp.
. Bell Atlantic Corp.
Manufacturing . Bellsouth Corp.
. Hansen Industries, Ltd. . Grupo Iusacell, S.A. de C.V.
. Siemens Nixdorf Information . Indiana Bell Telephone Co.
Systeme AG . Nevada Bell
. Ssangyong Cement Industrial Co., . NYNEX Corp.
Ltd. . Pacific Bell
. Teledyne, Inc. . Pacific Telesis Group
. SBC Technologies, Inc.
Oil and Gas . Southern New England Telephone
. Amoco Corporation Co.
. Chevron Corp. . Stentor Communications
. Conoco Inc. . TCI International, Inc.
. Exxon Corp. . Time Warner Inc.
. Humboldt Petroleum, Inc. . United States Telephone
. Liquid Carbonic Association
. Mobil Corp. . U.S. West Communications Group,
. Shell Oil Co. Inc.
. Texaco Inc.
. Unocal Corp.
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Transportation Other
. American Airlines, Inc. . DHL Corp.
. APL Limited . Good Guys, Inc.
. Continental Airlines, Inc. . Hughes Aircraft Company Inc.
. Northwest Airlines, Inc. . Moviefone, Inc.
. Southern Pacific Rail Corp. . Toyota Motor Sales USA, Inc.
. Union Pacific Corp. . United Parcel Service of America,
Inc.
Utilities
. Edison Electric Institute Inc.
. New England Power Co.
. Niagara Mohawk Power Corp.
. Northern States Power Co.
. Pacific Gas and Electric Co.
. Potomac Electric Power Co.
. Wisconsin Electric Power Co.
Representative Engagements. Examples of the Company's engagements, which the
Company believes are representative of the nature of its services, are set
forth below:
. Mergers and Acquisitions. The Company provides sophisticated economic
analysis to support and advise clients who are pursuing major mergers,
acquisitions or joint ventures, which often require approval by
antitrust authorities in the United States and abroad. This analysis
entails detailed evaluations of the competitive conditions in the
markets in which the firms operate, the potential for new entry into
those markets, and the environment for technological change that can
alter the boundaries of competition in those markets. Examples include:
The mergers of SBC Technologies, Inc. and Pacific Telesis Group and
of Bell Atlantic Corp. and NYNEX Corp.: The Company was engaged in
connection with the mergers of these regional bell operating companies.
The Company conducted detailed analyses of the extent of competition in
telecommunications services in each company's home territory, and the
prospects for future competition in local telephone, long distance and
other telecommunications services. The regulatory authorities allowed
both mergers to proceed.
Monsanto's acquisition of Holden, Corp., a manufacturer of germ
plasma: The Company evaluated the extent to which the assets of the two
firms were complementary and promoted the development of innovative
products.
Freightliner's acquisition of Ford's heavy truck division: The
Company's analysis helped the merging partners negotiate a favorable
termination of the Department of Justice's review.
. Complex Antitrust Litigation. The Company has been jointly engaged by
manufacturers of branded pharmaceutical products in connection with
nationwide antitrust litigation challenging industry pricing and
distribution practices. For this project, the Company is analyzing the
state of competition in markets for the manufacture and sale of
pharmaceutical products, including the effects of managed care on the
performance of the health care industry and specifically on the prices
of pharmaceutical products. The analysis is national in scope,
encompassing most of the manufacturers of branded pharmaceutical
products.
. Deregulation and Competition Policy. The largest twelve local United
States exchange telecommunications companies ("LECs") engaged the
Company to analyze the possible financial impacts of policy alternatives
under consideration by the Federal Communications Commission ("FCC").
The Company's financial simulation model enabled these companies to
assess effects of revenues, operating incomes, cash flow and equity
values under current market expectations and alternate scenarios that
depicted possible FCC policy decisions. The Company was also engaged by
one of the largest LECs to build a model to simulate entry by multiple
competitors to assess the
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financial viability of multiple local exchange entrants and determine
the impact that this might have on local exchanges service prices.
. Intellectual Property Valuation. In the context of an international tax
case, the Company was asked to evaluate a complex license agreement
between a United States company and its joint venture subsidiary in
Japan. The firm was asked to analyze the nature of the bargaining
environment in which the license agreement was formulated, the nature of
corporate control in Japan and the value of the technology which was
transferred to the United States company under the grant back provision
of the license agreement. The Company's analysis and presentation
enabled the Company's position to prevail on this important tax matter.
. Environmental. The Company has pioneered the use of economic analysis as
the basis for the equitable allocation of clean up costs at multi-party
superfund sites. The traditional approach to cost allocation at these
sites has been based on the volume of waste that each party generated.
However, at many sites there is only one generator of waste and the
responsible parties are defined by their economic or contractual
relationship to one another. For instance, at a single site there may be
an owner and an operator as well as one or more parties who arranged for
the waste generating activities to be undertaken. All are responsible
for clean up costs under the superfund laws. Recognizing that these
contracts are merely a means for joint risk and reward sharing, the
Company has advocated the allocation of clean up costs among the parties
according to the economic benefits that each party received under the
relevant contracts or economic relationship. This approach fits with
mainstream economic thinking on efficient contract information and
enforcement, as well as commonly accepted notions of fairness. The
Company has been able to apply this benefits-based approach to cost
allocation to several superfund sites.
. Corporate Strategy. The Company was engaged by a major manufacturer of
computer equipment and supplier of software services to explore the
impact of the Internet, and network computing more generally, on
business processes and business organization in the insurance industry
worldwide. The Experts and Professional Staff advised the client over a
four month period. The Company mapped the conceptual issues, sought
relevant data, and conducted interviews of information technology
managers on four continents. The study produced insights into the
business opportunities presented by the Internet, and identified the new
business models which may be possible in the life insurance industry in
the near future.
GROWTH STRATEGY
In addition to growth through additional engagements performed by the
Company's current Experts, the Company believes that there are additional
growth opportunities through (i) attracting additional Experts, (ii) expanding
geographically in the United States and abroad, and (iii) acquiring economic
consulting organizations on a select basis.
Expand Base of Experts. The Company believes that its continued success and
growth will require it to expand its base of Experts. The Company will
continue its efforts to attract renowned academics from universities
throughout the world and from the government agencies and the private sector
and to train and promote its own Professional Staff. The Company offers
Experts the support of the Professional Staff, an intellectual environment,
the opportunity to work with other leading experts and an attractive
compensation structure. The Company also believes that operating as a public
company will aid in recruiting, retaining and incenting current and future
employees.
Geographic Expansion. The Company intends to expand geographically by
establishing offices in proximity to major universities, think tanks,
financial markets and government centers in additional United States locations
and abroad. The Company believes that offices will need to be established in
various continental European countries, Latin America and the Asia Pacific
region. The Company recently opened offices in London, England and Wellington,
New Zealand.
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Selective Acquisitions. Given the highly fragmented nature of the economic
consulting industry, the Company believes that smaller consulting
organizations are potential acquisition opportunities. The Company expects to
continue to evaluate and meet with potential acquisition candidates that have
the potential to increase capacity or add complementary capabilities. At the
date of this Prospectus, the Company has no specific acquisition plans.
HUMAN RESOURCES
The Company believes that is has developed a unique model for a professional
services firm. The Company believes that the model is capable of attracting
and incenting the best and the brightest thought leaders and experts from
universities, think tanks and corporations. As a firm, the Company offers high
compensation to its Experts, a collegial atmosphere, high autonomy, and
transparency of rewards. High compensation is, however, coupled with high
accountability because the Experts' compensation on each project is linked to
the Company's collections on that project. To its Professional Staff, the
Company offers a learning environment, the opportunity to work with highly
credentialed Experts, competitive compensation and entrepreneurial
opportunities.
The Company has 35 Principals and 94 Affiliates. In most cases, the
Principals and Affiliates execute agreements with the Company. The agreements
with the Principals provide for the Principal to consult exclusively for the
Company in consideration for consulting fees determined by the time billed by
the Principal and actually collected by the Company as well as project
origination fees for work secured or managed by the Principal. The agreements
with the Affiliates are substantially the same as the agreements with the
Principals except they do not include an exclusivity provision and provide
slightly reduced fees to the Affiliates. The agreements with the Principals
are terminable at will and do not restrict competition with the Company
following termination. From time to time, the Company also engages experts not
otherwise associated with the Company to work on a particular matter. As of
September 30, 1997, the Professional Staff consisted of 129 employees of whom
68 held advanced degrees in economics, finance or related disciplines.
The Company has experienced low turnover with respect to its Principals.
Since the Company was founded in 1988, only four Principals have ceased
providing services to the Company.
The ability to draw on relevant expertise either within the Company or
through its connections with leading universities enables the Company to
assign a project to an Expert who is a leader in the particular field and who
does not require additional time to learn the fundamentals of the relevant
area. The Expert can rely on competent Professional Staff to organize and
analyze large quantities of data and institutional details to support its
thorough analysis. The Company believes that clients see value in having
studies performed by independent experts with recognized credentials and
communication capabilities likely to be able to author studies and provide
testimony that informs regulators, legislators, judges and juries.
Experts. The Company endeavors to attract renowned scholars who are faculty
or former faculty members at leading universities as well as experts from the
private sector and former government officials. The Company believes that
these highly credentialed individuals seek work environments different from
traditional corporate environments and which allow them to retain their
autonomy and intellectual freedom. In order to attract such individuals, the
Company has created a business environment characterized by high autonomy
within the corporate structure, high incentive compensation and a superior
support system.
Professional Staff. As of September 30, 1997, the Company's Professional
Staff consisted of 68 senior level staff, 15 associates and 48 research
analysts located in ten offices. This represents a 32% increase in
Professional Staff from September 30, 1996.
The Company's goal is to provide multiple and diverse career opportunities
that merge the interests, abilities and aspirations of each individual with
the objectives and interests of the Company. The Company's program
27
<PAGE>
offers structure to the career development process including (i) wide
flexibility for professional growth, (ii) defined responsibilities,
consistency and opportunities for advancement, (iii) recognition of individual
contributions to the Company and (iv) participation in national and
international projects.
The Company is committed to hiring the necessary senior economists,
associates and research analysts each year to staff the Company's growth. The
Company seeks the brightest graduates from the top national and international
economics programs as well as individuals with substantial experience. Of the
Company's 68 senior level staff, all have advanced degrees or professional
certificates, and the majority have a Ph.D. in either economics or finance. On
average, the Company's new hires have five to six years of relevant
experience. As a group, the Company's senior level Professional Staff average
about ten years of experience.
The Company encourages the professional growth of its staff and has
established a mentor program to facilitate this growth process. The aim of the
mentor program is to ensure excellence and consistency throughout the entire
organization while increasing individual and team productivity and
facilitating professional advancement. The Company conducts training sessions
that emphasize its consulting core values, development of consulting products
and business development techniques.
The Company's Professional Staff play significant roles in client case work.
Their management responsibilities include involvement with clients, Experts,
other staff, budgets and the quality and content of work product. Professional
Staff work closely with the Experts to conceptualize practical approaches to
clients' economic issues, and then direct professional resources to complete
necessary analyses in support of the Experts' report or testimony.
Administrative Staff. The rapid growth of the Company has increased the need
for sound management principles and programs. Recognizing this need, the
Company has strengthened its administrative management team by attracting
experienced personnel in several functional disciplines and encouraging
internal growth in many others. Members of the Company's administrative team
encompass all offices and work very closely with one another. The Company
believes that its management style enables individuals to grow professionally
and offers great autonomy for individuals to focus on the needs of clients.
Compensation. The Company believes that its success depends in large part on
attracting, retaining and motivating talented, creative and experienced
professionals at all levels. The Company attracts and motivates its
professional and administrative staff by a variable compensation system based
on attractive incentives and strong accountability. Experts are paid in
relation to their hours worked and fees collected and also receive additional
compensation based on projects they secure and manage. Although Experts are
well compensated, they do not receive any remuneration until the Company
collects the fees associated with the Expert's work. Professional Staff
receive salaries, options and bonuses commensurate with their performance,
skills and degrees. Bonuses provide a significant portion of the Professional
Staff's compensation and are paid at the end of the year.
MARKETING
The Company markets its services directly through corporate efforts and
through the individual efforts of its Principals. The Company relies heavily
on its externally recognized expertise and credentials and publications by its
Experts and Professional Staff in academic and professional journals and in
the trade and business press.
The reputation for academic and professional excellence and independence of
the Experts are the most important factors in the Company's business
development efforts. The Company maintains and enhances its name and
reputation through speeches, presentations, articles in industry, business,
economic, legal and scientific journals and through other publications by the
Experts. The Company also organizes conferences on current issues in economics
at which the Experts lecture, present studies, lead seminars and meet with
invitees. In the Company's experience, these conferences have been well
attended by decision makers from a wide range of industries who, the Company
believes, are particularly interested in listening to and retaining the
Experts.
28
<PAGE>
The Company also maintains relationships with law firms whose clients need
economic analyses across the broad range of services provided by the Company.
In the last three years, the Company received referrals from 65 of the 100
largest law firms in the United States.
The Company is selective in its client development targets and as to the
engagements it accepts. The pursuit of specific markets, clients and bids on
specific requests for proposals are carefully considered. As part of this
process, a conflict check is performed against an up-to-date internal client
data base and verified by the Company's administrative staff prior to
accepting an engagement in order to avoid a conflict of interest. In addition,
the Company declines projects which conflict with its ethical or professional
standards.
COMPETITION
The market for economic consulting services is intensely competitive, highly
fragmented and subject to rapid change. The market includes a large number of
participants from a variety of market segments, including economic consulting
firms, general management consulting firms, the consulting practices of the
"Big Six" accounting firms, technical and economic advisory firms, regional
and specialty consulting firms, small "niche" consulting companies and
individual academics. Many of these companies are national and international
in scope and have significantly greater personnel, financial, technical and
marketing resources than the Company, generate greater revenues and have
greater name recognition than the Company. There are relatively low barriers
to entry into the Company's markets and the Company has faced and expects to
continue to face additional competition from new entrants into the economic
consulting industry.
FACILITIES
The Company's executive offices are located in Emeryville, California where
the Company leases 47,125 square feet of office space. The Company's other
offices are located in Washington, D.C.; New York, New York; Evanston,
Illinois; College Station, Texas; Sacramento, California; Salt Lake City,
Utah; Toronto, Canada; Wellington, New Zealand; and London, England. The
Company believes that its facilities are adequate for its current needs and
that additional facilities can be leased to meet future needs.
29
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company as of October 15, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
David J. Teece...................................... 49 Chairman of the Board
Thomas M. Jorde..................................... 50 President and Director
Kimberly D. Gilmour................................. 39 Chief Financial Officer
and Secretary
Donald A. Bunch..................................... 52 Chief Operating Officer
Richard J. Gilbert.................................. 52 Director
Robert G. Harris.................................... 54 Director
Gordon C. Rausser................................... 54 Director
Mario M. Rosati(1)(2)............................... 51 Director
William J. Spencer(1)(2)............................ 67 Director
</TABLE>
- ---------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
David J. Teece. Dr. Teece has served as Chairman of the Board of Directors
of the Company since the Company was founded in 1988. Since 1982, he has been
a professor of business administration at the University of California at
Berkeley where since 1994, he has directed the Institute of Management,
Innovation and Organization. Dr. Teece has authored numerous publications in
economics, business and technology strategy. He has been an economic and
business consultant for 25 years.
Thomas M. Jorde. Professor Jorde has served as President and on the Board of
Directors of the Company since 1988. Professor Jorde received his B.A. from
Yale University in 1969 and his J.D. from Yale University in 1972 after which
he served as a law clerk to Justice Brennan, United States Supreme Court.
Since 1982, Professor Jorde has been Professor of Law at the University of
California at Berkeley. Professor Jorde is the co-founder of Boalt Hall's
Program in Technology and Law.
Kimberly D. Gilmour. Ms. Gilmour has served as Secretary of the Company
since October of 1997 and as Chief Financial Officer of the Company since
1991. Prior to joining the Company she held various positions at KPMG Peat
Marwick, LLP. She has over 14 years of accounting and operational experience
and is a C.P.A.
Donald A. Bunch. Mr. Bunch has served as Chief Operating Officer of the
Company since 1995. Prior to joining the Company, he was a partner with Arthur
Andersen LLP and later a chief operating officer at the law firm of Finnegan,
Henderson, Farabow, Garrett & Dunner.
Richard J. Gilbert. Dr. Gilbert has served on the Board of Directors of the
Company since 1990. Since 1983, Dr. Gilbert has been professor of Economics
and adjunct professor of business administration at the University of
California at Berkeley. His previous positions include Assistant Attorney
General for Antitrust Economics in the United States Department of Justice and
Director of the University of California Energy Institute. Dr. Gilbert has
been an economic and business consultant for over 20 years.
Robert G. Harris. Dr. Harris has served on the Board of Directors of the
Company since 1994. Since 1996, Dr. Harris has been a Professor Emeritus, and
from 1977 until 1996, Professor at the Haas School of Business at the
University of California at Berkeley. Dr. Harris has also served as Deputy
Director of the Interstate Commerce Commission.
Gordon C. Rausser. Dr. Rausser has served on the Board of Directors of the
Company since 1990. Since 1986, he has been the Robert Gordon Sproul
Distinguished Professor and, since 1994, Dean of the College of
30
<PAGE>
Natural Resources at the University of California at Berkeley. He has been
appointed to federal government economic positions and is a fellow of the
American Statistical Association, the American Association for the Advancement
of Science and the American Agricultural Economics Association.
Mario M. Rosati. Mr. Rosati has served on the Board of Directors of the
Company since October 1997. He is a member of the law firm of Wilson Sonsini
Goodrich & Rosati, which he joined in 1971. Mr. Rosati is a graduate of Boalt
Hall, University of California at Berkeley. Mr. Rosati is a director of C*ATS
Software Inc., a software development company, Genus, Inc., a semiconductor
company, Meridian Data, Inc., a software development company, Ross Systems, a
client/server application software company, Aehr Test Systems, a semiconductor
testing device company, and Sanmina Corporation, a customized, integrated
electronics manufacturing services company, as well as several private
companies.
William J. Spencer. Dr. Spencer has served on the Board of Directors of the
Company since October 1997. Since 1990, he has been President and Chief
Executive Officer of SEMATECH, a non-profit research and development
consortium of U.S. semiconductor manufacturers. He was appointed Chairman of
the Board of SEMATECH in August 1996. From May 1986 until October 1990, he was
Group Vice President and Senior Technical Officer of Xerox Corporation. Dr.
Spencer is a director of Investment Corporation of America and Adobe Systems,
Inc.
BOARD OF DIRECTORS; COMMITTEES
The Board of Directors presently consists of seven members who hold office
until the annual meeting of shareholders and until a successor is duly elected
and qualified, or until his earlier resignation or removal.
In October 1997, the Board of Directors formed an Audit Committee and a
Compensation Committee. The functions of the Audit Committee will be to
recommend to the Board of Directors independent auditors for the Company and
to analyze the reports and recommendations of such auditors. The Compensation
Committee will review the compensation of the President and employee benefit
and incentive plans and present recommendations thereon to the Board of
Directors, and will also administer the Company's 1997 Stock Option Plan and
1997 Employee Stock Purchase Plan.
DIRECTOR COMPENSATION
Directors receive $1,000 for each meeting of the Board attended and $500 for
each meeting of a Committee attended, plus, in each case, expenses incident to
attendance at such meetings. Messrs. Rosati and Spencer are expected to be
granted options for their service as Directors. Certain directors also act as
Experts for the Company and receive compensation for their work as Experts.
See "Certain Transactions.".
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth all compensation received for services
rendered to the Company in all capacities for the fiscal year ended December
31, 1996 by the Company's President (acting in a capacity similar to a chief
executive officer) and the only other executive officer whose total
compensation exceeds $100,000 for the fiscal year ended December 31, 1996
(collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION SALARY BONUS
<S> <C> <C>
Thomas M. Jorde(1)........................................... $100,000 $ 0
President
Donald A. Bunch(2)........................................... $200,000 $40,000
Chief Operating Officer
</TABLE>
- ---------------------
(1) Does not include amounts received in connection with consulting services
rendered to clients or project origination fees. In addition to these
amounts, Mr. Jorde received Subchapter S Distributions as a shareholder
of the Company. See "Certain Transactions--Consulting Agreements," and "S
Corporation Termination."
(2) Bonuses for services rendered are granted at the discretion of the Board
of Directors. All such bonuses are determined and paid before the end of
December.
EMPLOYEE BENEFIT PLANS
1997 STOCK OPTION PLAN
The Company's 1997 Stock Option Plan (the "Option Plan") provides for the
granting to employees of incentive stock options within the meaning of Section
422 of the Code of, and for the granting to employees, directors and
consultants of nonstatutory stock options and stock purchase rights ("SPRs").
The Option Plan was approved by the Board of Directors and the shareholders in
October 1997. Unless terminated sooner, the Option Plan will terminate
automatically in 2007. A total of 1,500,000 shares of Common Stock are
currently authorized for issuance pursuant to the Option Plan, of which
1,500,000 are still available for issuance. As of the date of this Prospectus
no shares had been issued upon the exercise of stock options or stock purchase
rights granted under the Option Plan, no shares were subject to outstanding
options and 1,500,000 shares remained available for future grant.
The Option Plan may be administered by the Board of Directors or a committee
of the Board (the "Committee"), which Committee shall, in the case of options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code, consist of two or more "outside directors" within
the meaning of Section 162(m) of the Code. The Committee has the power to
determine the terms of the options or SPRs granted, including the exercise
price, the number of shares subject to each option or SPR, the exercisability
thereof, and the form of consideration payable upon such exercise. In
addition, the Committee has the authority to amend, suspend or terminate the
Option Plan, provided that no such action may affect any share of Common Stock
previously issued and sold or any option previously granted under the Option
Plan.
Options and SPRs granted under the Option Plan are not generally
transferable by the optionee, and each option and SPR is exercisable during
the lifetime of the optionee only by such optionee. Options granted under the
Option Plan must generally be exercised within three months of the end of
optionee's status as an employee or consultant of the Company, or within
twelve months after such optionee's termination by death or disability, but in
no event later than the expiration of the option's ten year term. In the case
of SPRs, unless the Committee determines otherwise, the Restricted Stock
Purchase Agreement (as defined in the Option Plan) shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
disability). The purchase price for shares of Common Stock repurchased
pursuant to the Restricted Stock Purchase Agreement shall be the original
price paid
32
<PAGE>
by the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at a rate
determined by the Committee. The exercise price of all incentive Stock options
granted under the Option Plan must be at least equal to the fair market value
of the Common Stock on the date of grant. The exercise price of nonstatutory
stock options and SPRs granted under the Option Plan is determined by the
Committee, but with respect to nonstatutory stock options intended to qualify
as "performance-based compensation" within the meaning of Section 162(m) of
the Code, the exercise price must at least be equal to the fair market value
of the Common Stock on the date of grant. With respect to any participant who
owns stock possessing more than 10% of the voting power of all classes of the
Company's outstanding capital stock, the exercise price of any incentive stock
option granted must equal at least 110% of the fair market value on the grant
date and the term of such incentive stock option must not exceed five years.
The term of all other options granted under the Option Plan may not exceed ten
years.
The Option Plan provides that in the event of a merger of the Company with
or into another corporation, a sale of substantially all of the Company's
assets or a like transaction involving the Company, each option shall be
assumed or an equivalent option substituted by the successor corporation. If
the outstanding options are not assumed or substituted for as described in the
preceding sentence, the Optionee shall fully vest in and have the right to
exercise the option or SPR as to all of the optioned stock, including shares
as to which it would not otherwise have been vested and be exercisable. In the
event that an option or SPR becomes exercisable in full in the event of a
merger or sale of assets, the Administrator (as defined in the Option Plan)
shall notify the optionee that the option or SPR shall be fully vested and
exercisable for a period of fifteen (15) days from the date of such notice,
and the option or SPR will terminate upon the expiration of such period.
1997 EMPLOYEE SHARE PURCHASE PLAN
The Company's 1997 Employee Share Purchase Plan (the "Share Purchase Plan")
was adopted by the Board of Directors and the shareholders in October 1997. A
total of 500,000 shares of Common Stock have been reserved for issuance under
the Share Purchase Plan. The Share Purchase Plan, which is intended to qualify
under Section 423 of the Code, has consecutive overlapping, twenty-four month
offering periods. Each twenty-four month offering period includes four six
month purchase periods. The offering periods generally begin on the first
trading day on or after May 1 and November 1 each year, except the first such
offering period commences on the first trading day after the effective date of
the offering and ends on the last trading day on or before October 31, 1999.
The Share Purchase Plan is administered by the Board of Directors or by a
committee appointed by the Board. Employees are eligible to participate if
they are customarily employed by the Company or any participating subsidiary
for at least 20 hours per week and more than five months in any calendar year.
The Share Purchase Plan permits eligible employees to purchase Common Stock
through payroll deductions of up to 10% of an employee's compensation
(excluding commissions, overtime and other bonuses and incentive
compensation), subject to the limitations of Section 423(b)(8) of the Code.
The price of stock purchased under the Share Purchase Plan is 85% of the lower
of the fair market value of the Common Stock at the beginning of the offering
period or at the end of the relevant purchase period. Employees may end their
participation at any time during an offering period, and they will be paid
their payroll deductions to date. Participation ends automatically upon
termination of employment with the Company.
Rights granted under the Share Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the Share Purchase Plan. The Share Purchase Plan
provides that, in the event of a merger of the Company with or into another
corporation or a sale of substantially all of the Company's assets, the Board
of Directors shall shorten the offering period then in progress (so that
employees' rights to purchase stock under the Share Purchase Plan are
exercised prior to the merger or sale of assets). The Share Purchase Plan will
terminate in October 2007. The Board of Directors has the authority to amend
or terminate the Share Purchase Plan, except that no such action may adversely
affect any outstanding rights to purchase Stock under the Share Purchase Plan.
33
<PAGE>
401(K) PLAN
The Company maintains a 401(k) retirement savings plan (the "401(k) Plan").
Each participant may contribute to the 401(k) Plan, through payroll
deductions, up to a statutorily prescribed annual limit of $9,500 in 1997,
subject to statutory limitations imposed by the Internal Revenue Service. All
amounts contributed by employee participants and earnings on these
contributions are fully vested at all times. Employee participants may elect
to invest their contributions in various established funds.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors established a Compensation Committee in October 1997.
Prior to that time there was no compensation committee or other committee of
the board of directors of the Company performing similar functions. During the
fiscal year ended December 31, 1996, executive compensation decisions were
made by the entire board of directors of the Company consisting of Messrs.
Teece, Jorde, Gilbert, Harris and Rausser. Mr. Jorde was the President of the
Company at such time. The Company anticipates that executive compensation for
future periods will be determined by the Compensation Committee.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Restated Articles of Incorporation limit the liability of its
directors for monetary damages arising from a breach of their fiduciary duty
as directors, except to the extent otherwise required by the California
Corporations Code. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by California law, including
circumstances in which indemnification is otherwise discretionary under
California law. The Company has also entered into indemnification agreements
with its officers and directors containing provisions which are in some
respects broader than the specific indemnification provisions contained in the
California Corporations Code. The indemnification agreements require the
Company, among other things, to indemnify such officers and directors against
certain liabilities that may arise by reason of their status or service as
directors or officers (other than liabilities arising from willful misconduct
of a culpable nature) and to advance their expenses incurred as a result of
any proceeding against them as to which they could be indemnified.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
34
<PAGE>
CERTAIN TRANSACTIONS
GENERAL
In its ordinary course of business, the Company enters into transactions
with certain of its directors and officers. The Company believes that each
such transaction has been on terms no less favorable for the Company than
could have been obtained in a transaction with an independent third party.
PRINCIPAL AGREEMENTS
The Company is party to a principal agreement with each of David J. Teece,
the Chairman of the Board of Directors of the Company, Thomas M. Jorde, a
director and the President of the Company, and Richard Gilbert, Robert Harris
and Gordon Rausser, each a director of the Company. Each of Messrs. Teece,
Jorde, Gilbert, Harris and Rausser have entered into exclusive consulting
agreements with the Company pursuant to which each such person provides
consulting services to the Company in consideration for a cash payment equal
to the sum of the amount of fees collected by the Company for the hours billed
by such person and a percentage (ranging from 14% to 20%) of fees collected by
the Company on projects secured or managed by such person. During fiscal 1996,
the Company paid $595,082, $396,796, $816,191, $1,461,486 and $1,314,235 to
Dr. Teece, Professor Jorde, Dr. Gilbert, Dr. Harris and Dr. Rausser,
respectively, pursuant to these arrangements as payment in full. These
consulting agreements are terminable at will by either the consultant or the
Company and do not contain restrictions on competition after termination.
INDEBTEDNESS
In connection with the purchase of shares of Common Stock on July 1, 1993,
Kimberly D. Gilmour, the Company's Chief Financial Officer, executed a
$117,702.40 promissory note to the Company with interest at 7% per annum. The
largest principal amount outstanding under such note during 1996 was
$115,922.53. As of October 15, 1997, the outstanding principal amount under
this promissory note was $78,990.51. In connection with the purchase of shares
of Common Stock on January 1, 1997, Donald A. Bunch, the Company's Chief
Operating Officer, executed a $87,013.76 promissory note to the Company with
interest at 7% per annum. As of October 15, 1997, the outstanding principal
amount under this promissory note was $87,013.76. In connection with the
purchase of shares of Common Stock on July 1, 1993, May 1, 1995 and October
16, 1996, Robert G. Harris, a director of the Company, executed three
promissory notes to the Company for $235,404.80, $536,143.68 and $687,427.20,
respectively, totalling $1,458,975.68 with interest at 7% per annum. The
largest aggregate principal amount outstanding under these three notes during
1996 was $ 1,395,695.06. As of October 15, 1997, the outstanding principal
amount on these three promissory notes was $1,164,982.52. Each of the above
notes was amended in October 1997 to extend the maturity date.
S CORPORATION DISTRIBUTION
The Company has declared an S Corporation distribution to its shareholders
estimated to be approximately $4.1 million on the date of this Prospectus.
This distribution will be paid from the proceeds of this offering to those
persons or entities who held shares of common stock of the Company immediately
prior to this offering, including Messrs. Teece, Jorde, Bunch, Gilbert, Harris
and Rausser and Ms. Gilmour. Of the $4.1 million dividend, approximately $0.5
million will be retained by the Company to reduce the principal of the
promissory notes referred to above.
35
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of October 15, 1997, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, by
(i) each person known by the Company to own more than 5% of the outstanding
shares of the Common Stock, (ii) each Named Executive Officer, (iii) each of
the Company's directors, (iv) all directors and executive officers as a group
and (v) each Selling Shareholder holding 1% or more of the Common Stock:
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING(1) AFTER OFFERING(1)(2)
---------------------- NUMBER OF ----------------------
NAME AND ADDRESS OF NUMBER OF SHARES BEING NUMBER OF
BENEFICIAL OWNER SHARES PERCENT OFFERED SHARES PERCENT
- ------------------- ------------ --------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
NAMED EXECUTIVE OFFICERS
AND DIRECTORS:
David J. Teece(3)..... 2,817,052 28.2% 458,657 2,358,395 17.6
Thomas M. Jorde....... 1,499,571 15.0% 244,152 1,255,419 9.4
Gordon C. Rausser(4).. 1,499,571 15.0% 244,152 1,255,419 9.4
Richard J. Gilbert.... 1,178,235 11.8% 191,833 986,402 7.4
Robert G. Harris(5)... 1,178,235 11.8% 191,833 986,402 7.4
Kimberly D. Gilmour... 85,690 * 13,952 71,738 *
Donald A. Bunch....... 42,845 * 0 42,845 *
Mario M. Rosati....... 0 -- 0 0 --
William J. Spencer.... 0 -- 0 0 --
All directors and
executive officers as
a group (seven
persons)............. 8,301,199 83.0% 1,344,579 6,956,620 51.9
OTHER SELLING
SHAREHOLDERS:
Daniel L. Rubinfeld... 499,143 4.9% 81,268 417,875 3.2
Steven N. Wiggins..... 428,449 4.2% 69,758 358,691 2.7
Joe D. Pace........... 321,337 3.2% 52,318 269,019 2.0
Thomas E. Randlett.... 192,802 1.9% 31,391 161,411 1.2
David F. Babbel....... 85,690 * 13,710 71,980 *
Vince O'Brien......... 85,690 * 0 85,690 *
Baruch Lev............ 42,845 * 0 42,845 *
Barry Nalebuff........ 42,845 * 6,976 35,869 *
</TABLE>
- ---------------------
* Represents less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options held by that person that
are currently exercisable, or will become exercisable within 60 days after
October 15, 1997, are deemed outstanding. Such shares, however, are not
deemed outstanding for purposes of computing the percentage ownership of
any other person. Unless otherwise indicated in the footnotes to this
table, the persons and entities named in the table have represented to the
Company that they have sole voting and sole investment power with respect
to all shares beneficially owned, subject to community property laws where
applicable. Unless otherwise indicated, the address of each of the
individuals listed in the table is c/o LECG, Inc. 2000 Powell Street,
Emeryville, California 94608.
(2) This column assumes no exercise of the Underwriters' over-allotment
option. If, however, the Underwriters' over-allotment is exercised in
full, certain shareholders will sell an aggregate of 750,000 shares of
Common Stock. Specifically, in such event, in addition to those share
amounts set forth in the table above (i) Mr. Teece will sell 216,851
shares, (ii) Mr. Jorde will sell 115,435 shares, (iii) Mr. Rausser will
sell 115,435 shares, (iv) Mr. Gilbert will sell 90,700 shares, (v) Mr.
Harris will sell 90,700 shares, (vi) Ms. Gilmour will sell 6,597 shares,
(vii) Mr. Rubinfeld will sell 38,424 shares, (viii) Mr. Wiggins will sell
32,982 shares, (ix) Mr. Pace will sell 24,736 shares, (x) Mr. Randlett
will sell 14,842 shares and (xi) Mr. Nalebuff will sell 3,298 shares.
(3) Includes 226,712 shares held by a family trust.
(4) Includes 40,692 shares held by a family trust.
(5) Includes 7,690 shares held by two family trusts.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the
Company consists of 40,000,000 shares of Common Stock, $0.001 par value per
share, and 5,000,000 shares of Preferred Stock, $0.001 par value per share.
COMMON STOCK
On October 15, 1997, there were 10,000,000 shares of Common Stock
outstanding, held of record by sixteen shareholders. The holders of Common
Stock are entitled to one vote for each share held of record on all matters
submitted to a vote of shareholders. Accordingly, holders of a majority of the
shares of Common Stock entitled to vote in any election of directors may elect
all of the directors standing for election. Subject to preferences that may be
applicable to any outstanding Preferred Stock, holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from
time to time by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, holders of Common Stock are entitled to share
ratably in all assets remaining after payment of the Company's liabilities and
the liquidation preference, if any, of any outstanding preferred stock.
Holders of Common Stock have no preemptive rights and no rights to convert
their Common Stock into any other securities, and there are no redemption
provisions with respect to such shares. All of the outstanding shares of
Common Stock are, and the shares to be sold in the offering when issued and
paid for will be, fully paid and non-assessable. The rights, preferences and
privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of preferred
stock which the Company may designate and issue in the future.
PREFERRED STOCK
The Board of Directors is authorized, without any action of the
shareholders, to provide for the issuance of one or more series of Preferred
Stock and to fix the designation, preferences, powers and relative,
participating, optional and other rights, qualifications, limitations and
restrictions thereof including, without limitation, the dividend rate, voting
rights, conversion rights, redemption price and liquidation preference per
series of Preferred Stock. Any series of Preferred Stock so issued may rank
senior to the Common Stock with respect to the payment of dividends or amounts
to be distributed upon liquidation, dissolution or winding up. There are no
agreements or understandings for the issuance of Preferred Stock, and the
Board of Directors has no present intent to issue any Preferred Stock. The
existence of authorized but unissued Preferred Stock may enable the Board of
Directors to render more difficult or to discourage an attempt to obtain
control of the Company by means of a merger, tender offer, proxy contest or
otherwise. For example, if in the due exercise of its fiduciary obligations,
the Board of Directors were to determine that a takeover proposal is not in
the Company's best interests, the Board of Directors could cause shares of
Preferred Stock to be issued without shareholder approval in one or more
private offerings or other transactions that might dilute the voting or other
rights of the proposed acquirer or insurgent shareholder or shareholder group.
The issuance of shares of Preferred Stock pursuant to the Board of Directors'
authority described above could decrease the amount of earnings and assets
available for distribution to holders of Common Stock and adversely affect the
rights and powers, including voting rights, of such holders and may have the
effect of delaying, deferring or preventing a change in control of the
Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is .
Its address is .
LISTING
The Company has applied to list its Common Stock on the New York Stock
Exchange (the "NYSE") under the trading symbol " ". The Company has not
applied to list its Common Stock on any other exchange or quotation system.
See "Risk Factors--Absence of Prior Market and Possible Volatility of Stock
Price."
37
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company. Therefore, future sales of substantial amounts of Common Stock in the
public market could adversely affect the prevailing market price from time to
time. Furthermore, because only a limited number of shares will be available
for sale shortly after this offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock of the Company in the public market after the restrictions lapse
could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.
Upon completion of this offering, the Company will have outstanding an
aggregate 13,400,000 shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option. Of these outstanding shares of Common
Stock, the 5,000,000 shares sold in this offering will be freely tradeable
without restriction or further registration under the 1933 Act, unless
purchased by "affiliates" of the Company as that term is defined in Rule 144
under the 1933 Act. As a result of lock-up agreements between certain
shareholders and the Underwriters, shares will not become available for
sale in the public market until 180 days after the effectiveness of this
offering, subject in some cases to the volume and other restrictions of Rule
144 and Rule 701 of the Securities Act. Shares of Common Stock outstanding
upon completion of this offering and held by existing shareholders will be
"restricted securities" as that term is defined in Rule 144 under the
Securities Act ("Restricted Shares"). Restricted Shares may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 promulgated under the 1933 Act,
which rules are summarized below. Sales of the Restricted Shares in the public
market, or the availability of such shares for sale, could adversely affect
the market price of the Common Stock.
All shareholders have entered into contractual "lock-up" agreements
providing that they will not offer, sell, contract to sell or grant any option
to purchase or otherwise dispose of the shares of Common Stock owned by them
or that could be purchased by them through the exercise of options to purchase
Common Stock of the Company for a period of 180 days after the date of this
Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation, as Representative of the Underwriters.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for
at least one year, but less than two years, including persons who may be
deemed to be "affiliates" of the Company, would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of: (i)
one percent of the number of shares of Common Stock then outstanding (which
will equal approximately 134,000 shares immediately after this offering); or
(ii) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information
about the Company. Under Rule 144(k), a person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the 90 days preceding a sale, and who has beneficially owned for
at least two years the Restricted Shares proposed to be sold (including the
holding period of any prior owner except an affiliate), is entitled to sell
such shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144. In general, under Rule 701
under the Securities Act as currently in effect, any employee, consultant or
advisor of the Company who purchases shares from the Company in connection
with a compensatory stock or option plan or other written agreement related to
compensation is eligible to resell such shares 90 days after the effective
date of the offering in reliance on Rule 144, but without compliance with
certain restrictions contained in Rule 144.
The Company has agreed not to sell or otherwise dispose of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock, or enter into any swap or similar agreement that transfers,
in whole or in part, the economic risk of ownership of the Common Stock, for a
period of 180 days after the date of this Prospectus, without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation,
subject to certain limited exceptions. See "Risk Factors--Shares Eligible for
Future Sale."
38
<PAGE>
The Company intends to file a registration statement under the Securities
Act covering 2,000,000 shares of Common Stock reserved for issuance under the
1997 Stock Option Plan and the 1997 Employee Share Purchase Plan. See
"Management--Employee Benefit Plans." Such registration statement is expected
to be filed subsequently to the closing of this offering and will
automatically become effective upon filing. Accordingly, shares registered
under such registration statement will, subject to Rule 144 volume limitations
applicable to affiliates and the lapsing of the Company's repurchase options,
be available for sale in the open market, except to the extent that such
shares are subject to vesting restrictions with the Company or the contractual
restrictions described above.
39
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement, dated
, 1997 (the "Underwriting Agreement"), the underwriters named below (the
"Underwriters"), who are represented by Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") and Legg Mason Wood Walker, Incorporated
(collectively, the "Representatives"), have severally agreed to purchase from
the Company and the Selling Shareholders the respective number of shares of
Common Stock set forth opposite their names below.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
Legg Mason Wood Walker, Incorporated........................
---
Total.....................................................
===
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval by their counsel of certain legal
matters and to certain other conditions. The Underwriters are obligated to
purchase and accept delivery of all the shares of Common Stock offered hereby
(other than those shares covered by the over-allotment option described below)
if any are purchased.
The Underwriters initially propose to offer the shares of Common Stock in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain dealers (including
the Underwriters) at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may re-allow, to certain
other dealers a concession not in excess of $ per share. After the initial
offering of the Common Stock, the public offering price and other selling
terms may be changed by the Representatives at any time without notice. The
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
The Selling Shareholders have granted to the Underwriters an option,
exercisable within 30 days after the date of this Prospectus, to purchase,
from time to time, in whole or in part, up to an aggregate of 750,000
additional Shares of Common Stock at the initial public offering price less
underwriting discounts and commissions. The Underwriters may exercise such
option solely to cover over-allotments, if any, made in connection with the
offering. To the extent that the Underwriters exercise such option, each
Underwriter will become obligated, subject to certain conditions, to purchase
its pro rata portion of such additional shares based on such Underwriter's
percentage underwriting commitment as indicated in the preceding table.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
Each of the Company, its executive officers and directors and certain of the
shareholders of the Company (including the Selling Shareholders) has agreed,
subject to certain exceptions, not to (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase or otherwise transfer
or dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
(ii) enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or otherwise) for a period of 180 days after the date of this Prospectus
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. In addition, during such period, the Company has also agreed not
to file any registration statement with respect to, and each of its executive
officers, directors and certain shareholders of the Company (including
40
<PAGE>
the Selling Shareholders) has agreed not to make any demand for, or exercise
any right with to, the registration of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock
without Donaldson, Lufkin & Jenrette Securities Corporation's prior written
consent.
Prior to this offering, there has been no established trading market for the
Common Stock. The initial public offering price for the shares of Common Stock
offered hereby will be determined by negotiation among the Company,
representatives of the Selling Shareholders and the Representatives. The
factors to be considered in determining the initial public offering include
the history of and the prospects for the industry in which the Company
competes, the past and present operations of the Company, the historical
results of operations of the Company, the prospects for future earnings of the
Company, the recent market prices of securities of generally comparable
companies and the general condition of the securities markets at the time of
the offering.
Application will be made to list the Common Stock on the NYSE. In order to
meet the requirements for listing the Common Stock on the NYSE, the
Underwriters have undertaken to sell lots of 100 or more shares to a minimum
of 2,000 beneficial owners.
Other than in the United States, no action has been taken by the Company,
the Selling Shareholders or the Underwriters that would permit a public
offering of the shares of Common Stock offered hereby in any jurisdiction
where action for that purpose is required. The shares of Common Stock offered
hereby may not be offered or sold, directly or indirectly, nor may this
Prospectus or any other offering material or advertisement in connection with
the offer and sale of any such shares of Common Stock be distributed or
published in any jurisdiction, except under circumstances that will result in
compliance with the applicable rules and regulations of such jurisdiction.
Persons into whose possession this Prospectus comes are advised to inform
themselves about and to observe any restrictions relating to the offering of
the Common Stock and the distribution of this Prospectus. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
shares of Common Stock offered hereby in any jurisdiction in which such an
offer or a solicitation is unlawful.
In connection with this offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may over-allot the offering,
creating a syndicate short position. The Underwriters may bid for and purchase
shares of Common Stock in the open market to cover such syndicate short
position or to stabilize the price of the Common Stock. In addition, the
underwriting syndicate may reclaim selling concessions from syndicate members
and selected dealers if they repurchase previously distributed Common Stock in
syndicate covering transactions, in stabilizing transactions or otherwise.
These activities may stabilize or maintain the market price of the Common
Stock above independent market levels. The Underwriters are not required to
engage in these activities, and may end any of these activities at any time.
From time to time, in the ordinary course of business, Legg Mason Wood
Walker, Incorporated has provided and may in the future provide financial
advisory or other services to the Company. To date, Legg Mason Wood Walker,
Incorporated has received a fee of $25,000 from the Company for such services.
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
shares of Common Stock offered hereby will be passed upon for the Company and
the Selling Shareholders by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto,
California. A member of the firm, Mario M. Rosati, is a member of the
Company's Board of Directors. Certain legal matters in connection with this
offering will be passed upon for the Underwriters by Katten Muchin & Zavis,
Chicago, Illinois.
41
<PAGE>
EXPERTS
The consolidated balance sheets of the Company and subsidiaries as of
December 31, 1995 and 1996 and the related consolidated statements of income,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996 appearing in this Prospectus and Registration
Statement have been audited by Arthur Andersen LLP, independent auditors, as
set forth in their reports thereon appearing elsewhere herein and are included
in reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1 under the 1933 Act with
respect to the shares of Common Stock offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. Certain items are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock offered hereby, reference is made
to the Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this Prospectus as to the contents of any contract or
any other document referred to are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy of the Registration
Statement, and the exhibits and schedules thereto, may be inspected without
charge at the public reference facilities maintained by the Commission in Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices at Seven World Trade Center, Suite 1300, New
York, New York 10048 and 500 West Madison Street, Chicago, Illinois 60661.
Copies of such materials may be obtained from the Public Reference Section of
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street N.W.,
Washington, D.C. 20549, and its principal reference facilities in New York,
New York and Chicago, Illinois, at a prescribed rate. The Commission maintains
a World Wide Web site that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission. The address of the site is http://www.sec.gov.
42
<PAGE>
LECG, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Income.......................................... F-4
Consolidated Statements of Shareholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of LECG, Inc.:
We have audited the accompanying consolidated balance sheets of LECG, Inc.
(a California corporation) and subsidiaries as of December 31, 1995 and 1996,
and the related consolidated statements of income, shareholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LECG, Inc. and
subsidiaries as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
San Francisco, California
October 7, 1997
(except with respect to the matters
discussed in Note 12, as to which
the date is October 13, 1997)
F-2
<PAGE>
LECG, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
PRO FORMA
JUNE 30, JUNE 30,
1995 1996 1997 1997
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash.................. $ 597,928 $ 2,889 $ 374,486 $ 374,486
Accounts receivable,
net.................. 9,604,923 11,128,887 15,125,575 15,125,575
Prepaid expenses...... 96,985 144,714 149,628 149,628
------------ ------------ ------------ ------------
Total current as-
sets............... 10,299,836 11,276,490 15,649,689 15,649,689
Security deposits....... 71,941 114,326 125,873 125,873
Property and equipment,
net.................... 1,194,227 1,806,888 2,481,998 2,481,998
------------ ------------ ------------ ------------
Total assets........ $ 11,566,004 $ 13,197,704 $ 18,257,560 $ 18,257,560
============ ============ ============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Borrowings under line
of credit............ $ 0 $ 0 $ 607,968 $ 607,968
Accounts payable and
accrued liabilities.. 318,807 630,442 1,316,923 1,316,923
Accrued expert and
project origination
fees:
Related party....... 2,611,418 2,944,438 4,017,207 4,017,207
Other............... 935,298 1,732,727 3,325,950 3,325,950
Retainers and deferred
revenue.............. 359,565 497,876 655,581 655,581
Deferred purchase op-
tion deposit......... 0 851,862 0 0
Deferred tax liabili-
ty................... 0 0 0 2,580,000
Distribution payable.. 0 0 0 400,000
Other current liabili-
ties................. 140,876 276,749 377,130 377,130
------------ ------------ ------------ ------------
Total current lia-
bilities........... 4,365,964 6,934,094 10,300,759 13,280,759
Deferred purchase option
deposit................ 851,862 0 0 0
------------ ------------ ------------ ------------
Total liabilities..... 5,217,826 6,934,094 10,300,759 13,280,759
------------ ------------ ------------ ------------
Shareholders' equity:
Common shares, $.001
par value; authorized
40,000,000 shares;
issued and
outstanding,
9,918,595,
10,014,996, and
10,229,220 shares as
of December 31, 1995,
1996 and June 30,
1997, respectively... 9,918 10,014 10,228 10,228
Additional paid-in
capital.............. 2,628,868 5,101,219 5,662,837 5,662,837
Notes receivable from
shareholders......... (1,575,992) (3,045,169) (2,783,952) (2,783,952)
Retained earnings..... 5,285,384 4,197,546 5,067,688 2,087,688
------------ ------------ ------------ ------------
Total shareholders'
equity............. 6,348,178 6,263,610 7,956,801 4,976,801
------------ ------------ ------------ ------------
Total liabilities
and shareholders'
equity............. $ 11,566,004 $ 13,197,704 $ 18,257,560 $ 18,257,560
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-3
<PAGE>
LECG, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------- -------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 24,548,023 $ 24,835,188 $ 31,391,870 $ 14,398,586 $ 20,785,826
Cost of services
Related party.......... 7,389,395 6,440,823 7,329,346 3,356,642 4,199,057
Other.................. 9,382,933 10,024,540 13,551,511 6,248,485 9,540,743
------------ ------------ ------------ ------------ ------------
Total cost of servic-
es.................... 16,772,328 16,465,363 20,880,857 9,605,127 13,739,800
------------ ------------ ------------ ------------ ------------
Gross profit........... 7,775,695 8,369,825 10,511,013 4,793,459 7,046,026
General and administra-
tive................... 3,639,158 4,047,524 5,258,389 2,241,289 3,301,758
------------ ------------ ------------ ------------ ------------
Income before income
taxes and
extraordinary gain.... 4,136,537 4,322,301 5,252,624 2,552,170 3,744,268
Income taxes............ 89,801 83,005 188,650 53,035 145,283
------------ ------------ ------------ ------------ ------------
Income before extraor-
dinary gain........... 4,046,736 4,239,296 5,063,974 2,499,135 3,598,985
Extraordinary gain:
Expiration of purchase
option, net of income
taxes of $34,084...... 0 0 0 0 817,778
------------ ------------ ------------ ------------ ------------
Net income............. $ 4,046,736 $ 4,239,296 $ 5,063,974 $ 2,499,135 $ 4,416,763
============ ============ ============ ============ ============
Pro forma income data
(unaudited):
Net income as reported............................ $ 5,063,974 $ 4,416,763
Pro forma adjustments............................. (1,964,926) (2,207,645)
------------ ------------
Pro forma net income.............................. $ 3,099,048 $ 2,209,118
------------ ------------
Pro forma net income per share.................... $ 0.32 $ 0.22
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4
<PAGE>
LECG, INC.
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
NOTES AND INTEREST
RECEIVABLE FROM RETAINED
ADDITIONAL SHAREHOLDERS EARNINGS TOTAL
PAID-IN ------------------ ----------- -----------
SHARES AMOUNT CAPITAL
---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993................... 8,997,429 $ 8,997 $ 738,514 $ (470,810) $ 3,592,646 $ 3,869,347
Net income............. 4,046,736 4,046,736
Distributions to share-
holders............... (2,448,382) (2,448,382)
Sale of common shares.. 85,690 86 190,370 (152,365) 38,091
Accrued interest on
notes receivable from
shareholders.......... 53,049 (53,049) 0
Collection of notes re-
ceivable from share-
holders............... 33,557 33,557
---------- ------- ---------- ------------ ----------- -----------
Balance at December 31,
1994................... 9,083,119 9,083 981,933 (642,667) 5,191,000 5,539,349
Net income............. 4,239,296 4,239,296
Distributions to share-
holders............... (3,344,644) (3,344,644)
Sale of common shares.. 1,435,304 1,435 1,572,378 (982,930) 590,883
Repurchase of common
shares................ (599,828) (600) (3,400) (800,268) (804,268)
Accrued interest on
notes receivable from
shareholders.......... 77,957 (77,957) 0
Collection of notes re-
ceivable from share-
holders............... 127,562 127,562
---------- ------- ---------- ------------ ----------- -----------
Balance at December 31,
1995................... 9,918,595 9,918 2,628,868 (1,575,992) 5,285,384 6,348,178
Net income............. 5,063,974 5,063,974
Distributions to share-
holders............... (4,901,995) (4,901,995)
Sale of common shares.. 985,433 985 2,318,130 (1,619,174) 699,941
Repurchase of common
shares................ (889,032) (889) (519) (1,249,817) (1,251,225)
Accrued interest on
notes receivable from
shareholders.......... 154,740 (154,740) 0
Collection of notes re-
ceivable from share-
holders............... 466,926 466,926
Advances to sharehold-
ers................... (162,189) (162,189)
---------- ------- ---------- ------------ ----------- -----------
Balance at December 31,
1996................... 10,014,996 10,014 5,101,219 (3,045,169) 4,197,546 6,263,610
========== ======= ========== ============ =========== ===========
Net income (unau-
dited)................ 4,416,763 4,416,763
Distributions to
shareholders
(unaudited)........... (3,546,621) (3,546,621)
Sale of common shares
(unaudited)........... 214,224 214 466,336 (87,014) 379,536
Accrued interest on
notes receivable from
shareholders (unau-
dited)................ 95,282 (95,282) 0
Collection of notes re-
ceivable from share-
holders (unaudited)... 616,933 616,933
Advances to
shareholders
(unaudited)........... (173,420) (173,420)
---------- ------- ---------- ------------ ----------- -----------
Balance at June 30, 1997
(unaudited)............ 10,229,220 $10,228 $5,662,837 $ (2,783,952) $ 5,067,688 $ 7,956,801
========== ======= ========== ============ =========== ===========
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE>
LECG, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DEC 31, SIX MONTHS ENDED JUNE 30,
------------------------------------- --------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operat-
ing activities:
Net income............. $ 4,046,736 $ 4,239,296 $ 5,063,974 $ 2,499,135 $ 4,416,763
Adjustments to recon-
cile net income to net
cash provided by oper-
ating activities:
Depreciation and amor-
tization.............. 272,205 340,245 435,163 207,574 295,781
Bad debt expense....... 329,758 100,584 358,374 67,605 7,400
Expiration of deferred
purchase option....... 0 0 0 0 (851,862)
Loss on disposal of
property and equip-
ment.................. 9,194 15,335 26,186 21,698 0
Decrease (increase) in
accounts receivable... (3,587,543) 61,759 (1,882,338) (187,864) (4,004,088)
Decrease (increase) in
prepaid expenses and
security deposits..... 27,640 15,347 (90,114) (46,602) (16,461)
Increase (decrease) in
accounts payable and
accrued liabilities... (337,577) (110,077) 311,635 393,005 686,481
Increase (decrease) in
accrued expert and
project origination
fees.................. 1,454,845 (572,888) 1,130,449 1,294,551 2,665,992
Increase in retainers
and deferred revenue.. 123,853 73,065 138,311 104,126 157,705
Increase (decrease) in
other liabilities..... (32,108) 19,422 135,873 24,479 100,381
----------- ----------- ----------- ------------ ------------
Net cash provided by
operating activities.. 2,307,003 4,182,088 5,627,513 4,377,707 3,458,092
----------- ----------- ----------- ------------ ------------
Cash flows from invest-
ing activities:
Purchase of property
and equipment......... (321,651) (563,358) (1,080,333) (530,153) (970,891)
Proceeds from disposal
of property and equip-
ment.................. 76,960 2,700 6,323 0 0
----------- ----------- ----------- ------------ ------------
Net cash used in in-
vesting activities.... (244,691) (560,658) (1,074,010) (530,153) (970,891)
----------- ----------- ----------- ------------ ------------
Cash flows from financ-
ing activities:
Borrowings under line
of credit............. 500,000 0 2,206,380 932,350 1,335,485
Repayments on line of
credit................ (500,000) 0 (2,206,380) (932,350) (727,517)
Sale of common stock... 38,091 590,883 699,941 472,236 379,536
Repurchase of common
stock................. 0 (804,268) (1,251,225) (1,251,225) 0
Advances to sharehold-
ers................... 0 0 (162,189) (66,750) (173,420)
Collection of notes re-
ceivable from share-
holders............... 33,557 127,562 466,926 224,193 616,933
Distributions to share-
holders............... (2,448,382) (3,344,644) (4,901,995) (3,027,293) (3,546,621)
----------- ----------- ----------- ------------ ------------
Net cash used in fi-
nancing activities.... (2,376,734) (3,430,467) (5,148,542) (3,648,839) (2,115,604)
----------- ----------- ----------- ------------ ------------
Net increase (decrease)
in cash................ (314,422) 190,963 (595,039) 198,715 371,597
Cash at beginning of
year................... 721,387 406,965 597,928 597,928 2,889
----------- ----------- ----------- ------------ ------------
Cash at end of year..... $ 406,965 $ 597,928 $ 2,889 $ 796,643 $ 374,486
=========== =========== =========== ============ ============
Supplemental cash flow
information:
Cash paid for inter-
est................... $ 10,497 $ 2,535 $ 12,008 $ 7,730 $ 3,044
=========== =========== =========== ============ ============
Cash paid for state in-
come taxes............. $ 132,936 $ 73,652 $ 200,488 $ 131,137 $ 167,441
=========== =========== =========== ============ ============
Noncash financing activ-
ities:
Sale of common stock
through issuance of
notes.................. $ 152,365 $ 982,930 $ 1,619,174 $ 708,354 $ 87,014
=========== =========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE>
LECG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1. DESCRIPTION OF BUSINESS:
The accompanying consolidated financial statements present the consolidated
financial position and results of operations of LECG, Inc. (formerly Law and
Economics Consulting Group, Inc.) a California corporation formed in March
1988, and its wholly owned subsidiaries: Law and Economics Consulting Company
Limited (United Kingdom), LECG Limited (United Kingdom), and Law and Economics
Consulting Group Limited (New Zealand).
The Company is a leading economic consulting services firm that provides
sophisticated economic and financial analysis, expert testimony, litigation
support and strategic management consulting to a broad range of public and
private enterprises in the United States and abroad. Revenues are derived
almost exclusively therefrom. The Company's areas of expertise include
antitrust, industry deregulation, damages analyses, economic and financial
modeling, intellectual property valuation, environmental economics and public
policy. Services are provided by Experts who are supported by Professional
Staff. The Company has offices in California, Washington, D.C., Illinois, New
York, Texas, Utah, Ontario, Canada, New Zealand and London.
The Risk Factors on pages 6 to 8 of this Prospectus are incorporated herein
by reference.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Consolidated Financial Information
The consolidated financial statements and related notes thereto as of June
30, 1997 and for the six months ended June 30, 1996 and 1997 are unaudited and
have been prepared on the same basis as the audited consolidated financial
statements included herein. In the opinion of management, such unaudited
consolidated financial statements include all normal recurring adjustments
necessary to present fairly the information set forth herein. Results of
operations for the interim periods are not necessarily indicative of the
results of operations for the full fiscal year.
Revenue Recognition
Revenue is recognized when services are provided. An allowance is provided
for any amounts considered uncollectable. Amounts collected in advance of
providing services are recorded as retainers and deferred revenue.
The Company bills clients for hourly fees as well as reimbursable expenses,
which consist of direct out-of-pocket costs, telecommunication charges and in-
house reproduction services. In providing consulting services to its clients,
the Company engages exclusive and non-exclusive Experts. These Experts are
generally paid consulting fees in an amount equal to the Experts' billing rate
for time actually billed and collected.
Project origination fees are paid to Experts (some of whom are related
parties) for securing or managing projects. These project origination fees
generally approximate 15 percent of all collected professional staff fees
(other than Expert fees actually collected) depending on project
profitability. These project origination fees are recorded on an accrual
basis, although they are not paid to the Experts until the project receivables
have been collected.
Property and Equipment
Property and equipment are recorded at cost. Depreciation of furniture,
fixtures and equipment is calculated using the straight-line method over the
estimated useful lives of the assets, generally five to seven years. Leasehold
improvements are amortized over the estimated useful lives of the assets or
the lease term, whichever is shorter.
F-7
<PAGE>
LECG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
The Company has elected subchapter S Corporation status for income tax
purposes. As a result of this election, the income of the Company is reported
on the individual income tax returns of its shareholders, using a cash basis
of accounting. Accordingly, the consolidated statements of income for the
years ended December 31, 1994, 1995, and 1996 and the six months ended June
30, 1996 (unaudited) and 1997 (unaudited) do not include a provision for
federal and certain state income taxes. The recorded provision consists of
state income taxes at rates ranging from 1.5 to 10 percent.
The subchapter S election will be terminated upon the closing of the
proposed initial public offering of common shares. Subsequently, the Company
will file income taxes as a C Corporation using an accrual basis of
accounting. A pro forma provision for income taxes has been presented as if
the Company was taxed as a C Corporation for the year ended December 31, 1996
and the six months ended June 30, 1997 (unaudited.) For those periods,
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (Statement 109) was used to calculate pro forma taxes on earnings and
the pro forma impact of deferred income taxes as a result of the termination
of the subchapter S election.
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 consolidated 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. 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.
At the time of the Company's S corporation status termination, a net
deferred income tax liability and a one-time additional provision for income
taxes will be recorded. The amount to be recorded will depend upon differences
between the financial reporting and tax bases of the Company's assets and
liabilities at the time. As of June 30, 1997, the pro forma deferred tax
liability is approximately $2,580,000 (see Note 10.)
Fair Value of Financial Instruments
All financial instruments are short term and are carried at amounts
approximating their fair value.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Actual results could differ from those estimates.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 128 (Statement 128),
"Earnings per Share", issued in February 1997, simplifies the standards for
computing and presenting earnings per share. It replaces the presentation of
primary EPS with basic EPS and requires a reconciliation of the basic EPS
computation to the diluted EPS computation. Basic EPS excludes dilution and is
computed by dividing income available to common shareholders by the weighted-
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that would occur if securities or other
contracts to issue common shares were exercised or converted into common
shares or resulted in the issuance of common shares that then benefited from
the earnings of the entity. Adoption of this statement is effective for
financial statements issued for periods ending after December 15, 1997, and
earlier application is not permitted. Additional disclosure is required by
Statement 128, however; the Company does not expect the effects of Statement
128 to be material.
F-8
<PAGE>
LECG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment, at cost, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30, ESTIMATED
1995 1996 1997 USEFUL LIVES
------------ ------------ ----------- ------------
(UNAUDITED) (YEARS)
<S> <C> <C> <C> <C>
Furniture and fixtures..... $ 389,311 $ 674,396 $ 878,727 7
Equipment.................. 1,484,471 1,976,878 2,691,952 5
Leasehold improvements..... 245,842 439,007 490,493 5-7
----------- ----------- -----------
2,119,624 3,090,281 4,061,172
----------- ----------- -----------
Less: Accumulated deprecia-
tion and amortization 925,397 1,283,393 1,579,174
----------- ----------- -----------
$ 1,194,227 $ 1,806,888 $ 2,481,998
=========== =========== ===========
</TABLE>
Depreciation and amortization expense was $272,205, $340,245, $435,163,
$207,574, and $295,781 for the years ended December 31, 1994, 1995 and 1996
and the six months ended June 30, 1996 (unaudited) and 1997 (unaudited),
respectively. Costs of repairs and maintenance of property and equipment are
expensed as incurred.
4. ACCOUNTS RECEIVABLE:
At December 31, 1995 and 1996 and June 30, 1997 (unaudited), the components
of accounts receivable were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Billed amounts...................... $ 7,427,823 $ 8,882,499 $ 11,281,080
Unbilled amounts.................... 2,377,100 2,546,388 4,128,912
Allowance for uncollectable ac-
counts............................. (200,000) (300,000) (284,417)
----------- ------------ ------------
Total............................... $ 9,604,923 $ 11,128,887 $ 15,125,575
=========== ============ ============
</TABLE>
Unbilled amounts represent balances accrued by the Company for services that
have been performed but have not been billed to the customer. Billings are
generally done on a monthly basis for the prior month's services.
The activity in the allowance for uncollectable accounts for the years ended
December 31, 1994, 1995, and 1996 and the six months ended June 30, 1997
(unaudited) was as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------- JUNE 30,
1994 1995 1996 1997
--------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance at beginning of period.... $ 100,000 $ 200,000 $ 200,000 $ 300,000
Provision for losses expensed..... 329,758 100,584 358,374 7,400
Charge-offs, net of recoveries.... (229,758) (100,584) (258,374) (22,983)
--------- --------- --------- ---------
Balance at end of period.......... $ 200,000 $ 200,000 $ 300,000 $ 284,417
========= ========= ========= =========
</TABLE>
F-9
<PAGE>
LECG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LINE OF CREDIT:
The Company has a commercial line of credit with a bank which allows
borrowings up to $3,000,000. The Company is currently negotiating with the
bank to increase the line to $10,000,000. The Company had $1,000,000,
$3,000,000 and $2,392,032 available under the line of credit at December 31,
1995, and 1996 and at June 30, 1997 (unaudited), respectively. The line is
secured by receivables and fixed assets. The line expires May 31, 2000, and
bears interest at the bank's prime rate, which was 8.5 percent at June 30,
1997 (unaudited). The weighted average interest rate of borrowings under the
line of credit for the years ended December 31, 1996 and for the six months
ended June 30, 1997 (unaudited) was 8.37 percent and 8.43 percent,
respectively. During 1995, no amounts were borrowed. The line of credit
agreement contains certain restrictive covenants including maintaining a ratio
of liabilities to tangible net worth (as defined), among other restrictions.
The Company is currently in compliance with all restrictive covenants.
6. RETIREMENT BENEFITS:
The Company has a defined contribution plan under Section 401(k) of the
Internal Revenue Code. All employees with 90 days of employment are eligible
to participate. The Company has the option of matching a portion of employee
contributions to the plan on a current or retroactive basis. In 1997, the
Company intends to match employee contributions for the first three percent of
salary at 100% and to contribute 50% of the employee's contributions between
three and five percent of the employees contribution.
7. SHAREHOLDERS' EQUITY:
Share sales originating with the Company have been executed in accordance
with the First Amended Shareholders' Buy-Sell Agreement (the Buy-Sell
Agreement). At the discretion of the Board of Directors, new shares can be
sold under the Policy for Option Program for High Performing LECG Shareholder
Principals (the Agreement).
Under the terms of the Buy-Sell Agreement, individuals have been offered
shares by the Board of Directors at a formula price based on a multiple of
equity plus earnings. The Company has financed 80% of the purchase price with
notes receivable. The notes are repaid out of subsequent distributions to the
shareholder. The interest rate charged on these notes was 7% for all periods.
Principal balances due to the Company under these notes were $1,525,980,
$2,866,357 and $2,499,652 at December 31, 1995, and 1996 and June 30, 1997
(unaudited), respectively. The principal and the interest earned on these
notes are offset against shareholders' equity in the consolidated statements
of shareholders' equity.
At the discretion of the Board of Directors, shareholders may be required to
sell shares back to the Company. Under the terms of the Buy-Sell Agreement,
the Company has the right of first refusal for any shares offered for sale by
a selling shareholder. Any repurchases are made at a formula price specified
in either the Buy-Sell Agreement or the Agreement. Balances due on notes
receivable are offset against the repurchase proceeds and the remainder is
remitted to the selling shareholder.
These agreements are expected to be terminated prior to the proposed initial
public offering of shares.
In April 1994, the Company granted options to purchase up to 342,759 common
shares at $2.09 per share, which was deemed to be market value at the time.
During 1996, 171,380 of these options were exercised. The remaining options
were exercised in April 1997.
F-10
<PAGE>
LECG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. RELATED-PARTY TRANSACTIONS:
Included in shareholders' equity are notes receivable from shareholders
arising from the sale of Common Stock (see Note 7), as well as other advances
to shareholders. These amounts are unsecured and payable from future
distributions. The notes bear interest at seven percent.
Related party cost of services and accrued expert and project origination
fees represent expert fees, project origination fees and other amounts paid or
owed to shareholders. These amounts are paid when the related project
receivables have been collected.
9. COMMITMENTS AND CONTINGENCIES:
The Company leases its office facilities and certain equipment under
operating leases through the year 2003.
Future minimum rental payments under these noncancellable leases with
initial or remaining lease terms in excess of one year are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30
-----------
<S> <C>
1997......................................................... $ 734,698
1998......................................................... 1,552,509
1999......................................................... 1,542,642
2000......................................................... 1,592,435
2001......................................................... 1,655,338
Thereafter................................................... 1,738,066
----------
Total minimum lease payments............................... $8,815,688
==========
</TABLE>
Rent expense was $756,841, $978,113, $1,077,530, $444,283, and $808,777 for
the years ended December 31, 1994, 1995, 1996 and the six months ended June
30, 1996 (unaudited) and 1997 (unaudited), respectively.
10. PRO FORMA FINANCIAL INFORMATION (UNAUDITED):
Pro Forma Adjustments To Consolidated Financial Statements (Unaudited)
The following pro forma adjustments have been made to the historical
consolidated balance sheet as of June 30, 1997 (unaudited), and to the
consolidated results of operations for the year ended December 31, 1996 and
the six months ended June 30, 1997 (unaudited).
a) As a result of the termination of the S Corporation election, a deferred
tax liability of $2,580,000 has been reflected on the pro forma
consolidated balance sheet as of June 30, 1997.
b) Subsequent to the consummation of its proposed initial public offering, the
Company will declare a S Corporation distribution to its existing
shareholders in an amount representing all undistributed cash earnings
through the termination of the Company's S Corporation status. At June 30,
1997, the S Corporation distribution is estimated to be approximately
$400,000. This distribution is reflected as a liability on the June 30,
1997 pro forma consolidated balance sheet. The amount of this distribution
will change and will significantly increase based upon actual cash basis
earnings between June 30, 1997 and the date of this Prospectus.
c) The extraordinary gain of $817,778 that occurred in 1997 (see Note 11) is
excluded from pro forma net income for the six months ended June 30, 1997.
F-11
<PAGE>
LECG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
d) The pro forma consolidated statements of income for the year ended December
31, 1996 and the six months ended June 30, 1997 have been adjusted to
reflect a provision for income taxes assuming an effective tax rate of 41
percent that would have been recorded had the Company been a C Corporation.
Pro Forma Net Income Per Share
Pro forma net income per share is computed using the weighted average common
shares outstanding at each reporting date. No material dilutive effects are
created by the common stock equivalents in any of the years presented. The
weighted average shares were 9,801,444 and 10,129,801 as of December 31, 1996
and June 30, 1997, respectively.
Pro Forma Deferred Tax Liability
Upon closing of the initial public offering, the Company's subchapter S
election will terminate and the Company will be taxed as a C Corporation. The
C Corporation will assume the tax basis of the assets and liabilities of the
terminated S Corporation. At the time of the Company's S Corporation status
termination, a deferred income tax liability and an additional one-time
provision for income taxes will be recorded. For purposes of the pro forma
consolidated balance sheet as of June 30, 1997, a net deferred tax liability
of $2,580,000 results from differing methods of accounting for financial
reporting and tax purposes for the following items:
<TABLE>
<S> <C>
Deferred tax assets:
Accrued expert and project origination fees....................... $ 3,010,694
Accounts payable.................................................. 501,784
Other current liabilities......................................... 154,623
-----------
3,667,101
Deferred tax liabilities:
Accounts receivable, net.......................................... (6,101,048)
Property and equipment............................................ (146,053)
-----------
(6,247,101)
-----------
Net deferred tax liability........................................ $(2,580,000)
===========
</TABLE>
11. EXTRAORDINARY ITEM--DEFERRED PURCHASE OPTION DEPOSIT:
In June 1993, the Company entered into an option agreement with an unrelated
third party for the purchase of all of the Company's assets or outstanding
common shares. The Company received $1,000,000 for the asset option, which was
deferred in the consolidated balance sheet, net of applicable expenses. During
1997, the option agreement expired and the company recognized the $851,862,
less taxes of $34,084, as an extraordinary gain in 1997.
F-12
<PAGE>
LECG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
12. SUBSEQUENT EVENTS:
Share Split
On October 13, 1997, LECG, Inc. amended its articles of incorporation
effecting a 2,142.2451 for one share split of the Company's Common Stock,
assigning a par value of $.001 per share, and increasing the number of
authorized common shares to 40,000,000. The Company also authorized 5,000,000
preferred shares. The accompanying financial statements and notes thereto have
been adjusted retroactively to give effect to the aforementioned actions.
1997 Stock Option Plan
On October 13, 1997, the Board of Directors and Shareholders approved the
Company's 1997 Stock Option Plan (the "Option Plan"). The Option Plan provides
for the granting to employees of incentive Stock options within the meaning of
Section 422 of the Internal Revenue Code, and for the granting to employees,
directors and consultants of nonstatutory stock options and stock purchase
rights. Unless terminated sooner, the Option Plan will terminate automatically
in 2007. A total of 1,500,000 shares of Common Stock are currently authorized
and available for issuance pursuant to the Option Plan. Currently, no shares
or stock purchase rights have been issued or are subject to outstanding
options under the Option Plan.
1997 Employee Share Purchase Plan
The Company's 1997 Employee Share Purchase Plan (the "Share Purchase Plan")
was adopted by the Board of Directors and the Shareholders in October 1997. A
total of 500,000 shares of Common Stock have been reserved for issuance under
the Share Purchase Plan. The Share Purchase Plan is intended to qualify under
Section 423 of the Internal Revenue Code. The Share Purchase Plan is
administered by the Board of Directors or by a committee appointed by the
Board. Eligible employees can purchase Common Stock through payroll deductions
(subject to Internal Revenue Code limitations) at 85% of the lower of the fair
market value of the Common Stock at the beginning of the offering period or at
the end of the relevant purchase period. Employees may end their participation
at any time during an offering period, and they will be paid their payroll
deductions to date. Participation ends automatically upon termination of
employment with the Company. The Share Purchase Plan will terminate in October
2007. Currently, no shares have been issued under the Share Purchase Plan.
F-13
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE SELLING
SHAREHOLDERS OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO,
OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CRE-
ATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 9
S Corporation Termination................................................ 9
Dividend Policy.......................................................... 9
Capitalization........................................................... 10
Dilution................................................................. 11
Selected Financial Data.................................................. 12
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 13
Business................................................................. 18
Management............................................................... 30
Certain Transactions..................................................... 35
Principal and Selling Shareholders....................................... 36
Description of Capital Stock............................................. 37
Shares Eligible for Future Sale.......................................... 38
Underwriting............................................................. 40
Legal Matters............................................................ 41
Experts.................................................................. 42
Additional Information................................................... 42
Index to Financial Statements............................................ F-1
</TABLE>
------------
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5,000,000 SHARES
LECG, INC.
COMMON STOCK
----------------
PROSPECTUS
----------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
LEGG MASON WOOD WALKER
INCORPORATED
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of Common Stock being registered. All amounts are
estimates except the SEC registration fee, the NASD filing fee and the NYSE
listing fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
---------
<S> <C>
SEC Registration Fee............................................... $ 22,652
NASD Filing Fee.................................................... 7,975
NYSE Listing Fee................................................... 84,600
Legal Fees and Expenses............................................ 325,000
Accounting Fees and Expenses....................................... 125,000
Printing and Engraving Expenses.................................... 70,000
Blue Sky Fees and Expenses......................................... 15,000
Transfer Agent and Registrar Fees.................................. 10,000
Miscellaneous Expenses............................................. 39,773
--------
Total............................................................ $700,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 317 of the California Corporations Code allows for indemnification
of officers, directors, and other corporate agents in terms sufficiently broad
to indemnify such persons under certain circumstances for liabilities
(including reimbursement for expenses incurred) arising under the Securities
Act of 1933, as amended the "Act"). Article IV of the Registrant's Restated
Articles of Incorporation (Exhibit 3.1 hereto) and Article VI of the
Registrant's Bylaws (Exhibit 3.2 hereto) provide for indemnification of the
Registrant's directors, officers, employees and other agents to the extent and
under the circumstances permitted by the California Corporations Code. The
Registrant has also entered into agreements with its directors and executive
officers that will require the Registrant, among other things, to indemnify
them against certain liabilities that may arise by reason of their status or
service as directors and executive officers to the fullest extent not
prohibited by law.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the
Underwriters of the Registrant, its directors and officers, and by the
Registrant of the Underwriters, for certain liabilities, including liabilities
arising under the Act, and affords certain rights of contribution with respect
thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since October 14, 1994, the Registrant has sold or issued the following
securities which were not registered under the Act:
(a) The Registrant issued and sold to Robert Harris 120 shares of Common
Stock and 210 shares of Common Stock on May 1, 1995 and October 16,
1996, respectively.
(b) The Registrant issued and sold to Richard Gilbert 450 shares of Common
Stock on June 1, 1995.
(c) The Registrant issued and sold to Joseph Pace 100 shares of Common
Stock and 50 shares of Common Stock on July 31, 1995 and June 1, 1996,
respectively.
(d) The Registrant issued and sold to Stephen Wiggins 200 shares of Common
Stock on April 1, 1996.
(e) The Registrant issued and sold to Donald Bunch 20 shares of Common
Stock on January 1, 1997.
II-1
<PAGE>
In all such transactions which relied upon the exemption set forth in
Section 4(2) of the Act, the recipients of securities represented their
intentions to acquire the securities for investments only and not with a view
to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the securities issued in such transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Amended and Restated Articles of Incorporation of the Registrant.
3.2 Amended and Restated Bylaws of the Registrant.
4.1 Form of the Registrant's Common Stock Certificate.*
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1 Form of Indemnification Agreement entered into by the Registrant with
each of its directors and executive officers.
10.2 1997 Stock Option Plan.*
10.3 1997 Employee Share Purchase Plan.*
10.4 Line of Credit Agreement between the Registrant and Wells Fargo Bank,
N.A dated May 31, 1996.
10.5 Promissory Note, dated July 1, 1993, between the Registrant and
Kimberly D. Gilmour, as amended.*
10.6 Promissory Note, dated January 1, 1997, between the Registrant and
Donald A. Bunch, as amended.*
10.7 Promissory Note, dated July 1, 1993, between the Registrant and Robert
G. Harris, as amended.*
10.8 Promissory Note, dated May 1, 1995, between the Registrant and Robert
G. Harris, as amended.*
10.9 Promissory Note, dated October 16, 1996, between the Registrant and
Robert G. Harris, as amended.*
10.10 Form of Principal Agreement.*
23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP, Independent Accountants (included on
page II-6).
24.1 Power of Attorney (included on the signature page of this Registration
Statement).
27.1 Financial Data Schedule.
</TABLE>
- ---------------------
* To be filed by amendment.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-2
<PAGE>
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions referenced in Item 14 of this Registration
Statement or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the information
omitted from the form of Prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in a form of Prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Act shall be deemed to be part of this Registration Statement as of the time
it was declared effective.
(2) For the purpose of determining any liability under the Act, each post-
effective amendment that contains a form of Prospectus shall be deemed to be a
new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT ON FORM S-1 TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
EMERYVILLE, STATE OF CALIFORNIA, ON THIS 16TH DAY OF OCTOBER 1997.
LECG, INC.
By: /s/Thomas M. Jorde
--------------------------------
NAME: THOMAS M. JORDE TITLE:
PRESIDENT
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints, jointly and severally, David J. Teece, Thomas
M. Jorde and Kimberly D. Gilmour and each one of them, his true and lawful
attorney-in-fact and agents, each with full power of substitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this registration
statement, and to file the same, with all exhibits thereto and all other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each of said attorneys-in-fact and agents or any of them,
or his or their substitute or substitutes, may lawfully do or cause to be done
or by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/David J. Teece Chairman of the October 16, 1997
- ------------------------------------- Board of Directors
DAVID J. TEECE
/s/Thomas M. Jorde President (Principal October 16, 1997
- ------------------------------------- Executive Officer)
THOMAS M. JORDE
/s/Kimberly D. Gilmour Chief Financial October 16, 1997
- ------------------------------------- Officer (Principal
KIMBERLY D. GILMOUR Financial and
Accounting Officer)
II-4
<PAGE>
SIGNATURE TITLE DATE
/s/ Richard J. Gilbert Director October 16, 1997
- -------------------------------------
RICHARD J. GILBERT
/s/ Robert G. Harris Director October 16, 1997
- -------------------------------------
ROBERT G. HARRIS
/s/ Gordon C. Rausser Director October 16, 1997
- -------------------------------------
GORDON C. RAUSSER
/s/ Mario M. Rosati Director October 16, 1997
- -------------------------------------
MARIO M. ROSATI
Director
- -------------------------------------
WILLIAM J. SPENCER
II-5
<PAGE>
EXHIBIT 23.2
[Letterhead of Arthur Andersen LLP]
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to the references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
San Francisco, California
October 15, 1997
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT DESCRIPTION NUMBERED PAGE
------- ------------------- -------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.*
3.1 Amended and Restated Articles of Incorporation of the
Registrant.
3.2 Amended and Restated Bylaws of the Registrant.
4.1 Form of the Registrant's Common Stock Certificate.*
5.1 Opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation.
10.1 Form of Indemnification Agreement entered into by the
Registrant with each of its directors and executive
officers.
10.2 1997 Stock Option Plan.*
10.3 1997 Employee Share Purchase Plan.*
10.4 Line of Credit Agreement between the Registrant and
Wells Fargo Bank, N.A. dated May 31, 1996.
10.5 Promissory Note, dated July 1, 1993, between the
Registrant and Kimberly D. Gilmour, as amended.*
10.6 Promissory Note, dated January 1, 1997, between the
Registrant and Donald A. Bunch, as amended.*
10.7 Promissory Note, dated July 1, 1993, between the
Registrant and Robert G. Harris, as amended.*
10.8 Promissory Note, dated May 1, 1995, between the
Registrant and Robert G. Harris as amended.*
10.9 Promissory Note, dated October 16, 1996, between the
Registrant and Robert G. Harris, as amended.*
10.10 Form of Principal Agreement.*
23.1 Consent of Wilson Sonsini Goodrich & Rosati,
Professional Corporation (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP, Independent
Accountants (included on page II-6).
24.1 Power of Attorney (included on the signature page of
this Registration Statement).
27.1 Financial Data Schedule.
</TABLE>
- ---------------------
* To be filed by amendment.
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF THE LAW AND ECONOMICS CONSULTING GROUP, INC.
Thomas M. Jorde and Kimberly D. Gilmour certify that:
1. They are the President and Chief Financial Officer, respectively, of
The Law and Economics Consulting Group, Inc., a California corporation.
2. The Articles of Incorporation of this corporation are amended and
restated to read in their entirety as follows:
I
The name of this corporation is LECG, Inc.
II
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
III
This corporation is authorized to issue two classes of shares of stock to
be designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares that this corporation is authorized to issue is forty-five
million (45,000,000) shares. The number of shares of Common Stock authorized is
forty million (40,000,000) shares. The par value of each share of Common Stock
is one-tenth of one cent ($0.001). The number of shares of Preferred Stock
authorized is five million (5,000,000) shares. The par value of each share of
Preferred Stock is one-tenth of one cent ($0.001). Upon filing of these amended
and restated articles of incorporation, each outstanding share of Capital Stock
shall be split and converted into two thousand one hundred forty-two and two
thousand four hundred fifty-one ten-thousandths (2142.2451) shares of Common
Stock.
The shares of Preferred Stock authorized by these Articles of Incorporation
may be issued from time to time in one or more series. For any wholly unissued
series of Preferred Stock, the Board of Directors is hereby authorized to fix
and alter the dividend rights, dividend rates, conversion rights, voting rights,
rights and terms of redemption (including sinking fund provisions),
<PAGE>
redemption prices, and liquidation preferences, the number of shares
constituting any such series and the designation thereof, or any of them.
For any series of preferred stock having issued and outstanding shares, the
Board of Directors is hereby authorized to increase or decrease the number of
shares of such series when the number of shares of such series was originally
fixed by the board, but such increase or decrease shall be subject to the
limitations and restrictions stated in the resolution of the Board of Directors
originally fixing the number of shares of such series. If the number of shares
of any series is so decreased, then the shares constituting such decrease shall
resume the status that they had prior to the adoption of the resolution
originally fixing the number of shares of such series. The Board of Directors
may not decrease the number of authorized shares of any outstanding series below
the number of shares of each series then outstanding.
IV
The liability of the directors of this corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
The corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the California Corporations Code) through bylaw
provisions, agreements with agents, vote of shareholders or disinterested
directors or otherwise, in excess of the indemnification otherwise permitted by
Section 317 of the California Corporation Code, subject only to the applicable
limits set forth in Section 204 of the California Corporations Code with respect
to actions for breach of duty to the corporation and its shareholders.
Any repeal or modification of the foregoing provisions of this Article IV
shall not adversely affect any right of indemnification or limitation of
liability of an agent of this corporation relating to acts or omissions
occurring prior to such repeal or modification."
3. The foregoing amendment and restatement of the Articles of
Incorporation have been duly approved by the Board of Directors.
4. The foregoing amendment and restatement of the Articles of
Incorporation have been duly approved by the required vote of shareholders in
accordance with Section 902 of the California Corporations Code. The number of
shares voting in favor of the amendment and restatement of the Articles of
Incorporation equaled or exceeded the vote required. The percentage vote
required was more than 50% of the outstanding shares of Capital Stock. The
total number of outstanding shares of the corporation is 4,448 shares of Capital
Stock.
<PAGE>
The foregoing declare under penalty of perjury under the laws of the State of
California that the matters set forth in this Certificate are true and correct
of their own knowledge.
Date: October 14, 1997 By: /s/ THOMAS M. JORDE
--------------------------------
Name: Thomas M. Jorde
Title: President
By: /s/ KIMBERLY D. GILMOUR
--------------------------------
Name: Kimberly D. Gilmour
Title: Chief Financial Officer
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
LECG, INC.
<PAGE>
AMENDED AND RESTATED BYLAWS OF
LECG, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - CORPORATE OFFICES............................................ 1
1.1 PRINCIPAL OFFICE................................................... 1
1.2 OTHER OFFICES...................................................... 1
ARTICLE II - MEETINGS OF SHAREHOLDERS.................................... 1
2.1 PLACE OF MEETINGS.................................................. 1
2.2 ANNUAL MEETING..................................................... 1
2.3 SPECIAL MEETING.................................................... 2
2.4 NOTICE OF SHAREHOLDERS' MEETINGS................................... 2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE....................... 3
2.6 QUORUM............................................................. 3
2.7 ADJOURNED MEETING; NOTICE.......................................... 3
2.8 VOTING............................................................. 4
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT.................. 5
2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING............ 5
2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING
CONSENTS.......................................................... 6
2.12 PROXIES............................................................ 6
2.13 INSPECTORS OF ELECTION............................................. 7
ARTICLE III - DIRECTORS.................................................. 8
3.1 POWERS............................................................. 8
3.2 NUMBER OF DIRECTORS................................................ 8
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS........................... 8
3.4 RESIGNATION AND VACANCIES.......................................... 8
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE........................... 9
3.6 REGULAR MEETINGS................................................... 9
3.7 SPECIAL MEETINGS; NOTICE........................................... 10
3.8 QUORUM............................................................. 10
3.9 WAIVER OF NOTICE................................................... 10
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
3.10 ADJOURNMENT....................................................... 11
3.11 NOTICE OF ADJOURNMENT............................................. 11
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING................. 11
3.13 FEES AND COMPENSATION OF DIRECTORS................................ 11
3.14 APPROVAL OF LOANS TO OFFICERS..................................... 11
ARTICLE IV - COMMITTEES.................................................. 12
4.1 COMMITTEES OF DIRECTORS............................................ 12
4.2 MEETINGS AND ACTION OF COMMITTEES.................................. 12
ARTICLE V - OFFICERS..................................................... 13
5.1 OFFICERS........................................................... 13
5.2 ELECTION OF OFFICERS............................................... 13
5.3 SUBORDINATE OFFICERS............................................... 13
5.4 REMOVAL AND RESIGNATION OF OFFICERS................................ 13
5.5 VACANCIES IN OFFICES............................................... 14
5.6 CHAIRMAN OF THE BOARD.............................................. 14
5.7 PRESIDENT.......................................................... 14
5.8 VICE PRESIDENTS.................................................... 14
5.9 SECRETARY.......................................................... 14
5.10 CHIEF FINANCIAL OFFICER............................................ 15
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND
OTHER
AGENTS............................................................. 15
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS.......................... 15
6.2 INDEMNIFICATION OF OTHERS.......................................... 16
6.3 PAYMENT OF EXPENSES IN ADVANCE..................................... 16
6.4 INDEMNITY NOT EXCLUSIVE............................................ 16
6.5 INSURANCE INDEMNIFICATION.......................................... 16
6.6 CONFLICTS.......................................................... 17
ARTICLE VII - RECORDS AND REPORTS........................................ 17
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER....................... 17
7.2 MAINTENANCE AND INSPECTION OF BYLAWS............................... 18
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS.............. 18
7.4 INSPECTION BY DIRECTORS............................................ 18
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER.............................. 19
7.6 FINANCIAL STATEMENTS............................................... 19
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS..................... 20
ARTICLE VIII - GENERAL MATTERS........................................... 20
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING.............. 20
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS.......................... 20
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED................. 20
8.4 CERTIFICATES FOR SHARES............................................ 21
8.5 LOST CERTIFICATES.................................................. 21
8.6 CONSTRUCTION; DEFINITIONS.......................................... 21
ARTICLE IX - AMENDMENTS.................................................. 22
9.1 AMENDMENT BY SHAREHOLDERS.......................................... 22
9.2 AMENDMENT BY DIRECTORS............................................. 22
</TABLE>
-iii-
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
---------------------------
OF
--
LECG, INC.
----------
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 PRINCIPAL OFFICE
----------------
The board of directors shall fix the location of the principal executive
office of the corporation at any place within or outside the State of
California. If the principal executive office is located outside such state and
the corporation has one or more business offices in such state, then the board
of directors shall fix and designate a principal business office in the State of
California.
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of shareholders shall be held at any place within or outside the
State of California designated by the board of directors. In the absence of any
such designation, shareholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING
--------------
The annual meeting of shareholders shall be held each year on a date and at
a time designated by the board of directors. In the absence of such
designation, the annual meeting of shareholders shall be held on the third
Wednesday of June in each year at 9 a.m. Pacific Standard Time. However, if such
day falls on a legal holiday, then the meeting shall be held at the same time
and
<PAGE>
place on the next succeeding full business day. At the meeting, directors
shall be elected, and any other proper business may be transacted.
2.3 SPECIAL MEETING
---------------
A special meeting of the shareholders may be called at any time by the
board of directors, or by the chairman of the board, or by the president, or by
one or more shareholders holding shares in the aggregate entitled to cast not
less than ten percent (10%) of the votes at that meeting.
If a special meeting is called by any person or persons other than the
board of directors or the president or the chairman of the board, then the
request shall be in writing, specifying the time of such meeting and the general
nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the chairman of the board, the president, any vice president or
the secretary of the corporation. The officer receiving the request shall cause
notice to be promptly given to the shareholders entitled to vote, in accordance
with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will
be held at the time requested by the person or persons calling the meeting, so
long as that time is not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, then the person or persons requesting
the meeting may give the notice. Nothing contained in this paragraph of this
Section 2.3 shall be construed as limiting, fixing or affecting the time when a
meeting of shareholders called by action of the board of directors may be held.
2.4 NOTICE OF SHAREHOLDERS' MEETINGS
--------------------------------
All notices of meetings of shareholders shall be sent or otherwise given in
accordance with Section 2.5 of these bylaws not less than ten (10) (or, if sent
by third-class mail pursuant to Section 2.5 of these bylaws, thirty (30)) nor
more than sixty (60) days before the date of the meeting. The notice shall
specify the place, date, and hour of the meeting and (i) in the case of a
special meeting, the general nature of the business to be transacted (no
business other than that specified in the notice may be transacted) or (ii) in
the case of the annual meeting, those matters which the board of directors, at
the time of giving the notice, intends to present for action by the shareholders
(but subject to the provisions of the next paragraph of this Section 2.4 any
proper matter may be presented at the meeting for such action). The notice of
any meeting at which directors are to be elected shall include the name of any
nominee or nominees who, at the time of the notice, the board intends to present
for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 310 of the Corporations Code of California (the
"Code"), (ii) an amendment of the articles of incorporation, pursuant to Section
902 of the Code, (iii) a reorganization of the corporation, pursuant to Section
1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to
Section 1900 of the Code, or (v) a distribution in dissolution other than in
accordance with the rights of outstanding
-2-
<PAGE>
preferred shares, pursuant to Section 2007 of the Code, then the notice shall
also state the general nature of that proposal.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of shareholders shall be given either (i)
personally or (ii) by first-class mail or (iii) by third-class mail but only if
the corporation has outstanding shares held of record by five hundred (500) or
more persons (determined as provided in Section 605 of the Code) on the record
date for the shareholders' meeting, or (iv) by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the shareholder at the address of that shareholder
appearing on the books of the corporation or given by the shareholder to the
corporation for the purpose of notice. If no such address appears on the
corporation's books or is given, notice shall be deemed to have been given if
sent to that shareholder by mail or telegraphic or other written communication
to the corporation's principal executive office, or if published at least once
in a newspaper of general circulation in the county where that office is
located. Notice shall be deemed to have been given at the time when delivered
personally or deposited in the mail or sent by telegram or other means of
written communication.
If any notice addressed to a shareholder at the address of that shareholder
appearing on the books of the corporation is returned to the corporation by the
United States Postal Service marked to indicate that the United States Postal
Service is unable to deliver the notice to the shareholder at that address, then
all future notices or reports shall be deemed to have been duly given without
further mailing if the same shall be available to the shareholder on written
demand of the shareholder at the principal executive office of the corporation
for a period of one (1) year from the date of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.6 QUORUM
------
The presence in person or by proxy of the holders of a majority of the
shares entitled to vote thereat constitutes a quorum for the transaction of
business at all meetings of shareholders. The shareholders present at a duly
called or held meeting at which a quorum is present may continue to do business
until adjournment, notwithstanding the withdrawal of enough shareholders to
leave less than a quorum, if any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
2.7 ADJOURNED MEETING; NOTICE
-------------------------
Any shareholders' meeting, annual or special, whether or not a quorum is
present, may be adjourned from time to time by the vote of the majority of the
shares represented at that meeting,
-3-
<PAGE>
either in person or by proxy. In the absence of a quorum, no other business may
be transacted at that meeting except as provided in Section 2.6 of these bylaws.
When any meeting of shareholders, either annual or special, is adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place are announced at the meeting at which the adjournment is taken.
However, if a new record date for the adjourned meeting is fixed or if the
adjournment is for more than forty-five (45) days from the date set for the
original meeting, then notice of the adjourned meeting shall be given. Notice
of any such adjourned meeting shall be given to each shareholder of record
entitled to vote at the adjourned meeting in accordance with the provisions of
Sections 2.4 and 2.5 of these bylaws. At any adjourned meeting the corporation
may transact any business which might have been transacted at the original
meeting.
2.8 VOTING
------
The shareholders entitled to vote at any meeting of shareholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 702 through 704 of the Code (relating to
voting shares held by a fiduciary, in the name of a corporation or in joint
ownership).
The shareholders' vote may be by voice vote or by ballot; provided,
however, that any election for directors must be by ballot if demanded by any
shareholder at the meeting and before the voting has begun.
Except as provided in the last paragraph of this Section 2.8, or as may be
otherwise provided in the articles of incorporation, each outstanding share,
regardless of class, shall be entitled to one vote on each matter submitted to a
vote of the shareholders. Any shareholder entitled to vote on any matter may
vote part of the shares in favor of the proposal and refrain from voting the
remaining shares or, except when the matter is the election of directors, may
vote them against the proposal; but, if the shareholder fails to specify the
number of shares which the shareholder is voting affirmatively, it will be
conclusively presumed that the shareholder's approving vote is with respect to
all shares which the shareholder is entitled to vote.
If a quorum is present, the affirmative vote of the majority of the shares
represented and voting at a duly held meeting (which shares voting affirmatively
also constitute at least a majority of the required quorum) shall be the act of
the shareholders, unless the vote of a greater number or a vote by classes is
required by the Code or by the articles of incorporation.
At a shareholders' meeting at which directors are to be elected, a
shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of votes which such shareholder normally
is entitled to cast) if the candidates' names have been placed in nomination
prior to commencement of the voting and the shareholder has given notice prior
to commencement of the voting of the shareholder's intention to cumulate votes.
If any shareholder has given such a notice, then every shareholder entitled to
vote may cumulate votes for candidates in
-4-
<PAGE>
nomination either (i) by giving one candidate a number of votes equal to the
number of directors to be elected multiplied by the number of votes to which
that shareholder's shares are normally entitled or (ii) by distributing the
shareholder's votes on the same principle among any or all of the candidates, as
the shareholder thinks fit. The candidates receiving the highest number of
affirmative votes, up to the number of directors to be elected, shall be
elected; votes against any candidate and votes withheld shall have no legal
effect.
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT
-------------------------------------------------
The transactions of any meeting of shareholders, either annual or special,
however called and noticed, and wherever held, shall be as valid as though they
had been taken at a meeting duly held after regular call and notice, if a quorum
be present either in person or by proxy, and if, either before or after the
meeting, each person entitled to vote, who was not present in person or by
proxy, signs a written waiver of notice or a consent to the holding of the
meeting or an approval of the minutes thereof. The waiver of notice or consent
or approval need not specify either the business to be transacted or the purpose
of any annual or special meeting of shareholders, except that if action is taken
or proposed to be taken for approval of any of those matters specified in the
second paragraph of Section 2.4 of these bylaws, the waiver of notice or consent
or approval shall state the general nature of the proposal. All such waivers,
consents, and approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice of and presence at that meeting, except when the person objects at the
beginning of the meeting to the transaction of any business because the meeting
is not lawfully called or convened. Attendance at a meeting is not a waiver of
any right to object to the consideration of matters required by the Code to be
included in the notice of the meeting but not so included, if that objection is
expressly made at the meeting.
2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------
Any action which may be taken at any annual or special meeting of
shareholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, is signed by the holders
of outstanding shares having not less than the minimum number of votes that
would be necessary to authorize or take that action at a meeting at which all
shares entitled to vote on that action were present and voted.
In the case of election of directors, such a consent shall be effective
only if signed by the holders of all outstanding shares entitled to vote for the
election of directors. However, a director may be elected at any time to fill
any vacancy on the board of directors, provided that it was not created by
removal of a director and that it has not been filled by the directors, by the
written consent of the holders of a majority of the outstanding shares entitled
to vote for the election of directors.
All such consents shall be maintained in the corporate records. Any
shareholder giving a written consent, or the shareholder's proxy holders, or a
transferee of the shares, or a personal
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representative of the shareholder, or their respective proxy holders, may revoke
the consent by a writing received by the secretary of the corporation before
written consents of the number of shares required to authorize the proposed
action have been filed with the secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing and if the unanimous written consent of all such
shareholders has not been received, then the secretary shall give prompt notice
of the corporate action approved by the shareholders without a meeting. Such
notice shall be given to those shareholders entitled to vote who have not
consented in writing and shall be given in the manner specified in Section 2.5
of these bylaws. In the case of approval of (i) a contract or transaction in
which a director has a direct or indirect financial interest, pursuant to
Section 310 of the Code, (ii) indemnification of a corporate "agent," pursuant
to Section 317 of the Code, (iii) a reorganization of the corporation, pursuant
to Section 1201 of the Code, and (iv) a distribution in dissolution other than
in accordance with the rights of outstanding preferred shares, pursuant to
Section 2007 of the Code, the notice shall be given at least ten (10) days
before the consummation of any action authorized by that approval.
2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS
-----------------------------------------------------------
For purposes of determining the shareholders entitled to notice of any
meeting or to vote thereat or entitled to give consent to corporate action
without a meeting, the board of directors may fix, in advance, a record date,
which shall not be more than sixty (60) days nor less than ten (10) days before
the date of any such meeting nor more than sixty (60) days before any such
action without a meeting, and in such event only shareholders of record on the
date so fixed are entitled to notice and to vote or to give consents, as the
case may be, notwithstanding any transfer of any shares on the books of the
corporation after the record date, except as otherwise provided in the Code.
If the board of directors does not so fix a record date:
(a) the record date for determining shareholders entitled to notice of
or to vote at a meeting of shareholders shall be at the close of business on the
business day next preceding the day on which notice is given or, if notice is
waived, at the close of business on the business day next preceding the day on
which the meeting is held; and
(b) the record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, (i) when no prior
action by the board has been taken, shall be the day on which the first written
consent is given, or (ii) when prior action by the board has been taken, shall
be at the close of business on the day on which the board adopts the resolution
relating to that action, or the sixtieth (60th) day before the date of such
other action, whichever is later.
The record date for any other purpose shall be as provided in Article VIII
of these bylaws.
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2.12 PROXIES
-------
Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the secretary of the
corporation. A proxy shall be deemed signed if the shareholder's name is placed
on the proxy (whether by manual signature, typewriting, telegraphic transmission
or otherwise) by the shareholder or the shareholder's attorney-in-fact. A
validly executed proxy which does not state that it is irrevocable shall
continue in full force and effect unless (i) the person who executed the proxy
revokes it prior to the time of voting by delivering a writing to the
corporation stating that the proxy is revoked or by executing a subsequent proxy
and presenting it to the meeting or by voting in person at the meeting, or (ii)
written notice of the death or incapacity of the maker of that proxy is received
by the corporation before the vote pursuant to that proxy is counted; provided,
however, that no proxy shall be valid after the expiration of eleven (11) months
from the date of the proxy, unless otherwise provided in the proxy. The dates
contained on the forms of proxy presumptively determine the order of execution,
regardless of the postmark dates on the envelopes in which they are mailed. The
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Sections 705(e) and 705(f) of the Code.
2.13 INSPECTORS OF ELECTION
----------------------
Before any meeting of shareholders, the board of directors may appoint an
inspector or inspectors of election to act at the meeting or its adjournment.
If no inspector of election is so appointed, then the chairman of the meeting
may, and on the request of any shareholder or a shareholder's proxy shall,
appoint an inspector or inspectors of election to act at the meeting. The
number of inspectors shall be either one (1) or three (3). If inspectors are
appointed at a meeting pursuant to the request of one (1) or more shareholders
or proxies, then the holders of a majority of shares or their proxies present at
the meeting shall determine whether one (1) or three (3) inspectors are to be
appointed. If any person appointed as inspector fails to appear or fails or
refuses to act, then the chairman of the meeting may, and upon the request of
any shareholder or a shareholder's proxy shall, appoint a person to fill that
vacancy.
Such inspectors shall:
(a) determine the number of shares outstanding and the voting power of
each, the number of shares represented at the meeting, the existence of a
quorum, and the authenticity, validity, and effect of proxies;
(b) receive votes, ballots or consents;
(c) hear and determine all challenges and questions in any way arising
in connection with the right to vote;
(d) count and tabulate all votes or consents;
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(e) determine when the polls shall close;
(f) determine the result; and
(g) do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the Code and any limitations in the articles
of incorporation and these bylaws relating to action required to be approved by
the shareholders or by the outstanding shares, the business and affairs of the
corporation shall be managed and all corporate powers shall be exercised by or
under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
-------------------
The number of directors of the corporation shall be not less than (4) four
nor more than (7) seven. The exact number of directors shall be (7) seven until
changed, within the limits specified above, by a bylaw amending this Section
3.2, duly adopted by the board of directors or by the shareholders. The
indefinite number of directors may be changed, or a definite number may be fixed
without provision for an indefinite number, by a duly adopted amendment to the
articles of incorporation or by an amendment to this bylaw duly adopted by the
vote or written consent of holders of a majority of the outstanding shares
entitled to vote; provided, however, that an amendment reducing the fixed number
or the minimum number of directors to a number less than seven (7) cannot be
adopted if the votes cast against its adoption at a meeting, or the shares not
consenting in the case of an action by written consent, are equal to more than
sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to
vote thereon. No amendment may change the stated maximum number of authorized
directors to a number greater than two (2) times the stated minimum number of
directors minus one (1).
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
----------------------------------------
Directors shall be elected at each annual meeting of shareholders to hold
office until the next annual meeting. Each director, including a director
elected to fill a vacancy, shall hold office until the expiration of the term
for which elected and until a successor has been elected and qualified.
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3.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign effective on giving written notice to the chairman
of the board, the president, the secretary or the board of directors, unless the
notice specifies a later time for that resignation to become effective. If the
resignation of a director is effective at a future time, the board of directors
may elect a successor to take office when the resignation becomes effective.
Vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; however, a vacancy created by the removal of a director by the vote or
written consent of the shareholders or by court order may be filled only by the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present (which shares voting affirmatively
also constitute a majority of the required quorum), or by the unanimous written
consent of all shares entitled to vote thereon. Each director so elected shall
hold office until the next annual meeting of the shareholders and until a
successor has been elected and qualified.
A vacancy or vacancies in the board of directors shall be deemed to exist
(i) in the event of the death, resignation or removal of any director, (ii) if
the board of directors by resolution declares vacant the office of a director
who has been declared of unsound mind by an order of court or convicted of a
felony, (iii) if the authorized number of directors is increased, or (iv) if the
shareholders fail, at any meeting of shareholders at which any director or
directors are elected, to elect the number of directors to be elected at that
meeting.
The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors, but any such election other
than to fill a vacancy created by removal, if by written consent, shall require
the consent of the holders of a majority of the outstanding shares entitled to
vote thereon.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
Regular meetings of the board of directors may be held at any place within
or outside the State of California that has been designated from time to time by
resolution of the board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the board may be held at any place within or outside the State of
California that has been designated in the notice of the meeting or, if not
stated in the notice or if there is no notice, at the principal executive office
of the corporation.
Any meeting, regular or special, may be held by conference telephone or
similar communication equipment, so long as all directors participating in the
meeting can hear one another; and all such directors shall be deemed to be
present in person at the meeting.
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3.6 REGULAR MEETINGS
----------------
Regular meetings of the board of directors may be held without notice if
the times of such meetings are fixed by the board of directors.
3.7 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.8 QUORUM
------
A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as provided in Section 3.10
of these bylaws. Every act or decision done or made by a majority of the
directors present at a duly held meeting at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of
Section 310 of the Code (as to approval of contracts or transactions in which a
director has a direct or indirect material financial interest), Section 311 of
the Code (as to appointment of committees), Section 317(e) of the Code (as to
indemnification of directors), the articles of incorporation, and other
applicable law.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.9 WAIVER OF NOTICE
----------------
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice or a consent to holding the meeting or an approval of the
minutes thereof, whether before or after the meeting, or (ii) who attends the
meeting without protesting, prior thereto or at its commencement,
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the lack of notice to such directors. All such waivers, consents, and approvals
shall be filed with the corporate records or made part of the minutes of the
meeting. A waiver of notice need not specify the purpose of any regular or
special meeting of the board of directors.
3.10 ADJOURNMENT
-----------
A majority of the directors present, whether or not constituting a quorum,
may adjourn any meeting to another time and place.
3.11 NOTICE OF ADJOURNMENT
---------------------
Notice of the time and place of holding an adjourned meeting need not be
given unless the meeting is adjourned for more than twenty-four (24) hours. If
the meeting is adjourned for more than twenty-four (24) hours, then notice of
the time and place of the adjourned meeting shall be given before the adjourned
meeting takes place, in the manner specified in Section 3.7 of these bylaws, to
the directors who were not present at the time of the adjournment.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Any action required or permitted to be taken by the board of directors may
be taken without a meeting, provided that all members of the board individually
or collectively consent in writing to that action. Such action by written
consent shall have the same force and effect as a unanimous vote of the board of
directors. Such written consent and any counterparts thereof shall be filed with
the minutes of the proceedings of the board.
3.13 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.13 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.
3.14 APPROVAL OF LOANS TO OFFICERS/1/
-----------------------------
The corporation may, upon the approval of the board of directors alone,
make loans of money or property to, or guarantee the obligations of, any officer
of the corporation or its parent or
______________________
/1/ This section is effective only if it has been approved by the shareholders
in accordance with Sections 315(b) and 152 of the Code.
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subsidiary, whether or not a director, or adopt an employee benefit plan or
plans authorizing such loans or guaranties provided that (i) the board of
directors determines that such a loan or guaranty or plan may reasonably be
expected to benefit the corporation, (ii) the corporation has outstanding shares
held of record by 100 or more persons (determined as provided in Section 605 of
the Code) on the date of approval by the board of directors, and (iii) the
approval of the board of directors is by a vote sufficient without counting the
vote of any interested director or directors.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent member at any meeting of the committee.
The appointment of members or alternate members of a committee requires the vote
of a majority of the authorized number of directors. Any committee, to the
extent provided in the resolution of the board, shall have all the authority of
the board, except with respect to:
(a) the approval of any action which, under the Code, also requires
shareholders' approval or approval of the outstanding shares;
(b) the filling of vacancies on the board of directors or in any
committee;
(c) the fixing of compensation of the directors for serving on the
board or any committee;
(d) the amendment or repeal of these bylaws or the adoption of new
bylaws;
(e) the amendment or repeal of any resolution of the board of
directors which by its express terms is not so amendable or repealable;
(f) a distribution to the shareholders of the corporation, except at a
rate or in a periodic amount or within a price range determined by the board of
directors; or
(g) the appointment of any other committees of the board of directors
or the members of such committees.
4.2 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
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Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice),
Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section
3.12 (action without meeting), with such changes in the context of those bylaws
as are necessary to substitute the committee and its members for the board of
directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the board of directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the board of directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The board of directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The officers of the corporation shall be a president, a secretary, and a
chief financial officer. The corporation may also have, at the discretion of the
board of directors, a chairman of the board, one or more vice presidents, one or
more assistant secretaries, one or more assistant treasurers, and such other
officers as may be appointed in accordance with the provisions of Section 5.3 of
these bylaws. Any number of offices may be held by the same person.
5.2 ELECTION OF OFFICERS
--------------------
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws,
shall be chosen by the board, subject to the rights, if any, of an officer under
any contract of employment.
5.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or may empower the president to
appoint, such other officers as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
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<PAGE>
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
board of directors at any regular or special meeting of the board or, except in
case of an officer chosen by the board of directors, by any officer upon whom
such power of removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
--------------------
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
---------------------
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 PRESIDENT
---------
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction, and control of the business and the officers of the corporation. He
shall preside at all meetings of the shareholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He shall have the general powers and duties of management usually
vested in the office of president of a corporation, and shall have such other
powers and duties as may be prescribed by the board of directors or these
bylaws.
5.8 VICE PRESIDENTS
---------------
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these bylaws, the
president or the chairman of the board.
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5.9 SECRETARY
---------
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors and shareholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at shareholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all shareholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the shareholders and of the board of directors required to be given by law or by
these bylaws. He shall keep the seal of the corporation, if one be adopted, in
safe custody and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
-----------------------
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his
transactions as chief financial officer and of the financial condition of the
corporation, and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or these bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
--------------------------------------------------
AND OTHER AGENTS
----------------
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6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
The corporation shall, to the maximum extent and in the manner permitted by
the Code, indemnify each of its directors and officers against expenses (as
defined in Section 317(a) of the Code), judgments, fines, settlements, and other
amounts actually and reasonably incurred in connection with any proceeding (as
defined in Section 317(a) of the Code), arising by reason of the fact that such
person is or was an agent of the corporation. For purposes of this Section 6.1,
a "director" or "officer" of the corporation includes any person (i) who is or
was a director or officer of the corporation, (ii) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was a
director or officer of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.2 INDEMNIFICATION OF OTHERS
-------------------------
The corporation shall have the power, to the extent and in the manner
permitted by the Code, to indemnify each of its employees and agents (other than
directors and officers) against expenses (as defined in Section 317(a) of the
Code), judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding (as defined in Section 317(a) of the
Code), arising by reason of the fact that such person is or was an agent of the
corporation. For purposes of this Article VI, an "employee" or "agent" of the
corporation (other than a director or officer) includes any person (i) who is or
was an employee or agent of the corporation, (ii) who is or was serving at the
request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.3 PAYMENT OF EXPENSES IN ADVANCE
------------------------------
Expenses incurred in defending any civil or criminal action
or proceeding for which indemnification is required pursuant to Section 6.1 or
for which indemnification is permitted pursuant to Section 6.2 following
authorization thereof by the Board of Directors shall be paid by the corporation
in advance of the final disposition of such action or proceeding upon receipt of
an undertaking by or on behalf of the indemnified party to repay such amount if
it shall ultimately be determined that the indemnified party is not entitled to
be indemnified as authorized in this Article VI.
6.4 INDEMNITY NOT EXCLUSIVE
-----------------------
The indemnification provided by this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
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action in another capacity while holding such office, to the extent that such
additional rights to indemnification are authorized in the Articles of
Incorporation.
6.5 INSURANCE INDEMNIFICATION
-------------------------
The corporation shall have the power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation against any liability asserted against or incurred by such person in
such capacity or arising out of such person's status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of this Article VI.
6.6 CONFLICTS
---------
No indemnification or advance shall be made under this Article VI, except
where such indemnification or advance is mandated by law or the order, judgment
or decree of any court of competent jurisdiction, in any circumstance where it
appears:
(1) That it would be inconsistent with a provision of the Articles of
Incorporation, these bylaws, a resolution of the shareholders or an agreement in
effect at the time of the accrual of the alleged cause of the action asserted in
the proceeding in which the expenses were incurred or other amounts were paid,
which prohibits or otherwise limits indemnification; or
(2) That it would be inconsistent with any condition expressly imposed
by a court in approving a settlement.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER
--------------------------------------------
The corporation shall keep either at its principal executive office or at
the office of its transfer agent or registrar (if either be appointed), as
determined by resolution of the board of directors, a record of its shareholders
listing the names and addresses of all shareholders and the number and class of
shares held by each shareholder.
A shareholder or shareholders of the corporation who holds at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation or who holds at least one percent (1%) of such voting shares and has
filed a Schedule 14B with the Securities and Exchange Commission relating to the
election of directors, may (i) inspect and copy the records of shareholders'
names, addresses, and shareholdings during usual business hours on five (5)
days' prior written demand on
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<PAGE>
the corporation, (ii) obtain from the transfer agent of the corporation, on
written demand and on the tender of such transfer agent's usual charges for such
list, a list of the names and addresses of the shareholders who are entitled to
vote for the election of directors, and their shareholdings, as of the most
recent record date for which that list has been compiled or as of a date
specified by the shareholder after the date of demand. Such list shall be made
available to any such shareholder by the transfer agent on or before the later
of five (5) days after the demand is received or five (5) days after the date
specified in the demand as the date as of which the list is to be compiled.
The record of shareholders shall also be open to inspection on the written
demand of any shareholder or holder of a voting trust certificate, at any time
during usual business hours, for a purpose reasonably related to the holder's
interests as a shareholder or as the holder of a voting trust certificate.
Any inspection and copying under this Section 7.1 may be made in person or
by an agent or attorney of the shareholder or holder of a voting trust
certificate making the demand.
7.2 MAINTENANCE AND INSPECTION OF BYLAWS
------------------------------------
The corporation shall keep at its principal executive office or, if its
principal executive office is not in the State of California, at its principal
business office in California the original or a copy of these bylaws as amended
to date, which bylaws shall be open to inspection by the shareholders at all
reasonable times during office hours. If the principal executive office of the
corporation is outside the State of California and the corporation has no
principal business office in such state, then the secretary shall, upon the
written request of any shareholder, furnish to that shareholder a copy of these
bylaws as amended to date.
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS
-----------------------------------------------------
The accounting books and records and the minutes of proceedings of the
shareholders, of the board of directors, and of any committee or committees of
the board of directors shall be kept at such place or places as are designated
by the board of directors or, in absence of such designation, at the principal
executive office of the corporation. The minutes shall be kept in written form,
and the accounting books and records shall be kept either in written form or in
any other form capable of being converted into written form.
The minutes and accounting books and records shall be open to inspection
upon the written demand of any shareholder or holder of a voting trust
certificate, at any reasonable time during usual business hours, for a purpose
reasonably related to the holder's interests as a shareholder or as the holder
of a voting trust certificate. The inspection may be made in person or by an
agent or attorney and shall include the right to copy and make extracts. Such
rights of inspection shall extend to the records of each subsidiary corporation
of the corporation.
7.4 INSPECTION BY DIRECTORS
-----------------------
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<PAGE>
Every director shall have the absolute right at any reasonable time to
inspect all books, records, and documents of every kind as well as the physical
properties of the corporation and each of its subsidiary corporations. Such
inspection by a director may be made in person or by an agent or attorney. The
right of inspection includes the right to copy and make extracts of documents.
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER
-------------------------------------
The board of directors shall cause an annual report to be sent to the
shareholders not later than one hundred twenty (120) days after the close of the
fiscal year adopted by the corporation. Such report shall be sent at least
fifteen (15) days (or, if sent by third-class mail, thirty-five (35) days)
before the annual meeting of shareholders to be held during the next fiscal year
and in the manner specified in Section 2.5 of these bylaws for giving notice to
shareholders of the corporation.
The annual report shall contain (i) a balance sheet as of the end of the
fiscal year, (ii) an income statement, (iii) a statement of changes in financial
position for the fiscal year, and (iv) any report of independent accountants or,
if there is no such report, the certificate of an authorized officer of the
corporation that the statements were prepared without audit from the books and
records of the corporation.
The foregoing requirement of an annual report shall be waived so long as
the shares of the corporation are held by fewer than one hundred (100) holders
of record.
7.6 FINANCIAL STATEMENTS
--------------------
If no annual report for the fiscal year has been sent to shareholders, then
the corporation shall, upon the written request of any shareholder made more
than one hundred twenty (120) days after the close of such fiscal year, deliver
or mail to the person making the request, within thirty (30) days thereafter, a
copy of a balance sheet as of the end of such fiscal year and an income
statement and statement of changes in financial position for such fiscal year.
If a shareholder or shareholders holding at least five percent (5%) of the
outstanding shares of any class of stock of the corporation makes a written
request to the corporation for an income statement of the corporation for the
three-month, six-month or nine-month period of the then current fiscal year
ended more than thirty (30) days before the date of the request, and for a
balance sheet of the corporation as of the end of that period, then the chief
financial officer shall cause that statement to be prepared, if not already
prepared, and shall deliver personally or mail that statement or statements to
the person making the request within thirty (30) days after the receipt of the
request. If the corporation has not sent to the shareholders its annual report
for the last fiscal year, the statements referred to in the first paragraph of
this Section 7.6 shall likewise be delivered or mailed to the shareholder or
shareholders within thirty (30) days after the request.
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<PAGE>
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the corporation or by the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, the president, any vice president, the chief
financial officer, the secretary or assistant secretary of this corporation, or
any other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority herein
granted may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
ARTICLE VII
GENERAL MATTERS
---------------
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
-----------------------------------------------------
For purposes of determining the shareholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
shareholders entitled to exercise any rights in respect of any other lawful
action (other than action by shareholders by written consent without a meeting),
the board of directors may fix, in advance, a record date, which shall not be
more than sixty (60) days before any such action. In that case, only
shareholders of record at the close of business on the date so fixed are
entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided in the Code.
If the board of directors does not so fix a record date, then the record
date for determining shareholders for any such purpose shall be at the close of
business on the day on which the board adopts the applicable resolution or the
sixtieth (60th) day before the date of that action, whichever is later.
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<PAGE>
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
-----------------------------------------
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
--------------------------------------------------
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.4 CERTIFICATES FOR SHARES
-----------------------
A certificate or certificates for shares of the corporation shall be issued
to each shareholder when any of such shares are fully paid. The board of
directors may authorize the issuance of certificates for shares partly paid
provided that these certificates shall state the total amount of the
consideration to be paid for them and the amount actually paid. All
certificates shall be signed in the name of the corporation by the chairman of
the board or the vice chairman of the board or the president or a vice president
and by the chief financial officer or an assistant treasurer or the secretary or
an assistant secretary, certifying the number of shares and the class or series
of shares owned by the shareholder. Any or all of the signatures on the
certificate may be facsimile.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed on a certificate ceases to be that officer,
transfer agent or registrar before that certificate is issued, it may be issued
by the corporation with the same effect as if that person were an officer,
transfer agent or registrar at the date of issue.
8.5 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and canceled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
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<PAGE>
8.6 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Code shall govern the construction of these
bylaws. Without limiting the generality of this provision, the singular number
includes the plural, the plural number includes the singular, and the term
"person" includes both a corporation and a natural person.
ARTICLE IX
AMENDMENTS
----------
9.1 AMENDMENT BY SHAREHOLDERS
-------------------------
New bylaws may be adopted or these bylaws may be amended or repealed by the
vote or written consent of holders of a majority of the outstanding shares
entitled to vote; provided, however, that if the articles of incorporation of
the corporation set forth the number of authorized directors of the corporation,
then the authorized number of directors may be changed only by an amendment of
the articles of incorporation.
9.2 AMENDMENT BY DIRECTORS
----------------------
Subject to the rights of the shareholders as provided in Section 9.1 of
these bylaws, bylaws, other than a bylaw or an amendment of a bylaw changing the
authorized number of directors (except to fix the authorized number of directors
pursuant to a bylaw providing for a variable number of directors), may be
adopted, amended or repealed by the board of directors.
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<PAGE>
EXHIBIT 5.1
October 16, 1997
LECG, Inc.
2000 Powell Street
Suite 600
Emeryville, CA 94608
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed by you with
the Securities and Exchange Commission (the "Commission") on October 16, 1997
(as such may be further amended or supplemented, the "Registration Statement"),
in connection with the registration under the Securities Act of 1933, as
amended, of 5,750,000 shares of your Common Stock (the "Shares"). The Shares,
which include up to 750,000 shares of Common Stock issuable pursuant to an over-
allotment option granted to the underwriters (the "Underwriters"), are to be
sold to the Underwriters as described in such Registration Statement for sale to
the public. As your counsel in connection with this transaction, we have
examined the proceedings proposed to be taken by you in connection with the
issuance and sale of the Shares.
Based on the foregoing, it is our opinion that, upon conclusion of the
proceedings being taken or contemplated by us, as your counsel, to be taken
prior to the issuance of the Shares and upon completion of the proceedings taken
in order to permit such transactions to be carried out in accordance with the
securities laws of various states where required, the Shares, when issued and
sold in the manner described in the Registration Statement, will be legally and
validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the used of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part thereof,
and any amendments thereto, which has been approved by us as such may be further
amended or supplemented, or incorporated by reference in any registration
statement relating to the prospectus filed pursuant to Rule 462(b) of the Act.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ WILSON SONSINI GOODRICH & ROSATI
<PAGE>
EXHIBIT 10.1
FORM OF INDEMNIFICATION AGREEMENT
---------------------------------
This Indemnification Agreement ("AGREEMENT") is made as of this ___th day
of _______________, 199_, by and between LECG, Inc, a California corporation
(the "COMPANY"), and ________ ("INDEMNITEE").
WHEREAS, the Company and Indemnitee recognize the increasing difficulty in
obtaining directors' and officers' liability insurance, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting officers and directors
to expensive litigation risks at the same time as the availability and coverage
of liability insurance has been severely limited;
WHEREAS, Indemnitee does not regard the current protection available as
adequate under the present circumstances, and Indemnitee and other officers and
directors of the Company may not be willing to continue to serve as officers and
directors without additional protection; and
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve as officers and directors of
the Company and to indemnify its officers and directors so as to provide them
with the maximum protection permitted by law.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. INDEMNIFICATION.
---------------
(a) Third Party Proceedings. The Company shall indemnify Indemnitee if
-----------------------
Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
Company) by reason of the fact that Indemnitee is or was a director, officer,
employee or agent of the Company, or any subsidiary of the Company, by reason of
any action or inaction on the part of Indemnitee while an officer or director or
by reason of the fact that Indemnitee is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement (if
such settlement is approved in advance by the Company, which approval shall not
be unreasonably withheld) actually and reasonably incurred by Indemnitee in
connection with such action or proceeding if Indemnitee acted in good faith and
in a manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe Indemnitee's conduct was
unlawful. The termination of any action or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
---------------
shall not, of itself, create a presumption that (i) Indemnitee did not act in
good faith and in a manner which Indemnitee reasonably believed to be in or not
opposed to the best interests of the Company, or (ii) with respect to any
criminal action or proceeding, Indemnitee had reasonable cause to believe that
Indemnitee's conduct was unlawful.
<PAGE>
(b) Proceedings By or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action or proceeding by or in
the right of the Company or any subsidiary of the Company to procure a judgment
in its favor by reason of the fact that Indemnitee is or was a director,
officer, employee or agent of the Company, or any subsidiary of the Company, by
reason of any action or inaction on the part of Indemnitee while an officer or
director or by reason of the fact that Indemnitee is or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees) and, to the fullest extent permitted by
law, amounts paid in settlement, in each case to the extent actually and
reasonably incurred by Indemnitee in connection with the defense or settlement
of such action or proceeding if Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Company and its shareholders, except that no indemnification shall be made
in respect of any claim, issue or matter as to which Indemnitee shall have been
finally adjudicated by court orders or judgment to be liable to the Company in
the performance of Indemnitee's duty to the Company and its shareholders unless
and only to the extent that the court in which such action or proceeding is or
was pending shall determine upon application that, in view of all the
circumstances of the case, Indemnitee is fairly and reasonably entitled to
indemnity for expenses and then only to the extent that the court shall
determine.
2. EXPENSES; INDEMNIFICATION PROCEDURE.
-----------------------------------
(a) Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action or proceeding referenced in Section
1(a) or (b) hereof (but not amounts actually paid in settlement of any such
action or proceeding). Indemnitee hereby undertakes to repay such amounts
advanced only if, and to the extent that, it shall ultimately be determined that
Indemnitee is not entitled to be indemnified by the Company as authorized
hereby. The advances to be made hereunder shall be paid by the Company to
Indemnitee within twenty (20) days following delivery of a written request
therefor by Indemnitee to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to his right to be indemnified under this Agreement, give
the Company notice in writing as soon as practicable of any claim made against
Indemnitee for which indemnification will or will be sought under this
Agreement. Notice to the Company shall be directed to the Chief Executive
Officer of the Company at the address shown on the signature page of this
Agreement (or such other address as the Company shall designate in writing to
Indemnitee). Notice shall be deemed received three business days after the date
postmarked if sent by domestic certified or registered mail, properly addressed;
otherwise notice shall be deemed received when such notice shall actually be
received by the Company. In addition, Indemnitee shall give the Company such
information and cooperation as it may reasonably require and as shall be within
Indemnitee's power.
-2-
<PAGE>
(c) Procedure. Any indemnification and advances provided for in
---------
Section 1 and this Section 2 shall be made no later than forty-five (45) days
after receipt of the written request of Indemnitee. If a claim under this
Agreement, under any statute, or under any provision of the Company's Articles
of Incorporation or Bylaws providing for indemnification, is not paid in full by
the Company within forty-five (45) days after a written request for payment
thereof has first been received by the Company, Indemnitee may, but need not, at
any time thereafter bring an action against the Company to recover the unpaid
amount of the claim and, subject to Section 12 of this Agreement, Indemnitee
shall also be entitled to be paid for the expenses (including attorneys' fees)
of bringing such action. It shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in connection with any
action or proceeding in advance of its final disposition) that Indemnitee has
not met the standards of conduct which make it permissible under applicable law
for the Company to indemnify Indemnitee for the amount claimed, but the burden
of proving such defense shall be on the Company and Indemnitee shall be entitled
to receive interim payments of expenses pursuant to Subsection 2(a) unless and
until such defense may be finally adjudicated by court order or judgment from
which no further right of appeal exists. It is the parties' intention that if
the Company contests Indemnitee's right to indemnification, the question of
Indemnitee's right to indemnification shall be for the court to decide, and
neither the failure of the Company (including its Board of Directors, any
committee or subgroup of the Board of Directors, independent legal counsel, or
its shareholders) to have made a determination that indemnification of
Indemnitee is proper in the circumstances because Indemnitee has met the
applicable standard of conduct required by applicable law, nor an actual
determination by the Company (including its Board of Directors, any committee or
subgroup of the Board of Directors, independent legal counsel, or its
shareholders) that Indemnitee has not met such applicable standard of conduct,
shall create a presumption that Indemnitee has or has not met the applicable
standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice of
------------------
a claim pursuant to Section 3(b) hereof, the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
under Section 2(a) hereof to pay the expenses of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the defense
of such proceeding, with counsel approved by Indemnitee, which approval shall
not be unreasonably withheld, upon the delivery to Indemnitee of written notice
of its election so to do. After delivery of such notice, approval of such
counsel by Indemnitee and the retention of such counsel by the Company, the
Company will not be liable to Indemnitee under this Agreement for any fees of
counsel subsequently incurred by Indemnitee with respect to the same proceeding,
provided that (i) Indemnitee shall have the right to employ his counsel in any
such proceeding at Indemnitee's expense; and (ii) if (A) the employment of
counsel by Indemnitee has been previously authorized by the Company, (B)
Indemnitee shall have reasonably concluded that
-3-
<PAGE>
there may be a conflict of interest between the Company and Indemnitee in the
conduct of any such defense, or (C) the Company shall not, in fact, have
employed counsel to assume the defense of such proceeding, then the fees and
expenses of Indemnitee's counsel shall be at the expense of the Company.
3. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY.
-------------------------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement, the
-----
Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Articles of
Incorporation, the Company's Bylaws or by statute. In the event of any change,
after the date of this Agreement, in any applicable law, statute or rule which
expands the right of a California corporation to indemnify a member of its Board
of Directors, an officer or other corporate agent, such changes shall be ipso
facto, within the preview of Indemnitee's rights and Company's obligations,
under this Agreement. In the event of any change in any applicable law, statute
or rule which narrows the right of a California corporation to indemnify a
member of its Board of Directors, an officer or other corporate agent, such
changes, to the extent not otherwise required by such law, statute or rule to be
applied to this Agreement shall have no effect on this Agreement or the parties'
rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement
--------------
shall not be deemed exclusive of any rights to which Indemnitee may be entitled
under the Company's Articles of Incorporation, its Bylaws, any agreement, any
vote of shareholders or disinterested Directors, the Corporation Law of the
State of California, or otherwise, both as to action in Indemnitee's official
capacity and as to action in another capacity while holding such office. The
indemnification provided under this Agreement shall continue as to Indemnitee
for any action taken or not taken while serving in an indemnified capacity even
though he may have ceased to serve in such capacity at the time of any action,
suit or other covered proceeding.
4. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision
-----------------------
of this Agreement to indemnification by the Company for some or a portion of the
expenses, judgments, fines or penalties actually or reasonably incurred by him
in the investigation, defense, appeal or settlement of any civil or criminal
action or proceeding, but not, however, for the total amount thereof, the
Company shall nevertheless indemnify Indemnitee for the portion of such
expenses, judgments, fines or penalties to which Indemnitee is entitled.
5. MUTUAL ACKNOWLEDGEMENT. Both the Company and Indemnitee acknowledge
----------------------
that in certain instances, Federal law or applicable public policy may prohibit
the Company from indemnifying its directors and officers under this Agreement or
otherwise. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake with the Securities and
Exchange Commission to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
-4-
<PAGE>
6. OFFICER AND DIRECTOR LIABILITY INSURANCE. The Company shall, from time
----------------------------------------
to time, make the good faith determination whether or not it is practicable for
the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among other
considerations, the Company will weigh the costs of obtaining such insurance
coverage against the protection afforded by such coverage. In all policies of
director and officer liability insurance, Indemnitee shall be named as an
insured in such a manner as to provide Indemnitee the same rights and benefits
as are accorded to the most favorably insured of the Company's directors, if
Indemnitee is a director; or of the Company's officers, if Indemnitee is not a
director of the Company but is an officer; or of the Company's key employees, if
Indemnitee is not an officer or director but is a key employee. Notwithstanding
the foregoing, the Company shall have no obligation to obtain or maintain such
insurance if the Company determines in good faith that such insurance is not
reasonably available, if the premium costs for such insurance are
disproportionate to the amount of coverage provided, if the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or if Indemnitee is covered by similar insurance maintained by a
subsidiary or parent of the Company.
7. SEVERABILITY. Nothing in this Agreement is intended to require or
------------
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
8. EXCEPTIONS. Any other provision herein to the contrary
-----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Excluded Acts. To indemnify Indemnitee for any acts or omissions
-------------
or transactions from which a director may not be relieved of liability under the
California General Corporation Law.
(b) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 317 of the California Corporation Law, but such indemnification or
advancement of expenses may be provided by the Company in specific cases if the
Board of Directors has approved the initiation or bringing of such suit; or
-5-
<PAGE>
(c) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
(d) Insured Claims. To indemnify Indemnitee for expenses or
--------------
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee by an insurance carrier under a policy of
officers' and directors' liability insurance maintained by the Company.
(e) Claims Under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
9. CONSTRUCTION OF CERTAIN PHRASES.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
if Indemnitee is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, Indemnitee shall stand in
the same position under the provisions of this Agreement with respect to the
resulting or surviving corporation as Indemnitee would have with respect to such
constituent corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as a director, officer, employee or agent of the Company which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants, or beneficiaries;
and if Indemnitee acted in good faith and in a manner Indemnitee reasonably
believed to be in the interest of the participants and beneficiaries of an
employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not
opposed to the best interests of the Company" as referred to in this Agreement.
10. COUNTERPARTS. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
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<PAGE>
11. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
----------------------
Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
12. ATTORNEYS' FEES. In the event that any action is instituted by
---------------
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee with respect to such action,
unless as a part of such action, the court of competent jurisdiction determines
that each of the material assertions made by Indemnitee as a basis for such
action were not made in good faith or were frivolous. In the event of an action
instituted by or in the name of the Company under this Agreement or to enforce
or interpret any of the terms of this Agreement, Indemnitee shall be entitled to
be paid all costs and expenses, including reasonable attorneys' fees, incurred
by Indemnitee in defense of such action (including with respect to Indemnitee's
counterclaims and cross-claims made in such action), unless as a part of such
action the court determines that each of Indemnitee's material defenses to such
action were made in bad faith or were frivolous.
13. NOTICE. All notices, requests, demands and other communications under
-------
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee, on the date of such
receipt, or (ii) if mailed by domestic certified or registered mail with postage
prepaid, on the third business day after the date postmarked. Addresses for
notice to either party are as shown on the signature page of this Agreement, or
as subsequently modified by written notice.
14. CONSENT TO JURISDICTION. The Company and Indemnitee each hereby
------------------------
irrevocably consent to the jurisdiction of the courts of the State of California
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of California.
15. CHOICE OF LAW. This Agreement shall be governed by and its provisions
-------------
construed in accordance with the laws of the State of California, as applied to
contracts between California residents entered into and to be performed entirely
within California.
16. SUBROGATION. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable to
corporation effectively to bring suit to enforce such rights.
17. CONTINUATION OF INDEMNIFICATION. All agreements and obligations of
-------------------------------
the Company contained herein shall continue during the period that Indemnitee is
a director, officer or agent of the Company and shall continue thereafter so
long as Indemnitee shall be subject to any possible claim or threatened, pending
or completed action, suit or proceeding, whether civil, criminal, arbitrational,
administrative or investigative, by reason of the fact that Indemnitee was
serving in the capacity referred to herein.
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<PAGE>
18. AMENDMENT AND TERMINATION. Subject to Section 17, no amendment,
-------------------------
modification, termination or cancellation of this Agreement shall be effective
unless in writing signed by both parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
LECG, INC.
By:______________________________
Title:___________________________
Address: 2000 Powell Street
Suite 600
Emeryville, CA 94608
AGREED TO AND ACCEPTED:
INDEMNITEE:
______________________________
______________________________
(print name)
______________________________
(address)
______________________________
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<PAGE>
EXHIBIT 10.4
CREDIT AGREEMENT
THIS AGREEMENT is entered into as of May 31, 1996, by and between THE LAW
AND ECONOMICS CONSULTING GROUP, INC., a California corporation ("Borrower"), and
WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").
RECITAL
-------
Borrower has requested from Bank the credit accommodations described below
(each, a "Credit" and collectively, the "Credits"), and Bank has agreed to
provide the Credits to Borrower on the terms and conditions contained herein.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Bank and Borrower hereby agree as follows:
ARTICLE I
---------
THE CREDITS
-----------
SECTION 1.1. LINE OF CREDIT.
(a) Line of Credit. Subject to the term and conditions of this Agreement,
--------------
Bank hereby agrees to make advances to Borrower from time to time up to and
including May 31, 2000, not to exceed .at any time the aggregate principal
amount of Three Million Dollars ($3,000,000.00) ("Line of Credit"), the proceeds
of which shall be used solely to finance Borrower's working capital
requirements. Borrower's obligation to repay advances under the Line of Credit
shall be evidenced by a promissory note substantially in the form of Exhibit A
attached hereto ("Line of Credit Note"), all terms of which are incorporated
herein by this reference.
<PAGE>
(b) Optional Commitment Increase. Once during the term of the Line of
----------------------------
Credit, upon Bank's receipt of Borrower's written request for an increase in the
maximum principal amount then available thereunder, Bank agrees to review said
request and, so long as all of the conditions set forth herein are met to Bank's
satisfaction, to provide an increase in said maximum principal amount to an
amount which Bank deems acceptable, in its discretion:
(i) Bank shall have obtained such audits and appraisals of all
collateral for the Line of Credit as Bank deems necessary, all in
form, substance and performed by auditors and appraisers
satisfactory to Bank, and assuring that Bank's security interests in
and liens on, said collateral shall remain of first priority
following any such increase, if granted, with all costs and expenses
of such audits and appraisals to be paid by Borrower;
(ii) Bank shall have determined that there is sufficient collateral value
to support a Line of Credit increase, based upon Bank's then current
loan-to-value ratios and other policies and procedures in effect at
the time such increase is requested for each type of collateral
which secures the Line of Credit;
(iii) Borrower shall have paid to Bank a non-refundable commitment fee for
such increase equal to one-quarter percent (1/4%) of the new maximum
principal amount available under the Line of Credit;
(iv) Borrower shall have executed, or caused to be executed, and
delivered to Bank any and all documents required by Bank to evidence
such increase and Bank's continued security interests in and liens
on all collateral for the Line of Credit, including without
limitation, a Modification to the Line of Credit Note, all of which
shall be in form and substance satisfactory to Bank; and
(v) at the time an increase is requested and the time, if any, any such
increase is granted, there exists no Event of Default hereunder, nor
any condition, act or event which with the giving of notice or the
passage of time, or both, would constitute any such Event of
Default.
(c) Letter of Credit Subfeature. As a subfeature under the Line of
---------------------------
Credit, Bank agrees from time to time up to and including May 31, 1997, to issue
standby letters of credit for the account of Borrower and for purposes deemed
acceptable by Bank (each, a "Letter of Credit" and collectively, "Letters of
Credit"); provided however, that the form and substance of each Letter of
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<PAGE>
Credit shall be subject to approval by Bank, in its sole discretion; and
provided further, that the aggregate undrawn amount of all outstanding Letters
of Credit shall not at any time exceed Two Hundred Fifty Thousand Dollars
($250,000.00). Each Letter of Credit shall be issued for a term not to exceed
three hundred sixty (360) days, as designated by Borrower; provided however,
that no Letter of Credit shall have an expiration date subsequent to the
maturity date of the Line of Credit. The undrawn amount of all Letters of Credit
shall be reserved under the Line of Credit and shall not be available for
borrowings thereunder. Each Letter of Credit shall be subject to the additional
terms and conditions of the Continuing Standby Letter of Credit Agreement and
related documents, if any, required by Bank in connection with the issuance
thereof (each, a "Letter of Credit Agreement" and collectively, "Letter of
Credit Agreements"). Each draft paid by Bank under a Letter of Credit shall be
deemed an advance under the Line of Credit and shall be repaid by Borrower in
accordance with the terms and conditions of this Agreement applicable to such
advances; provided however, that if advances under the Line of Credit are not
available, for any reason, at the time any draft is paid by Bank, then Borrower
shall immediately pay to Bank the full amount of such draft, together with
interest thereon from the date such amount is paid by Bank to the date such
amount is fully repaid by Borrower, at the rate of interest applicable to
advances under the Line of Credit. In such event Borrower agrees that Bank, in
its sole discretion, may debit any demand deposit account maintained by Borrower
with Bank for the amount of any such draft.
(d) Borrowing and Repayment. Borrower may from time to time during the
-----------------------
term of the Line of Credit borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions contained herein or in the Line of Credit Note; provided however,
that the total outstanding borrowings under the Line of Credit shall not at any
time exceed
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<PAGE>
the maximum principal amount available thereunder, as set forth above or such
other amount as shall then be available thereunder pursuant to the terms hereof.
SECTION 1.2. BMSC LETTER OF CREDIT.
(a) BMSC Letter of Credit. In addition to and separate from the Line of
---------------------
Credit subfeature for Letters of Credit, Bank has issued a standby letter of
credit for the account of Borrower and for the benefit of Bristol-Myers Squibb
Company in support of Borrower's long term lease obligations (the "BMSC Letter
of Credit") in the amount of Sixty-Nine Thousand Dollars ($69,000.00). Subject
to the terms and conditions of this Agreement, Bank hereby confirms that the
BMSC Letter of Credit remains in full force and effect. The BMSC Letter of
Credit has an expiration date of April 30, 1997, and shall be automatically
extended pursuant to its terms, without written amendment, to April 30 of each
succeeding calendar year up to April 30, 2002, and then up to but not beyond
December 29, 2002, and is subject to the additional terms of the Application and
Agreement for Standby Letter of Credit attached hereto as Exhibit B (the "BMSC
Letter of Credit Agreement"), all terms of which are incorporated herein by this
reference.
(b) Repayment of Drafts. Each draft paid by Bank under the BMSC Letter
-------------------
of Credit shall be repaid by Borrower in accordance with the provisions of the
BMSC Letter of Credit Agreement.
SECTION 1.3. INTEREST/FEES.
(a) Interest. The outstanding principal balance of the Line of Credit
--------
shall bear interest at the rate of interest set forth in the Line of Credit
Note. The amount of each draft paid by Bank under the BMSC Letter of Credit
shall bear interest from the date such draft is paid by Bank to the date such
amount is fully repaid by Borrower at the rate of interest set forth in the BMSC
Letter of Credit Agreement.
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<PAGE>
(b) Computation and Payment. Interest shall be computed on the basis of
-----------------------
a 360-day year, actual days elapsed. Interest shall be payable at the times and
place set forth in the Line of Credit Note and the BMSC Letter of Credit
Agreement.
(c) Unused Commitment Fee. Borrower shall pay to Bank a fee equal to
---------------------
one-eighth percent (1/8%) per annum (computed on the basis of a 360-day year,
actual days elapsed) on the average daily unused amount of the Line of Credit,
which fee shall be calculated on a quarterly basis by Bank and shall be due and
payable by Borrower in arrears on each February 28, May 31, August 31, and
November 30.
(d) BMSC Letter of Credit Fees. Borrower shall pay to Bank a fee upon
--------------------------
each annual anniversary date of the BMSC Letter of Credit, commencing as of
April 30, 1997, equal to two percent (2%) per annum (computed on the basis of a
360-day year, actual days elapsed) of the face amount thereof, and fees upon the
payment or negotiation of each draft under the BMSC Letter of Credit and upon
the occurrence of any other activity with respect to the BMSC Letter of Credit
(including without limitation, the transfer, amendment or cancellation thereof)
determined in accordance with Bank's standard fees and charges then in effect
for such activity.
(e) Letter of Credit Fees. Borrower shall pay to Bank fees upon the
---------------------
issuance of each Letter of Credit, upon the payment or negotiation by Bank of
each draft under any Letter of Credit and upon the occurrence of any other
activity with respect to any Letter of Credit (including without limitation, the
transfer, amendment or cancellation of any Letter of Credit) determined in
accordance with Bank's standard fees and charges then in effect for such
activity.
SECTION 1.4. COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect
all interest and fees due under each Credit by charging Borrower's demand
deposit account number
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<PAGE>
4125-108456 with Bank, or any other demand deposit account maintained by
Borrower with Bank, for the full amount thereof. Should there be insufficient
funds in any such demand deposit account to pay all such sums when due, the full
amount of such deficiency shall be immediately due and payable by Borrower.
SECTION 1.5. COLLATERAL. As security for all indebtedness of Borrower to
Bank, Borrower hereby grants to Bank security interests of first priority in all
Borrower's accounts receivable and other rights to payment, general intangibles,
inventory and equipment. All of the foregoing shall be evidenced by and subject
to the terms of such security agreements, financing statements, deeds of trust
and other documents as Bank shall reasonably require, all in form and substance
satisfactory to Bank. Borrower shall reimburse Bank immediately upon demand for
all costs and expenses incurred by Bank in connection with any of the foregoing
security, including without limitation, filing fees and costs of appraisals and
audits.
ARTICLE II
----------
REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower makes the following representations and warranties to Bank, which
representations and warranties shall survive the execution of this Agreement and
shall continue in full force and effect until the full and final payment, and
satisfaction and discharge, of all obligations of Borrower to Bank subject to
this Agreement.
SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly organized and
existing and in good standing under the laws of the State of California, and is
qualified or licensed to do business (and is in good standing as a foreign
corporation, if applicable) in all jurisdictions in which
-6-
<PAGE>
such qualification or licensing is required or in which the failure to so
qualify or to be so licensed could have a material adverse effect on Borrower.
SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement, the Line of
Credit Note, the BMSC Letter of Credit Agreement, and each other document,
contract and instrument required hereby or at any time hereafter delivered to
Bank in connection herewith (collectively, the "Loan Documents") have been duly
authorized, and upon their execution and delivery in accordance with the
provisions hereof will constitute legal, valid and binding agreements and
obligations of Borrower or the party which executes the same, enforceable in
accordance with their respective terms.
SECTION 2.3. NO VIOLATION. The execution, delivery and performance by
Borrower of each of the Loan Documents do not violate any provision of any law
or regulation, or contravene any provision of the Articles of Incorporation or
By-Laws of Borrower, or result in any breach of or default under any contract,
obligation, indenture or other instrument to which Borrower is a party or by
which Borrower may be bound.
SECTION 2.4. LITIGATION. There are no pending, or to the best of
Borrower's knowledge threatened, actions, claims, investigations, suits or
proceedings by or before any governmental authority, arbitrator, court or
administrative agency which could have a material adverse effect on the
financial condition or operation of Borrower other than those disclosed by
Borrower to Bank in writing prior to the date hereof.
SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial statement
of Borrower dated December 31, 1995, a true copy of which has been delivered by
Borrower to Bank prior to the date hereof, (a) is complete and correct and
presents fairly the
-7-
<PAGE>
financial condition of Borrower, (b) discloses all liabilities of Borrower that
are required to be reflected or reserved against under generally accepted
accounting principles, whether liquidated or unliquidated, fixed or contingent,
and (c) has been prepared in accordance with generally accepted accounting
principles consistently applied. Since the date of such financial statement
there has been no material adverse change in the financial condition of
Borrower, nor has Borrower mortgaged, pledged, granted a security interest in or
otherwise encumbered any of its assets or properties except in favor of Bank or
as otherwise permitted by Bank in writing.
SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any pending
assessments or adjustments of its income tax payable with respect to any year.
SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture, contract
or instrument to which Borrower is a party or by which Borrower may be bound
that requires the subordination in right of payment of any of Borrower's
obligations subject to this Agreement to any other obligation of Borrower.
SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will hereafter
possess, all permits, franchises and licenses required and rights to all
trademarks, trade names, patents, and fictitious names, if any, necessary to
enable it to conduct the business in which it is now engaged in compliance with
applicable law.
SECTION 2.9. ERISA. Borrower is in compliance in all material respects
with all applicable provisions of the Employee Retirement Income Security Act of
1974, as amended or recodified from time to time ("ERISA"); Borrower has not
violated any provision of any defined employee pension benefit plan (as defined
in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no
Reportable Event as defined in ERISA has occurred and is continuing with
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<PAGE>
respect to any Plan initiated by Borrower; Borrower has met its minimum funding
requirements under ERISA with respect to each Plan; and each Plan will be able
to fulfill its benefit obligations as they come due in accordance with the Plan
documents and under generally accepted accounting principles.
SECTION 2.10. OTHER OBLIGATIONS. Borrower is not in default on any
obligation for borrowed money, any purchase money obligation or any other
material lease, commitment, contract, instrument or obligation.
SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to
Bank in writing prior to the date hereof, Borrower is in compliance in all
material respects with all applicable Federal or state environmental, hazardous
waste, health and safety statutes, and any rules or regulations adopted pursuant
thereto, which govern or affect any of Borrower's operations and/or properties,
including without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act
of 1976, the Federal Toxic Substances Control Act and the California Health and
Safety Code, as any of the same may be amended, modified or supplemented from
time to time. None of the operations of Borrower is the subject of any Federal
or state investigation evaluating whether any remedial action involving a
material expenditure is needed to respond to a release of any toxic or hazardous
waste or substance into the environment. Borrower has no material contingent
liability in connection with any release of any toxic or hazardous waste or
substance into the environment.
-9-
<PAGE>
ARTICLE III
-----------
CONDITIONS
----------
SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of
Bank to grant any of the Credits is subject to the fulfillment to Bank's
satisfaction of all of the following conditions :
(a) Approval of Bank Counsel. All legal matters incidental to the
------------------------
granting of each of the Credits shall be satisfactory to Bank's counsel.
(b) Documentation. Bank shall have received, in form and substance
-------------
satisfactory to Bank, each of the following, duly executed:
(i) This Agreement and the Line of Credit Note.
(ii) Continuing Standby Letter of Credit Agreement.
(iii) BMSC Letter of Credit Agreement
(iv) Corporate Borrowing Resolution.
(v) Certificate of Incumbency.
(vi) Security Agreement Covering Equipment.
(vii) Continuing Security Agreement Covering Rights to Payment and
Inventory.
(viii) UCC-1 Financing Statements covering accounts receivable,
general intangibles, inventory and equipment.
(ix) Such other documents as Bank may require under any other
Section of this Agreement.
(c) Financial Condition. There shall have been no material adverse change,
-------------------
as determined by Bank, in the financial condition or business of Borrower, nor
any material decline, as determined by Bank, in the market value of any
collateral required hereunder or a substantial or material portion of the assets
of Borrower.
(d) Insurance. Borrower shall have delivered to Bank evidence of insurance
---------
coverage on all Borrower's property, in form, substance, amounts, covering risks
and issued by companies satisfactory to Bank, and where required by Bank, with
loss payable endorsements in favor of Bank.
-10-
<PAGE>
SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of
Bank to make each extension of credit requested by Borrower hereunder shall be
subject to the fulfillment to Bank's satisfaction of each of the following
conditions:
(a) Compliance. The representations and warranties contained herein and in
----------
each of the other Loan Documents shall be true on and as of the date of the
signing of this Agreement and on the date of each extension of credit by Bank
pursuant hereto, with the same effect as though such representations and
warranties had been made on and as of each such date, and on each such date, no
Event of Default as defined herein, and no condition, event or act which with
the giving of notice or the passage of time or both would constitute such an
Event of Default, shall have occurred and be continuing or shall exist.
(b) Documentation. Bank shall have received all additional documents which
-------------
may be required in connection with such extension of credit, including without
limitation, prior to the issuance of each Letter of Credit, a properly completed
and duly executed Letter of Credit Agreement or application therefor.
ARTICLE IV
----------
AFFIRMATIVE COVENANTS
---------------------
Borrower covenants that so long as Bank remains committed to extend credit
to Borrower pursuant hereto, or any liabilities (whether direct or contingent,
liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents
remain outstanding,.and until payment in full of all obligations of Borrower
subject hereto, Borrower shall, unless Bank otherwise consents in writing:
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<PAGE>
SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal, interest,
fees or other liabilities due under any of the Loan Documents at the times and
place and in the manner specified therein.
SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records in
accordance with generally accepted accounting principles consistently applied,
and permit any representative of Bank, at any reasonable time, to inspect, audit
and examine such books and records, to make copies of the same, and to inspect
the properties of Borrower.
SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the following,
in form and detail satisfactory to Bank:
(a) not later than 120 days after and as of the end of each fiscal year, a
reviewed financial statement of Borrower, prepared by a certified public
accountant acceptable to Bank, to include a balance sheet, income statement,
statement of cash flows and accompanying notes and schedules;
(b) not later than 60 days after and as of the end of each fiscal quarter,
a financial statement of Borrower, prepared by Borrower, to include a balance
sheet, income statement, and an aged listing of accounts receivable and accounts
payable;
(c) from time to time such other information as Bank may reasonably
request.
SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses, permits,
governmental approvals, rights, privileges and franchises necessary for the
conduct of its business; and comply with the provisions of all documents
pursuant to which Borrower is organized and/or which govern Borrower's continued
existence and with the requirements of all laws, rules, regulations and orders
of any governmental authority applicable to Borrower and/or its business.
-12-
<PAGE>
SECTION 4.5. INSURANCE. Maintain and keep in force insurance of the types
and in amounts customarily carried in lines of business similar to that of
Borrower, including but not limited to fire, extended coverage, public
liability, flood, property damage and workers' compensation, with all such
insurance carried with companies and in amounts satisfactory to Bank, and
deliver to Bank from time to time at Bank's request schedules setting forth all
insurance then in effect.
SECTION 4.6. FACILITIES. Keep all properties useful or necessary to
Borrower's business in good repair and condition, and from time to time make
necessary repairs, renewals and replacements thereto so that such properties
shall be fully and efficiently preserved and maintained.
SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due any
and all indebtedness, obligations, assessments and taxes, both real or personal,
including without limitation Federal and state income taxes and state and local
property taxes and assessments, except such (a) as Borrower may in good faith
contest or as to which a bona fide dispute may arise, and (b) for which Borrower
has made provision, to Bank's satisfaction, for eventual payment thereof in the
event Borrower is obligated to make such payment.
SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of any
litigation pending or threatened against Borrower in excess of an aggregate of
$100,000.00.
SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower's financial condition
as follows using generally accepted accounting principles consistently applied
and used consistently with prior practices (except to the extent modified by the
definitions herein):
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<PAGE>
(a) Tangible Net Worth not at any time less than $5,000,000.00, with
"Tangible Net Worth" defined as the aggregate of total stockholders' equity plus
subordinated debt less any intangible assets.
(b) Total Liabilities divided by Tangible Net Worth not at any time
greater than 1.75 to 1.0, with "Total Liabilities" defined as the aggregate of
current liabilities and non-current liabilities less subordinated debt, and with
"Tangible Net Worth" as defined above.
(c) Net income after taxes on an annual basis, determined as of each
fiscal year end, not less than $1.00.
(d) EBITDA Coverage Ratio not less than 3.0 to 1.0 as of each fiscal year
end, with "EBITDA" defined as net profit before tax plus interest expense (net
of capitalized interest expense), depreciation expense and amortization expense,
and with "EBITDA Coverage Ratio" defined as EBITDA divided by the aggregate of
total interest expense plus the prior period current maturity of long-term debt
and the prior period current maturity of subordinated debt.
SECTION 4.10. NOTICE TO BANK. Promptly (but in no event more than five
(5) days after the occurrence of each such event or matter) give written notice
to Bank in reasonable detail of: (a) the occurrence of any Event of Default, or
any condition, event or act which with the giving of notice or the passage of
time or both would constitute an Event of Default; (b) any change in the name or
the organizational structure of Borrower; (c) the occurrence and nature of any
Reportable Event or Prohibited Transaction, each as defined in ERISA, or any
funding deficiency with respect to any Plan; or (d) any termination or
cancellation of any insurance policy which Borrower is required to maintain, or
any uninsured or partially uninsured loss through liability or property damage,
or
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<PAGE>
through fire, theft or any other cause affecting Borrower's property in excess
of an aggregate of $100,000.00.
ARTICLE V
---------
NEGATIVE COVENANTS
------------------
Borrower further covenants that so long as Bank remains committed to extend
credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all obligations
of Borrower subject hereto, Borrower will not without Bank's prior written
consent:
SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any credit extended
hereunder except for the purposes stated in Article I hereof.
SECTION 5.2. OTHER INDEBTEDNESS. Create, incur, assume or permit to exist
any indebtedness or liabilities resulting from borrowings, loans or advances,
whether secured or unsecured, matured or unmatured, liquidated or unliquidated,
joint gr several, except (a) the liabilities of Borrower to Bank, and (b) any
other liabilities of Borrower existing as of, and disclosed to Bank prior to,
the date hereof.
SECTION 5.3. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Except as
provided in this Section 5.3, merge into or consolidate with any other entity;
make any substantial change in the nature of Borrower's business as conducted as
of the date hereof; acquire all or substantially all of the assets of any other
entity; nor sell, lease, transfer or otherwise dispose of all or a substantial
or material portion of Borrower's assets except in the ordinary course of its
business. Notwithstanding the foregoing, so long as there exists no Event of
Default under this Agreement or any other of the Loan Documents, (a) Bank hereby
consents to the consolidation of Borrower with,
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<PAGE>
or merger of Borrower into, Coopers & Lybrand, a New York general partnership,
pursuant to the term of that certain Stock or Asset Purchase Option Agreement
dated as of June 18, 1993 (the "Purchase Option Agreement"), and (b) Bank
further agrees that, following such consolidation or merger, Bank shall permit
Coopers & Lybrand to assume Borrower's obligations hereunder with aggregate
future liabilities in excess of $100,000.00 and which are not terminable by
Borrower for a cost of less than $100,000.00, upon similar terms and conditions
as those set forth herein and subject to Bank's prior receipt of notification
from Coopers & Lybrand of its intention to assume said obligations as required
by the Purchase Option Agreement.
SECTION 5.4. GUARANTIES. Guarantee or become liable in any way as surety,
endorser (other than as endorser of negotiable instruments for deposit or
collection in the ordinary course of business), accommodation endorser or
otherwise for, nor pledge or hypothecate any assets of Borrower as security for,
any liabilities or obligations of any other person or entity.
SECTION 5.5. LOANS, ADVANCES, INVESTMENTS. Make any loans or advances to
or investments in any person or entity in amounts in excess of an aggregate of
$150,000.00 outstanding at any one time, except loans or advances to any
existing or new shareholder made in connection with such shareholder's purchase
of shares of stock in Borrower.
SECTION 5.6. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to exist
a security interest in, or lien upon, all or any portion of Borrower's assets
now owned or hereafter acquired, except any of the foregoing in favor of Bank.
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<PAGE>
ARTICLE VI
----------
EVENTS OF DEFAULT
-----------------
SECTION 6.1. The occurrence of any of the following shall constitute an
"Event of Default" under this Agreement:
(a) Borrower shall fail to pay when due any principal, interest, fees or
other amounts payable under any of the Loan Documents.
(b) Any financial statement or certificate furnished to Bank in connection
with, or any representation or warranty made by Borrower or any other party
under this Agreement or any other Loan Document shall prove to be incorrect,
false or misleading in any material respect when furnished or made.
(c) Any default in the performance of or compliance with any obligation,
agreement or other provision contained herein or in any other Loan Document
(other than those referred to in subsections (a) and (b) above), and with
respect to any such default which by its nature can be cured, such default shall
continue for a period of twenty (20) days from its occurrence.
(d) Any default in the payment or performance of any obligation, or any
defined event of default, under the terms of any contract or instrument (other
than any of the Loan Documents) pursuant to which Borrower has incurred any debt
or other liability to any person or entity, including Bank.
(e) The filing of a notice of judgment lien against Borrower; or the
recording of any abstract of judgment against Borrower in any county in which
Borrower has an interest in real property; or the service of a notice of levy
and/or of a writ of attachment or execution, or other like process,.against the
assets of Borrower; or the entry of a judgment against Borrower.
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<PAGE>
(f) Borrower shall become insolvent, or shall suffer or consent to or
apply for the appointment of a receiver, trustee, custodian or liquidator of
itself or any of its property, or shall generally fail to pay its debts as they
become due, or shall make a general assignment for the benefit of creditors;
Borrower shall file a voluntary petition in bankruptcy, or seeking
reorganization, in order to effect a plan or other arrangement with creditors or
any other relief under the Bankruptcy Reform Act, Title 11 of the United States
Code, as amended or recodified from time to time ("Bankruptcy Code"), or under
any state or Federal law granting relief to debtors, whether now or hereafter in
effect; or any involuntary petition or proceeding pursuant to the Bankruptcy
Code or any other applicable state or Federal law relating to bankruptcy,
reorganization or other relief for debtors is filed or commenced against
Borrower, or Borrower shall file an answer admitting the jurisdiction of the
court and the material allegations of any involuntary petition; or Borrower
shall be adjudicated a bankrupt, or an order for relief shall be entered against
Borrower by any court of competent jurisdiction under the Bankruptcy Code or any
other applicable state or Federal law relating to bankruptcy, reorganization or
other relief for debtors.
(g) There shall exist or occur any event or condition which Bank in good
faith believes impairs, or is substantially likely to impair, the prospect of
payment or performance by Borrower of its obligations under any of the Loan
Documents.
(h) The dissolution or liquidation of Borrower; or Borrower, or any of its
directors, stockholders or members, shall take action seeking to effect the
dissolution or liquidation of Borrower.
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<PAGE>
(i) Any change in ownership during the term of this Agreement of an
aggregate of twenty-five percent (25%) or more of the common stock of Borrower,
except pursuant to the Purchase Option Agreement.
ARTICLE VII
-----------
MISCELLANEOUS
-------------
SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank in
exercising any right, power or remedy under any of the Loan Documents shall
affect or operate as a waiver of such right, power or remedy; nor shall any
single or partial exercise of any such right, power or remedy preclude, waive or
otherwise affect any other or further exercise thereof or the exercise of any
other right, power or remedy. Any waiver, permit, consent or approval of any
kind by Bank of any breach of or default under any of the Loan Documents must be
in writing and shall be effective only to the extent set forth in such writing.
SECTION 7.2. NOTICES. All notices, requests and demands which any party is
required or may desire to give to any other party under any provision of this
Agreement must be in writing delivered to each party at the following address:
BORROWER: THE LAW AND ECONOMICS CONSULTING GROUP, INC.
2000 Powell Street, Suite 600
Emeryville, California 94608
BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION
East Bay Regional Commercial Banking Office
One Kaiser Plaza, Suite 850
Oakland, California 94612
Attention: Darrell Rodriguez
or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery,
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<PAGE>
upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or
three (3) days after deposit in the U.S. mail, first class and postage prepaid;
and (c) if sent by telecopy, upon receipt.
SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to
Bank immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of Bank's in-house counsel), incurred by
Bank in connection with (a) the negotiation and preparation of this Agreement
and the other Loan Documents, Bank's continued administration hereof and
thereof, and the preparation of any amendments and waivers hereto and thereto,
(b) the enforcement of Bank's rights and/or the collection of any amounts which
become due to Bank under any of the Loan Documents, and (c) the prosecution or
defense of any action in any way related to any of the Loan Documents, including
without limitation, any action for declaratory relief, and including any of the
foregoing incurred in connection with any bankruptcy proceeding relating to
Borrower.
SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties; provided however, that
Borrower may not assign or transfer its interest hereunder without Bank's prior
written consent. Bank reserves the right to sell, assign, transfer, negotiate or
grant participations in all or any part of, or any interest in, Bank's rights
and benefits under each of the Loan Documents. In connection therewith, Bank may
disclose all documents and information which Bank now has or may hereafter
acquire relating to any of the Credits, Borrower or its business, or any
collateral required hereunder.
SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other
Loan Documents constitute the entire agreement between Borrower and Bank with
respect to the
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<PAGE>
Credits and supersede all prior negotiations, communications, discussions and
correspondence concerning the subject matter hereof. This Agreement may be
amended or modified only by a written instrument executed by each party hereto.
SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and
entered into for the sole protection and benefit of the parties hereto and their
respective permitted successors and assigns, and no other person or entity shall
be a third party beneficiary of, or have any direct or indirect cause of action
or claim in connection with, this Agreement or any other of the Loan Documents
to which it is not a party.
SECTION 7.7. TIME. Time is of the essence of each and every provision of
this Agreement and each other of the Loan Documents.
SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this
Agreement shall be prohibited by or invalid under applicable law, such provision
shall be ineffective only to the extent of such prohibition or invalidity
without invalidating the remainder of such provision or any remaining provisions
of this Agreement.
SECTION 7.9. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, except to the
extent Bank has greater rights or remedies under Federal law, whether as a
national bank or otherwise, in which case such choice of California law shall
not be deemed to deprive Bank of any such rights and remedies as may be
available under Federal law.
SECTION 7.10. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which when executed and delivered shall be deemed to be
an original, and all of which when taken together shall constitute one and the
same Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
THE LAW AND ECONOMICS WELLS FARGO BANK,
CONSULTING GROUP, INC. NATIONAL ASSOCIATION
By: /s/ Thomas M. Jorde By: /s/ Darrell Rodriguez
--------------------- -----------------------
Darrell Rodriguez
Title: President Assistant Vice President
By: /s/ David J. Teece
--------------------
Title: Chairman of the Board
-22-
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